Global merger and acquisitions activity volume just surpassed the $1-trillion mark. The tricky part, of course, is knowing how to identify takeover targets before a deal is announced. Tricky… but not impossible. And we can dramatically improve our odds of success by following three simple steps for predicting takeovers…

Consolidation is Your Friend

Consolidation trends are a powerful predictive tool because they tend to persist. Think about it. When your biggest competitor buys a fellow firm and doubles in size overnight, there’s only one way to respond: Find a suitable acquisition of your own to remain competitive. Thus, by focusing on those industries and sectors undergoing the most rapid consolidation, we can isolate high probability targets.

Focus on Companies With Valuable (and Undervalued) Assets

Whether it’s a new drug, a mammoth oil discovery, key market share, distribution channels, or a few promising patents, the real reason a company is acquired is because it owns a particular asset of value to the acquirer. So it stands to reason that we should only invest in companies with such “must-have” assets.

Insist on Improving Fundamentals

Takeovers take time. In fact, a buyer might spend as much as nine months conducting due diligence on a takeover target. Even then, there’s nothing stopping them from walking away from a deal (Microsoft and Yahoo! ring a bell?). As a result, I recommend buying an “insurance policy” that’ll protect against such unprofitable breakups. By that, I mean that you should only buy companies with improving fundamentals – whether it’s strong earnings growth, new product launches, increasing market share and so on. That way, you’ll be in good shape, even if a takeover never materializes. So, let’s take a look at a company sitting in the takeover crosshairs…

by Louis Basenese , Wall Street Daily