The pullback in stocks from record highs over the past month as global trade tensions escalate has the potential to spark a new wave of M&A deals. The S&P 500 plunged as much as 6.8% over the month of May and the resulting lowered market valuations of a range of companies has produced a swath of possible takeover targets. Even despite the recent uptick in stocks in response to the Federal Reserve’s new stance on interest rates, a number of potential M&A targets are still trading below their record highs.
Morgan Stanley screened for some of the most likely targets using its Acquisition Likelihood Estimate Rankings Tool, which filters companies based on factors like market capitalization, debt-to-assets ratio, and dividend yield. Other factors are linked to specific sectors, with health care companies likely to receive more takeover bids and industrials less likely, for example. Morgan Stanley came up with a list of 15 companies, according to Business Insider. Seven of those are listed below.
7 Stocks Ripe for M&A
(Stock: market capitalization)
- Domino’s Pizza Inc. (DPZ): $12.0 billion
- Marriott Vacations Worldwide Corp. (VAC): $4.3 billion
- BJ’s Wholesale Club Holdings Inc. (BJ): $3.5 billion
- WPX Energy Inc. (WPX): $4.5 billion
- Transocean Ltd. (RIG): $3.7 billion
- Allergan PLC (AGN): $42.0 billion
- Alexion Pharmaceuticals Inc. (ALXN): $26.8 billion
Source: Morgan Stanley, Business Insider
What It Means for Investors
Alexion presents a possible takeover target in the pharmaceutical industry as the company’s stock is trading well below highs reached in 2014 and has been trading sideways for the past three years even as earnings have improved. In early February, Piper Jaffray’s Christopher Raymond suggested Alexion might be a good fit for Amgen, based on similar areas of research.
Domino’s Pizza presents one of the strongest potential targets in the restaurant industry, a company with a strong brand and expertise in food delivery. Andrew Charles of Cowen Research explained earlier this year why Domino’s would be a preeminent candidate for Restaurant Brands International (RBI) to acquire. He emphasized the voids that Domino’s could fill for RBI, including both digital and delivery best practices.
The Cheveron–Anadarko deal earlier this spring is seen as heralding a number of other M&A deals in the Permian basin. WPX Energy, one of the smaller producers in the region, is one of a number of potential targets. The company’s stock is currently trading at less than half its record high reached back in 2014, making it a potentially cheap pick for major players looking to complement their asset portfolios.
The escalation of trade wars is creating a lot of uncertainty. However, rather than acting as a damper on the strength of the M&A market, the ongoing trade conflicts could help to intensify cross-border deals as companies look to secure supply chains and respond to unfavorable tariffs and other barriers to trade. Recent U.S. tax reform and a more relaxed regulatory climate are additional factors fuelling optimism for continued strength in the M&A market.