Lower interest rates make it easier for firms to carry out acquisitions. That’s because the lower rates enable them to borrow the funds they need to make big deals much more cheaply.
After the number of net new jobs added by the economy in July came in well below economists’ average estimate, 100% of economists surveyed expect the Federal Reserve to slash its benchmark rate by one-half of a percentage point in September. Roughly 60% expect the central bank to reduce the rate by another half of a percentage point in November with the rest anticipating a quarter of a percentage point reduction.
Even before the Street became convinced the Fed would rapidly cut rates, the total value of global mergers and acquisitions had risen by 5% in the first half of 2024 versus the same period a year earlier. Now that rates will in all likelihood drop sharply going forward, the number of deals and their value are likely to increase a great deal compared to the past two years when rates were relatively high. Here are three potential takeover targets that could very well be acquired amid this trend.
CyberArk (CYBR)
Many large tech firms have acquired sizeable cybersecurity practitioners. In the last decade, FireEye, McAfee, Symantec,and Cylance were all bought. Since all firms need to protect themselves from cyberattacks, most IT security firms will have no problem generating significant growth. And showing there is still a big appetite for buying companies in the space, Alphabet (NASDAQ:GOOG, GOOGL) offered to pay $23 billion for Wiz, an Israeli IT security startup. Wiz, however, rejected the offer.
Like Wiz, CyberArk (NASDAQ:CYBR) is based in Israel. However, unlike the startup Wiz, CyberArk is a very mature IT security company. In just the first quarter, the firm’s revenue soared 37% versus the same period a year earlier to $221.6 million. It also generated $68.6 million of cash from its operating activities. The company’s roster of customers includes huge names like Mastercard (NYSE:MA), Aflac (NYSE:AFL) and Exxon Mobil (NYSE:XOM).
CYBR stock has a market capitalization of $10.5 billion. A big player like Alphabet, Cisco (NASDAQ:CSCO) or Microsoft (NASDAQ:MSFT) could easily buy it.
Roku (ROKU)
I’ve long believed a major cable station owner like Comcast (NYSE:CMCSA) or Paramount Global (NASDAQ:PARA) could acquire Roku. That’s because Roku’s revenue, unlike that of the cable channels, is growing rapidly. Indeed, its revenue jumped 19% versus the same period a year earlier to $882 million.
And although Roku is not profitable (it reported net losses of $493.2 million in the 12 months ending in June), it did generate $104.6 million of cash last year. What’s more, it may be profitable on the bottom line after the synergies that an acquisition would generate.
Also importantly, as of February the company had over 80 million active accounts. The owners of legacy cable channels can use advertisements on Roku to attract tens of millions of viewers to their shows.
Also making an acquisition of Roku more likely is that streaming channels other than Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) have not gained much traction.
Consequently, I believe that Comcast, Paramount and Warner Bros Discovery (NASDAQ:WBD) are ready to give up on their “go-it-alone” strategy on content and attracting audiences. That’s particularly true of Warner Bros, whose revenue sank 6% year-over-year last quarter. Comcast’s Peacock streaming service has also struggled. Either of those firms could elect to buy Roku in order to shake up its strategy.
Roku’s current market capitalization is $7.8 billion so it could be acquired for $20 billion to $25 billion. That would be a very doable deal for Comcast, Paramount or even Warner Bros Discovery, in my opinion. As a result, I view Roku as one of the top potential takeover targets.
Upstart Holdings (UPST)
Upstart Holdings (NASDAQ:UPST) uses AI to find borrowers who have been rejected by lenders but pose little credit risk.
The firm has been struggling in recent years as its revenue tumbled from $907 million in 2022 to $560 million in 2023 and a similar $568 million in the 12 months that ended in June.
However, I believe Upstart may have found a way to turn itself around during the current quarter. The firm provided Q3 revenue guidance of $150 million. That is well above analysts’ average estimate of $135.3 million and its Q2 sales of $128 million.
As reasons for the nascent turnaround, CEO Dave Girouard cited “significant advances in our AI model, a revitalized funding supply, and increased operating efficiency.”
It’s possible the firm is benefiting from the rapid advances in AI technology. Along with a great deal of positive publicity about AI, that may be persuading more banks to utilize Upstart’s offering.
Similarly, given the positive publicity about AI and many companies’ eagerness to embrace the technology, a fintech firm like PayPal (NASDAQ:PYPL) or SoFi Technologies (NASDAQ:SOFI) may like the idea of acquiring Upstart. Such a deal, after all, would give those firms the opportunity to brag to investors about their “AI unit.”
And with Upstart expecting to generate positive EBITDA in Q4, its business could very well be profitable after synergies for PayPal, SoFi or another fintech firm. Consequently, Upstart deserves to be on any list of top potential takeover targets.
On the date of publication, Larry Ramer 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 held a LONG position in XOM and WBD.
