By John Dorfman
Bloomberg News Columnist
Picking takeover candidates for fun and profit is a perennial investment sport.
How can it not be? When one company takes over another, it typically pays a 20% to 70% premium over the target's prevailing stock price. Takeovers can enrich investors instantly.
According to Bloomberg's database, there were 2,061 deals announced in the first quarter. The dollar volume of $269 billion was more than in any of the previous nine quarters.
In the second quarter so far, the average takeover premium has been unusually rich-61%, the highest in 12 years.
I don't expect that lofty figure to last. Premiums will probably revert to a more normal range of 30% to 45%. The good news is that I expect a continuing flow of deals in 2011 and 2012.
On Oct. 4, 2010, when merger and acquisitions started to resume after a recession-induced freeze, I wrote a column mentioning nine stocks that I thought could become takeover candidates. As a group, through May 4, their performance has trailed one percentage point behind the 19% total return in the Standard & Poor's 500 Index.
I prefer to judge stock picks based on a time frame of one year or more. Yet I'm doing a new takeover-candidates list now because M&A activity is heating up.
Finding Candidates
To find a new crop of candidates, I am using the following set of criteria, which are modified slightly from those of six months ago:
-- U.S.-based companies with a market value of $500 million to $5 billion.