by Clement Thibault
The usual signs of summer—warmer temperatures, the expected array of seasonal fruit—have begun to appear, but this year there's been a market warm-up as well...the mergers and acquisition arena has been heating up. Buyouts and rumors of impending buyouts have started to proliferate, pushing some share prices through the roof and creating potentially attractive returns for sharp-eyed investors on the lookout for the next M&A opportunity.
Microsoft (NASDAQ:MSFT) and LinkedIn (NYSE:LNKD) recently kicked off the season with Microsoft's mid-June announcement of its $26 billion acquisition of the social networking site, valuing LinkedIn shares at $196, almost 50% above their prior closing price. Loyal LNKD shareholders who stood by the stock after its value was almost cut in half last February when the social networking site reported trouble with its user growth were richly rewarded.
But Microsoft and LinkedIn are old news. Astute traders and investors aim to stay ahead of the pack by paying attention to recent rumors and eyeing potential takeover targets. Below, three companies that are already potential targets plus three more we believe could make good acquisitions in the not so distant future.
Harley-Davidson
The iconic motorcycle manufacturer Harley-Davidson (NYSE:HOG) jumped almost 20% on Friday, on rumors of a buyout by private equity firm Kohlberg Kravis Roberts & Co (NYSE:KKR). The motorcycle company suffered heavily from the 2008 financial crisis, trading for less than 10-dollars a share in early 2009. Nevertheless, HOG managed to reestablish itself as a household name, industry leader and coveted brand.
Indeed, its share price rose to a peak of over $74 dollars during May 2014. Unfortunately, the motorcycle market also peaked in May 2014, and Harley shares have been relatively stagnant, trading around the $40 range since then, until last week's rumors of the potential KKR purchase emerged and pushed the price to $54.25 at Friday's close.
In the past, KKR has acquired a diversified portfolio, with purchases ranging from food giant RJR Nabisco in 1989, to the 2007 acquisition of retail chain store Dollar General (NYSE:DG) (before taking it public in 2009) to high tech companies such as NXP Semiconductors NV (NASDAQ:NXPI) of which it was a stakeholder beginning in 2006 until the company went public in 2010.
The Hershey Company
From classic motorcycles to iconic chocolate. Hershey (NYSE:HSY) rejected a $23 billion takeover bid by food maker Mondelez International Inc (NASDAQ:MDLZ) on Thursday, denying Mondelez a larger footprint within the American food market. At least for now. According to Fortune:
"A Mondelez-Hershey deal—if Hershey were to get on board—would likely not be subject to such intense scrutiny...Regionally, the companies don’t overlap too much. At Hershey, nearly 88% of total revenue comes from the North American market. Mondelez only derives 24% of revenue from that region; Europe is a far larger market for the snacking giant, and it has sizable operations in the Latin America and Asia Pacific regions."
If a future bid is accepted (and many analysts believe a higher offer will be forthcoming), the two companies would merge to create the world's largest confectioner. However, the potential takeover is expected to run into several major obstacles before it can be approved. First, the Hershey Trust, which controls 81% of the voting rights (and 8.4% of the common stock), is committed to keeping the company independent, as was evident when it objected to a proposed deals with Wrigley in 2002 and Cadbury in 2007 and 2010 (today, Mondolez owns Cadbury).
In addition, because the company is based in Pennsylvania and there have been recent allegations of overpayment to some of the company's board members, as well as conflict of interest and expensing problems that have embroiled 3 longstanding board members, the state's attorney-general has to approve any deal agreed to by the Trust.
This recent chaos, which involves both the AG's office and the Trust's management, could bode well for Mondelez. The fact that Hershey's shares are still trading close to the rejected bid offer-price clearly indicates that investors are not expected this drama to end anytime soon.
Netflix
While the two potential acquisitions described above have some actual facts to bolster the rumors, this next one is a bit of a head-scratcher. Shares of Netflix (NASDAQ:NFLX) soared almost 6% on Friday, but investors are having trouble figuring out why.
