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How to Choose Possible M&A Targets Before the Deal

Since November, U.S. companies have announced a dozen purchases worth $3 billion or more in mining, food, technology, airlines and other industries. Stocks of the acquired companies have soared 20% or more above where they were trading before the deals were announced.

On Thursday, billionaire Warren Buffett added to the frenzy. His company, Berkshire Hathaway (BRK.A), joined another investment firm to buy all the stock of H.J. Heinz for $23 billion, or $72.50 per share. That was 20 percent higher than the ketchup maker's share price the day before.

A week earlier, another group of shareholders scored. In an echo of the big leveraged buyouts of the boom years, Michael Dell and an investment firm offered to take his publicly traded computer company private for $24 billion, most of that borrowed money. That translates to $13.65 per share, a 25% gain for stock owners, but they may get even more. Two big Dell (DELL) investors are protesting that the offer is too low, raising the possibility of something rarely seen in M&A these days -- a bidding war.

Investors are watching this deal closely for another reason: They hope it inspires investment firms to attempt other big leveraged buyouts -- risky takeovers that use lots of borrowed money from banks and bond markets. The Dell deal would be the first large leveraged buyout since before the recession.

"We're finally dusting off the cobwebs," says R.J. Hottovy, a director at Morningstar, a research firm. "It shows that banks are willing to take risks."

Most deals have been companies buying each other in the same or similar businesses, with investment firms, and their heaps of borrowed money, playing no role. The companies often tap banks for money but usually use more of their own cash and are considered safer.

Still, CEOs have hesitated to strike deals because they were unsure they could count on the economy to help lift profits and absorb the costs of combining two companies. Now, that fear apparently is ebbing.

"It's a sign that Corporate America believes that the expansion is going to accelerate," says Peter Cardillo, chief market economist at Rockwell Global Capital.
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