14 Deal-Ready Stocks for the M&A Boom
Frankly, it doesn't pay to speculate too much on which companies will be doing the buying. These acquirers typically get little initial credit among investors and can even see their shares drop on an announcement. (That can create a solid opportunity as investors discount the eventual benefits that such deals are likely to bring.)
Why do investors react negatively? Because they fear "acquisition indigestion." Deal-making entails risk. It can cause management to lose focus as overlapping teams create a bit of friction. And even though companies initially tout the cross-selling opportunities that a deal can bring, investors prefer to take a wait-and-see stance to ensure that such synergies really take place.
So it's the companies that might get acquired that should be in focus for you. Make no mistake: It's foolish to buy a stock just because you think it might get acquired. Most rumored deals never come to pass, and you may be left holding the bag when buyout hopes fade.
Instead, it's wisest to focus on buyout candidates that are already attractively priced on their own merits. If a buyout doesn't happen, you can still do well, and if a buyout does happen, then you can score quick gains: A typical buyout offer is made at 20% to 40% above the current price to help grease the wheels for a company that may be reluctant to sell.
You're most likely to see M&A activity in industries and sectors where growth has slowed to a crawl. Take the defense sector as an example. Projected budget cuts will make it much harder for the nation's top defense contractors to boost sales and profits. Lockheed Martin (LMT) and Raytheon(RTN) are both expect to post a modest drop in sales in 2012 and again in 2013.
To keep their dance card full, they could look to acquire a company such as Aerovironment(AVAV) , which has become a leader in unmanned aerial vehicles (drones) that dot the skies in the Middle East and elsewhere. Or they might look to acquire a company such as iRobot(IRBT) , which also has solid government contracts for its products that can be piloted in a remote fashion in hostile environments. Both Aerovironment and iRobot are trading far from their 52-week highs, creating relative bargains for potential acquirers.