M&A activity has been big part of the global market for the past few years now, and that’s likely to continue. Tax reform has freed up more cash and made potential targets more accretive. The economy is humming along. And in a few key sectors — consumer goods and media come to mind — there’s an obvious logic behind consolidation.
The old rules still apply as well. Older companies are looking to drive scale and cut costs. Newer companies are looking to expand their reach — or cash out by selling to one of those older companies looking to spark growth of their own.
With U.S. mergers actually down in 2017 — perhaps due to tax uncertainty — there’s some pent-up demand as well. And so this might be exactly the type of market to look for takeover stocks. These 18 stocks all have been rumored or reported targets. And in many (though not necessarily all) cases, the possibility of an acquisition doesn’t necessarily look priced in.
Takeover Stocks: BlackBerry (BB)
On this site late last year, Larry Ramer argued that BlackBerry (NYSE:BB) was a prime takeover target. Ramer isn’t alone in that argument. Noted short-seller Citron Research made a similar claim last year in arguing that BB stock had the potential to double.
Rumors of potential acquirers have swirled for some time. BlackBerry of course almost went private back in 2013 at $9-per-share. Two years later, the company reportedly was in talks with Samsung about an acquisition.
There’s still a logical takeover case for BlackBerry at the moment. The phone business is gone, leaving an attractive software business. The QNX operating system has a real role to play in ensuring security for autonomous driving. BlackBerry’s patents have real value, with potential upside from a filed suit against Facebook (NASDAQ:FB). And with over $2 billion in cash on the books, another go-private transaction could work as well.
BB stock, meanwhile, has pulled back below $10 despite a Q1 earnings beat. Investors are worried that the company’s turnaround simply isn’t progressing fast enough (indeed, I’ve made that argument myself). But with real value in the software and the nameplate, it simply may be that the turnaround could be better executed under different ownership.
Takeover Stocks: Lions Gate Entertainment (LGF.A, LGF.B)
The acquisition of Time Warner by AT&T (NYSE:T) has led to a belief that consolidation is coming in the media space. As James Brumley wrote last month:
“…the previous lines between media distribution, media creation, and content licensing have been completely wiped away. This is just the beginning of a heated M&A race, with all players knowing once-unthinkable partnerships are now going to be permitted.”
And so the owners of content look like attractive targets, and Lions Gate Entertainment (NYSE:LGF.A, NYSE:LGF.B) is high on the list. As Will Healy argued last month, its ownership of Starz, films such as The Hunger Games and TV programs, including Mad Men and Will & Grace all make Lions Gate an intriguing target for larger distributors.
LGF earnings have struggled a bit, and so has LGF stock. Analysts have abandoned the story of late. And investors likely will need a bit of patience. It seems likely that consolidation, if it comes, won’t kick into full gear until the drama between Comcast (NASDAQ:CMCSA), Disney (NYSE:DIS) and Twenty-First Century Fo (NASDAQ:FOX, NASDAQ:FOXA) has completed. But for investors who believe that consolidation is inevitable, LGF’s lower valuation and content portfolio make it among the most attractive takeover stocks to buy at the moment.
Takeover Stocks: AMC Networks (AMCX)
Lions Gate isn’t the only potential target, however. AMC (NASDAQ:AMCX) is another mid-sized content provider that could provide an attractive consolation prize for acquirers who miss out on the big fish. It also provides a nice ‘tuck-in’ acquisition for companies looking to expand their reach.
AMC owns five networks, including the flagship AMC, along with WE tv, Sundance, BBC America and IFC. Ratings for The Walking Dead have declined of late, but it’s still the most-watched program on cable and it has a huge long tail of content licensing revenue ahead. (AMCX owns Dead in full, unlike Mad Men and Breaking Bad.)
Meanwhile, AMCX is controlled by the Dolan family, who has already sold off Cablevision and reportedly would like to do the same with MSG Networks (NYSE:MSGN). And of late, the company has aggressively repurchased shares instead of paying down debt, which suggests at least a possibility that management believes that debt could become someone else’s problem.
The only concern here is valuation. I sold AMCX on a recent runup near $70, while the stock looks cheap on a price-to-earnings basis, further declines from The Walking Dead can lead earnings south, and even 2018 growth looks relatively muted. With a recent pullback after a big run following the AT&T/Time Warner deal, however, AMCX is starting to drift back to an attractive valuation.
Takeover Stocks: BioMarin Pharmaceutical (BMRN)
Acquisition rumors have swirled around specialty biotech BioMarin Pharmaceutical (NASDAQ:BMRN) for years now. In fact, Genetic Engineering & Biotechnology News has had it on its takeover target list for six years now.
