One of the biggest considerations companies make when deciding whether to acquire another company is how fairly priced the company is. If the company is overvalued, others will not be interested in buying it.
Analysts and investors follow potential takeover/leveraged buyout targets because when a company announces that it is being taken over, its stock price usually jumps to reflect the takeover premium being paid. This is usually a profitable event for shareholders.
We compiled a list of rumored potential takeover/LBO targets from various sources including CNNMoney and Wall St. Cheat Sheet. We then compared their stock prices to their Graham numbers to find those that may be attractively priced or undervalued.
The Graham number is a measure of maximum fair value created by the "godfather of value investing," Benjamin Graham. It is based on a stock's earnings per share and book value per share:
Graham number = Square Root of (22.5 x Trailing-12-Month EPS x Most-Recent-Quarter BVPS)
The equation assumes that the P/E ratio should not be higher than 15 and the P/BV ratio should not be higher than 1.5. Stocks trading well below their Graham number, or their maximum fair value, may be undervalued. This could indicate that the stocks have more value to price in.
Business section: Investing ideas
Below are the results from this screen. These rumored takeover/LBO targets are trading at steep discounts to their Graham numbers, which may indicate that they are also attractively priced.
Do you think these companies are attractive takeover targets?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. American Electric Power
2. Best Buy
4. Kulicke & Soffa Industries: Designs, manufactures, and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high- and low-powered discrete devices, light-emitting diodes, and power modules. Takeover/LBO rumor sourced from Bloomberg Businessweek. Diluted TTM earnings per share of $1.62 and a MRQ book value per share value of $6.55 imply a Graham number fair value of $15.45. Based on the stock's price at $12.08, this implies a potential upside of 27.91% from current levels.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.