|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
Professor Aswath Damodaran's Target Company M&A Screen
Posted by: Mark Lin (IP Logged)
Date: November 9, 2012 10:52AM
Aswath Damodaran is a professor of finance at NYU Stern. He is the author of several widely used academic and practitioner texts on valuation, corporate finance and investment management, and is regarded as an authority on the subject of valuation.
He has also written books about investing, notably "Investment Philosophies and Investment Fables." In Chapter 10 of "Investment Fables: Exposing the Myths of 'Can't Miss' Investment Strategies," he talked about how, if one could identify target firms before they become targets in acquisitions, one would be able to reap incredible rewards.
He found characteristics of companies more likely to be acquired:
- Poorly managed companies are more likely to bought over as there is room for improvement and a chance for acquirers to "make a good company great."
- Managers who are not entrenched are in a weaker position to resist change of control.
In addition, he suggested low-risk stocks, so that even if a merger or acquisition (M&A) does not materialize, the downside risk is not magnified.
He suggested the following criteria to screen for stocks likely to be targets in M&A:
- Return on equity more than 4% below the peer group ROE (to be modified)
- Stock returns over last year lag peer group returns by more than 5% (to be modified)
- Annualized standard deviation in stock prices exceeds 80% (to be modified)
- Insider holdings less than 10%
- debt to capital ratios< 50%
I have modified the first three criteria slightly and the new screening criteria is as follows:
- Return on equity (trailing twelve months) less than half of return on equity (five-year average)
- Current P/B less than 70% of five-year average P/B
- Beta< 1.5
- Insider holdings less than 10%
- Debt to capital ratios< 50%
The following stocks passed the Damodaran Target Company M&A Screen:
All the stocks had zero debt.
Stocks Discussed: ASIA, IQNT, LPHI, NEWN, ZIXI,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.