Seeking Alpha
, Think Finance (1,112 clicks)
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)  

There are many reasons that can lead to a company getting bought out. Some of the most common are those dictated by the company’s attractiveness to a private equity takeover, but there are also strategic reasons when an expanding sector undergoes concentration, as well as more frivolous reasons tied to the so-called “institutional imperative."

To be attractive to a private equity group, a company usually needs to be rather stable, showing good cash flow and earnings generation, and it’s preferable that it doesn’t carry too much debt, as surely enough the private equity acquirer will probably want to leverage it up (many of the private equity acquisitions are also leveraged buyouts).

Strategic reasons can vary wildly, though they are common when companies want to enter a given market segment they deem attractive, or want to just gain size on such a segment.

Institutional imperative acquisitions can happen because of anything a peer does, and suddenly every other competitor feels the urge to copy it. The original acquisition can even be made on strategic grounds, the ones that follow, however, even if they are justified on those grounds, are really “me too” acquisitions.

This article will be the first of a series trying to identify, from various possible angles, what I feel are potential acquisition targets. We’ll start with 6 possible candidates, two of which I’ve already talked about in other articles.

Ascena Retail Group Inc. (NASDAQ:ASNA)

Ascena Retail Group Inc. has a market capitalization of $2.3 billion, and is trading at a TTM P/E of 14.09 with expected earnings growth of 12.36% taking it to a forward P/E of 10.21 next year. The TTM P/E means ASNA trades at a premium to the S&P500 TTM P/E of 13.0. The PEG (Price/Earnings Growth) stands at 1.02. The Price/Book is 1.92.

The ROE is quite high at 15.07%, which is usually a sign of a good business (though sometimes cyclicality can be the reason). The stock is up 0.54% in the last month as well as up 12.49% from the start of 2011.

ASNA seems like a good fit for a private equity takeover, because it carries no debt and has as much as $289 million in cash, all this while generating such a high unlevered ROE, perhaps a sign of the value of its brands. The low valuation and lack of leverage make it a prime target.

Amtech Systems Inc. (NASDAQ:ASYS)

Amtech Systems Inc. has a market capitalization of $80.25 million, and is trading at a forward P/E of 7.60 next year. ASYS has a low Price/Book of 0.69. There are studies that indicate that low Price/Book stocks outperform over time, although some times the low Price/Book is also an indication of risk or permanently bad profitability.

The ROE is quite high at 22.82%, which can be a sign of a good business. The stock is down -0.82% in the last month as well as being down -66.16% from the start of 2011.

I’ve already covered Amtech in my article “10 Cheap Stocks With Strong Earnings Growth.” Amtech was hit hard in 2011 by the solar industry slump, yet expectations for 2012, albeit cut, still show the company as potentially undervalued. However, if revisions continue to take place, this might no longer be the case. The slump can be seen in the estimated near-60% plunges in revenues expected for the present and next quarters. If any kind of recovery in activity is possible (as per the analyst estimates), ASYS will seem a steal since the stock is trading at almost the cash it has in hand.

Given the closeness of ASYS to its cash in hand and position in a promising - if cyclical - industry undergoing a deep slump, some other player in the industry might see this as a strategic opportunity to gain size cheaply and lead to more concentration and better margins. It’s not unusual to see mergers in a slumping industry, in search of scale and to remove competition.

Brooks Automation Inc. (NASDAQ:BRKS)

Brooks Automation Inc. has a market capitalization of $680.39 million, and is trading at a TTM P/E of 5.19 with expected earnings growth of 121.82% taking it to a forward P/E of 8.42 next year. BRKS also trades at a discount to S&P500 TTM P/E. The PEG stands at 0.29, a level which is usually seen as attractive. BRKS has a low Price/Book of 1.31.

BRKS's dividend yield is generous at 3.12%, this equates to a dividend payout of 4.13%. The dividend exceeds the S&P500 dividend yield, presently at 2.1%. The dividend is higher than the yield on the 10 year bond, presently at 1.92%.

The ROE is quite high at 28.31%, which can be a sign of a good business. The stock is up -2.28% in the last month as well as up 15.26% from the start of 2011.

BRKS like many other semiconductor equipment makers had a challenging 2011, with revenues suffering broadly (falling by almost 25%). Yet, it does supply a niche in semiconductor equipment, namely vacuum tools, and could easily be seen as a good strategic fit to other semiconductor equipment makers, which would be able to pick it up cheaply, since it carries no debt and a low valuation, while being able to generate good earnings when the cycle turns.

Culp Inc. (NYSE:CFI)

Culp Inc. has a market capitalization of $108.80 million, and is trading at a TTM P/E of 6.76 with expected earnings growth of 31.71% taking it to a forward P/E of 7.89 next year. CFI also trades at a discount to S&P500 TTM P/E. The PEG stands at 0.29, a level which is usually seen as attractive. CFI has a low Price/Book of 1.29.

The ROE is quite high at 21.19%, which can be a sign of a good business.

The stock has been having a strong performance lately, being up 10.08% in just the last week. However, the stock is still down by -17.76% from the start of 2011.

CFI was also covered in my article “10 Cheap Stocks With Strong Earnings Growth.” Very little growth is expected in terms of revenues, but earnings are expected to grow strongly into 2012. CFI is easily the kind of company that could attract interest from either a private equity company, given its low debt, good profitability and low valuation, or even Warren Buffett or a similar acquirer, given the sector’s predictability together with the low valuation and unlevered profitability.

Gravity Co., Ltd (NASDAQ:GRVY)

Gravity Co., a Korean Company trading through ADSs representing ¼ of a share, has a market capitalization of $40.31 million, and is trading at a TTM P/E of 6.04, but earnings are expected to decline. GRVY has a low Price/Book of 0.49. The ROE is 8.57%.

The stock has been having a strong performance lately, being up 7.41% in just the last week. However, the stock is still down by -15.20% from the start of 2011.

GRVY is interesting as a takeover candidate for several reasons. First, it trades at a very low Price/Book, and most importantly, it even trades below the cash it has in its balance sheet. This is particularly important because the company is profitable and growing, albeit not much. Also, GRVY is established in an attractive market segment, online massive multiplayer gaming, drawing the kind of subscription revenues that are also very attractive. It is thus attractive both from a strictly financial perspective, as well as a strategic perspective for other gaming companies wanting to enter, or extend their presence, in the online gaming market segment.

A possible obstacle to this could be the 59% ownership by a single shareholder (GungHo Online), however this shareholder is levered and might be interested in selling if the opportunity presents itself.

Material Sciences Corp. (NASDAQ:MASC)

Material Sciences Corp. has a market capitalization of $88.86 million, and is trading at a TTM P/E of 9.03 with expected earnings growth of 3.19% taking it to a forward P/E of 8.47 next year. MASC also trades at a discount to S&P500 TTM P/E. The PEG stands at 1.81. MASC has a low Price/Book of 1.24.

The ROE is quite high at 15.55%, which can be a sign of a good business. MASC is up by 28.44% from the start of 2011.

MASC produces material-based solutions for acoustical and coating applications, used in the automotive sector, as well as telecommunications, appliances, etc. It trades very cheaply (EV/EBITDA is just 4) and would be a good niche fit for a conglomerate to buy. Given that it has no debt, a decent ROE and carries an extreme undervaluation, it could also be a target for a private equity firm, even though its size is rather small.

Source: Analyzing 6 Potential Takeover Candidates