Analysts have become part of the act off and on as well, with speculated acquirers including Sanofi (NYSE:SNY) and Roche Holdings (OTCMKTS:RHHBY).
The M&A case here makes some sense. BioMarin has developed an attractive portfolio, including several “orphan drugs”, as well as potentially valuable gene therapy treatments for hemophilia. 2018 revenue should be in the range of $1.5 billion, but BioMarin continues to post losses, which is one reason why the stock has flat-lined the past few years.
A larger acquirer could add growth from BioMarin’s drugs and cut costs to turn the company profitable. The big concern is valuation, particularly after a 30% run off of April lows. Still, at some point, the long-awaited sale of BioMarin appears likely. And even just below $100, there’s still more upside to come in that scenario.
Takeover Stocks: Arconic (ARNC)
Aircraft parts manufacturer Arconic (NYSE:ARNC) has been a subject of takeover speculation ever since it split from Alcoa (NYSE:AA). An activist stake owned by Elliott Management, whose strategies generally center on a near-term sale, only added to the frenzy. CNBC’s Jim Cramer argued last year that Honeywell International (NYSE:HON) was the obvious buyer, after United Technologies (NYSE:UTX) agreed to acquire Rockwell Collins (NYSE:COL).
That speculation has been paused, however, as Arconic’s performance has hit the skids. The stock plunged in late April after cutting its full-year outlook. Higher aluminum costs are hitting margins (and somewhat ironically benefiting the Alcoa unit that supposedly was hiding Arconic’s true potential). Production missteps under Elliott’s new, hand-picked CEO have only added to the pressure.
Still, at some point, Arconic seems likely to return to being one of the most talked-about takeover stocks. It will take some time for the company to work through near-term issues. But with end demand from Boeing (NYSE:BA) strong and likely to stay the way, and consolidation in the space inevitable, Arconic very well may be acquired sooner than many investors currently believe.
Takeover Stocks: Xilinx (XLNX)
There are three key reasons why chipmaker Xilinx (NASDAQ:XLNX) is a likely acquisition target. The first is that the chip space in general is performing well and optimism toward the future is rising. With trends like IoT (Internet of Things) providing tailwinds, there’s an increasing belief that the old, more cyclical, nature of the space is starting to fade.
Secondly, Xilinx looks like a strong play on one of the bigger trends: artificial intelligence. Its FPGAs (Field Programmable Gate Arrays) are tailor-made for AI applications. Indeed, the company focused heavily on artificial intelligence during its Investor Day in May.
And, third, there’s a logical acquirer here in Broadcom (NASDAQ:AVGO). Even before Broadcom’s bid to buy Qualcomm (NASDAQ:QCOM) fell through, XLNX was touted as an attractive target for that always-acquisitive company. With Broadcom now U.S.-based, and with plenty of dry powder, such a deal makes even more sense at the moment. With XLNX lagging the chip space — it has gained less than 5% over the past year — despite strong earnings, the valuation looks workable as well.
Takeover Stocks: Maxim Integrated (MXIM)
Maxim Integrated (NASDAQ:MXIM) is another target for Broadcom or another large semiconductor company. Indeed, speculation has swirled for some time. Rumors of interest from Japan’s Renesas Electronics (OTCMKTS:RNECY) spiked MXIM stock in January, but the rumor was quickly shot down. Back in 2015, sources said Maxim held talks with Analog Devices (NASDAQ:ADI) and Texas Instruments (NASDAQ:TXN).
In both cases, price was a reported issue, and that still may be the case. At 21x forward earnings, MXIM stock isn’t exactly cheap. But a takeover at some point does seem possible, if not necessarily likely. And in the meantime, investors can receive a 2.8% dividend yield as they wait.
Takeover Stocks: Mattel (MAT)
Mattel (NASDAQ:MAT) is not a stock for the faint of heart. Execution missteps and weak demand have led MAT stock to drop by about 62% over the past five years, and 32% over the past three, even with a recent rally. The loss of a key licensing deal with Disney to rival Hasbro (NASDAQ:HAS) has only added to the pressure.
Indeed, I don’t see MAT as a buy, particularly after gains over the past couple of months. I argued a year ago that the stock was a value trap (when it traded above current levels) and I wasn’t particularly impressed with Q1 results.
But Mattel appears to have entered the realm of takeover stocks, and with some reason. Hasbro could be a suitor, although antitrust concerns are an issue. The company itself said it had rejected an offer from MGA Entertainment in May.
