The years 2006 and early 2007 saw record numbers of mergers, takeovers and buyouts. Since that time, the activity has subsided due to the problems in the credit markets. Liquidity is not as easily available and, as result, there is a lot less money sloshing around to drive mergers and takeovers. Yet, while the frantic pace of merger activity seen in past years is unlikely to return soon, a few deals will surely be announced next year. This installment of “Stock Talk†highlights three of the top takeover candidates for 2008.
OptionsXpress (OXPS) is a familiar name to most options traders. The Chicago-based online broker is a niche player with a focus on trading puts and calls. OptionsXpress also offers online trading of stocks, bonds, mutual funds, and futures. The firm has been steadily growing and, in the five years ended 2006, saw revenues grow from $17.3 million to almost $187 million.
In addition, in its most recent post earnings conference call, OptionsXpress also said that it has no exposure to mortgages or assets backed by mortgages. For that reason, the stock has not suffered due to worries about the problems in the credit markets. Most other brokers have. Instead, OXPS shares are up 46.8% year-to-date and, at $33.1 a share, within striking distance of its all-time highs of $33.94.
Meanwhile, the online brokerage industry has been in a period of consolidation. The recent wave of merger activity has included TD Waterhouse, Wall Street Access, Datek, and another options-trading firm, ThinkorSwim. The trend is expected to continue and, for that reason, OptionsXpress might be ripe for the picking.
The steel industry has also been consolidating in recent years and it is reasonable to assume that the pattern will continue in the future. As was recently noted in this week’s “Sector Watch: 2007 Winners and Losers,†“US Steel (X) took over Lone Star Technologies and Sweden’s SSAB’s acquired Ipsco. The wave of merger activity is expected to continue, as large steel companies attempt to get bigger and more efficient through acquisitions.†High steel prices and merger activity fueled big gains in the sector and the SIG Steel Sector Index ($STQ), which tracks the performance of 15 different stocks in the steel industry, is up 60% year to date.
Given recent trends in the steel industry, several companies in the steel sector are possible takeover candidates. US Steel, AK Steel (AKS), and Steel Dynamics (STLD) are all possibilities. One of the more likely, however, is Allegheny Technologies (ATI). As we can see from Figure 2, the stock price has not appreciated along with the other companies in the industry in 2007. At the same, the company has been showing steady profit growth and trades at a price-to-earnings ratio of less than 12, which is well below the industry average. In addition, with a debt to equity ratio of .25, or roughly half the industry average, it is probably one of the more attractive acquisition candidates, if the wave of consolidation in the steel industry continues in 2008.
Cree Research (CREE) is also an interesting takeover play for 2008. In November, Philips Electronics (PHG) agreed to buy Genlyte (GLYT) for $2.7 billion. The merger leaves Cree as the last big company that focuses only on lightning products. In fact, takeover speculation triggered a one-day 15.2% rally in CREE when the Phillips acquisition of Genlylte was announced one month ago.
As we can see from Figure 3, CREE gave back some of that one-day gain during the first few weeks of December and is more than 30% below its September highs of $34.75 a share. Nevertheless, given the trends in the industry and the decline in the stock price, the timing might be right for a bidder to step forward and acquire the company. In conclusion, Cree, Inc. joins OptionsXpress and Allegheny Tech, as one of the top 3 takeover candidates for 2008.
