According to The Wall Street Journal, numerous industry experts, and even statistics from the U.S. Federal Reserve, it looks like we're about to enter a period of extraordinary corporate activity. Are you ready for some intense Wall Street action?

Dozens of corporations today are cash heavy, bare boned, and ready to slice their way into a target-rich environment. At the exact same time, there are literally thousands of struggling companies out there, sitting on expensive assets that healthy companies would rather purchase on the cheap than create for themselves. The confluence of these scenarios has to be irresistible to the acquisitive executive.

I'm not guaranteeing anything, but according to a recent survey in the Journal, companies today are holding relatively more cash than at any point in the past 40 years. Are you ready to reap the benefits?

Feeling it out
Examine this quote pulled from a recent article in the Financial Post, "Internal cash generated by non-financial corporations in the second quarter exceeded inventory and capital spending needs by an annualized $156-billion, compared with an average cash-flow deficit of $152-billion over the past 10 years. Meanwhile, private equity in North America, which has barely participated in the takeover market this year, is assumed to be sitting on roughly half-a-trillion in cash."

All that corporate nickel-and-diming has paid off.

For the first time in a long time, businesses and investors are sitting on a fat cash position and are starting to lick their chops at the sight of crippled businesses being sold for a song.

Hooking in
To be fair, the mere existence of hoarded cash doesn't necessarily mean companies will be inclined to spend it all in a huge flurry of activity, but consider this: The M&A party has, essentially, already begun. The Wall Street Journal reported recently that "Global M&A volume reached $305 billion (EUR202.4 billion) in November 2009, the highest monthly volume for the year, and the first time that the total breached $300 billion since July 2008." Just this week, ExxonMobil (NYSE:XOM) raised the stakes with its $41 billion purchase of XTO Energy (NYSE:XTO).

Furthermore, consider what else the Journal said, "In a survey published earlier this month by Ernst & Young, a quarter of 500 company bosses polled said that they planned to do a deal within the next six months, and a third said they had M&A plans for the next 12 months."

I can't be sure, but it would appear we're headed for something big, indeed.

What should we do?
To capitalize on this situation, you must be smart about it. Begin by identifying the likely participants.

I started off with a search on a data service called Capital IQ, and I asked the software to tell me what companies have publicly declared interest in new acquisitions or investments. You can do similar things yourself by scanning Google News or other financial media sites and using keywords like "acquisitions," "mergers," or any other synonymous jargon. Here are some of the names that came up during my search:


Market Capitalization (in Billions)

Citigroup (NYSE:C)


GlaxoSmithKline (NYSE:GSK)


General Electric (NYSE:GE)


Source: Capital IQ, a division of Standard and Poor's.

It's nice to know that executives at these companies say they're going to be making some moves. But, at the same time, I'm not inclined to believe that a company is going to start picking off companies left and right, simply because it claims it is going to. Can you imagine Citigroup making big deals even as it attempts to raise capital to exit its current, quasi-government-owned state? I think not.

In this era of tight credit, I'd rather first look to companies that can finance such large deals with adequate amounts of their own cash. Here are two names that come up:


Market Capitalization
(in Billions)

Total Cash
(in Billions)

Total Debt
(in Billions)

Pfizer (NYSE:PFE)








Source: Capital IQ, a division of Standard and Poor's.

These are just two of the several dozen companies that have said they want to do deals and have the cash to do something about it. These are the guys that can actually make moves. Focus your attention here.

We're not done yet, however.

The next step
As investors, we generally prefer to be on the other side of the M&A equation. We want to be invested in companies that are the targets of big-time buyouts. The reason: Shareholders typically get paid a premium for owning shares of companies being purchased. That's what we want.

Therefore, examine businesses that look like your standard takeout company. Look for businesses that carry lots of cash and little debt (this makes the buyer that much more inclined to own it), ones that are sitting on undervalued assets, and ones that are able to generate positive cash flow or have done so in recent history (because parent companies generally want their new toys to hit the ground running).

Here are two candidates that I think make the cut:


Market Capitalization
(in Millions)

Total Cash
(in Millions)

Total Debt
(in Millions)

Operating Cash Flow
(in Millions)






Electronic Arts





Source: Capital IQ, a division of Standard and Poor's.

These are two companies that appear to be great targets for M&A activity. If you match these qualities against an excessively cheap stock price, you've found a business that is ripe for purchase.

The Foolish bottom line
We know that companies these days are sitting on loads of cash and are hungry to strike, but we also know you can't just randomly pick a company to take advantage. If you want to seize the day, I suggest you focus your research. Look for businesses that have the cash to initiate those actions themselves. Or, alternatively, examine likely targets with good assets, lots of cash versus debt, and a proven ability to generate cash flow. That's where you want to be.

If you're looking for some serious M&A contenders, check out the Motley Fool Hidden Gems service, where you'll find lots of cash-rich, proven assets that are being sold for exquisitely cheap prices. These may be the market's hottest targets, and you can take a look at all of them completely free -- simply click here.

Fool Nick Kapur owns no shares of any companies mentioned. InterDigital and Electronic Arts are Stock Advisor recommendations. Pfizer is an Inside Value recommendation. The Fool owns shares of XTO and has a disclosure policy.