By Matt Doiron
Because takeovers of public companies occur at a significant premium to the stock price, investors who correctly anticipate impending takeovers can achieve high annual returns. Of course, many takeover rumors are false or exaggerated, and buying into these rumors can similarly result in losses for investors; as a result, buying a stock purely on takeover rumors is generally a bad risk/return game in our view. However, investors can analyze rumored takeover targets in a few different ways to gauge the likelihood that buyers may actually be interested or the possibility that the stock is undervalued on its own. Here are five stocks which have fallen at least 5% from their highs after takeover rumors began to circulate:
One of the biggest speculated takeovers so far this year has been the potential acquisition of Vodafone (VOD) by Verizon, as an alternative to merely buying out Vodafone's minority stake in Verizon Wireless. Billionaire David Einhorn of Greenlight Capital had suggested that the market was undervaluing Vodafone's assets in this area, and Verizon has in fact confirmed its interest in controlling all of Verizon Wireless (though they claim to be uninterested in Vodafone as a whole). Vodafone's stock is down 7% in the last month; it is currently valued at 8.7x trailing EBITDA. While its dividends do fluctuate, based on historical patterns, the current yield seems to be above 5%.
Earlier this year there was some speculation of a takeover of $5.4 billion market cap mining equipment company Joy Global (JOY); however, the stock price has declined more or less steadily so far in 2013 and is currently down about 20% year to date. Troubles in the mining industry so far this year have stung Joy Global, with revenue down 12% last quarter compared to Q1 2012 and net income declining at a slightly faster rate. Analyst forecasts imply a forward earnings multiple of 9. Iridian Asset Management, managed by David Cohen and Harold Levy, purchased 1.4 million shares of the stock in the first quarter of 2013.
Saks (SKS) is currently down about 8% from its levels at the end of May, when reports began to speculate that the company had hired Goldman Sachs to explore a potential sale. Even after this decline, however, the stock looks quite expensive to us in fundamental terms: the retailer is valued at 26 times forward earnings estimates, and that's with analysts expecting the company to significantly grow its earnings per share over the next year and a half. 25% of the float is held short, suggesting that many market players aren't believing this rumor, and we think that Saks does look fairly high risk as a buy.
For some time, bankers have argued that data storage platform provider Fusion-io (FIO) is a takeover target; the stock price is currently down over 40% year to date after slipping 10% in the last month. Fusion-io is another popular short target, with short sellers responsible for nearly half of the stock's float. Profits are low compared to the company's valuation, and with revenue falling 7% in its most recent quarter compared to the same period in the previous fiscal year, we don't think that the fundamentals favor buying Fusion-io either.
A huge earnings miss caused Nuance Communications (NUAN) to plunge over $4 in one day to $19 per share in late April. This came shortly after billionaire activist Carl Icahn took a large stake in the company and some rumors had swirled that the company might be targeted by Microsoft, another large tech company, or private equity investors. Nuance provides software for voice and language functions. Despite the earnings misses, revenue has been up going by recent reports. Nuance trades at 12 times forward earnings estimates, but it looks to us that analysts are being very optimistic about future EPS growth.