Who Will Be Bought Next?

Even as the rally in the market has somewhat stalled over the past couple of weeks, the environment for merger and acquisition activity remains extremely robust. Just this week, Reynolds American (RAI) announced it will acquire Lorillard (LO) in a deal valued at over $25 billion. Yesterday we learned that 21st Century Fox (FOXA) is interested in acquiring Time Warner (TWX) in a deal that would be significantly north of $75 billion. It is not just the big fish that are getting gobbled up. Small and mid-cap acquisitions have also been active. In this week alone, I have had two of the midcaps in my portfolio acquired. Kodiak Oil & Gas (KOG) was purchased by Whiting Petroleum (WLL) on Monday. Yesterday International Game Technology (IGT) was bought by lottery operator Gtech. Both of these stocks were positively profiled in some of my columns earlier this year at much lower prices. M&A activity is likely to be robust throughout the rest of the year. Debt financing rates are near historical lows, organic growth is hard to come by in a tepid global economy and the market has been bidding up the stocks of both the target and the acquirer in most of these transactions. This signals investors' approval of these types of deals in the current environment and encourages additional ones. I never buy a stock primarily based on the belief that it will be acquired. However, given I tend to lean away from momentum plays and more into the value space, it does not surprise me when one of my positions is taken out with a nice premium. Besides, there are worse ways to start one's day than by turning on CNBC and seeing one of the stocks in your portfolio making a nice move up on announcing it is being acquired. Here is a quick rundown on some of the companies in my portfolio I like as standalone entities, but where news of being acquired would not raise any eyebrows. Barrick Gold (ABX) is one of the larger-cap stocks in my portfolio that looks primed to be either acquired or to merge with an equal. The company has had merger talks with Newmont Mining (NEM) in the past. This combination makes a lot of strategic sense as both mining companies get approximately 40% of their gold production from Nevada and would have significant economies of scale and lower operating costs as a combined entity. Gold and silver miners are also going through a consolidation phase due to the falling prices of precious metals over the last year and a half. Mine projects are being suspended, assets are being sold off and increased merger activity appears to be on the horizon. In addition, Barrick kicked out its CEO the other day. The chairman has stated this does not mean the company is again interested in merging with Newmont, but it seems like a hollow denial. There has been some speculation on who will be acquired next in the Bakken on the back of the takeout of Kodiak. I would also not ignore possible merger activity in the Eagle Ford region as two companies there recently received permission from the Commerce Department to export its condensate, which is the light oil that comes from shale. This could shine a light on the huge production coming from the Eagle Ford and Permian shale regions in Texas. If a major like ExxonMobil (XOM) wanted to make a major splash in these regions in Texas, the two logical targets would be EOG Resources (EOG) or Pioneer Natural Resources (PXD). Although not out of the question, I believe merger activity in the state will be confined to the small and mid-cap space for the time being. There are a myriad of smaller plays that I could see as easy, bite-size acquisitions if activity amid the E&P concerns picks up. I recently picked up Callon Petroleum (CPE) based on major production increases it is seeing in the Permian, which is starting to translate to major earnings growth. It would qualify as a solid smaller takeout target with a current market capitalization of under $500 million. I don't think I will see another week this year where two of my portfolio companies get acquired in the first three days of the trading week. However, given the current tailwinds in the M&A space, I would not be surprised if several more go this route by the end of 2014. In the meantime, this activity should continue to provide support to the overall market while it lasts.

Who Will Be Bought Next?

M&A activity is in full swing, so watch these companies.

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