By Brian Tracz
The mere mention of M&A is enough to move the market. A study reviewing merger and acquisition announcements in the London Stock Exchange concluded that after the announcement of a potential takeover or merger, the market tends to act efficiently, quickly "pricing in" the change. Interesting, though, is that this pop is usually followed by a depression in price as the possibility of the acquisition is more critically analyzed. Timing is of the essence for M&A plays, so in this article, we take a look at five takeover candidates that have seen recent price action in the face of rumors or announcements. With these companies, announcements and rumors were met with pops in price, followed by a level-out or a slight drop off.
In a high-profile possible acquisition, Netflix, Inc. (NFLX) shares are up around 25 percent since early October after rumors surfaced that Microsoft Corporation (MSFT) might be tabling a bid for the company. As one commentator notes, there is some logic behind this spike. Netflix CEO Reed Hastings stepped down as director at Microsoft earlier in October, a move that would be necessary prior to any formal acquisition talks. Concerns about Netflix's profitability absent such a deal should be a concern for any interested investor; the company sports a dull operating margin of 2.8 percent. However, as we reported previously, we like Carl Icahn's activity in the company, which has been itself a source of the rally seen in Netflix shares.
A company whose shares are peaking right now, Huntsman Corporation (HUN) has also been the subject of low-level takeover rumors. The Blaze reported in June that Bain Capital was interested in purchasing this mid-sized chemical company, though nothing much has come of it since then. Actually, that isn't quite true: shares are up about 30 percent since these speculations began. Third quarter earnings for the company were also a surprise at 70 cents a share, topping the consensus estimate of 51 cents a share. Aside from its takeover prospects, shares of Huntsman Corporation are trading at a mere 7 times forward consensus earnings, compared to 11.9 times forward earnings for The Dow Chemical Company (DOW). Some M&A activity could be the icing on the cake.
Amarin Corporation plc (AMRN) is a pharmaceutical company specializing in the treatment of cardiovascular disease through its research in lipid science. As one commentator put it, Amarin is "playing the dating game" with its drug Vascepa. The FDA approved the drug over the summer for use in lowering triglyceride levels in patients with abnormally high levels, and Amarin has been pondering the multiple ways to bring the drug to market, which includes establishing a partnership, going it alone, or selling to an acquirer. The prognosis for the company could be rather "non-linear"-do not be surprised if Amarin brings the drug to market and then is subsequently purchased by the likes of Bristol Myers Squibb Co. (BMY) or AstraZeneca plc (AZN), both of which may have interest in the company's patent offerings. With a present market cap of $1.66 billion and significantly depressed share prices, Amarin Corporation could soar if its drug receives approval for a broad base of patients with high triglyceride levels.
Another significant, "post-rumor" acquisition play is Clearwire Corporation (CLWR), a company that owns about 160 MHz of 4G wireless spectrum in the United States. As reported by Mount Kellett, a 7 percent stakeholder, the company owns an average of 60 to 80 MHz of surplus spectrum throughout its overall footprint, suggesting that it could raise a significant amount of capital by selling these valuable assets. Mount Kellett is one of a few major holders in the company who is anxious about the over 50 percent stake that Sprint Nextel Corporation (S) recently initiated in the company. These stakeholders view the company's 4G infrastructure as fundamentally undervalued despite the company's negative earnings estimates over the next several quarters. That said, the stock nearly doubled early in October after earnings Sprint began its outright acquisition talks. Over the next year, the Clearwire acquisition play is worth tracking.
Advanced Micro Devices, Inc. (AMD) perpetually enters and exits the rumor mill. Earlier in August, rumors surfaced that the company was subject to takeover bids. With a number of technology firms switching to chips from AMD's beleaguered peer Intel Corporation (INTC), shares of AMD have fallen to historically low levels-shares trade at the same levels they did in 1979. Though there was a hiccup after the rumor in August, AMD has since hemorrhaged to a mere $2 a share. This could make the company an attractive and inexpensive pick-up for a larger firm. As with the other rumored take-over candidates, we advise caution in playing the timing of these "Rumortrade" possibilities.
Disclosure: I am long MSFT.