The three most plausible explanations are: Netflix's possible entry into the Chinese market; an bullish outlook upgrade to the stock by several analysts; and the rumor of a possible buyout by Disney (NYSE:DIS). In 2012, Disney agreed to let Netflix exclusively stream Disney content and movies—that agreement takes effect in September 2016.
So why initiate a buyout now? To begin with, once the agreement takes effect, Netflix will be taking business away from live TV, hurting Disney's ESPN as well as its other live content. Netflix shares have been comparatively low after its meteoric rise in 2015, making this a good time to strike a deal. But without any confirmation from either Disney or Netflix, this is a rumor that may just stay one.
3 Additional, Plausible Targets for Future Acquisitions
Delphi Automotive
Delphi Automotive (NYSE:DLPH) is a high-tech company which innovates in the automotive sector. Registered in the U.K, DLPH currently employs over 160 thousand people, and operates across 44 countries.
Given the rise of electric and self-driven cars, purchasing a high tech company that specializes in integrating technology into automobiles would be a smart move for any big manufacturer that's lagging today's smart car trend. With a market capitalization of about $17B, a Delphi buyout would need an acquirer with fairly deep pockets. An acquirer could emerge from any of the global automotive giants ranging from Toyota (NYSE:TM) with its $165B market cap to Nissan (OTC:NSANY) at $39B.
Of course, all of the automotive giants are developing their own version of the car-of-the-future, but competitive tension has been ratcheting up since the launch of Tesla's (NASDAQ:TSLA) Model 3, along with Volvo's promised 100% safe self-driving car by 2020. With technology behemoths Google (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) also on the case, we see many potential suitors for Delphi Automotive. Bolstering our thinking: Delphi's earnings and stock price have basically been flat during the past two years, and its TTM P/E is hovering around 11, a bit below the industry average.
ServiceNow
ServiceNow (NYSE:NOW) is a cloud computing company offering everything-as-a-service cloud computing for companies large and small, including platform-as-a-service (PaaS) enterprise service management software for human resources, law, facilities management, finance, marketing, and field operations. The company is growing fast, with earnings having more than doubled in Q1 compared to last year, and revenue up by almost 50%.
Cloud computing and IT are today's hot technologies, with everyone from market leader Amazon (NASDAQ:AMZN) to the still-repositioning-itself IBM (NYSE:IBM) jumping in as each tries to grab a piece of the pie. Similar to Delphi, albeit in a completely different sector, multiple larger companies could be very interested in annexing the capacities ServiceNow has on offer.
Microsoft and SAP (NYSE:SAP) are two of the larger-cap possibilities we see. Indeed, ServiceNow's $10B market cap won't bother either company, nor would it likely stop serial acquirer Salesforce.com (NYSE:CRM) which has already digested 8 companies in the past 2 years alone.
Square
Square Inc (NYSE:SQ) is a fintech startup offering electronic software and hardware payment products, available anywhere. The company, founded in 2009 by Twitter co-founder Jack Dorsey, went public in November 2015.
While the company might not yet be ripe for acquisition—it still needs to develop its user base and improve its technology—we wouldn't be surprised to see it sold in the future. The way consumers and merchants make and receive payments is changing: from new credit card technologies, to the introduction of PayPal (NASDAQ:PYPL) and more recently Apple and Android Pay.
In fact, the latter two solutions are hurting PayPal, and the competition between credit card companies remains harsh, with Visa (NYSE:V) and Mastercard (NYSE:MA) continually cutting in on American Express's (NYSE:AXP) market share. The inability to develop new products in-house for the more conservative credit card industry might push any one of these companies to make a move on Square, perhaps sooner rather than later.
Square's stock price was almost $16 just three months ago, but shares plunged to $9 after the company posted a bigger than expected loss, although the Y/Y revenue grew by 51%. Like many innovative start-ups, SQ is one of those companies likely to incur losses during their early developmental stages, but ultimately have a chance to revolutionize their industry. Which is why we believe there's a good chance they'll be snapped up while they are still growing.