Fortune recently reported that mergers and acquisitions (M&A) activity is up 17% worldwide through the first half of 2024. Of this activity, 90% of the largest deals so far year-to-date were U.S. targets. Almost half of the top 10 deals in 2024 were stock rather than cash payments. That makes sense given interest rates are higher and stock prices are relatively healthy. So, who are the acquisition targets to buy now?
I’ve recommended three stocks that could be acquisition targets. For my criteria, at least one of the companies, acquirer or acquired, must be in the S&P 500. In addition, the targets must have market capitalizations that are significantly lower than the acquirers. Furthermore, these are speculative acquisitions and are not guaranteed to happen. Rather, this serves as a thought experiment of potential moves that could happen in the market.
Celanese (CE)
Celanese (NYSE:CE) is the 83rd smallest company on the index with a market capitalization of $15.15 billion. CE stock is down over 10% YTD as I write this. Furthermore, Celanese is a global leader in the production of specialty materials and chemical products like acetic acid. It is the world’s largest producer of acetyl products, which are used in all kinds of high-value applications and products.
Its Q1 2024 sales were $2.61 billion, down 8.4 percent from $2.85 billion a year earlier. Its operating income for the quarter was $210 million, down 16.3% from $251 million a year earlier.
“Our first quarter results demonstrate our ability to execute in a commercial environment that has stabilized but still shows limited signs of meaningful recovery,” CEO Lori Ryerkerk said in its Q1 2024 press release.
The company’s stock is currently valued at 12.35x its forward 2024 earnings. Its price-to-sales ratio is 1.42x, less than the five-year average of 1.74x. With significant headwinds still facing its business, it might be a good time for a larger company such as Dow (NYSE:DOW) or DuPont de Nemours (NYSE:DD) to consider buying it.
Pinterest (PINS)
Pinterest (NASDAQ:PINS) is not part of the index. It has a market cap of $25.78 billion. PINS stock is up 4% YTD at the time of writing. I believe Meta Platforms (NASDAQ:META), which is part of the index, would make an excellent buyer of Pinterest. Facebook doesn’t have the best reputation in social media, while Pinterest is generally considered the only platform that’s not about distributing misinformation.
As far as social media platforms go, Pinterest has a more creative niche and interactive design. From a financial standpoint, Meta could easily afford PINS as its free cash flow last quarter was $12.53 billion. In the trailing 12 months ended March 31, it was nearly $50 billion, more than enough to Pinterest on its list of acquisition targets.
But what could compel Meta to make the purchase? Pinterest’s reported Q2 2024 results on July 30 after the market close could give a reason. While its results beat on both the top and bottom lines, its shares fell in after-hours trading due to weak guidance.
Its monthly average users (MAUs) in the second quarter were 522.0 million, 12% higher than Q2 2023, and 1.9 million higher than the analyst estimate. Its revenue increased 21% to $853.7 million, and its adjusted EBITDA was $179.9 million, 68% higher than a year ago. Beyond the market reaction, Pinterest’s monetization efforts are gaining traction.
In one acquisition Meta would gain an improved reputation and a more visually appealing social media platform for its 3.07 billion MAUs worldwide.
E.L.F. Beauty (ELF)
E.L.F. Beauty (NYSE:ELF) is not in the index. It has a market cap of $9.40 billion. ELF stock is up 20% YTD as I write this and 44% over the past year. However, it’s down nearly 25% from its 52-week high of $221.83.
The buyer? Estee Lauder (NYSE:EL), whose market cap is 3.7x ELF, has lost nearly half its value over the past year.
It needs some good news. Earlier this year, it announced it would lay off between 3-5% of its global labor force, cutting as many as 3,000 positions as part of the company’s restructuring that will result in restructuring charges of $500 million to $700 million. As a result, its operating profits should rise nearly 40% once complete, to more than $1.1 billion.
CEO Fabrizio Freda has been in charge of the company since July 2009. In the top position for 15 years, he probably doesn’t want his legacy to be his cost-cutting. Buying ELF would give it some time to find more high-end products that its customers want while gaining a whole bunch of new ones.
And it most likely would make the Lauder family, who control the company, much happier about his time spent as CEO.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.