Investing in companies that get bought out is one of the fastest ways to grow your wealth. Acquirer companies typically pay generous premiums to buy other companies — sometimes over 100% more than what the company is worth.

To take advantage of these opportunities, you need to be invested in the right stocks. The right ones are not always obvious, but there are clues for finding them since they possess a few key characteristics.

3 Characteristics of Takeover Targets

Nearly every takeover target has at least two of these three characteristics:

  1. Innovative Product or Service.

Companies that have established an innovative solution can quickly become takeover targets. These are often pure-play companies that have spent time and money to successfully bring an innovative product or service to the market. Frequently, these are solutions in the form of a blockbuster drug or next-generation technology that sets a company apart from other players in the market.

Acquirers will pay top dollar for these companies. If a product or service is patent-protected, buying out the company may be the best way to gain access to it. Even if there is no patent, it is typically cheaper and more efficient for an acquirer to purchase a company outright than to spend time and money developing the product or service in-house.

Just two weeks ago we saw this occur firsthand. Aimmune Therapeutics Inc. (Nasdaq: AIMT), the developer of the first Food and Drug Administration-approved peanut allergy treatment, received a buyout offer from Nestle for $2.6 billion, a 174% premium.

  1. Developed Network.

Companies often acquire other companies for their network alone. Whether it be a well-developed customer base or a large and growing user base, networks are extremely valuable. After all, the value of a product or service is questionable if there is no network to monetize it.

A strong customer base is an immediate path to growing sales and margins. It allows for upselling additional products and services. It also gives the acquiring company access to user data and revenue streams such as advertising and premium services.

Google’s $1.6 billion acquisition of YouTube in 2007 may have been one of the most notable network-driven acquisitions of all time. YouTube generated over $15 billion in sales for Google in 2019 alone.

  1. Small Market Cap.

Small companies are the most likely to be buyout candidates. Simply put, acquiring a smaller company is less risky than acquiring a bigger company. If the acquisition turns out to be a bad move, a smaller deal will have less of a negative financial impact on the acquirer than a bigger deal.

During the last five years, 73% of U.S. public company takeovers included target companies valued at less than $3 billion. The majority of takeover targets were valued at less than $1 billion:

Keep an Eye out for Takeover Targets

Finding the next takeover target among a basket of nearly 15,000 U.S. stocks isn’t easy. There is a lot of noise in the stock market, and these companies are often under the radar. But knowing the primary characteristics of attractive takeover targets can drastically improve your chances.


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Stephan Fernandez

Analyst, Automatic Fortunes