3 Takeover Targets and Options Plays to Profit From Them

Includes: CAM, CIS, GE, NSTC, RDC
by: Simon Monger

Rowan Companies Inc. (NYSE:RDC), Cameron International Corporation (NYSE:CAM) and Camelot Information Systems Inc. (NYSE:CIS) are three potential takeover targets mentioned by stock analysts this week. Investors looking to capitalize on the potential buyouts may want to consider using long-term options, pairs trades and other unique strategies to maximize their risk-adjusted returns.

Rowan is the Most Attractive Target in Oil Services

Rowan Companies Inc. is a provider of international and domestic contract drilling services. Rowan represents the most attractive takeover target in the oil services sector, according to BMO Capital. BMO's analyst expects that the sector will consolidate further after the firm’s recent sale of LeTourneau Technologies mining and drilling equipment unit to Joy Global Inc. (JOYG) for $1.1 billion in cash.

Investors looking to capitalize on this potential for consolidation may want to consider a pairs trade to enhance risk-adjusted returns, given the volatile nature of the oil industry in recent months. By purchasing three 35 January ’13 calls for $8.10 per contract and one Oil Services HOLDRs (NYSEARCA:OIH) 145 January ’13 put for $24.75 per contract, investors can isolate the M&A opportunity without market risk.

Cameron Could Become an Acquisition Target

Cameron International Corporation (CAM), a provider of flow equipment products and systems to global oil, gas and process industries, could be an attractive takeover target for a company like General Electric Company (NYSE:GE), according to BMO Capital. The analyst believes that the recent pullback has created a very attractive entry point for investors and sees the stock as one of BMO's top three picks in the sector.

Investors looking to capitalize on a potential buyout for this company may want to consider using long-term equity anticipation securities, or LEAPS, in lieu of stock to lower their total invested capital and leverage their returns. Specifically, investors may want to consider the 42.50 January ’12 calls priced at $6.50 per contract, which creates a breakeven point of $49.00 per share.

Camelot Could be a Takeover Target for CVCI

Camelot Information Systems Inc. is a Chinese company focused on enterprise applications and IT services in China. Camelot could be a takeover target for CitiVentures, according to Susquehanna. The analyst noted that the group has acquired Ness Technologies (NASDAQ:NSTC) and Managing Director Ajit Bhushan joined the company’s board last year – two promising precursors.

Investors looking to capitalize on this potential may want to consider using longer-term call options like the 15 December ’11 calls for $2.20 per contract. Alternatively, investors can place a bet on volatility by simultaneously purchasing the 15 December ’11 puts for $4.10 per contract, creating a position that is profitable above $21.30 and below $8.70 per share.

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