The huge amount of debt is a big problem, as markets are valuing that debt as low as 82 cents on the dollar, making it less likely that an acquirer would want to pay par and provide a premium to equity owners. Still, rumors continue to swirl, and if Mattel can make some progress on its turnaround, the calls for a sale likely will only get louder.
Takeover Stocks: Red Hat (RHT)
Red Hat (NYSE:RHT) is in an interesting spot at the moment. The open-source software developer unquestionably has a major growth driver in cloud computing. But it’s also coming off a disappointing Q1 earnings report that sent RHT stock plunging.
Even after the losses, RHT still isn’t cheap.
Yet takeover speculation has continued, with recent rumors suggesting Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) should be interested as it builds out its cloud business. Any interest could start a bidding war, with other tech giants including Microsoft (NASDAQ:MSFT) perhaps becoming interested.
Whether there’s room for more premium is unclear, with RHT still trading at a dear 34x+ forward P/E multiple. But given its growth potential and importance in such a key space, Red Hat could become a target at any time.
Takeover Stocks: Sprouts Farmers Market (SFM)
Grocery stocks have struggled for the past year, ever since Amazon announced its acquisition of Whole Foods Market. And with the industry’s majors looking to increase scale and stand out from the crowd, Sprouts Farmers Market (NASDAQ:SFM) seems like an intriguing target.
Analysts have called out Sprouts as an attractive target. And indeed, Sprouts itself has taken steps down that path. Its CEO said in December that Sprouts was amenable to a takeover. It held talks with Albertsons early last year, though after they fell through, that giant instead chose to merge with Rite Aid (NYSE:RAD). Target (NYSE:TGT), Walmart (NYSE:WMT) and Kroger (NYSE:KR) all potentially make sense as buyers.
The concern is that — like many of these takeover stocks — some M&A premium is already priced in. And SFM did fall hard after a disappointing Q1 report in early May. But the stock has regained most of those losses, and it has held up despite the pressure on the space. That’s likely because the market believes that at some point, a buyout offer will come along.
Takeover Stocks: AeroVironment (AVAV)
Drone manufacturer AeroVironment (NASDAQ:AVAV) has been a logical M&A target going back to the last decade. Longstanding relationships with the U.S. Army and the Department of Defense, along with a generally heavy cost structure, theoretically made AVAV a natural target for a major defense contractor like Lockheed Martin (NYSE:LMT) or General Dynamics (NYSE:GD).
But the recent gains in AVAV stock, which has tripled from late 2016 lows, are coming from improvements in the business, not takeover speculation. Margins are improving. AeroVironment has two key opportunities in commercial applications (notably for agricultural use) and a joint venture with Softbank (OTCMKTS:SFTBY) to offer 5G wireless from high-altitude drones.
Still, there’s a potential M&A case here, with the only concern being its valuation. AVAV looks awfully stretched from here, trading at ~45x forward earnings. There are a lot of costs to cut, but it remains to be seen if the savings, and the potential growth, are large enough to justify more gains for AVAV.
Takeover Stocks: W.R. Grace (GRA)
Chemical producer W.R. Grace (NYSE:GRA) doesn’t get a lot of attention from investors, despite a $5 billion market cap. But there is increasing belief that Grace could be a takeover target relatively soon.
In April, chatter surrounding a Honeywell (NYSE:HON) bid sent GRA shares up over 6%. Before that, RBC cited the company as one of five likely takeover targets. And the 2016 spin-off of GCP Applied Technologies (NYSE:GCP) made a potential sale easier, as Grace’s CFO admitted at the time.
In the meantime, GRA still looks reasonably attractive. Despite a sharp rebound from early April lows, GRA trades at a still-reasonable 17x forward earnings. Chemical production is increasing. GRA doesn’t look like a bad stock on its own, and a buyout from Honeywell, or another acquirer, could create real upside.
Takeover Stocks: Ciena (CIEN)
There are few, if any, companies that have been takeover stocks longer than optical networking provider Ciena (NYSE:CIEN). Investors were looking for a Ciena buyout going back to the dot-com bubble. In 2010, Nokia (NYSE:NOK) looked like the buyer. Two years ago, rumors swirled of interest from Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), which was supposed to buy the company eight years earlier.
More recent speculation names Cisco (NASDAQ:CSCO) as potentially having interest. And several firms, including Morgan Stanley, have added CIEN to their list of takeover stocks.
Will this time be different? Possibly. But in the meantime, Ciena has a healthy balance sheet, a focus on margin expansion, and a reasonable valuation. Even if a takeover doesn’t (finally) materialize, there could be some value left in CIEN stock.
