5 Companies Ready to Make Acquisitions

Editor’s Note: A previous version of this article contained an incorrect Merck acquisition. We regret the error.

According to PricewaterhouseCoopers' midyear report on merger and acquisition activity, total deal value has increased 39% year over year to $454 billion. Through the first five months of the year, that's an additional $127 billion that has been pumped into deals versus last year.

Martyn Curragh of PwC's transaction services department said, "As expected, the favorable conditions that escalated through the end of 2010 and drove the pickup in M&A activity carried through in the first five months of 2011."

This is good news for investors, because even as the economic picture has turned a bit cloudier recently, at least two such "favorable conditions" for deals continue to exist. Namely, most companies are still looking to grow and many companies have a ton of cash on their balance sheets. As a result, corporate deal-making could provide a push for the stock market at a time when investors seem to have taken a breather.

Sold!
There have been some massive deals announced so far this year. AT&T is in the process of getting its huge $39 billion acquisition of T-Mobile approved. Including debt, the Duke Energy (NYSE: DUK  ) merger with Progress Energy comes to about $26 billion. And Johnson & Johnson cracked its piggy bank to spend $21 billion on Synthes.

The total value of megadeals -- that is, deals of $10 billion or more -- was way up over last year according to PwC, but this part of the M&A market can be lumpy because the number of deals tends to be very small.

Numbers from Reuters show that roughly half of all deals in 2010 and so far this year have taken place in the range of $1 billion to $10 billion. This deal-making sweet spot would include Microsoft's $8.5 billion takeover of Skype, Berkshire Hathaway's (NYSE: BRK-B  ) $9 billion Lubrizol buy, and Teva Pharmaceutical's (Nasdaq: TEVA  ) $6.2 billion Cephalon grab.

Still on the prowl
As noted above, the cash on companies' balance sheets means that there's still plenty of dry powder for more acquisitions. Numbers from Factset peg total cash on S&P 500 balance sheets at roughly $1.1 trillion.

So who's going to be buying? The following five companies not only have a significant amount of cash on their balance sheet in relation to their market cap, but also have a history of making acquisitions. Weakness in the stock market could even be further encouragement for these cash-rich companies to open up their wallets to buy.

Company

Industry

Cash and Equivalents*

Notable Recent Acquisitions

Boeing (NYSE: BA  ) Transportation/Defense $7.8 billion Argon ST ($775 million), Vought Aircraft facility ($580 million)
General Electric (NYSE: GE  ) Industrial/Finance $82.2 billion Clarient ($580 million), Converteam ($3.2 billion), Lineage Power ($520 million), Dresser ($3 billion)
Berkshire Hathaway Insurance/Conglomerate $41.2 billion Lubrizol ($9 billion), Burlington Northern Santa Fe ($34 billion), Wesco Financial ($548 million)
Nokia (NYSE: NOK  ) Communication Equipment $16.4 billion Motally (?), Novarra (?), MetaCarta (?)
Merck (NYSE: MRK  ) Pharmaceuticals $13 billion Schering-Plough ($41 billion), Inspire Pharmaceuticals ($430 million), SmartCells (~$500 million)

Sources: Capital IQ (a Standard & Poor's company), press releases, and news reports.
*As of most recent financial report.

In addition to the cash on hand and the history of acquisitions, all of the companies above are motivated buyers. Though price isn't the only consideration, Berkshire Hathaway's acquisitions will be largely driven by the availability of attractively priced companies, as Warren Buffett is a well-known value investor. But he's been very vocal about his interest in continuing to make big acquisitions. In his latest letter to Berkshire shareholders, he wrote:

We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.

I don't think Lubrizol is the last time we'll see that elephant gun drawn.

Industrial companies like GE often look to acquisitions for a healthy portion of their growth since they tend to serve mature markets and may not have huge opportunities for organic growth. But it's GE's financial arm that may be readying itself for the next big buy; it's been a rumored suitor for ING's U.S. online bank.

While I don't think there's reason to expect that the U.S. defense budget will get drastically slashed, with the government budget already stretched thin, it seems hard to believe that there will be a whole lot of defense spending growth. For that reason, Boeing -- and other defense companies like Lockheed Martin and General Dynamics, which also have a good deal of cash -- may need to look to acquisitions if they want to show shareholders some growth.

Merck is part of the Big Pharma bloc that has investors on edge as they await the impact of major drug-patent expirations. Though these expirations will undoubtedly be a hit on Big Pharma's collective results, most of these companies are also flush with cash. That not only has allowed them to pay healthy dividends to their shareholders, but it gives them the opportunity to cushion the patent-expiration blow with acquisitions.

And finally we come to Nokia. Poor, poor Nokia. None of the recent purchases in the table have been listed with transaction values because they were all small buys with undisclosed terms. We're a few years out now from the Symbian and NAVTEQ pickups, but Nokia is in a position where it may feel pressure to do something drastic. That could mean making a big, bold acquisition, but it also could mean becoming a target itself -- Microsoft and Samsung have both been floated as possible suitors.

A watchful eye
Acquisitions can be a double-edged sword. In the hands of a savvy deal-maker -- Buffett would be a good example of this -- they can be a boon and grow shareholder value. However, some deals, particularly large deals that are described with adjectives like "transformational," can often be ill-advised haymakers that do little but destroy shareholder value.

Of this group, I think Nokia is the only company seriously at risk of doing the latter because it has its back against a wall right now. However, shareholders should take a good look at all of their companies' acquisitions to make sure that management is keeping their eye on the ball.

If I think one thing is for sure, though, it's that as we move into the second half of the year, we're going to continue to see corporate deal-making heat up. And what if you're looking for smaller companies that could end up as acquisition targets? My fellow Fools think these two stocks are "too small to fail," but they may be just the right size to be acquired.

The Motley Fool owns shares of Lockheed Martin, Berkshire Hathaway, Teva Pharmaceutical Industries, Johnson & Johnson, Microsoft, and General Dynamics. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Microsoft, Teva Pharmaceutical Industries, AT&T, and Berkshire Hathaway. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Johnson & Johnson, Berkshire Hathaway, AT&T, and Microsoft, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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