Related topics: stocks, energy, retail, American Eagle, economy
With Super Sunday behind us, it's time now to focus on one of Wall Street's favorite betting games: Merger Monday.
For reasons we'll get to in a moment, you can pretty much count on a regular stream of corporate takeovers announced every Monday, and most other days as well, during the rest of this year.
This merger rush will be unlike anything we have seen since before the financial meltdown. But profiting from these moves is hard for regular investors like you and me.
Truth is, we have to do some guessing to figure out which potential buyout targets will mean big winnings, while corporate insiders can position themselves like skilled NFL receivers to catch large gains. Their fancy footwork consists of big stock purchases and changes in employment contracts that will net them bigger personal payouts in the event of a takeover.
Like so much of what happens in the stock market, this seems unfair. But it's not illegal, as long as the executives make these maneuvers well ahead of a merger so that they can plausibly argue later that they did not see it coming at the time. We'll call it just another example of how company insiders always seem to have an edge, and typically benefit more than you and I from whatever drives up their stocks.
Michael Brush
It's also another area where watching insiders can work in our favor -- the old "if you can't beat 'em, join 'em" idea. By following telling moves, we can catch some of the gains, too.
So based on such a reading, here are seven companies that might be in takeover play, and why:
- At American Eagle Outfitters (AEO, news), which operates in a sector that recently saw two significant takeovers, several insiders just purchased a total of 15 million shares of stock.
- I also see lots of insider buying at Petrohawk Energy (HK, news). It owns a lot of promising natural-gas assets in the parts of the oil patch where big energy companies have been snapping up reserves.
- Big banks are going to be gobbling up smaller regional banks this year to expand. Recent insider buying at Western Alliance Bancorp (WAL, news), based in Phoenix, suggests it may be a target.
- And at Lawson Software (LWSN, news), Copano Energy (CPNO, news), Pride International (PDE, news)and LKQ (LKQX, news), executives just got new pay deals that dramatically increase how much they would reap in gains on options and stock if their companies get taken over. Gee, I wonder if that's a signal that someone's thinking about a buyout.
The year of the takeover
Before we get to the details on these companies and the skillful positioning of their executives, let's take a quick look at why so many more companies will be takeover bait this year, pushing mergers and acquisitions up to levels not seen since 2007:
- The economy is clearly rebounding, so companies are no longer in hunker-down mode.
- But the economy isn't off to the races, either, so companies are on the hunt to build earnings growth through acquisitions.
- They have the firepower to do it. Public companies have lots of cash saved up, well over $1 trillion -- thanks to all that hunkering down and cost-cutting during the meltdown that cost so many people their jobs. Behind the scenes, investors are pouring money into the kinds of funds, called bank loan mutual funds, that lend cash to power takeovers. And many private equity shops that specialize in takeovers also have lots of cash to fund them.
"You have so many strategic acquirers and private equity firms with cash to spend, it sets the stage for a pretty frothy mergers-and-acquisitions market in 2011," says R.J. Hottovy, who helped oversee a recent Morningstar effort to identify takeover targets.
An indicator to follow
Of course, you may now be wondering how, if predicting takeovers involves so much guesswork, I can know that any of the seven companies I've named will be bought out. Short answer: I don't. Nothing is certain in life, especially the stock market. But there's a good formula for making an educated guess.
The stock analysts at Morningstar have a pretty good record in calling stock moves. So I started with a list of potential buyout candidates they put together, looking at factors such as financial strength and sector trends.
American Eagle, Petrohawk and Western Alliance appear on their shortlist of about 70 potential buyout candidates. Adding that to the way insiders at these companies have been buying helps me narrow the list down to a more manageable number: three.
