Ernst & Young has conducted research into the Global M&A activity and its findings are anything but pretty. It predicts that global M&A deals from 2012 will total $2.25 trillion, 47% less than the M&A boom in 2007. It sees additional contraction in 2013 as executives around the world choose to play an extremely conservative hand. Until the economies in both the United States and Europe improve, there's no telling how low the numbers could go. Nonetheless, deals will still get done in 2013; here are my three most likely candidates.
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LeapFrog Enterprises (NYSE:LF)
This could be one of the most perplexing stocks anywhere on the planet. It has some of the most popular toys for learning including the LeapPad 2, which has been the market share leader for children's tablets. It has beaten analyst estimates in 10 consecutive quarters; yet its stock price flounders around $8 per share. LeapFrog had a tremendous 2012 and 2013 looks no different. Its earnings per share are expected to grow 20% per annum for the next five years. If it achieves this growth rate, it should deliver $1.87 per share in earnings in fiscal 2017. That's a forward P/E of 4.2, far lower than either Mattel (Nasdaq:MAT) or Hasbro (Nasdaq:HAS), where both companies have an earnings growth rate that is half LeapFrog's.
Mattel's botched purchase of The Learning Company for $3.5 billion in 1999 is considered one of the worst M&A deals in U.S. history. Although this makes the world's largest toy company an unlikely candidate to go after LeapFrog, I have to believe it has a better understanding of what it would be buying a second time around. More than a decade later, educational toys utilizing electronics are hotter than ever. This acquisition is potentially as important as Mattel's purchase of Fisher Price was back in 1993.
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Although Diageo (NYSE:DEO) seemingly has an unlimited bankroll to purchase other liquor companies, it still has to take a pass once in a while. Beam, however, might be too tempting to resist. Britain's Sunday Telegraph reported in December that Diageo was pursuing Beam this past summer in conjunction with Suntory, Japan's spirits and beverage giant. Nothing came of those discussions but where there's smoke, there's fire. On December 11, Diageo called off discussions to purchase an equity stake in Jose Cuervo, the world's best-selling tequila brand. In addition to needing a global tequila brand, it also needs a bourbon brand as well. Beam has both in Sauza and Jim Beam, not to mention the excellent Maker's Mark. Any deal is expected to run pretty high as Beam's enterprise value is approximately $12 billion. A partner would help financially, but probably even more vital is its ability to lower anti-trust concerns. After all, Diageo is the world's largest liquor company; acquiring the fourth-largest would most certainly bring increased scrutiny from various countries including the U.S. and Great Britain. In addition, Diageo's got a lot on its plate right now including acquiring a majority control of India's largest liquor company, United Spirits and the potential purchase of 50% of Ketel One vodka it doesn't already own. It wouldn't be surprising if it passed as a result of its busy agenda but with others such as Bacardi and Pernod Ricard (OTC:PDRDY) likely interested, it stands to reason Diageo won't sit idly by while its competitors work a deal. Somebody will make a play for Beam in 2013.
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Monster Beverage (Nasdaq:MNST)
The final three months of 2012 were very turbulent for the maker of energy drinks. In October the U.S. Food and Drug Administration indicated that it was investigating five deaths associated with the consumption of Monster's energy drinks. In addition, a Maryland couple launched a wrongful death lawsuit against the company suggesting their daughter's consumption of two 24-ounce cans contributed to her death. The combination of events caused Monster's stock to crater 30% over three days of trading. One month later, the FDA came out and said that while it may require greater information on the cans about the caffeine content in its drinks and the possible side effects, etc., it did state that there are several products on the market (coffee and tea) containing caffeine that have been used safely for years. Since the news, its stock returned to previous levels around $50+. Unless something extraordinarily bad happens between the beginning and the end of 2013, I see Coca-Cola (NYSE:KO) being awfully interested in its approximate 35% market share. Coke continues to deny that it's interested but already distributing the product, it knows first-hand the popularity of Monster's energy drinks. Once the brouhaha over the wrongful death suit fades, look for Coke to pounce.
The Bottom Line
Despite Ernst & Young's dire prediction for M&A activity in 2013, I see all three stocks being legitimate acquisition targets in 2013.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.