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Morningstar Predicts Hedge Fund Takeover Candidates

Date: Wednesday, January 26, 2011
Author: Alex Akesson, HedgeCo.net

New York (HedgeCo.net) – Independent hedge fund research firm, Morningstar, Inc., has published its Merger and Acquisition Outlook for 2011, identifying the 100 most likely takeover candidates across Morningstar’s equity coverage universe.

“While global merger and acquisition activity has been on the decline over the last few years, we observed the inklings of a revival in 2010 and expect both the number and size of deals to substantially increase in 2011,” RJ Hottovy, director of equity research for consumer stocks and editor of the report, said. “We expect some of the key M and A themes to include interest in emerging markets, companies that have mastered a unique niche in their respective industries, and the ability to generate free cash flow.”

Morningstar equity analysts identified approximately 100 takeover targets across nine sectors: banking, basic materials, consumer, energy, healthcare, industrials, technology/communication services, and utilities. Potential takeover candidates for each sector were determined by unique and proprietary scoring systems for each sector, based on industry-specific drivers of merger and acquisition activity as well as factors such as free cash flow, management, and capital structure.

Morningstar’s report also includes a section devoted to Footnoted.com, who released a list of potential takeover candidates for 2011, based on its analysis of Securities and Exchange Commission (SEC) filings. Morningstar acquired the Footnoted business in February 2010.

Footnoted analysts combed through SEC filings, looking for signals that could point to a potential deal, including seemingly innocuous items such as new employment contracts or director and executive changes.

“In 2010, we identified that there were pre-merger signals at more than 40 companies that later announced deals, based on information buried in their SEC filings,” said Michelle Leder, editor and founder of Footnoted. “Finding these subtle signals isn’t as easy at it sounds. And sometimes, it takes a lot of time for deals to materialize. For example, in March 2009, we found and reported on some interesting disclosures in Jo-Ann Stores’ filings that suggested the company might be preparing for an acquisition. Then in December 2010, a deal was announced to take Jo-Ann Stores private.”

Morningstar’s top 10 potential takeover candidates

Footnoted’s takeover candidates for 2011

Editing by Alex Akesson
For HedgeCo.net