The pace of mergers and acquisitions has slowed: Study
Morningstar, Inc., a provider of independent investment research, today published its merger and acquisition insights report for 2012, “Economic Headwinds Shift Catalysts for Takeover Activity.” Morningstar’s comprehensive research report includes investment ideas among its list of potential takeover candidates, M&A analysis by sector, credit implications of M&A activity, and investing opportunities for option investors.
Bridget Freas, CFA, senior equity analyst for Morningstar and co-editor of the report, said, “The pace of mergers and acquisitions has slowed following robust activity in the first half of 2011, but we still see ample opportunity for deals in the coming year as buyers look to scoop up businesses with stable growth prospects in an uncertain economic environment. Equity values have rebounded in the last few months across most sectors; however, we’re starting to see a greater disparity in stock prices. Industry consolidation and M&A as an avenue to emerging markets are likely to be recurring themes. The weakened credit markets pose a challenge, but there are still quite a few cash-rich firms looking for bargains and the low valuations in sectors such as basic materials, energy, and financial services may be enticing.”
Despite the rising hurdles for M&A deals, several of the takeover targets Morningstar identified in the last 12 months have already accepted acquisition offers. From Morningstar’s 2011 list of likely takeover candidates and acquirers, six companies—BJ’s Wholesale, Constellation Energy, Massey Energy, Petrohawk Energy, Pride International, and Temple-Inland—have announced a deal, two of which were also highlighted as top investment ideas. All six companies saw stock price appreciation of at least 17 percent from the time Morningstar named them to the potential takeover list to the time they accepted takeover offers. Several potential acquirers on the list also announced deals in 2011, including 3M, AGCO, Broadcom, Danaher, Exelon, SAB Miller, United Technologies, and VFC Corporation.
According to Morningstar, the top 20 investment ideas among potential takeover candidates in 2012 are:
- American Eagle
- Charles River
- Chico’s FAS
- Cloud Peak Energy
- Collective Brands
- Dice Holdings
- Leap Wireless
- Myriad Genetics
- NASDAQ OMX Group
- NII Holdings
- Range Resources
- Riverbed Technology
- SandRidge Energy
- Ultra Petroleum
In the 2012 research report, Morningstar equity analysts identified a total of 87 takeover targets across nine sectors: basic materials, consumer, energy, financial services, healthcare, industrials, technology/communication services, and utilities. Potential takeover candidates for each sector were determined by unique and proprietary scoring systems for each sector, based on industry-specific drivers of merger and acquisition activity as well as factors such as free cash flow, management, and capital structure.
Morningstar then examined its list of potential takeover candidates across all nine sectors to identify the 20 most compelling stocks for 2012. Morningstar selected companies that are the most attractively priced based on their price/fair value ratio and ranking in their respective, sector-specific potential takeover candidate list.