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Greenberg: Possible Hostile Takeover Targets

Tuesday, 22 Mar 2011 | 11:58 AM ET

Which companies are vulnerable to hostile takeover bids? There’s no way to know, for sure.

Businessman with crystal ball
Fredrik Skold | The Image Bank | Getty Images
Businessman with crystal ball

But some companies stick out more than others.

Using a screen created on AnalytixInsight’s database, I came up with three interesting possibilities: Marvell Technology, Mattel and Pentair.

Why those three? We did what any activist takeover candidate would do: We screened—in this case screening for companies that have takeover target attributes in the $1 billion to $10 billion market-cap range whose price-to-book ratios lagged their peers, with relatively low debt-to-equity ratios, strong interest coverage, sufficient cash flow and a stock at the low-end of its 52-week range.

These are metrics that anybody interested in doing a deal would include on a list, which they then would tweak with additional due diligence and research.

So, to make it clear—this is a quick scan, but it’s interesting, nonetheless:

Marvell Technologies . Not only is the semiconductor company’s price-to-book below its peers, but the company’s earnings rise faster than its sales, according to AnalytixInsight, suggesting it’s “cost conscious and selective about its growth opportunities.”

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Marvell's return on capital has declined from above average to about average among its peers, indicating declining operating performance. But its “size current valuation make it an attractive merger target.”

Note: Hostile tech takeovers are rare and don’t usually go well.

Mattel . Last quarter the toy company reported better-than-expected results, but according to AnalytixInsight it still lags on key metrics. According to the research service’s model, “The market currently does not expect high earnings growth from the company but seems to expect Mattel to maintain its relatively high rates of return.”

But it has several things a buyer might want, including relatively high operating returns and a low-level of capital investment that suggests the company might be “milking its business.”

Also noteworthy, as of December 31 Carl Icahn owned 2.6 million shares.

Pentair . This diversified industrial manufacturer, with a focus on water, hits AnalytixInsight’s screens with better growth than its peers, but trading at a discount to its book value. Its return on capital over the past five years has been average, suggesting “that it does not have any particular operational advantages."

At the same time, the data suggests the company has been under-investing in a business that is producing peer-average returns. As a result, it has a clean balance sheet, but also pays a big dividend. Its size and valuation, however, make it a possible takeover target.

But this note: After ITT said it was going to break itself up, Pentair said—it wasn’t! Raiders, ready?

My take: Remember, these are merely pulled off of the first layer of screening. The idea is give you an idea of what a buyer might find interesting.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter:

@herbgreenberg

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