The folks at Morningstar and its subsidiary Footnoted.com recently released lists of companies they consider promising takeover candidates. But before you buy any of the stocks, dispel those visions of premium-priced profits dancing in your head. Buying a stock simply on speculation doesn't always pan out. You'll want to look for more reliable indicators of value instead.
Pros and cons
Let's look at a few of Footnoted's suggested takeover targets:
- Activist investor Carl Icahn now owns more than 10% of Lawson Software. For years, observers have expected Oracle (Nasdaq: ORCL) to gobble up this smaller enterprise-resource-planning specialist, and with breakup- and sale-happy Icahn in the mix, that could finally happen. The situation isn't all rosy, though: some analysts think the company's been destroying shareholder value lately.
- Copano Energy (Nasdaq: CPNO) is a promising stock if you're bullish on the future of natural gas. In a joint venture with Kinder Morgan Energy Partners (NYSE: KMP), it's investing millions in pipelines and related facilities. But its revenue has fallen in recent years, and net losses marred several recent quarters.
- Some speculate that Infinera (Nasdaq: INFN) might get bought out by rivals Alcatel-Lucent (NYSE: ALU) or Cisco Systems (Nasdaq: CSCO) for its optical networking technology. But its cash flow has been lumpy in recent years, and it has frequently burned more greenbacks than it generated.
Still waiting …
Sure, some companies on the list will indeed get swallowed up by rivals or other interested parties. Heck, one already has. Rock-Tenn will snap up Smurfit-Stone Container (Nasdaq: SSCC), which emerged from bankruptcy protection last year. Smurfit-Stone's shares surged 27% on the news, inevitably making more investors look for takeover targets.
Just remember that in a year or two, plenty of companies on these lists will remain unacquired. In 2008, The Wall Street Journal published a list of eight takeover targets. A quick check suggests that all but one are still trading under their own names. The last filed for bankruptcy.
If you're buying solely on speculation, don't. You've got better reasons to buy.
