Executives at chip-equipment maker Lam Research (Nasdaq: LRCX)
pulled off a masterstroke this week. A decision to buy Novellus Systems (Nasdaq: NVLS)
has the makings of a "home run," according to Citigroup.
Why? Because the acquisition may boost Lam's earnings per share (EPS) by 35% in 2012, and the $44 share purchase price is well below the $60 target Novellus had reportedly been seeking. The fact that the company settled for a 25% discount tells you it's a buyer's market right now.
And that's good news for investors. Those who can find companies likely to be acquired could find themselves making quick gains as another company comes along and tries to make a deal.
Indeed, the logic behind acquisitions has rarely been so strong. Sales and EPS growth for many companies are finally set to cool in 2012 after robust gains in 2010 and 2011. So the only way to keep the top and bottom lines moving is to spend some of the massive amounts of cash that has been built up during the last few years on acquisitions. (Lam Research had $2 billion in the bank as of the end of September, for example.)
Why haven't we seen more mergers and acquisition (M&A) deals in 2011? Because many executives are loathe to deal when the economy is at risk of falling into recession. A slumping economy can turn a promising deal into an albatross when sales and profits goals become impossible to achieve. Yet it's increasingly clear that the U.S. economy is on the mend. Weekly jobless claims are falling, and other recent economic data points have been more solid than in prior quarters. In effect, the economy should be growing at a slow pace in 2012, but not shrinking, giving merger strategists a smooth environment in which to make deals.
Here are three sectors that may be the focus of M&A dealings in 2012. If you can get in on any of these stocks before these deals transpire, you're likely to reap some nice gains...
1. Chip-equipment stocks: ASM International (Nasdaq: ASMI)
It's no coincidence that Lam and Novellus decided to join forces. The entire sector has been consolidating in recent years.