Identifying and tracking takeover targets is an important part of investing due diligence. After all, if a company in which you are investing – or planning to invest in is a target or a potential acquirer, you’d want to know that, right?
It’s not easy to tell which companies are potential takeover targets but there are two basic things to look for – either the company is struggling or if it has a large amount of cash on its balance sheet. Either situation could put the right company onto a takeover target list.
When An Acquirer Invests
In addition to the two factors named above, another indication that a company might be a takeover target is when a “could be” acquirer starts buying shares of the target company. Importantly, if the potential acquirer purchases more than 5% of outstanding shares, the buyer must report the purchase to the Securities and Exchange Commission (SEC). In many cases this act triggers investor interest and a flurry of activity in the potential target’s stock.
M&A Activity Soars
In the first year of the Trump administration, M&A activity has flourished. In that period almost 12,700 M&A deals worth $1.2 trillion in the U.S. took place according to Thomson Reuters. This represented both the highest number of deals and the highest deal value for a newly elected president in modern times. For the full year of 2017 there were 17,804 transactions totaling $1.8 trillion in North America. Those who believe 2018 may not deliver gains comparable to those of 2017 are likely looking for M&A candidates in the new year.
Searching By Index
Of 17 stocks identified by Goldman Sachs that it considers likely acquisition targets moving forward, the focus was on industries with low market concentration as measured by the Herfindahl-Hirschman Index (HHI). When the HHI is low, there tends to be more competition in that industry and a lower likelihood the government will oppose a merger. Goldman’s analysts indicated probabilities ranging from 30% to 50% that companies they identified will be M&A targets.
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According to Goldman Sachs, companies with HHI numbers of 9% or less are especially attractive takeover targets. From Goldman’s list the following (along with their HHI scores) are seen as takeover targets in the coming year.
Twitter Inc. (NYSE:TWTRC) 8% HHI, SeaWorld Entertainment Inc. (NYSE:SEASB) 4% HHI, E*Trade Financial Corp. (NASDAQ:ETFCC) 16% HHI, Kimberly-Clark Corp. (NYSE:KMBC) 26% HHI, T-Mobile US Inc. (NYSE:TMUSB) 27% HHI, Sprint Corp. (NYSE:SB) 27% HHI, Rite Aid Corp. (NYSE:RADC) 21% HHI and Etsy Inc. (:ETSYN/A) 8% HHI.