7 Potential Takeover Targets

by: David Zanoni

With the recent M&A activity taking place between BHP Billiton (NYSE:BHP) and Potash (POT), Intel (NASDAQ:INTC) and McAfee (MFE), Sanofi-Aventis (NYSE:SNY) and Genzyme (GENZ), HP (NYSE:HPQ)/Dell (DELL) and 3Par (NYSE:PAR), investors always speculate on who will be the next takeover target.

After the Potash takeover chatter, investors were again speculating that the phosphate and potash producer, Mosaic (NYSE:MOS), could be the next agricultural company to be taken over. Mosaic is sporting a 16.7% revenue growth rate and a 169% earnings growth rate, which could be an attractive purchase for a cash rich company like Vale (NYSE:VALE). By buying Mosaic, Vale would diversify their metal/mining business into agriculture to achieve expanded growth.

The machinery manufacturer, Terex (NYSE:TEX), has also been mentioned as a takover target. Although it is growing revenue at 14%, Terex is currently experiencing negative cash flow from operations. So they appear to be a more speculative target.

US Steel (NYSE:X) is also rumored to be a target of steel producer, Arcelor Mittal (NYSE:MT). US Steel is growing revenue at 120%. However, an acquisition by Arcelor Mittal probably is unlikely because together they would control 75% of the nation's steel for automobiles, which may be an antitrust obstacle.

The mining company, Cliffs Natural Resources (NYSE:CLF), is also stimulating takeover talk. CLF is growing revenue at 203% and earnings at 473%. They have a healthy balance sheet, positive cash flow and a PEG of 0.72. CLF looks like a nice takeover for a larger miner to expand operations.

Content delivery network, Akamai Technologies (NASDAQ:AKAM), has been rumored to be a target. Akamai currently dominates the server field for websites that need fast, secure software updates, delivery of pages, and large media files. Although growing revenue at 20%, and earnings at 5%, AKAM has a PEG of 1.99 which may make it overvalued at current levels. This would make a takeover a tough sell to shareholders of a potential suitor.

Also in the tech field, Symantec (NASDAQ:SYMC), has raised eyebrows for a takeover after the McAfee anouncement. SYMC is growing earnings at 117% and has positive cash flow, a healthy balance sheet, and a PEG of 1.1. They could be a strategic acquisition for a large tech conglomerate.

Finally, here is an interesting prospect - SunTrust Bank (NYSE:STI). The thing that makes STI compelling for a takeover is that it is trading well under its book value. Their book value is at $36, but the stock is trading at only $22. Although they have $22 billion in debt, their solid balance sheet and positive cash flow make this manageable.

To conclude, I would like to pick the best prospect out of the bunch. I would pick the company that is a good stock going forward regardless of it being a takeover target or not. I like Mosiac and Akamai, but feel they are overvalued right now with PEGs of 2.02 and 1.99 respectively. Terex's negative cash flow turns me off. US Steel's takeover seems unlikely and the stock is just too choppy. I was never a fan of Norton antivirus, so that rules out Symantec.

So that brings us Cliffs Natural Resources and SunTrust Bank. They both appear to be good values at current prices and would make strategic sense for the right companies to acquire them. I'll consider it a tie between CLF and STI.

Disclosure: No positions