So far in 2012, merger and acquisition (M&A) activity has been fairly subdued. But the few deals that have been announced have taken the stocks of the firms being acquired much higher.
Recently, for instance, the largest U.S. oilfield operator National Oilwell Varco (NYSE: NOV) said it would buy Robbins & Myers (NYSE: RBN) for $60 per share in a $2.5 billion deal. This worked out to a 28% premium over Robbin's stock price prior to the announcement.
Earlier this month, home improvement giant Home Depot (NYSE: HD) said it would buy U.S. Home Systems Inc. (Nasdaq: USHS), an installer of kitchen cabinets and countertops, in a $93.4 million deal for $12.50 a share, or a 38% premium. Also earlier this month, pharmaceutical giant Bristol Myers Squibb Co. (NYSE: BMY) finalized its acquisition of smaller drug maker Amylin for $31 per share in a deal valued at about $5.3 billion. Bristol Myers upped its offer a couple of times, and ended up buying the company for a 41% premium, a lot higher than the original offer of $22 per share.
These three examples clearly show that finding appealing takeover targets can represent one of the quickest and most lucrative ways to earn a huge premium on your initial investment.
Below are three candidates on my list for potential takeovers.
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1. Avery Dennison (NYSE: AVY)
Business: Labels and packaging materials
Top on my list of potential takeover candidates is label and packaging materials firm Avery Dennison. Avery has market-leading positions in manufacturing pressure-sensitive labels and other items such as merchandise tags. It's definitely mundane stuff, but it's a very lucrative business. Last year, Avery reported just above $6 billion in sales and a free cash flow margin of 5% for nearly $300 million in profits, or $2.73 per share.
This sounds all well and good, but back in 2008, Avery's sales stood at $6.7 billion and its free cash flow was $348 million, or $3.53 per share. Its management team has failed to make up for sales lost during the financial crisis and ensuing recession. The company's struggling industrial clients are surely to blame, but rivals have had a much easier time recovering.
A likely acquirer could be label and adhesives giant 3M (NYSE: MMM), which, with a robust market cap of $63 billion, would have no problem digesting Avery's $3.3 billion market value. It would easily be able to swoop in and cut overhead to boost efficiencies, as it has a reputation of doing.
2. Office Depot (NYSE: ODP) or OfficeMax (NYSE: OMX)
Business: Office supplies retailing
Back in 2007, the Federal Trade Commission (FTC) rejected a bid by office supply giant Staples (Nasdaq: SPLS) to buy out archrival Office Depot. During the 1990s, these retailers, along with OfficeMax, were rapidly expanding and the FTC feared Staples would grow too dominant and force OfficeMax out of business. As it turns out, Staples has still dominated the space and pushed its two smaller rivals into numerous restructurings and periods of operating losses.