A report released recently by consultancy EY has said that around a quarter of big groups are now on the lookout for takeover targets within the next year. It cited low interest rates and large cash piles among companies across the globe as being the key drivers of potential M&A activity. In addition, a key reason for US companies such as Abbvie and Pfizer lining up bids for UK-listed Shire and AstraZeneca in 2014 could be a desire to utilise cash held outside the US that, if returned to the US, would be taxed.
Given that interest rates are unlikely to remain at historic lows over the medium term, here are three companies that could be ripe for takeover.
ARM
Having experienced a disappointing first half of 2014 where they have fallen by 17%, shares in UK-based technology firm ARM (LSE: ARM) (NASDAQ: ARMH.US) are more sensibly priced these days. The company has a highly attractive business model that focuses on intellectual property rather than relying on manufacturing, which allows it to stay relevant and a step ahead of many of its rivals. As such, it could be a potential bid target for US technology firms that are seeking to utilise non-US cash reserves. Although a different beast than fellow UK technology firm Autonomy (which was bought for $10.2 billion in 2011 by HP), that deal shows that UK-technology firms are very much on the radar of their US counterparts.
Debenhams
After delivering a profit warning at the end of 2013 following a disappointing Christmas run-up, shares in Debenhams (LSE: DEB) have delivered a rather muted performance and are down 2% in the first half of 2014. However, despite profit being well down on the prior year, the company still offers a strong return on shareholder equity and could prove to be a lucrative purchase for a rival retailer or, indeed, a group of private investors. Meanwhile, shares trade on a price to earnings (P/E) ratio of just 9.6 and the company has substantial international expansion potential that may attract a bid approach.
SSE
Following Ed Miliband’s announcement that a Labour government would freeze electricity prices and form a new regulator, SSE (LSE: SSE) saw its share price fall by around 20% in 2013/early 2014. However, almost all of this fall has now been reversed as the focus on electricity prices has subsided following falling inflation and real wage growth. As such, the political risk from investing in SSE appears to be much lower than it was six months ago. After sector peer Severn Trent was approached last summer with a bid, SSE (with a lower debt to equity ratio, a higher yield and lower P/E ratio) could prove to be popular for an investor seeking a relatively stable income stream.