The nine richest companies on the S&P 500 have a combined $460 billion cash on hand. All of them have more cash than the United States government. Of the estimated $1.2 trillion in cash held by nonfinancial companies on the S&P 500, one-third of it belongs to the index’s top 10 firms.
Oftentimes those cash-rich companies use that money for acquisitions. “Elephant hunting,” as Warren Buffett calls it. Just look at the last couple years.
Google (NASDAQ: GOOG) bought out Motorola Mobility for $12.5 billion. Facebook (NASDAQ: FB) acquired photo-sharing social media app Instagram for $1 billion. And Buffett’s Berkshire Hathaway (NYSE: BRK-B) bought a 50% stake in Heinz (NYSE: HNZ) for $12 billion.
Instagram was not a public company. But the other two companies that were bought out were. And anyone who owned shares of those companies were well compensated in the buyout.
Heinz shareholders received $72.50 per share in the Berkshire Hathaway deal, a 20% premium to the stock’s $60.48 share price at the time the deal was agreed upon.
Motorola Mobility shareholders had an even bigger payday. They received $40 a share in the Google buyout – a 63% premium to the stock’s closing price.
It pays to own shares of a company that gets bought out. With that in mind, it makes sense to own stocks that are potential takeover targets.
America’s largest companies have more excess cash than ever. And many of them have been using that cash to snatch up smaller rivals.
As investors, we should always be on the lookout for takeover targets. Right now, there are a number of potential buyout candidates to keep on your radar.
Three Takeover Targets Worth Your Consideration
Navistar (NYSE: NAV) is one of them. The $3 billion manufacturer of commercial and military trucks and diesel engines for distribution around the globe is in the process of expanding its market share under new CEO Troy Clarke.
Those growth prospects have led some, including billionaire activist investor Carl Icahn, to buy up shares in anticipation of a takeover. Icahn and fellow activist investor Mark Rachesky own 12 million shares of Navistar apiece – accounting for 15% of the entire company.
Men’s Wearhouse (NYSE: MW) is another high-profile takeover target. In fact, the clothing retailer just rejected a buyout offer in October when Joseph A. Banks attempted to buy the company for $2.3 billion. Joseph A. Banks’ offer amounted to $48 per share, or 36% above Men’s Wearhouse’s stock price at the time. It still wasn’t enough … which tells you that Men’s Wearhouse is holding out for a much better deal. In fact, the company’s CEO didn’t pull any punches about the deal.
“The board and management team are confident that continuing our strategic plan will create more value for shareholders than Joseph A. Bank’s inadequate, highly conditional proposal,” Douglas S. Ewert said.
In light of that statement, it seems only a matter of time until Men’s Wearhouse is offered a better deal. If a 36% premium was “inadequate,” here’s guessing Men’s Wearhouse won’t settle for anything less than a 50% premium.
(Side note: The Men’s Wearhouse-Joseph A. Banks dustup took a comedic turn last week when Men’s Wearhouse turned the tables on Joseph A. Banks and offered to buy them out for even less money, at $1.5 billion.)
American Eagle (NYSE: AEO) is another retailer ripe for the pickings. The apparel company has been a rumored buyout target for years. At 14 times forward earnings, some analysts think the company remains undervalued, trading at least 25% below its private market value.
Furthermore, American Eagle has zero debt, generated more than $400 million in free cash flow last year, and boasts a strong brand name. Those factors all seem to point toward an eventual takeover.
Those are just three high-profile examples of possible takeover targets. There are plenty of others out there. Sniffing one out at just the right time is the tricky part.
However, as Motorola Mobility shareholders discovered, succeeding in doing so could mean an instant 63% return.
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