Inside Wall Street: Putting Mergers and Acquisitions to Work for You


Mergers and acquisitions seem to be taking the business world by storm, with buyout and merger transactions -- which jumped some 23% in 2010 from 2009 -- up an additional 24% in just the first two months of this year.

According to analysts at mega investment bank Goldman Sachs (GS), stronger global economic growth and continued low interest rates, plus companies' attractive valuations and high cash hoards among U.S. corporations and private equity funds, have combined to create the perfect conditions for a flurry of M&A activity since October of 2009.

"We see continued upside to the M&A cycle and remain core buyers of the theme across our Americas coverage," Goldman Sachs analyst Robery Borouherdi notes in an M&A report released Friday.

Leveraged Buyouts to Keep Growing

Leveraged buyouts, or LBOs, appear to be one of the most attractive deals in the making. "With about $400 billion in unlevered private-equity cash and a favorable deployment backdrop, we expect the pace of LBO activity to continue," Boroujerdi says in a report.

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All together, the companies that Goldman covers have cash balances that have cumulatively grown 50% since 2007. In the past two quarters alone, their gross balances have grown more than 10%.

The Goldman study lists companies that are potential buyout targets, as well as possible strategic acquirers, based -- in part -- on their profitability and cash stash. The study also highlights 33 stocks that could benefit from the mushrooming M&As.

Stocks Poised to Gain from M&A

The following companies top the list of companies with at least a 30% chance of getting involved in M&A activity, according to Goldman estimates:

  • Alexion Pharmaceuticals (ALXN), which develops drugs to treat autoimmune disorders, among other diseases, and is currently trading at $94 a share.

  • Cabot Oil & Gas (COG), a natural-gas exploration company now trading at $48 as share.

  • Mead Johnson Nutrition (MJN), which makes nutritional products for infants and children and trades at $55 per share

  • Abercrombie & Fitch (ANF), a major apparel retailer trading at $53 a share.

  • Huntington Bancshares (HBAN), which operates 600 Huntington National Bank branches and sells at about $7 a share.

  • Varian Semiconductor Equipment (VSEA), the world's largest designer and maker of ion-implantation equipment used to modify semiconductor wafers' electrical properties, currently trading at $44 a share.

Among the potential acquirers that Goldman Sachs lists are Google (GOOG), with net cash holdings of $31.5 billion at the end of 2010; Apple (AAPL), with $27 billion; Cisco Systems (CSC), with $25 billion; Intel (INTC), with $19 billion; Johnson & Johnson (JNJ), with $10.7 billion; Qualcomm (QCOM), with $10.5 billion; and Chevron (CVX), with $5.8 billion.

Private Equity Also Could Benefit

Several publicly traded private-equity firms also are well positioned to benefit from the M&A trend, including leveraged buyouts, the Goldman team says. These include:

1. Blackstone Group (BX), one of the world's largest private-equity firms and alternative-asset managers with nearly $100 billion of assets under management. With $16.5 billion in cash assets, Blackstone is Goldman's top listed top alternative asset manager and currently trades at $16.59 a share.

2. Kohlberg, Kravis & Roberts (KKR), a private-equity outfit specializing in acquisitions, leveraged buyouts, management takeovers and other investments, KKR has $13 billon of "dry powder" that it could set off to help finance deals and is now trading at $16.53 a share.

3. Evercore Partners (EVR), an investment boutique with a global franchise that provides advisory services for mergers and acquisitions, restructurings, divestitures and financing, and is currently trading at $30 a share.

Large institutional investors already have exposure to many of these companies for reasons other than their M&A appeal. But for investors seeking to catch potential M&A plays, these stocks could be a way to get into the game.

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