Reports from JPMorgan and Deloitte anticipate brisk M&A action in 2019, and this sets the stage for investors to reap substantial gains, if they correctly identify takeover targets. "M&A activity is expected to remain strong," according to JPMorgan. "While many of the effects of tax reform and repatriated cash were used for share repurchases and dividends in 2018, it is anticipated that boards will also deploy extra cash for acquisition-driven growth," their report adds.

Stock analysts believe that these four companies are likely acquisition targets, according to CNBC: XPO Logistics Inc. (XPO), Q2 Holdings Inc. (QTWO), Mitek Systems Inc. (MITK), and Jagged Peak Energy Inc. (JAG). Meanwhile, Genetic Engineering & Biotech News has named 10 takeover candidates in the biopharma field, including these four: Gilead Sciences Inc. (GILD), Alexion Pharmaceuticals Inc. (ALXN), Amarin Corp. PLC (AMRN), and BioMarin Pharmaceutical inc. (BMRN).

8 Possible M&A Targets

  • XPO Logistics, $6.7 billion
  • Q2 Holdings, $3.0 billion
  • Mitek Systems, $0.5 billion
  • Jagged Peak Energy, $2.3 billion
  • Gilead, $85.9 billion
  • Alexion, $31.6 billion
  • Amarin, $6.4 billion
  • BioMarin, $16.5 billion

Source: CNBC, as of April 11, 2019

Significance for Investors

"In 2018, deals over $10 billion made up only 6% of the number of announced deals over $1 billion. We anticipate activity in $1 billion-$10 billion deals will continue to be robust and drive the M&A market," JPMorgan observes.

According to Deloitte, "Respondents from larger private equity funds are almost unanimous in their anticipation of more deals in 2019, as 94% of respondents at funds larger than $5 billion expect an increase compared with last year. Interestingly, there is not the same correlation among corporations; only 65% of respondents at the biggest companies ($5 billion or more in annual revenue) see accelerating deal flow in the next 12 months."

However, Deloitte also said, "Almost a third of corporate respondents see a significant increase in deal activity—up from about a quarter a year earlier; and 29 percent of private equity respondents expect a surge, up from 19 percent a year ago."

Jagged Peak conducts oil and gas exploration in the Delaware Basin of west Texas and southern New Mexico. Private equity fund Quantum Energy Partners has a 69% ownership stake. This, plus "favorable acreage position" and "20% annual growth leading to FCF by mid-2020 or sooner," makes it "an attractive takeover candidate," according to SunTrust, as quoted by CNBC.

BioMarin has been a buyout candidate since 2013, per Genetic Engineering & Biotech News. It has a strong pipeline of drugs nearing approval, focusing on "orphan drugs" for rare diseases ignored by larger competitors. "It is a comparatively low-risk acquisition for a Big Pharma firm looking to add to its drug offerings and fend off the decline in revenue associated with patent expiration and competition," per a MarketWatch column.

Alexion also focuses on rare diseases, and thus BioMarin may acquire it, per Seeking Alpha. The same column notes that Bernstein sees Amgen Inc. (AMGN) as a possible buyer, seeking to control R&D costs while strengthening its own drug pipeline.

Amarin has been buoyed by a string of positive reports on its drug Vascepa, a fish oil derivative that may offer a breakthrough in treating and preventing cardiovascular disease. Its modest market cap makes it an affordable target for Big Pharma.

Looking Ahead

Investing on the basis of takeover speculation can be risky, especially if company fundamentals deteriorate. Moreover, many small biotech firms are risky enterprises, given large R&D expenditures and years-long, setback-filled, paths to commercialization.