Takeover Stocks: Square (SQ)
Square (NYSE:SQ) seems like a classic takeout candidate. It’s disrupting a payment space largely led by giants. The business could benefit from increased scale, and an acquirer could gain from lower sales and marketing spend.
The only question at this point is whether SQ stock is too expensive. I’ve long been bearish from a valuation perspective, but so far, I’ve been completely wrong.
In my defense, I’m not alone. At $65, SQ stock is well ahead of the consensus Wall Street target of $57. And at nearly 10x revenue, there’s a question as to whether the valuation can support anything left in the way of premium. Companies like PayPal (NASDAQ:PYPL) and even Visa (NYSE:V) and Mastercard (NYSE:MA) could be logical suitors. But can they — and will they — pay what Square shareholders would ask for?
Takeover Stocks: National Beverage (FIZZ)
Just a few years ago, beverage maker National Beverage Corp. (NASDAQ:FIZZ) was a sleepy producer of smaller soft drink brands. But the company’s LaCroix sparkling water brand took off, and so did FIZZ stock. It has risen 484% in the past five years alone.
Along with that increased valuation has come increased attention. Short sellers have targeted FIZZ stock. And rumors of a takeover have only amplified.
After all, LaCroix looks like a big winner. It has massive market share in sparkling water, a category that is taking share from diet soda (and regular soda as well). Quirky branding, design and marketing has garnered the label a cult following.
And so an acquisition makes sense — if one of the majors can’t undercut the LaCroix business. PepsiCo (NASDAQ:PEP) is trying to do so with its Bubly line. Coca-Cola Co (NYSE:KO) has rolled out Dasani sparkling water and acquired Topo Chico. But if LaCroix continues its dominance, Pepsi or Coke may simply decide to buy out National Beverage. Acquisitive Dr Pepper Snapple Group (NYSE:DPS) could be in the mix as well.
Takeover Stocks: Campbell’s Soup (CPB)
The rumor mill is as hot around Campbell Soup (NYSE:CPB) as any of the takeover stocks right now. In May, disappointing numbers and the exit of its CEO sent CPB stock to its lowest levels in nearly five years. But reports that Kraft Heinz Co (NASDAQ:KHC) is interested in buying the company have sent CPB shares soaring.
From here, the logic of a Kraft-Campbell’s tie-up seems minimal. Adding one zero-growth, indebted manufacturer to another doesn’t seem like an attractive combination. But at the least, it does seem like CPB’s family ownership group is accepting the need for a sale. And with activist pressure helping, that could lead to a buyout, whether by Kraft or by someone else.
Takeover Stocks: Hain Celestial (HAIN)
A common trend in the food industry the last few years has been for larger companies to buy smaller, faster-growing brands in the natural and organic spaces. But Hain Celestial (NASDAQ:HAIN) seems to have missed out.
Over the past few years, Hain has been cited as a possible target for a number of companies, including Kraft Heinz, Campbell’s and Hormel Foods (NYSE:HRL). But a somewhat unwieldy portfolio, which includes personal care, meats and snacks, has made a straight sale difficult. In the meantime, HAIN stock has taken a big hit, touching a six-year low in late May before a recent rebound.
But a sale finally may be on the way. An activist has taken a 9.9% stake and is pushing for a sale. HAIN probably won’t get a price close to its peak, and it may have to break itself up to create incremental value for existing shareholders. There is some value here, however, and a clear motivation to — finally — get a deal done.
Takeover Stocks: Wynn Resorts (WYNN)
Takeover speculation has ramped up around Wynn Resorts (NASDAQ:WYNN) this year. Once founder Steve Wynn stepped down amid sexual harrassment allegations in February, the path to a sale actually became a bit clearer.
Rival Las Vegas Sands (NYSE:LVS) seemed like the most logical acquirer. Rumors followed in April that MGM Resorts (NYSE:MGM) was interested in a takeover.
And with WYNN pulling back over the past few weeks, largely due to concerns surrounding its operations in Macau, the case for a takeout looks stronger. U.S. casinos have been in full-out M&A mode, with Eldorado Resorts (NASDAQ:ERI) buying up Isle of Capri and other assets and Penn National Gaming (NASDAQ:PENN) merging with Pinnacle Entertainment (NASDAQ:PNK), among many other moves. Similar logic would work for a takeout of Wynn.
The logic of a deal doesn’t necessarily mean one is on the way. But one way for Wynn Resorts to get a truly fresh start would be to find a different owner.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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