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- Acquisition targets tend to pop after the announcement of a deal, which makes getting in early key.
- Bank of America analysts broke down the four things they’re watching for among potential targets.
- They also highlighted the 12 stocks that have all the pieces in place to be acquired.
There are few catalysts that are almost certain to boost the value of a stock. Strong earnings surprises, the introduction of a successful product, or even the departure of a despised leader have all been known to boost stock prices.
Acquiring another company is one of the most surefire ways to send a company’s stock skyrocketing. Acquisition offers must be compelling to shareholders, so the offer to purchase a company is usually greater than its current share price, pushing the stock higher. Furthermore, the premium often causes investors from all over the market to pour money into the stock in an attempt to arbitrage the difference between the current price and the higher acquisition price, creating more demand and, in turn, rapid price appreciation.
Unfortunately, if it were simple to predict mergers and acquisitions before they occur, everyone would do it.
Fortunately, Bank of America analysts recently published a list of factors they look for when determining which stocks are primed for an acquisition — as well as a list of companies that could be potential M&A candidates right now.
How to Identify a Stock That May Be Acquired
Savita Subramanian, head of US equity and quantitative strategy, and her colleagues described the common factors among potential acquisition targets that their suitors appear to be looking for in a recent note to clients.
One of these is their “preferred M&A valuation metric: FCF/EV, where we screen for those trading below the universe median,” according to Subramanian. The free cash flow to enterprise value ratio compares a company’s valuation to how much cash it can generate, providing insight into a company’s value if acquired and ability to pay off the cost of acquisition, with a lower ratio indicating a better investment.
Following that, the analysts looked for stocks with market capitalizations less than $15 billion — after all, the more expensive a company is, the less likely it is to be purchased. They also looked for companies with a history of consistent earnings, which the analysts measured using the S&P Quality Rankings, focusing only on those ranked B or higher.
Furthermore, “because we expect growth to be a motivation for many of the acquisitions, we have limited the screen to companies with expected long-term growth rates above the universe median,” Subramanian wrote in a note.
The 12 stocks that meet the criteria are listed below, along with their ticker symbol, sector, industry, last closing price, market capitalization, S&P quality rank, free cash flow to enterprise value ratio, and consensus long-term growth rates.
Companies in the financials and managed care industries were excluded from Bank of America’s analysis due to structural incompatibilities that make them difficult to compare with FCF/EV ratios.