3 Potential Takeover Targets and How to Profit

Includes: ISIL, KERX, TYC
by: Simon Monger

Tyco International Ltd. (NYSE:TYC), Intersil Corporation (NASDAQ:ISIL), and Keryx Biopharmaceuticals (NASDAQ:KERX) are three potential takeover targets ripe for profit-taking in 2011.

Tyco Could be Worth $67.00+ in a Takeover

Tyco International Ltd. (TYC), a diversified company with numerous segments targeting many industries, could be worth $67+ in a takeover transaction, according to FBR Capital. The analyst suggested that the company’s sum-of-parts valuation was around $58-62 per share and that a 15-20% change of control premium could result in a $67.00 per share or higher takeover offer.

The prediction comes shortly after rumors surfaced that Schneider Electric sent a letter to the company’s board of directors outlining its interest in buying the company. Reports from The Telegraph indicated that Schneider is believed to have hired JP Morgan and Merrill Lynch to advise it on a bid, while Goldman Sachs is reportedly working for Tyco’s board.

Intersil Seen as Takeover Candidate after TI Deal

Intersil Corporation (ISIL), a developer of high-performance analog integrated circuits for four different markets, has been seen as a strong potential takeover candidate after Texas Instruments (NYSE:TXN) purchased National Semiconductor earlier this year. With the deal occurring at a 78% premium to market price, there has been optimism that more semiconductor deals may be on the way.

According to Needham analysts, the Texas Instruments acquisition occurred at a dramatically higher price than most investors expected, while Intersil is a smaller version of what National Semiconductor was before the takeover. Often times, competitors within the industry look to bulk up their own size after acquisitions like these, and the company appears to be a great strategic fit.

Keryx Could Be a Target with Two Late-Stage Drugs

Keryx Biopharmaceuticals (KERX), a biopharmaceutical company focused on the treatment of life-threatening diseases, represents a solid takeover target within the M&A-heavy pharmaceutical industry. With patent expirations on many blockbuster drugs for giants like Pfizer Inc. (NYSE:PFE) and Merck & Co. Inc. (NYSE:MRK), there are many companies looking for promising new drugs for their pipelines.

Over the past year, the biopharmaceutical company has moved both of its compounds, KRX-0401 and Zerenex, into Phase III development under an SPA with the FDA. The stock jumped higher after the firm released positive Phase III data from its Zerenex clinical trials, while expected results from its KRX-0401 metastatic colorectal study could provide a further catalyst later this year.

How to Profit from Potential Takeovers

The first step in profiting from potential takeovers is determining the likelihood of the takeover and identifying the market’s sentiment. Often times, this is easiest by watching the company’s options trading activity. Implied volatility (the price of an at-the-money straddle) can tell you when the market is expecting a big jump; looking at the volume versus open interest can tell you where action is happening; and, looking at whether the price is hitting the bid or ask can tell you if it’s buying or selling pressure.

The second step in profiting is then determining how to take advantage of a price jump. If the options have become too expensive from expectations, buying stock on margin can provide leverage. Other creative ways to profit may be purchasing call options in rival companies that may experience a jump in share price after such a bid.

And finally, the third step is hedging out some risk of a no-deal by shorting an industry ETF in a pair trading-like strategy. This way, if the stock down due to a market decline, you are making money on the short to offset those declines. But, if the stock rises significantly due to a buyout, you’re making most of the premium, and only losing out on a marginal increase likely in the short position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.