4 Buyouts to Watch for in 2010

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Wall Street's consolidation feeding frenzy will continue throughout 2010, as larger companies devour smaller competitors or potential disruptors. Dinner bells and wedding bells are still ringing, since many of the factors that fueled last year's buyouts have only intensified:

  • The economy is showing signs of life, leading larger companies to believe that when it comes to snapping up smaller rivals, it's now or never. Acquisitions will be more expensive down the line if the recovery is for real.
  • Companies have spent the past two years shaving costs to the bone. There's no more margin expansion to be had, so those same corporations are seeking out non-organic opportunities for growth.
  • Having boatloads of greenbacks is rarely a problem, but interest rates remain at historic lows. In other words, companies with cash-rich balance sheets aren't making a whole lot of interest income by parking their money in fixed-income investments. Deploying some of the greenbacks into fast-growing purchases seems perfectly logical.

Investors' quest, naturally, is to seek out the stocks that will be acquired. But that's not as easy as it sounds. The best bets are usually disruptive companies that have checked their egos at the door, in light of their own inherent mortality. Many of the obvious candidates may already have a bit of a buyout premium attached to their current market prices. The key is to find stocks that make sense as stand-alone companies, and consider any possible buyout markup as a bonus.

Let's go over a few of the companies that I see getting hitched in 2010.

Take-Two Interactive (Nasdaq: TTWO  )
It seems hard to believe that Take-Two turned down a $26-a-share buyout offer from Electronic Arts (Nasdaq: ERTS  ) less than two years ago. Then again, the publisher of the Grand Theft Auto video game series probably never fathomed that it would be targeting losses in the near term.

Take-Two is suffering through product delays and a moribund industry that has posted lower year-over-year sales in eight of the past nine months. That last point is critical in Take-Two's buyout thesis, though, since its larger competitors are also reeling at this point.

Larger developers can't rely on organic growth to put food on the table these days, and Take-Two is the industry's most compelling acquisition candidate. With several hot properties in its portfolio, including BioShock and Grand Theft Auto, executives have to be embarrassed to find their shares fetching just 40% of the buyout price the company turned down last spring.

E*TRADE (Nasdaq: ETFC  )
Discount brokers were in frenetic consolidation mode a couple of years ago. Today, the sector's no longer so fragmented -- but that simply draws all eyes to E*TRADE as the next logical buyout.

E*TRADE has had to pay the price for its mortgage-lending ways when it comes to online banking, but its equity brokerage business continues to gain ground. You can thank the breakthrough "E*TRADE Baby" ads for the recent spike in popularity.

However, E*TRADE has been posting losses, even as its larger peers remain squarely in the black. You also have to go all the way back to September to find the last time that shares traded for more than a pair of Dollar Menu burgers.

Tellingly, when its outgoing CEO announced his retirement last year, E*TRADE had to settle for enlisting a board member as its interim CEO. If every qualified candidate feels that an imminent acquisition might make E*TRADE a shaky gig, they're basically creating a self-fulfilling prophecy.

Hansen Natural (Nasdaq: HANS  )
The company behind the popular Monster energy drinks has enjoyed a monster run, but it may be time to map out an exit strategy. Monster and niche leader Red Bull have succeeded in keeping the two soft-drink giants -- and any envious food company -- from penetrating this market as anything more than fringe players or third-party distributors.

However, Hansen's torrid run is tiring. Analysts project that revenue inched just 9% higher last year, and they see Hansen's top line growing by 8% this year. Margin expansion has led to more dramatic bottom-line spurts, but this Monster masher may be willing to settle for a bidding war between the country's two pop stars. Coca-Cola (NYSE: KO  ) is the likely victor, especially since it signed on as a regional distributor when its own Full Throttle entry failed to gain serious traction. But the door is always open for any food or beverage giant hungry for a little octane.

The key question here is whether the energy-drink market is maturing. The niche may now seem saturated, or perhaps even peaking, but that sales slowdown could also result from the challenges in pushing premium-priced canned beverages in a soft economy. If the latter scenario's true, Hansen's revenue growth may be on the cusp of accelerating. Savvy acquirers would want in before that happens.

Netflix (Nasdaq: NFLX  )
Whispers that (Nasdaq: AMZN  ) might gobble down Netflix have been making the rounds for ages. I believe that there are more potential suitors than just the world's leading online retailer.

Either way, Netflix is the perfect buyout candidate. It's doing really well right now -- and ironically leading the way in digital delivery -- but its moat will be tested once the optical disc goes kaput. Without the need for physical distribution centers or red mailers, digital delivery subscriptions will be commoditized -- assuming the studios don't simply cut out the middlemen.

Like the other companies on this list, Netflix isn't a dinosaur. However, there's nothing like the fear of extinction to sway it into considering exit strategies at reasonable premiums while they're still available.

Coca-Cola is a Motley Fool Inside Value selection and a Motley Fool Income Investor selection. Hansen Natural and Take-Two Interactive are Motley Fool Rule Breakers picks., Electronic Arts, and Netflix are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is not on anyone's list of likely buyouts this year. He does not own shares in any of the stocks in this article, except for Netflix. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool's disclosure policy politely declines all buyout offers.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2010, at 12:34 PM, prginww wrote:

    In the past two months, The Fool has sent several messages regarding TTWO and it is anyone's guess which one reflects your true opinion of Take-Two. I suppose it is best to continue to follow your reports and any others with the hope that a clear direction will surface.

    E Trade needs a transfusion. Its volume is always near the top of the charts but it just flounders. I own it but even a buyout won't resusitate it that much. It will not get top dollar but anything approaching $3.00 will be like a breath of fresh air.

  • Report this Comment On January 05, 2010, at 4:25 PM, prginww wrote:

    hmmm...Re: Coke and Hansen's. If Hansen's is slowing down, why would Coke by them??? That is, unless Coke has figured out how to blow out sales (but even that doesn't make too much sense - since Coke hasn't been able suppland Monster with it's own Full Throttle brand).

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