(by Louis Basenese, Advisory Panelist) I promise. Alexander Green and I are not in cahoots about the coming boom in corporate takeovers…
We both researched the possibility separately. Unprompted, I might add. And yet, armed with different evidence, we arrived at the same conclusion.
If you ask me, such a convergence of analysis in a narrow space of time shouldn’t be ignored. So today, let’s move on from why a takeover boom is imminent and focus exclusively on three takeover targets you can profit from…
Identifying The Market’s Next Takeover Targets
The task of identifying the market’s next takeover targets can be daunting. Literally thousands of potential targets exist, which is probably why most investors liken it to a crapshoot and in turn, shun such a strategy altogether.
But that’s a monumental mistake!
They’re passing up easy double-digit profits. Historical takeover premiums (the amount paid over the current share price for a target company) average 22%, according to a study in The Journal of Finance.
And that’s just the averages.
It’s common for many deal premiums to reach into the high double digits and even triple digits.
Investing in Takeover Targets - 3 Steps to Improving Your Odds
By following three simple steps when investing in takeover targets, we can dramatically improve our odds of success…
- Go where there is consolidation. Consolidation trends are a powerful predictive tool because they tend to persist. Think about it. When your biggest competitor goes out and doubles in size overnight, there’s only one way to respond - find a suitable acquisition of your own to remain competitive. Thus, by focusing on those industries and sectors undergoing the most rapid consolidation, we can isolate high probability targets.
- Focus on companies with valuable (and undervalued) assets. Whether it’s a new drug, a mammoth oil discovery, key market share, distribution channels, or a few promising patents, the real reason a company is acquired is because it owns a particular asset of value to the acquirer. Only invest in companies with such “must have” assets. And to reduce risk even further, I suggest buying clearly undervalued companies - ones trading at or near cash levels on the balance sheet. (Yes, they do exist.)
- Insist on improving fundamentals. Understand that takeovers take time. In fact, acquiring companies might spend as much as nine months conducting due diligence.
