As M&A activity has soared under President Trump, investors increasingly are interested in turning a quick profit by identifying promising takeover candidates. In the first year from his election onwards, there were nearly 12,700 deals worth $1.2 trillion in the U.S., as tallied by Thomson Reuters and reported by CNBC. Both figures were the highest-ever for newly elected modern presidents, CNBC added. Casting a slightly wider net, for the full year 2017, there were 17,804 transactions totaling $1.8 trillion throughout North America, according to the Institute for Mergers, Acquisitions and Alliances (IMAA). (For more, see also: 5 Top Value Stocks for 2018.)
For those who believe that the markets are unlikely to deliver comparable gains in 2018 to the stellar performance of 2017, hunting for M&A candidates is a logical strategy. Goldman Sachs Group Inc. (GS), for example, projects a 2018 ending value of 2,850 for the S&P 500 Index (SPX), up less than 7% for the year, and just 3% above the January 11 close.
Meanwhile, Goldman Sachs has identified 17 stocks that are likely acquisition targets in the opinion of their analysts. They focused on industries with low market concentration as measured by the Herfindahl-Hirschman Index (HHI). The lower the index number, the more competition is in that industry, and thus the less likely that a merger will encounter government opposition on antitrust grounds.
Among the stocks highlighted by Goldman are these eight, with their respective industry groups' HHI numbers, per Goldman:
- Twitter Inc. (TWTR): 8% HHI
- SeaWorld Entertainment Inc. (SEAS): 4%
- E*Trade Financial Corp. (ETFC): 16%
- Kimberly-Clark Corp. (KMB): 26%
- T-Mobile US Inc. (TMUS): 27%
- Sprint Corp. (S): 27%
- Rite Aid Corp. (RAD): 21%
- Etsy Inc. (ETSY): 8%
Goldman's analysts give probabilities of 30% to 50% that companies on their list will be targets of M&A activity. Moreover, they highlight those stocks with HHI figures of 9% or less as being particularly likely candidates. Goldman's January 2018 report, "Where to Invest Now," also noted that one member of its M&A basket, Kimberly-Clark, also is in its high investment for growth basket. (For more, see also: 9 Stocks That Can Outperform As Bull Market Ages: Goldman.)
Among big pharmaceutical companies, M&A activity may be on the upswing, according to The Wall Street Journal. These companies are facing slowing revenue growth, particularly as consolidation among insurers and pharmacy benefit managers results in greater pushback on prices. Meanwhile, they have strong balance sheets and the cost of debt remains at historically low levels, so growth through acquisition is an attractive option, the Journal adds.
In particular, big pharma has been active in buying out biotech startups in recent years. However, now there are few, if any, small biotech firms left standing that can produce a significant near-term revenue impact for a big acquirer, the Journal notes.
For the largest drug companies that can spend $15 billion to $39 billion or more on an acquisition, Zacks Investment Research offers four potential targets that have promising developments in treating rare, deadly diseases. These companies are: BioMarin Pharmaceutical Inc. (BMRN), Vertex Pharmaceuticals Inc. (VRTX), Incyte Corp. (INCY), and Alexion Pharmaceuticals Inc. (ALXN).