In a note to clients, Morgan Stanley research introduced a new model designed to identity stocks that will receive a tender offer – a takeover bid – over the next 12 months.
The model is called ALERT, which stands for the Acquisition Likelihood Estimate Ranking Tool.
The team believes high corporate cash balances and recent offer activity, which is at a cyclical low (see chart below) leave the market “poised for a rebound in activity.”
Photo: Morgan Stanley
The ALERT model uses 10 indicators, including debt-to-asset ratio, dividend yield, and relative price-to-book, to identify potential offer recipients.Of the 40 stocks in the top quintile of ALERT, 9 stocks received an ‘overweight’ rating from Morgan Stanley analysts:
- Atwood Oceanics Inc. (ATW);
- Walter Energy Inc. (WLT);
- Air Lease Corp. (AL);
- Brinker International Inc. (EAT);
- Fresh Market Inc. (TFM);
- Gilead Sciences Inc. (GILD);
- Express Scripts Holding Co. (ESRX);
- Biogen Idec Inc. (BIIB); and
- Celgene Corp (CELG).
The research team throws caution to the winds, reminding clients that only 2.8% of the largest 1000 companies receive an offer over the course of the year. The stocks that do receive an offer, however, tend to appreciate handsomely. According to Morgan Stanley’s team, “Stocks that receive an offer in the subsequent quarter produce an average relative return of over 21 per cent from the end of the quarter through the day of the offer.”