A research report from 2017 indicates that mergers and acquisitions have created more value for acquiring firm shareholders post-2009 than ever before. This particularly holds true for mega deals worth $500 million or more.

It’s likely that this research holds true today. Therefore, looking at companies that have impending mergers can be a good basis for stock selection. This column focuses on three merger stocks that are likely to fly higher once the deal is completed.

It’s worth noting that the global value of M&A activity in the first half of 2024 was $1 trillion. On a year-on-year basis, M&A activity has increased. Further, there were 10 megadeals ($10 billion or higher) in Q1 2024. With significant level of M&A activity, there will be potential value creators on the back of merger synergies.

Let’s discuss three merger stocks that are poised to trend higher once the merger is closed.

Chevron Corporation (CVX)

Chevron Corporation (NYSE:CVX) stock has been sideways over the last 12 months. The 4.13% dividend yield stock looks attractive from a valuation perspective. Further, there are two potential catalysts that can translate into a big rally for CVX stock.

First, there is a possibility of multiple rate cuts in the next 12 to 18 months. Expansionary policies are positive for energy prices and as oil trends higher, I expect CVX stock to rally.

Further, in Oct. 2023, Chevron had announced a deal to acquire Hess Corporation (NYSE:HES) for a consideration of $53 billion. This deal was approved by Hess shareholders in May 2024.  

However, the U.S. Federal Trade Commission has delayed the decision on the merger until after an arbitration case with Exxon Mobil (NYSE:XOM). It’s likely to happen eventually, but the delay is a good opportunity to accumulate CVX stock.

Leaving this merger aside, Chevron has an investment grade balance sheet and low break-even assets. The cash flow outlook for this merger stock is robust for the coming years coupled with value creation through dividends and share repurchase.

Synopsys (SNPS)

Synopsys (NASDAQ:SNPS) is a provider of electronic design automation software products that are used to design and test integrated circuits. It’s worth noting that SNPS stock touched 52-week high of $630. From those levels, the stock has corrected by 13%. I see this as a good opportunity to accumulate.

In January, Synopsys announced the acquisition of Ansys (NASDAQ:ANSS) for a consideration of $35 billion. The pending acquisition will combine leading players in semiconductor design technology and simulation and analysis.

Further, the total addressable market (TAM) for Synopsys will expand by 1.5x to $28 billion. Analysts expect the combined TAM to grow at a CAGR of 11%. Clearly, Synopsys will experience healthy growth upon the completion of the acquisition in the first half of 2025.

Another point to note is that the merged entity is likely to deliver robust cash flows. This will help Synopsys deleverage with a target of 2x debt-to-adjusted-EBITDA within two years post-closing. As credit metrics improve, I expect SNPS to trend higher. Further, there is a strong case for healthy dividends in the next few years.

The Home Depot (HD)

The Home Depot (NYSE:HD) stock has been relatively subdued in the last 12 months. This does not come as a surprise with macroeconomic headwinds and higher interest rates impacting growth. However, with the possibility of expansionary monetary policies, I expect HD stock to trend higher in the coming quarters.

Further, in March 2024, The Home Depot announced the acquisition of SRS Distribution. The latter is a leading residential specialty trade distribution company and the acquisition is for a consideration of $18.25 billion. Notably, they completed the merger last month. However, the real impact on the merger stock will be seen in the next 12 to 24 months when macroeconomic headwinds wane.

It’s worth noting that prior to the merger, Home Depot had an addressable market of $50 billion. With the completion of the merger, the addressable market has swelled to $1 trillion. This puts into perspective the likely impact of the merger in the coming years.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.