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Tickers in this Article: RSH, PALM, BBY, WMT, TGT
The economic recovery although still in its early stages has had a terrific impact on stocks, as we all know. It's arguable that an increase in good fortunes will lead to increased deal making activity.

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Why Deal Making Makes Sense
When stock prices were really low in the beginning of 2009, one might have assumed that we would see a groundswell of deal activity. But that didn't really materialize for several reasons. First, banks were extremely reluctant to lend; it wasn't easy to raise money in the public markets; and frankly, potential suitors were likely concerned about buying a large company, not knowing about what the macroeconomic picture might look like.

To be clear, this economy still has a long recovery period ahead. However, with the markets having rebounded, investors seem a bit more willing to gobble up debt offerings, banks seem a little more willing to lend out money to credit worthy businesses. And, perhaps just as important, our financial system and economy appear as if they are improving, albeit slowly. In short, these conditions make it more likely that acquisition-oriented companies and private equity firms will be on the prowl.

Targets
Radio Shack (NYSE:RSH)
This past week, some in the marketplace was speculating that the electronics retailer could sell itself to Best Buy (NYSE:BBY). There could indeed be some merit to this. The reasons:

  • The shares have risen sharply from their single-digit lows, and the board might want to take advantage of this. After all, the competition with Best Buy, and even Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), which also sell electronic goods, is likely to be stiff in the future.

  • While the typical Radio Shack store is much smaller than the typical Best Buy store, it could be valuable in that it has many well-placed locations. In addition, Best Buy could use these stores to focus on a specific segment of sales - like cell phones, and/or computers, or even for its Geek Squad crew.

  • Finally, despite the lousy economy, the chain is expected to put up some good earnings numbers this year and next, and one might suspect there could be cost savings by combining with a larger company. If a suitor were to emerge, the company could fetch somewhere in the upper $20s or low $30s.
Wendy's/Arby's Group, Inc. (NYSE:WEN)
McDonalds (NYSE:MCD) has been doing extremely well recently, as one can tell from its stock price performance. Its ability to reach into its pocketbook and successfully market its many wares combined with its Dollar Menu items have been extremely effective at bringing eager families in the door. And unfortunately, Wendy's seems like it has been playing second fiddle to both McDonalds and Burger King (NYSE:BKC) for quite a while. That said, the Wendy's concept could be a great target for an acquirer.

If a company can potentially come along and institute a viable breakfast business and put out better advertising, it could really ramp up visitor traffic. Will Wendy's/Arby's be approached on this front? That's not clear, but with the shares under $5, one might surmise that the board could be looking for ways to enhance shareholder value and therefore may be receptive or consider a good offer if it were to come along. It's possible that Yum! (NYSE:YUM), famous for its successful KFC, Taco Bell and Pizza Hut concepts, could be interested in either just the Wendy's concept or the entire company.

Palm (Nasdaq:PALM)
In the fall time period, shares of the smartphone company were trading north of $15, and it appeared to me as if it were almost invincible. But no longer, as it now trades under the $4 mark.

To be clear, the-California based company has drawn skepticism, because its near-term earnings outlook is a big negative. However, at such a low price, it is within the realm of possibility that a suitor could emerge at some point. Keep in mind that the company has a good name, some popular products and, as of November 30, 2009, according to its balance sheet, it had more than $500 million in cash/cash equivalents and short-term investments on its balance sheet. That could potentially help protect the downside.

Bottom Line
With the domestic economy finally showing some signs of life, the stock market has done well. But we will start to see deal making perk up. Again, a seemingly friendlier lending environment and more willing investors could be big catalysts. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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