Heard on the Street:
PaineWebber Strategist Kerschner Draws Up
List of Firms He Believes Will Be Acquired
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By E.S. Browning
Staff Reporter of The Wall Street Journal
With new takeover announcements streaming in at the rate of about two or three per Monday, a growing number
of investors are making decisions based on something intangible: the takeover hope.
Worried that their favorite stocks may have trouble gaining as much as they have over the past three years,
investors may be tempted to comfort themselves with the notion that the stock price always could be jacked up
more if it were bought out.
Yesterday, PaineWebber strategist Edward Kerschner, who calls a takeover possibility "icing on the cake,"
unveiled a list of 72 companies he believes may be acquired. He has also refined the list to 31 companies rated
strong or weak buys by PaineWebber analysts even if they aren't taken over. And he has six top picks within that
group as well.
Mr. Kerschner acknowledges that his timing may look suspect. January is, after all, a time when many
investors, having taken tax losses by selling stocks in December or just received year-end bonuses, have fresh
money to spend. Brokerage firms salivate and mailboxes bulge with lists of recommended January stocks. Mr.
Kerschner insists that his list isn't one of those.
"We don't do the stock-of-the-week club and we don't do the theme-of-the-month club," he says.
What he does do, he says, is identify broad themes that he thinks will move the market over a period of years.
Then he recommends stocks that fit those themes preferably stocks that fit several themes at once.
In recent years he has recommended companies that dominate their markets, companies that offer global brands,
those that respond to people's needs for information and those that benefit from growing consumer prosperity.
Now he is urging people to pick stocks that might also get taken over. The top six among those, he says, are
America Online, Nextel Communications, utility holding company Nipsco Industries, ScheringPlough,
medical-device company Sofamor/Danek and Sunbeam Corp. Three -- AOL, Schering and Sunbeam -- were
already on his recommended list based on the previous criteria.
"M&A activity, already strong, is likely to accelerate in 1998," Mr. Kerschner says. Although takeover activity
in dollar terms already has set records for three years straight, he notes that takeovers as a percentage of total
stock market value still haven't returned to their 1988 peak.
At the same time, as it gets harder to cut costs or raise prices, big companies are getting desperate to boost
earnings some other way. Mr. Kerschner forecasts that more will buy earnings growth -- through
acquisitions.
Among the 31 favorites are drug and medical companies Alkermes, Eclipse Surgical, Genzyme Transgenics, St.
Jude Medical and Texas Biotechnology; technology companies BAY NETWORKS, Data General, Digital Equipment,
Fore Systems and Vantive Corp.; oil- and gas-related companies MCN Energy, Nuevo Energy, Sonat and
Unocal; financial-services companies such as Money Store; utilities such as Consolidated Natural Gas and New
York State Electric & Gas, and telephone companies including AirTouch Communications, Century Telephone
and PriCellular Corp.
Some acquisition experts caution that profits from takeover investing may be getting harder to find. La Quinta
Inns and Southern New England Telecommunications both gained sharply yesterday on the news of their
impending acquisitions. But many other potential takeover stocks already have gained sharply in anticipation.
The extra takeover premiums paid by acquirers have been shrinking, leading in some cases to "takeunders," or
acquisitions below companies' listed stock prices.
David Katz, chief investment officer of New York money-management firm Matrix Asset Advisors, says he
tries to avoid overpriced stocks by buying beaten-down companies that are ripe for both takeover and
turnaround -- figuring that if they aren't bought, they will bounce back anyhow. His favorites include casino
group Circus Circus and medical concerns Spacelabs Medical and U.S. Surgical.
"We try to avoid the companies that are in the rumor mill on a daily basis," he says, because their stocks tend to
be high-priced. "If they don't get bought you are going to get hurt."
But Mr. Kerschner worries that beaten-down stocks may continue to sag. He prefers stronger performers.
"Although the shares of many target companies carry high price-earnings ratios by the standards of recent
history, so do the shares of acquirers," he notes. And acquirers can use their high-priced shares to finance
takeovers.
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New Year's Meals
For those who dare to invest in takeover stocks, here are Edward Kerschner's six favorites and the prices at
which he thinks they could be ingested.
FORECAST
1/5/98 TAKEOUT
STOCK CLOSE PRICE
America Online $91.13 $125
Nextel 26.00 45
Nipsco 49.69 65
Schering-Plough 63.38 73
Sofamor/Danek 65.00 85
Sunbeam 41.38 53
Source: PaineWebber
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PS Hey Mang, glad to see your posts again. |
