2015 has been a huge year for deal activity, with world-wide mergers and acquisitions up 36 percent compared with the first 5½ months of 2014, according to Thomson Reuters. And the deal talk has heated up in the past week, with the major health insurance firms clamoring to complete tie-ups, and energy company Williams rejecting an offer from Energy Transfer Equity.
So if the rampant dealmaking continues, which companies could be next to get a suitor?
Since smaller companies are more likely to get acquired than giants, it's worth starting off by looking only at companies with market values ranging from $500 million to $2 billion.
Then, one must think like an acquirer. While stock investors typically look at valuation measures like price-to-earnings ratios or a stock's dividend yield, a potential pursuer looks at a company differently, from what's known as a "control perspective" in the valuation context.
The price one is paying for a company's expected earnings, or the size of the dividend checks that company sends out, has paramount relevance for an individual investor. That's because the investor must more or less accept the company's operations and corporate structure as is. But if an investor is acquiring control over a company, that party can completely revamp a company's operations—changing its management, shifting its capital structure, or combining operations with other portfolio companies, among many other maneuvers.
That's why investors in prospective M&A candidates should perform valuation analysis in the context of a company's core operations.