Top 5 Takeover Targets Of 2012

by: Richard Saintvilus

I have yet to make up my mind on what direction the stock market is going to take next. But as high as all of the indices appear, the only logical direction to expect (one would think) is down. Except the market does not care what you or I think. There are stocks that should not be going up, but are. Yet on the flip side, there are those (less fortunate) that are losing ground on a daily basis when all logic and common sense suggest that they should be going up.

The point of all of this I'm realizing is that it's not worth the fight. What I'm realizing early on after having a chance to digest the volume of earnings that have been reported so far this year is that companies are feeling increasingly more comfortable with the prospects of not only the U.S. economic recovery, but also are feeling pretty good (of late) about the status of their own balance sheets and their growing cash - but more specifically, how to use it.

Wall Street applies extreme pressure on these companies to generate growth, or those fortunate enough to have the "growing cash problem." Having that cash sit around while netting slow growth on a sequential or quarterly basis makes for some sleepless nights for many CEOs, so the outcome is often a shopping spree or M&A activity. So far early indicators show that the economy should improve considerably going forward. So it stands to reason that more companies will enter the fray of spending on buying up firms or competitors that can help deliver the type of growth that Wall Street craves.

So on the heels of database giant Oracle's (NASDAQ:ORCL) recent acquisition of Taleo, I'm starting to glance around the market to try to identify the ever popular question "who's next?" Let's take a look at some names of possible candidates who will be looking for some suitors in the coming months - assuming discussions have not already started. We are going to first look at the technology sector for a list of possible candidates.



Market Cap. In Billions

Current Price

Research in Motion
















Sirius XM




Click to enlarge

Sirius XM

The interesting thing here with Sirius is that it appears on this list along with Research in Motion. I have suggested that the two companies should consider coming together, although that is highly unlikely to happen. But to me, it makes perfect sense. However, the question is now which company should be the acquirer and which should be the target? Remarkably, Sirius is now more valuable than RIM in terms of market cap.

Another reason that Sirius makes this list has to do with the swirl of speculation that continues to involve Liberty Media (NASDAQ:LMCA). My stance on this is simple: it doesn't make sense for Liberty to disrupt what Sirius is doing, especially considering that it already owns 40 percent of the company and has all of the benefits of ownership without all of the risks. There are several things that Sirius can do to return value to shareholders - for one, manage its perception, which it failed to do during its recent earnings announcement. But we're not going to get into that again.

Many investors appear stunned at what is now perceived as me being too harsh on the company. But that is not the case. I have been a huge apologist for the company during all of 2011. This year, as an investor, I have decided to raise the bar.


I think an Adobe acquisition by Microsoft (NASDAQ:MSFT) could be a match made in heaven. If nothing else, it should work because they both have common enemies in Apple and Google. Of course a synergistic merger requires more than having similar adversaries, but marriages typically work better when both parties have at least one thing in common. But for Adobe and Microsoft, the great thing is that their similarities reach far beyond just their shared hatred for Apple and Google.

First and foremost, they are both technology giants with a concentration in software applications that offer a wide array of desktop publishing and web-based applications. Secondly, they are both facing up to the fact that Google offers (for free) what both Microsoft and Adobe rely upon at the core of their sales - namely Google Docs.

It offers users features that are similar to the experience of MS Office and it then allows the document to seamlessly convert into a PDF file. As Google increases its portfolio of free applications, there will be a point when users have to wonder why they are spending money on Microsoft and Adobe products. It will no longer make sense - that's assuming it ever did. I have to imagine that a merger between the two companies is one that will eventually happen.


When rumor surfaced last month that Verizon (NYSE:VZ) was considering acquiring Netflix, the stock surged 6 percent. It has since lost some of that luster when the idea was dissected a bit further and discovered to not have made much sense. But I have to wonder that this will not be the end of this sort of speculation when it comes to Netflix. Amazon (NASDAQ:AMZN) has also been involved in that discussion and as Netflix' stock continue to falter, one has to believe that all of the smoke will eventually lead investors to the fire.

Aside from the tough competition, what has hurt Netflix is the public relations disaster it caused surrounding its recent price increase during the summer of last year - an event that prompted many faithful subscribers to cancel and ultimately led to the company offering an apology. I think once the subscriber defections stabilize, so will the stock price. I'm not suggesting that it will go higher, only that it may not go much lower.

As heated as the competitive landscape is for its business, Netflix has the benefit of having a great lead in that market - something that any acquirer will not be able to immediately duplicate. For this reason, Netflix remains one of the top targets of 2012.

Research in Motion

What would be an M&A discussion without mentioning Research in Motion? In 2011 as the stock started its precipitous decline from prominence the company was rumored to have been the target of virtually anyone with a market cap high enough to finance the purchase. So it should come as no surprise that I am leading with RIM as my top target for 2012. In fact, I have gone on record and said something will likely occur within six months (give or take).

The company has been the constant topic of M&A since it dropped below $30 last year and seeing as the stock is now at $15 one would think that it is even more attractive - at least from my vantage point. In January, when rumors started swirling regarding a possible acquisition, RIM saw its stock surge as much as 10 percent. After reaching another 52-week low of $12.45, the stock surged past $14 when analyst Mark McKechnie of ThinkEquity raised his rating on the stock to buy from hold and hinted that (again) Amazon (AMZN) may be targeting RIM.

Mark suggested that RIM's current price undervalues the company's $5 billion worth of patents, $3 in cash per share, and its BlackBerry messaging service. It is hard to imagine that RIM will be acquired soon, but by the same token, I don't see any other way for it to survive. It has become time for this once-proud company to be put out of its misery. The real tragedy in all of this is with its diehard investors who refuse to accept the company's current reality.


On the heels of Yahoo having hired a new CEO, I begin to wonder if this will put an end to its search for a potential suitor. As I have said recently, no matter how much value the company tries to project, it is working in a space also occupied by Google - that fact alone makes it unattractive to potential acquiring companies who would then immediately become Google's (NASDAQ:GOOG) competitor. Chinese Internet conglomerate Alibaba continues to be at the top of the list of potential suitors who would not mind acquiring Yahoo and thus taking on Google.

As noted by Seeking Alpha contributor Jiang Zhang, the acquisition of Yahoo will instantly give Alibaba a foothold in the U.S. online advertising and e-commerce market. To capitalize on the opportunity, Alibaba is likely to retain Yahoo's current headcounts because U.S. engineers are more innovative, creative and experienced than their Chinese counterparts. The Chinese engineers that Alibaba have are educated on a system that emphasizes memorization and theory while the U.S. engineers can contribute to the innovation and creativity to Yahoo based on their professional and academic experience.


This is not a complete list of takeout targets by any means. There are a handful of other potential candidates in the technology sector that can become extremely attractive to potential suitors looking for growth opportunities or areas of leverage. Firms that provide recurring revenue and are strong cash generators would be seem to some of the most attractive candidates. However, as I have warned previously, investors should avoid buying stocks solely on these assumptions and instead try to find those win-win situations where a company is appealing on its own fundamental metrics while at the same time presenting the qualities to potential suitors that can immediately provide a decent premium via an M&A.

Disclosure: I am long MSFT, ORCL.