Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

As M&A heats up, here are three takeover targets

Olstein: Amazon has 'no business plan to make a profit'

If Bob Olstein is right, the climate for takeovers is just beginning to heat up.

The head of Olstein Funds said recently that "acquisitions are just at the beginning" and he's telling investors he's taking advantage of the trend by focusing on undervalued companies which become takeover targets.

On CNBC's "Closing Bell" last Thursday, Olstein identified how to pinpoint these undervalued companies.

"We go in and look for companies that are generating huge free cash flow," he said. Olstein explained these companies must have a strong balance sheet and should be centered in a niche market where they are not properly valued because of short-term issues or misconceptions.

Within 24 hours of that interview, three companies in Olstein's portfolio, received takeover overtures: Covidien, Express and International Game Technology.

Since inception of the Olstein All-Cap Value Fund, more than 30 companies in Olstein's portfolio have been acquired.

For investors wanting to get a jump on the M&A game, he highlighted three undervalued companies that he believes should come into play if they remain at current prices:

Olstein's Takeover Targets

Company Ticker Price 6/17 Olstein Value
Pet SmartPETM59.790

"If they stay at these prices, private equity or strategic buyers could move in and close the discount," Olstein said. "Most investors prefer to run with the crowd and pile into the latest fads which can be a long-term recipe for investment failure. At Olstein we tend to buy companies before the acquirers because we will buy the temporary bad news which creates the valuation discounts and then ride out the storm. "

Olstein invests like a private equity investor without paying the same premium paid. He believes Oracle or Hewlett-Packard could move in on a Teradata in the short term. Just Tuesday, Oracle was rumored to be in discussions to takeover Micros Systems, which jumped 20 percent in the last three days.

Olstein, of course, owns Micros shares.

—By CNBC's Donna Burton

Disclosure: Olstein does not own shares of Oracle, HP or Teradata but his firm, Olstein Funds, does.