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The Wall Street Journal Interactive Edition -- January 6, 1998
PaineWebber Strategist Lists
Potential Takeover Targets
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.
Monday, 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 Monday 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.
ÿÿÿ
Stockÿÿÿÿ
1/5/98 CloseForecast
Takeout Price America Onlineÿÿÿ$91.13ÿÿÿÿ$125 Nextelÿÿÿÿÿ26.00ÿÿÿÿÿÿÿÿ45Nipscoÿÿÿÿÿ49.69ÿÿÿÿÿÿÿÿ65Schering-Ploughÿÿÿÿÿ63.38ÿÿÿÿÿÿÿÿ73Sofamor/Danekÿÿÿÿÿ65.00ÿÿÿÿÿÿÿÿ85Sunbeamÿÿÿÿÿ41.38ÿÿÿÿÿÿÿÿ53
Source: PaineWebber
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