So the analysts at Deutsche Bank I mentioned figured out a way to hunt for specific targets. They analyzed 500 buyouts since 1986 to identify the key attributes of LBO targets.

Here's what they had in common: lots of free cash flow to support additional debt; below-average profit margins, which suggests plenty of room for cost cutting; and relatively cheap stocks, based on historic levels of stock prices compared with earnings for the company and its group. LBO targets also had below-average growth in corporate assets. (This sounds technical but simply suggests that it won't take a lot of capital to turn them around.)

Deutsche then screened the markets for companies with similar attributes to produce a short list of potential takeover targets. Here's a look at why five of the most prominent names made the list:


This iconic maker of home appliances looks cheap -- trading at just seven times expected earnings and 1.2 times book value, the value of its tangible assets. The company's brand could be valuable to a buyer as well. "It's a quality name it, just needs to be utilized better," says Ghriskey. Meanwhile, the company produces a nice $674 million in operating cash flow, and it pays a 2.9% dividend yield -- payouts that could be cut to support borrowing to finance a takeover.


At about $12.60 a share, regional carrier SkyWest trades at a price-to-earnings ratio of 10.2, well below its historic average of 11.5. It also has a price-to-book ratio of 0 .5, or less than a third of other regional airlines like Alaska Air (ALK, news). Its operating-profit margins of 5.6% are also well below those at Alaska Air. All of this suggests room for improvement at SkyWest in an LBO. SkyWest does have $1.8 billion in debt, which makes it less desirable as an LBO candidate. But that's offset in part by $684 million in cash and $280 million in annual operating cash flow. SkyWest cited high labor costs when it guided down on earnings last month. But unlike many other airlines, its labor force is nonunion -- suggesting room to maneuver here.


Despite its powerful brand, Xerox shares have lagged the markets significantly over the past five years. Its price-to-earnings ratio of 13, on the previous 12 months' earnings, is well below its historic five-year average of 20, according to Morningstar data. Xerox has been carrying out a restructuring. But net profit margins of 4.2% on a trailing 12-month basis, compared with 6% to 7.4% during 2005-2007, suggest a lot more can be done -- maybe after an LBO. The company produces $2 billion a year in operating cash flow, has $1 billion in cash and pays a 1.8% dividend, which could be cut to support a transaction. All of this makes the company look like a good potential target. "The brand is valuable and underused," says Ghriskey.

Tyson Foods

Tyson Foods is the world's largest meat company. It has 22% of the U.S. markets for beef and chicken. But even this huge market share cannot shield earnings from the volatility in the costs of the grain it needs to raise animals. This makes earnings tough to predict, and they shift around a lot, which turns off investors. That's one reason Tyson trades for a price-to-earnings multiple of 8.7, compared with around 13 for the S&P 500, despite the company's powerful brand and leading market position. Tyson is taking steps to boost profits, like renegotiating debt and reducing costs. But the stock's multiple suggests the company still doesn't get the respect it deserves. That, plus solid annual cash flow of $1.2 billion and a cash treasure trove of $794 million to help support an LBO, make it a potential target.


Aetna is the third-largest health insurer in the U.S. So it has the kind of size that gives it an edge over smaller rivals. But the numbers show it's not really doing that well, for the big leagues. Aetna carries a price-to-earnings ratio of 8.6, compared with an industry average of 12.1, according to Morningstar. That's also well below the company's five-year average of 11.9. Sure, health insurers are being held back by uncertainties about Obamacare. But Aetna's operating margins of 8.3% for the past year are well below the 10.1% to 11.9% it posted during 2004-2007 -- suggesting room for improvement in private hands. Its big operating cash flow -- $1.41 billion last year -- would help support an LBO.

Another play: the artists

If you'd rather not guess, another way to play an LBO rebound is to buy publicly traded shops involved in takeovers, like KKR Financial (KFN, news) and Apollo Global Management (APO, news).

At about $9.40 a share recently, KKR Financial was trading at book value, and paying a 6.8% dividend yield. Besides buyouts, the private equity shop invests in high-yield corporate debt and lots of energy plays, among other things. Insiders have been buying this year, around current levels.

Apollo Global Management looks even better, because at below $17 a share it's cheaper now than it was when it came up as a buy in April, at $18.20, in the stock selection systems I use for my newsletter.

Apollo Global Management is a value-oriented private equity and hedge fund with a contrarian bent and an excellent record. It favors distressed assets, which can pay off big for investors who have the patience to wait. The company has generated average annual returns of 26% since its inception in 1990. Managing partners Leon Black, Joshua Harris and Marc Rowan have worked together for more than 20 years, so if you buy shares now, you are still getting the same management that produced those excellent results.

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Employees have put about $1 billion of their own money into Apollo funds, and insiders put $20 million into the stock when it went public in an IPO earlier this year -- one of the main reasons I like this stock. If you can't orchestrate LBOs or spot the raiders at work, investing with their cousins isn't a bad way to go.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.