According to Goldman Sachs, Twitter (TWTR), Time Warner (TWX), Bristol-Myers (BMY), Yelp (YELP), and E*Trade (ETFC) are among the firms most likely to be acquired this year.
As mergers and acquisitions (M&A) are predicted to increase in 2018 as a result of the Republican tax cut completed late last year, Wall Street experts have produced a list of firms that they believe are most likely to become takeover targets.
President Trump’s tax proposal slashed the corporate tax rate from 35% to 21%, saving billions of dollars for some of America’s wealthiest firms while encouraging the repatriation of cash stored offshore by industry behemoths such as Apple Inc. (AAPL) and Cisco Systems Inc. (CSCO).
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Options-Based Methodology Finds Twitter, Time Warner, Bristol-Myers, Yelp and E*Trade Among Stocks Aggressively Positioned for Takeover
According to Thomson Reuters statistics, the tax reduction, along with solid economic growth and increased confidence, has sparked a record $389 billion in bids to begin the year, up from $236.5 billion in the same time last year. Mega-deals such as Cigna Corp.’s (CI) $52 billion purchase of pharmacy benefits management (PBM) Express Scripts Holding Co. (ESRX) and Keurig Green Mountain’s over $21 billion merger with Dr. Pepper Snapple Group Inc. typified the spike in M&A activity in 2018. (DPS).
Goldman Sachs’ Katherine Fogerty and her colleagues on the firm’s derivatives team analyzed the figures and identified possible buyout targets using an options-based technique aimed to identify firms for whom an M&A premium is already being reflected, according to Business Insider. The team’s strategy included calculating the three-month/12-month term structure, or measuring volatility expectations in three months vs twelve months, for a universe of corporations. Goldman graded the firms based on a degree of downward-sloping term structure after examining predictions about how much the stock would move in the near term vs the long run. All of the companies on the list satisfied a minimum liquidity requirement.
Analysts were trying to highlight firms where the “options market seems better positioned for the stock to move up strongly in the next three months, consistent with a stronger possibility for M&A.”
The sectors represented by the 15 corporations Goldman identified as most actively positioned for a takeover were industrials, consumer staples, consumer discretionary, energy, information technology, financials, and healthcare.
Kimberly-Clark Corp. (KMB) was the sole consumer goods company on the list, with a market value of $37.6 billion.
On the list of IT companies were Maxim Integrated Products Inc. (MXIM), restaurant review network Yelp Inc. (YELP), and social media powerhouse Twitter Inc. (TWTR).In healthcare, Goldman identified pharma titans Bristol-Myers Squibb Co. (BMY) and IncyteCorp. (INCY), as well as medical device business Edwards LifesciencesCorp (EW).The analysts emphasized industrial companies XPO Logistics (XPO), TransDigm Group Inc. (TDG), and C.H. Robinson Worldwide Inc. (CHRW), as well as oil plays NewfieldExploration Co. (NFX) and CNX Resources Corp. (CNX) (CNX).
E*Trade Financial Corp. (ETFC), a popular discount broker, also made the list, as did auto parts store Advanced Auto Parts Inc. (AAP) and Time Warner Inc. (TWX), whose planned merger with AT&T Inc. (T) is being challenged in court despite Justice Department concerns.
(Also see: Tax Cuts Spark the Biggest Merger Spree in Decades.)
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