How to Find Takeover Candidates

TENS of thousands of investors have been blessed with bonanzas from the surge in corporate mergers and takeovers. Because the stocks of the acquired companies have been bid up to giddy highs, many investors now are trying to guess which firms will be acquired next so they can buy those companies' stocks and ride them up.

In a takeover deal, the acquiring company may pay a premium of 30% or even more over the market price for each share of the company it wants to acquire. So it's small wonder that many investors rush to buy the stocks of companies that they think are candidates for takeovers. According to the late Wall Street writer Charles Rolo, here are some guidelines for finding them:

First, look where the bargain hunting corporations shop. Acquirers prefer companies that have large cash holdings. The buying company then can recover part of the purchase price by using the selling company's very own cash. Acquisition minded corporations also took for stocks selling appreciably below book value that is, total assets minus total liabilities per share.

Second, took where owners may want to sell. Deal makers often search out companies whose principal owners have reasons to want a merger for example, if they are elderly, own the controlling interest and have most of their eggs in that one corporate basket. A sellout would enable them to diversify their holdings and perhaps get some stock that is more readily marketable.

Third, look where takeover and merger activity is already strong. It has been intense in the broadcasting, publishing, oil, and software industries.