As mergers & acquisitions (M&A) are expected to spike in 2018 on the GOP tax overhaul passed late last year, Wall Street analysts have compiled a list of companies they see as most likely to become takeover targets.
President Trump's tax plan reduced the corporate tax rate from 35% to 21%, providing billions in tax savings for some of America's largest corporations while incentivizing repatriation of mounds of cash hoarded overseas by industry behemoths such as Apple Inc. (AAPL) and Cisco Systems Inc. (CSCO).
Options-Based Methodology Finds Twitter, Time Warner, Bristol-Myers, Yelp and E*Trade Among Stocks Aggressively Positioned for Takeover
The tax cut, coupled with strong economic growth and rising confidence, has spurred a record $389 billion in bids to start the year, compared to the $236.5 billion over the same period a year ago, according to data from Thomson Reuters. The surge in M&A activity in 2018 has been characterized by mega-deals including Cigna Corp.'s (CI) $52 billion acquisition of pharmacy benefits manager (PBM) Express Scripts Holding Co. (ESRX) and Keurig Green Mountain's over $21 billion deal to merge with Dr. Pepper Snapple Group Inc. (DPS).
Using an options-based methodology designed to highlighting companies for which an M&A premium is already being reflected, Goldman Sachs' Katherine Fogerty and her colleagues on the firm's derivatives team crunched the numbers and identified potential takeout targets, as reported by Business Insider. The team's approach involved calculations of the three-month/12 month term structure, or a measurement of volatility expectations in three months relative to 12-months, for a universe of companies. After assessing expectations around how much the stock will move in the short term versus the long term, Goldman ranked the companies by a degree of downward-sloping term structure. All firms on the list met a minimum liquidity threshold.
Analysts were seeking to highlight stocks where the "options market appears better positioned for the stock to trade up sharply in the next three months, consistent with a higher potential for M&A."
Among the 15 firms most Goldman listed as most aggressively positioned for a takeover spanned industries such as Industrials, Consumer staples, Consumer discretionary, Energy, Information Technology, Financials and Healthcare.
Consumer products giant Kimberly-Clark Corp. (KMB), with a market capitalization of $37.6 billion was the only one in its space on the list.
IT firms on the list included semiconductor play Maxim Integrated Products Inc. (MXIM), restaurant review platform Yelp Inc. (YELP) and social media giant Twitter Inc. (TWTR). In healthcare, Goldman pinpointed pharma giants Bristol-Myers Squibb Co. (BMY), with a market cap of over $100 billion, and Incyte Corp. (INCY), along with medical devices company Edwards Lifesciences Corp. (EW). The analysts highlighted industrials stocks XPO Logistics (XPO), TransDigm Group Inc. (TDG) and C.H. Robinson Worldwide Inc. (CHRW) alongside energy plays Newfield Exploration Co. (NFX) and CNX Resources Corp. (CNX).
Popular discount broker E*Trade Financial Corp. (ETFC) also made the list, as did car parts dealer Advanced Auto Parts Inc. (AAP) and Time Warner Inc. (TWX), whose proposed merger with AT&T Inc. (T) is being battled in court despite objections from the Justice Department.
(See also: Tax Cuts Prompt Biggest Merger Spree in Decades.)