When investors are looking for larger-than-average returns, they often try to sniff out the companies that seem ripe for a takeover. For while acquisitions targets aren't always easy to locate, they can generate big profits if you're savvy enough to spot them.

Here's why: In order for one company to buy out another, all shareholders must be on board with the merger. So when acquirers put a bid on the company to-be-acquired, they offer a premium for its stock, essentially sweetening the deal in order to incentivize approval.

So how can you tell which companies are wearing bulls-eyes on their backs? It's impossible to say for certain, but we came up with a way to try and find out.

First, we got the word on the Street, reading Barron's, Wall Street Journal, Morningstar, Marketwatch, TheStreet.com, StreetInsider, and other publications to see which takeover targets they were promoting.

This created a universe of about 250 companies, which you can access here. Then, we wanted to know which rumors were being taken seriously -- so we tried to find the takeover rumors that are seeing institutional buying (i.e., hedge funds, pension funds, big money managers etc.).

Institutional investors manage billions of dollars worth of holdings, so you can be pretty certain that before they buy, they're going to do some pretty thorough research.

After crunching the numbers, we came up with the following list. These rumored takeover targets have seen significant institutional inflows over the last three months, suggesting that the smart money thinks there may be some truth to the gossip -- do you?

Company

Source of Takeover Speculation

Institutional Transactions

The LGL Group (NYSE: LGL)

Nasdaq.com community

Institutional investors own 783,161 shares vs. 479,922 shares held three months ago (+63.19% change)

Webster Financial (NYSE: WBS)

Dick Bove, banking analyst

Institutional investors own 66,830,016 shares vs. 59,361,252 shares held three months ago (+12.58% change)

Seagate Technology (NYSE: STX)

Street Insider, Barrons

Institutional investors own 421,348,680 shares vs. 380,902,147 shares held three months ago (+10.62% change)

Pre-Paid Legal Services (NYSE: PPD)

Street Insider

Institutional investors own 7,899,856 shares vs. 7,167,440 shares held three months ago (+10.22% change)

CBOE Holdings (Nasdaq: CBOE)

Street Insider, UBS

Institutional investors own 12,422,690 shares vs. 11,396,931 shares held three months ago (+9.% change)

Rare Element Resources (NYSE: REE)

Benzinga

Institutional investors own 818,906 shares vs. 755,798 shares held three months ago (+8.35% change)

Exelixis (Nasdaq: EXEL)

Morningstar

Institutional investors own 72,393,727 shares vs. 67,797,596 shares held three months ago (+6.78% change)

The Children's Place Retail Stores (Nasdaq: PLCE)

TheStreet

Institutional investors own 31,995,519 shares vs. 29,968,904 shares held three months ago (+6.76% change)

NetApp (Nasdaq: NTAP)

Street Insider, UBS, Marketwatch

Institutional investors own 380,230,346 shares vs. 356,917,905 shares held three months ago (+6.53% change)

United Rentals (NYSE: URI)

The Globe and Mail

Institutional investors own 64,012,099 shares vs. 60,458,740 shares held three months ago (+5.88% change)

Xyratex (Nasdaq: XRTX)

Barrons

Institutional investors own 24,134,161 shares vs. 23,098,922 shares held three months ago (+4.48% change)

Novell (Nasdaq: NOVL)

Street Insider

Institutional investors own 288,343,852 shares vs. 277,863,698 shares held three months ago (+3.77% change)

Blue Nile (Nasdaq: NILE)

Business Insider

Institutional investors own 20,144,959 shares vs. 19,456,543 shares held three months ago (+3.54% change)

Walter Energy (NYSE: WLT)

UBS

Institutional investors own 51,957,272 shares vs. 50,360,160 shares held three months ago (+3.17% change)

Institutional data sourced from Reuters. The list has been sorted by the change in institutional ownership over the last three months.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top 9 stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


 

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

Exelixis and Blue Nile are Motley Fool Rule Breakers recommendations. The Fool owns shares of Exelixis. 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. The Motley Fool has a disclosure policy.