When a company looks to grow, there are plenty of ways to do so. One of the most popular ways is to acquire another business, usually within one's industry, although occasionally a company will try to enter a new line of business. Acquisitions can be extremely beneficial to a company if the right purchase is made and the price is not too high. Not all acquisitions work out, but one thing does usually happen. The company that is being acquired sees its stock price soar. Now, there is usually a fair amount of rumor and speculation that goes around with acquisitions, and many of it turns out to be false. People who get caught up in the initial speculation end up losing big, so if you see a stock jump 25% on rumors, either the rumor will be false, or much of the takeover premium has already been missed. That being said, here are seven potential names that many believe could be acquired within the next year.
| Company | Cost | EV/EBITDA | P/E |
| Walter Energy | $8.02B | 9.95 | 13.98 |
| Interdigital | $1.76B | 10.08 | 25.03 |
| Yahoo | $21.65B | 15.41 | 24.43 |
| Research in Motion | $9.33B | 1.81 | 3.91 |
| Human Genome | $1.79B | -5.67 | N/A |
| Potash | $50.73B | 11.97 | 16.56 |
| Cree | $2.76B | 11.96 | 35.45 |
To determine cost, I took the current enterprise value and added a 30% premium. Using that premium, gave two valuation metrics based on trailing twelve months EBITDA and net income.
Walter Energy (WLT): Walter Energy produces and exports metallurgical coal for the steel industry, mostly in the United States. Within the past three months, the stock has jumped on takeover rumors. The company is too large to be bought out by another US-based metallurgical coal company, but would make a nice target for a large international metals/mining company. Two mentioned acquirers have been Anglo American and BHP Billiton (BHP).
Trading in the mid $60s, Walter's stock is well below where it was several months ago when it was well into the $130s. When the first takeover rumor came out, Walter's stock jumped from $75 to $95 overnight, but that rally lasted all of a few minutes. The stock has tracked back, and hasn't even held the gains it made when the second round of takeover rumors came out.
Interdigital (IDCC): Shares of this technology company had a great summer after rumors of a buyout started and the company put itself up on the auction block. Many believe that the company, which is valued for its large and deep patent pool, including many patents on popular smartphones, could fetch more than the $4.5 billion that Nortel was acquired for earlier this year. Currently trading for less than $2 billion, this would be a nice premium.
Shares soared on these rumors, going from the upper $30s into the low $80s at one point. However, when Google (GOOG) bought out Motorola Mobility (MMI), the euphoria wore off as people thought that Interdigital's buyout hopes had been slashed. However, the auction process is still ongoing. The stock has lost almost all of its gains since the first pieces of news came out, and were not helped when a report came out that first round bids were in the $1 to $2 billion range. The stock was trading at $2.5 billion then, which sent the shares lower. They are now around $40, about 50% off their 52-week high. I've discussed this company with a fair amount of people, all who believe this company could go for $100 to $120 per share or more. I'm not that optimistic, but I think an $85 to $90 range is possible. That's still a double from here.
Yahoo (YHOO): This one may be a sensitive issue for some shareholders. Remember a couple of years ago when Microsoft (MSFT) offered a nice deal for Yahoo? I think it was roughly $31 a share. Yahoo rejected that offer, and is now trading at half that price. A buyout here would be much lower than that offer.
Microsoft has recently been looking at Yahoo's books but that's not necessarily a guarantee that an offer will be made. While it might be a good purchase for Microsoft strategically, as it can expand its search business and gain some other decent assets, I'm not sure it makes sense financially. You're talking about a $20 billion plus acquisition, and although some companies, like Microsoft, have the financial flexibility to pull it off, that's still a large chunk of dough. A company better be sure that deal will work before ponying up that kind of money. Just ask the folks at AOL (AOL) and Time Warner (TWX).
Research in Motion (RIMM): Everytime I hear some piece of news about RIMM, the question always seems to be, will the company get bought out soon? RIMM is having a lot of trouble competing with the iPhone, and recent BlackBerry outages have only made things worse. Just take a look at my RIMM article from September. This isn't just a company that's struggling, it is a company that is in serious trouble.
Now to be fair, RIMM is quite profitable at the moment. It's just not as profitable as people want it to be. Many analysts have gone negative on the stock recently (like one this morning who changed a buy to a sell after a $20 drop), some having targets as low as $12. RIMM's enterprise value of $7.2 billion currently is a bit high for many, so I don't see an acquisition coming just yet. I have a feeling that if its struggles continue, it will sell the company, but who would pay $20 to $25 to acquire it now if they think they can pay $15 a year from now?
Human Genome (HGSI): Human Genome popped last month when rumors of a buyout from GlaxoSmithKline (GSK) came out. However, those rumors were not true then, and the stock has lost 50% of its market value since then. I'm not the biggest follower of Human Genome, so if you want some more info on why it is a candidate, read this article.
Basically, Glaxo and Human Genome have a partnership on Benlysta, a lupus drug, so a buyout could make sense. But Human Genome is also working on improving its pipeline for the future, so really, it could be a potential acquisition candidate for any major pharma. Based on the recent drop, even a $2 billion acquisition price, a 45% premium from today's close, doesn't seem unreasonable for one of the big guys looking to take a chance.
Potash (POT): Last year, BHP Billiition tried to buy out the world's biggest fertilizer manufacturer, but withdrew its bid after a no-go from the Investment Canada Act. Just a few months before, Potash had rejected the $38.6 billion offer from BHP. Interestingly enough, the current enterprise value is only 1% higher, at $39 billion.
Now it is not unreasonable to think that BHP or another big international miner could come after Potash again, but it would be a huge deal. The investment banks would really love the fees coming to them. Given the 30% premium I mentioned above, you are talking about a $51 billion investment, something not many companies can afford. Even the ones that can probably wouldn't take the risk, but it's something to consider. With 36% net margins over the past year, it's not like the company doesn't make any money. The fertilizer business will continue to grow, so why not buy the biggest name? It's probably not likely, but it is very intriguing to think about.
Cree (CREE): Cree is a manufacturer of LED lighting products, and is the perfect acquisition for a company wanting to go green. Cree's products are much more energy efficient and longer lasting than traditional lighting sources, and it might be a good acquisition for a company like General Electric (GE) or Philips (PHG). Even Siemens (SI) could be interested.
Cree traded as high as $80 or so a few years ago, but a series of earnings disappointments and below expected revenue growth have whacked the shares. More than 20% of the market cap currently is cash, and as I mentioned above, the enterprise value (with 30% premium) at $2.76 billion is not that great. Cree has a great business model and a lot of good products. I've followed the name for the past couple of years and I always considered it a buyout candidate. One of these days, it just might occur.
Now that I've given you the details, it's time to have some fun. Let's build a theoretical $1 million portfolio out of these names, and see how they do over the next year. To be fair, I will equally weight them, regardless of buyout potential (Interdigital as highest chance in my opinion, Potash as lowest). Here's how the portfolio would look, and I'll check in as time goes on to see how they are doing.
| Company | Shares | Buy Price | Start Value |
| Walter Energy | 2,169 | $65.86 | $142,857 |
| Yahoo | 9,307 | $15.35 | $142,857 |
| Interdigital | 3,359 | $42.53 | $142,857 |
| Research in Motion | 8,669 | $16.48 | $142,857 |
| Human Genome | 19,463 | $7.34 | $142,857 |
| Potash | 3,383 | $42.23 | $142,857 |
| Cree | 5,770 | $24.76 | $142,857 |
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IDCC over the next 72 hours.
