Potential Takeover Targets: Morgan Stanley Report

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Huge levels of cash on corporate balance sheets sets the stage for a new wave of acquisition activity, says a new research note from Morgan Stanley.

The firm identifies some 40 stocks that could be candidates for tender offers in the next 12 months using its new quantitative model, or Acquisition Likelihood Estimate Ranking Tool.

The model uses 10 factors, including dividend yield, debt-to-asset ratio and sector relative price-to-book ratio to identify potential offer recipients.

Recent M&A activity is at a cyclical low, notes the report, but "past troughs have been brief raising the possibility of near-term increase in acquisition activity."

High corporate cash balances also increase the potential for deals.

"Furthermore, companies doing acquisitions have performed slightly above the market in recent times, potentially emboldening more management teams to consider deals," says the report, which analyzed M&A activity between 1983 and 2012.

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Here are some of the stocks with higher probabilities of receiving tender offers in 2013 than their peers:

• Nabors Industries (Energy)
  
• Atwood Oceanics (Energy)
  
• Walter Energy (Materials)
  
• Air Lease Corp. (Industrials)
  
• Brinker International (Consumer Discretionary)
  
• Fresh Market (Consumer Staples)
  
• Gilead Sciences (Healthcare)
  
• Express Scripts Holding (Healthcare)
  
• Biogen Idec (Healthcare)
  
• Celgene Corp. (Healthcare)
  
• Intuitive Surgical (Healthcare)
  
• SVB Financial Group (Financials)
  
• Equity One (Financials)
  
• First Solar (Information Technology)
  
• Brocade Communications Systems (Information Technology)
  
• NII Holdings (Telecommunication Services)
  

According to Morgan Stanley, healthcare stocks saw the most activity since 1983, with an average of four percent receiving offers each 12-month period.

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On the other hand, only 1.7 percent of staple stocks, on average, received offers during this period. And mega-cap stocks rarely receive tender offers, notes the report.

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