Harry Rady of Rady Asset Management thinks the hot start for deal activity in 2011 may be just the beginning.
“We’ve seen a massive amount of M&A coming this year and what we’ve seen so far is just the tip of the iceberg,” says Rady, whose San Diego-based firm has more than $250 million in assets under management.
Rady should know. He says his firm typically sees 5 -10 of the companies in its portfolio get acquired each year.
In his opinion, most deals take between six and 18 months of discussions and negotiations before they are announced. Rady believes the pipeline is full and that the market will explode with deals.
Rady believes that the economy is growing very slowly and companies are sitting on huge troves of cash. These companies have made all the cuts they can make and won’t see any growth organically. In order to achieve growth, they need to buy it. Credit markets have been supporting transactions as well.
A recent example for Rady is Cephalon(CEPH_). He owned the biotech company in his portfolio and was rewarded when it received a $5.7 billion buyout offer from Valient International(VRX_) last week. The stock jumped even beyond the offering price as market watchers decided the hostile bid might go even higher.
Rady thought that Cephalon’s value was depressed because the market was too focused on the short term and not giving the company enough credit for existing products and its pipeline. This is generally his strategy. Find good companies that the market has ignored. Here are some additional stocks that Rady thinks are takeover targets.
Adobe Systems(ADBE_) has underperformed compared to its peers in 2010. Mostly because Apple(AAPL_) refused to adopt Adobe’s Flash in its mobile platforms — specifically the iPad. Another negative came in September when Adobe said its sales were slowing.
Rady thinks the market has overreacted to these events. He believes in Adobe’s intellectual property and its dominant market share in web development and graphics software.
“Its market cap and IP portfolio also make it an attractive acquisition candidate. At 14 times, we think the stock has approximately 50% upside to a price target of $45,” says Rady.
But the company does have 12 million online subscribers driving profits. Activison expects the market for online-enabled game consoles like the Xbox and PS3 will grow by 24% and is focusing on this business as opposed to developing games for smart phones.
Rady thinks ATVI is an attractive takeover candidate that will outperform. He says, “Dominant, best of breed company with a 12 -18 month price target of $18, approximately 50%.”
Market watchers have been concerned about military spending cuts and the impact they could have on the company but the latest Republican budget proposal calls for an increase in military spending.
FLIR has been expanding the use of its products in commercial and retail markets as well. Rady believes that a bigger defence company worried about cuts in government spending may look at FLIR as a way to jumpstart growth. He has a price target that is 50% higher than where the stock currently trades, which is near $35.00.
Iridium(IRDM_) provides mobile voice and data through satellites. The company has dropped as a result of fewer equipment sales. But Rady points out that the company upgrades its satellites and maintains 15% plus in overall growth.
TheStreet Ratings has a hold on the stock and notes that net income growth has not outpaced the company’s average competitor even though sales have.
Rady believes the market will reward this niche player, whose stock is down more than 3% in the past year, and has a price target of $15.00
But NuVasive is a pioneer in its field and demand continues to grow as baby boomers age. Mizuho Securities upgraded the stock to outperform in March and set a 12-month price target of $29.
Rady points out that, prior to the worries over reimbursement, the stock was 100% higher and he sees no reason why it can’t return to those levels.
On the bright side, there is a large market for the drug and little competition, so Savient can still grow organically.
Rady believes a buyer may yet appear and says there is potential for the stock to rise 100% for where it is now, which is roughly $10.50.
Shorten up the time horizon though and the performance looks a lot better as SandRidge shares are up more than 70% in the past year, and have more than doubled from a 52-week low of $3.97 last August.
Many investors have been banking on natural gas prices to rise and they haven’t. Rady says the company has been transformed from a pure gas play to a company with more balance following a recent oil deal. He has a $14.00 target price.