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15 stocks turn up in hunt for cash-rich acquisition targets

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What are we looking for?

The next elephant-sized deal.

As the recent offers for Dell and H.J. Heinz demonstrate, the appetite for corporate acquisitions is enormous right now – and for good reason. In today's low interest rate environment, a well-heeled acquirer can often borrow money for less than the earnings stream of the company it's buying.

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Look at the math: A buyer who snaps up a company selling for, say, 12 times profit is getting better than an 8-per-cent earnings yield on its money. That is far more than the 6 per cent or so yield on many junk bonds.

In such a situation, a buyer could purchase the company, use part of the acquired firm's earnings stream to cover the cost of financing the acquisition, and have plenty of cash left over to stuff into its own wallet.

Many big companies could now make tempting targets for someone such as Warren Buffett, who has frequently said in recent years that he's hunting for elephant-sized acquisitions.

How we did it

Today's screen looks for big U.S. companies that are generating large amounts of cash and so could appeal to someone who wants to do a debt-financed acquisition. I looked among S&P 500 companies for the ones that have:

-an enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) of eight or less;

-a share-price-to-free-cash-flow ratio of 10 or less;

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-a dividend yield of 2 per cent or higher;

-cash and near-cash items of at least $500-million (U.S.).

What we found

Fifteen U.S. companies passed the screen. Some, such as Verizon, Apple and Microsoft, are probably too large to acquire; others, such as Pitney-Bowes, suffer from the perception that they are in declining industries. And one firm – Dell – is already the target of an offer.

Still, this list should provide plenty of intriguing possibilities for those searching for the next big deal – or simply attractive candidates for their portfolio.

As always, do your own research before buying any of the names listed here.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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