With business expansion a risky proposition for many companies given the uncertain future, acquiring established companies looks pretty compelling.
Many potential acquisition targets are doing fine in this downturn, yet are arguably trading at historically discounted levels.
Some are sitting on mountains of net cash, which can total as much as 60% of their share price.
Other companies have already rejected recent buy-out offers and are very much in-play.
Cephalon is a leading biopharmaceutical company developing treatments for sleep-related disorders, cancer, and pain.
While its shares have been under pressure due to the threat of generic competition for its key narcolepsy drug Provigil, these concerns may be overblown.
The company already has a next generation narcolepsy drug Nuvigil set up to replace Provigil. This new drug might even be approved to treat jet lag as an additional indication.
Cephalon's cancer and pain portfolio is both promising and already adding value, contributing to over 35% of the company's revenue.
All-in-all, consensus expects the company to earn over $6 a share for 2010, putting it at 2010 PE of under 10x. CEPH's balance sheet also has more cash than debt, thus is net cash.
Cephalon recently raised money and could be looking for acquisitions itself, yet it looks appealing to a larger pharmaceutical company in need of growth as well.
Acquiring CEPH is probably less risky and cheaper than doing R&D from scratch.
Establishing a hit video game is difficult, but once achieved, they tend to become repeatable cash cows.
That's why Activision-Blizzard could be an appealing industry-consolidation target for someone like (Electronic Arts), we'll go out on a limb here, Microsoft (MSFT).
The company owns Guitar Hero, which became so popular with gamers that there's a South Park episode dedicated to it.
It also owns hit franchises such as Call of Duty and World of Warcraft. Christmas is usually kind to video game sales, and ATVI's latest Call of Duty: Modern Warfare 2 is expected to be a top-seller this year.
Without even considering income from the upcoming Christmas season, ATVI already has net cash totalling about 20% of its market cap. Strip away this net cash from the company's market price and ATVI trades at about 12x 2010 earnings.
While recent insider selling requires scrutiny, ATVI could be cheaper than developing hit games from scratch.
Dolby has been blowing our minds since 1965 and is one of the best known brands for sound technology.
While the economic downturn may have stagnated the company's earnings growth, this brand isn't going anywhere because it is:
A) Extremely well established as a leader.
B) Essentially debt free.
C) Sitting on half a billion dollars of cash.
D) Highly cash-generative and profitable with near-50% operating margins.
These days, when growing a new line of business is harder than ever, Dolby presents an interesting alternative for an electronics company looking to put money to work.
Thing is, would Ray Dolby ever sell his controlling stake? Maybe for the right price.
KBR is a global engineering and construction company which was spun off from Halliburton in 2007.
They're actually the largest contractor for the US army, where business has been strong as one can imagine.
They are also a leader in the growing Liquified Natural Gas (LNG) space, with projects around the world.
Nonewithstanding the shares' rally since March, net cash on the balance sheet equals about 30% of KBR's current market valuation due to disciplined cost control and past debt reduction.
With a likely long-term future with the US military, and solid financials, this company could be a good bolt-on acquisition for many competitors.
Terra produces and sells nitrogen-based products such as fertilizers in North America, and is very much 'in play'.
The company rejected a bid by CF Industries (CF) back in January, yet the story didn't stop there. Terra's board of directors had to again reject CF's overture as recently as October 1st.
CF has been a very persistent suitor, having accumulated about 7% of Terra's shares.
2009 has been challenging for the company's business, in relation to the boom year of 2008. Yet consensus expects Terra to remain profitable in 2009 and start growing earnings again in 2010.
Despite takeover speculation, the stock remains well below the $55 level it reached in 2008.
Wether or not you're a fan of their shoes, Skechers is an internationally-recognised name in the branded footwear space.
It would be a nice add-on for a larger retail player or an interesting entry into branded business for any Asian OEM manufacturer.
Despite some unsurprising difficulty on the retail front these days, the company should remain profitable this year, and then to start to grow earnings again in 2010.
Skechers also happily sits on a mountain of net cash, equivalent to about 30% of its market cap.
The only hitch is that the Greenberg family has voting control of the company via special class B shares. Thus any buy-out would require their approval, which could mean a strong take-out premium since Skechers shares, now around $17, used to trade as high as $35.
Costar is a leading provider of web-based commercial real estate analytics and marketing services.
The business has done remarkably well considering the current economic circumstances. Demand remains strong for its products as customers try to take advantage of and manage themselves during the current real estate crisis.
While earnings this year are likely to be less than those of 2008, they will be higher than anything the company has made in previous years. They're also expected to grow in 2010.
While the company may not apear cheap on a PE basis, it could look more appealing to a suitor once cash flow (substantially higher than reported earnings) and net cash (totaling 25% of market cap) are considered.
Cadbury shares have been in play ever since the company rejected an unsolicted $16.73 billion bid from Kraft (KFT) in September.
The shares initially spiked towards the take-out price, but have drifted slightly lower as the potential for a protracted take-over became apparent. Currency factors may also be at play.
One potential upside case for the shares going forward is that Kraft may be forced to come back with a higher offer.
Cadbury is known to harbor ambitious expansion goals of its own and may fiercely resist any take-out.
There's also the potential for a counter-bidder to enter the fray, such as Hershey (HSY), though recently this has appeared less likely.
Ingram is the leading wholesale distributor of computer products and services in the world.
The economic downturn has slammed the company's sales, whereby 2009's full year revenue could be 20% lower than that of 2008.
Yet importantly, the company has remained profitable despite the fact that its business runs on razor-thin 1-2% operating margins.
Consensus expects Ingram's earnings to grow again in 2010 to $1.36, putting Ingram on a 2010 PE of about 12x.
Add in the the fact that net cash totals over 35% of the company's market cap, and you have a cash-rich business that could be compelling for other players in the computer supply chain.
Synopsys creates design automation software for the semiconductor industry.
It's another example of a company doing well despite the difficult economic environment.
2009 earnings are actually expected to hit a new all-time high.
2010 earnings could moderate a bit, but should remain decent. Cash flow is also notably much higher than reported earnings.
While the company itself has been picking up other companies to strengthen its business position, it could very well fall under the M&A sight as well.
It has net cash at almost 35% of its market cap.
E*Trade was hit hard by the subprime mortgage debacle, and as a battered financial company remains at risk of insolvency due to its exposure to toxic assets.
Still, despite the banking disaster, the company has been raising capital to shore up its balance sheet and its online brokerage business remains very strong.
If a competing brokerage such as Charles Schwab or TD Ameritrade could become comfortable with E*Trade's balance sheet risk, the troubled shares would be a great way to snap up market share.
This stock has generated massive volume lately, thus is very much 'in play' in one form or another.
Facet shares have been buoyant ever since the company rejected a $14.50 per share unsolicited bid from Biogen (BIIB) in September.
Despite the M&A disagreement, Facet and Biogen jointly develop two drugs together, one for multiple schlerosis and another for cancer. Few would argue that the fit doesn't make sense from a business perspective.
In this regard, Facet simply said that the offer price was too low, not off the table. Some believe that Biogen could come back with a better offer; the shares are even trading above Biogen's $14.50 bid.
Indeed it appears Biogen low-balled its initial offer price. Even at Facet's current market cap, the company's net cash alone would effectively pay back over 60% of any acquirer's purchase cost.