With private equity commanding so much attention today, it seems that every company is hailed a buyout candidate. That said, I think buying a stock based solely on the hope that someone else will buy the company for a fat premium is a poor investment strategy.
Consider the conclusions of the following strategic alternatives processes:
Consider further the following companies that are selling themselves, but for below market prices:
Certainly there are many counter examples of companies sold for hefty prices. But I still think it's a mistake if you need a buyout for your investment to work. They don't always happen the way we hope for.
A better idea is to formulate an investment thesis that can stand alone, and think of a premium buyout as a nice surprise. If a company is priced very cheaply or has a particularly attractive business as an independent entity, then you have reason to hope your investment will rise even without a private equity takeout.
Paying a big price hoping someone else will pay an even bigger price is putting all your eggs in one very precarious buyout basket. If you buy high and wait for a greater fool to come along, he may have already arrived.