Stick With Durable Stocks to Play M&A

Editor's Note: This column by Christopher Atayan is a special bonus for RealMoney readers. It appeared on Street Insight on Feb. 10. To sign up for Street Insight, please click here.

---

My investment posture continues to be that we are at the point of the cycle where managements are going to continue to look to acquisitions as their primary sources of growth. The recent announcements of Procter & Gamble (PG - commentary - Cramer's Take), SBC Communications (SBC - commentary - Cramer's Take), MetLife (MET - commentary - Cramer's Take) and others support this notion. The economy, with a 4% long bond as evidence, is slowing. High energy prices slowly are weaving their way through almost every sector and will be a drag on things for the foreseeable future.

This is almost the perfect environment for acquisitions to blossom. I recently attended a large private equity conference, and the market is flooded with capital from all sorts of sources looking to be put to work in corporate change-of-control transactions. With this kind of demand and liquidity as a tailwind, I think merger activity will continue to be heavy for the foreseeable future.

I will outline some high-quality names that I have in my sights. As always, investing on the basis of an acquisition strategy has to be done very carefully. It may take years for the eventual acquisition to play out. Hence, it is necessary to use prudence and only get involved in high-quality situations where you can comfortably let things materialize at their own pace.

Whirlpool Under Siege

One of the venerable names in the U.S. appliance industry is Whirlpool (WHR - commentary - Cramer's Take). This stock is under siege right now because the company is getting hammered by increases in the prices of raw materials and by high energy costs. While things are tough for the company now, historically it has been a well-managed business. I think this makes an ideal candidate for a going-private transaction.

The company trades around 10.5 times this year's estimated earnings. This clearly puts it in the range of the larger buyout firms, which all are hungry for transaction production. If one of these private equity firms were to make a proposal, it might flush out an opportunistic corporate player. The business also could be attractive to the likes of Emerson Electric (EMR - commentary - Cramer's Take), Siemens (SI - commentary - Cramer's Take), Danaher (DHR - commentary - Cramer's Take) or other multi-industry companies. Whirlpool pays a 2.74% yield while you wait, which it covers by a wide margin.

---

At time of publication, Atayan was long Morgan Stanley, although holdings can change at any time.

Christopher Atayan is a managing director of Slusser Associates, a private investment banking firm in New York that specializes in mergers and acquisitions and structured financings. He is also a principal in GBH Investments, which makes private equity investments on behalf of an educational foundation. Atayan has held both of these positions since 1988. He also currently is a director of Franchise Concepts. Atayan holds a bachelor's degree from the University of Wisconsin and attended the University of Chicago Graduate School of Business. Under no circumstances does the information in this commentary constitute a recommendation to buy or sell securities. Atayan appreciates your feedback and invites you to send it to [e-mail].