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Mergers and acquisitions activity has been on the rise since 2010 and it kept its momentum through 2011. I have seen strong indications that this trend is set to continue into 2012, and we'll see most of the action in the small cap sector, as valuable players are being snatched up by bigger players.

The companies we are reviewing today all share a common thread: Apart from the fact that they could become acquisition targets, they all offer highly specialized products that have niche markets. In fact, some of these companies are one-trick ponies, offering only single producers.

WD-40 Company (WDFC) manufactures two product lines: a multi-purpose maintenance range, and a homecare and cleaning product range. The company is best known for its multi-purpose range of lubricants that are all closely associated with the WD-40 brand name.

The suitor

There has been merger and acquisition activity in this sector recently - Akzo Nobel N.V. (OTCQX:AKZOY) acquiring another specialty chemical manufacturer, the Chinese surfactant producer Boxing Oleochemicals. In February 2011 Valspar Corporation (VAL) bought Brazilian-based Isocoat to give it a footprint into Latin America.

My research has led me to believe that we will see more buyout activity as coating and paint manufacturers look to keep pace with each other. Next in line to add to its existing assets is RPM International Inc. (RPM). The company is divided into two divisions: consumer and industrial segments, and the WD-40 product line will fit in very snugly with RPM's consumer products that already include maintenance and other do-it-yourself coating products.

WD-40 Company currently trades around $44, and its market capitalization is $700.64 million. The company returns strong, sustainable results and has strong brand presence. It's my opinion that a takeover bid will be in the region of $52 to $55 per share for a 20 - 25% premium on its current price.

Brooks Automation, Inc. (BRKS) provides automation, vacuum and instrumentation solutions to original equipment manufacturers and equipment users globally. The company is best known for its activities in the semiconductor industry, where it sells tools and services to semiconductor chip manufacturers. Brooks' specialty is the handling of wafer systems, be it wet, dry, atmospheric or vacuum.

The suitor

An emerging area for Applied Materials, Inc. (AMAT), the company that is closely related to the semiconductor and flat panel display industries, is in three-dimensional integrated circuits. Put plainly, the company is now involved in a type of chip packaging done at the wafer level to streamline the manufacturing process.

It makes for sound reasoning that Applied would highly value the expertise Brooks has attained with wafer handling. Considering the mixed set of results Brooks released for the quarter ended December 31, now is the time to strike.

Brooks' trading price around $12 gives it a market capitalization of $806.26 million. Even at a 25% premium on current share price, which arrives at around $15 per share, Applied's cash and equivalents of $5.6 billion will more than cover a takeover.

Volterra Semiconductor Corp (VLTR) develops analog and mixed-signal power management semiconductors for the computing, networking, and consumer markets. The company has performed well, beating analyst expectations with its reported earnings for the quarter ended December 31, but with its price earnings ratio at 40.3, performances like this should be the norm.

The suitor

It has been in the news lately, first after it acquired Dust Networks, Inc., maker of low powered wireless sensor networks; thereafter Linear Technology Corporation (LLTC) showed with its 2012 revenue expectations that the semiconductor industry has more upside to it than previously expected. My analysis points to it that Linear are hungry for more acquisitions and Volterra's exposure to cloud infrastructure and blade server growth is in its sights.

Volterra trades around $31 per share with its market capitalization at $779.68 million. I foresee an offer around $40 to acquire Volterra.

ATMI, Inc. (ATMI) is a supplier of materials, materials packaging and materials delivery systems used in the manufacture of microelectronics devices. The company's products are used by semiconductor manufacturers: sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases to semiconductor process equipment, and materials packaging and dispensing systems.

The suitor

Entegris, Inc. (ENTG) supplies products and materials used in processing and manufacturing in the semiconductor and other high-technology industries. Its products are marketed through three segments: contamination control solutions segment, microenvironments segment, and its specialty materials segment. It's the contamination control solutions segment that we are interested in and that is where ATMI's product offering will be of most benefit to Entegris.

ATMI currently trades around $23 with its market capitalization at $748.65 million, but an offer will be between $28 and $30.

InterMune, Inc. (ITMN) is a biotechnology company that develops therapies in pulmonology and fibrotic diseases. The company has developed a treatment for a condition called idiopathic pulmonary fibrosis that is currently in phase 3 clinical trials in the United States, but has already been approved in Japan and the European Union. Despite posting a fourth-quarter loss, I believe the stock is about to become a takeover target.

The suitor

The global and diversified healthcare company, Sanofi SA (SNY), has seven growth platforms; in this case its rare diseases segment will benefit most by acquiring InterMune as it specializes in rare, life threatening conditions. Also, its research programs are focused on the discovery of targeted, small-molecule therapeutics which fits in with Sanofi's innovative approach to drugs.

Intermune is trading around $14, but it's my view that an offer will be around $21.

Source: 5 Niche Stocks Targeted For M&A In 2012