Nov. 16 (Bloomberg) -- Warren Buffett’s takeover of Burlington Northern Santa Fe Corp. illustrates an emerging trend: Takeovers are back.

That’s good news for investors. When companies are eager to make acquisitions, it’s an encouraging sign to the market.

And, of course, it’s lovely if you happen to hold a stock that becomes a target. Buffett’s Berkshire Hathaway Inc. offered $100 a share for Burlington Northern when it was trading around $76. That’s typical: Takeovers are often done at 30 percent or more than the market price.

In October, U.S. companies announced 770 deals, the highest monthly total since September 2008, according to data compiled byu Bloomberg. Wall Street executives are optimistic about the outlook for more deals next year.

Google Inc., owner of the world’s top search engine, last week agreed to pay $750 million to acquire closely held Admob Inc., a mobile-phone advertising company.

Meanwhile Kraft Foods Inc. of Northfield, Illinois, reiterated its offer of about $16 billion to acquire Cadbury PLC, a British candy maker. So far Cadbury has rejected the offer. Some Cadbury holders are hoping that Switzerland-based Nestle SA will jump in with a higher bid.

Hewlett-Packard Co., the world’s largest personal-computer maker, said it will spend $2.7 billion to buy 3Com Corp., which makes computer networking equipment and gets almost half its revenue from China.

Who’s Next

Naturally, investors want to know who will be the next takeover target. One way to speculate on this activity is to seek out companies with characteristics likely to make them attractive to potential acquirers. Often, these same qualities make for a good investment even if no suitor shows up.

Last week I screened about 2,600 U.S. companies looking for ones with alluring valuations, low debt, and at least $100 million of cash in the till.

All of these qualities, I believe, make a target company attractive to a potential acquirer. Cash is important because sometimes a buyer can use the target’s own money to defray part of the acquisition cost.

Several managed-care organizations met the criteria. They are cheap now because investors are uncertain how the rules for health-care companies will change, assuming Congress enacts a legislative overhaul this year or next.

Aetna’s Appeal

Aetna Inc., I think, is a tempting target. With a market value of about $13 billion, it is small enough for a potential acquirer to swallow. Rivals such as UnitedHealth Group Inc., at $34 billion, and Travelers Cos., at $29 billion, would be more difficult to digest.

Aetna is cheap enough to be attractive, selling for about nine times earnings. And it had $1.8 billion of cash and near- cash as of Sept. 30.

Investors figure the federal government will pay a bigger share of the nation’s health-care bill in the future. Under pressure from huge federal deficits, the government may be stingy with payments under Medicare, Medicaid and whatever programs are created under new legislation.

What the pessimists overlook, however, is that any new health-care laws will mandate some form of compulsory insurance coverage, which will expand insurers’ pool of customers.

Ensco Modernizes

Another potential takeover target is Ensco International Inc., an offshore oil drilling company based in Dallas. When I first became a securities analyst 12 years ago, Ensco had a reputation as a driller with a hodge-podge of relatively old equipment, exploring primarily in the Gulf of Mexico.

The company has changed since then. It has more modern equipment today than many competitors, and it drills all over the world, especially in Asia and the U.K.

Ensco stock sells for only seven times earnings. And the company has about $1 billion of cash and equivalents. All this might be enough to make a potential acquirer salivate.

Some of Ensco’s rivals, Diamond Offshore Drilling Inc. and Noble Corp., also look like takeover bait to me. However, at $14 billion and $11 billion market value, respectively, they might be harder to acquire than Ensco at $6.5 billion.

Allstate’s Value

A third possible takeover candidate is a company I never expected to consider in that vein -- Allstate Corp., the largest publicly traded U.S. home and auto insurer.

The stock market has banged up Allstate up so badly that it now has a market value of less than $16 billion. Burlington Northern, by contrast, is valued at more than $33 billion, or twice as much.

Is Burlington Northern really worth twice as much as Allstate? I can make a good case that it’s not.

Last year Burlington Northern had revenue of about $18 billion while Allstate’s revenue was $29 billion. To be sure, Allstate had a loss last year while Burlington Northern had a profit. Yet Allstate had its best year in 2006, earning about $5 billion and the following year it earned $4.6 billion.

Burlington Northern, by contrast, has never earned more than last year’s total of $2.1 billion.

I say this not to argue that Warren Buffett overpaid for Burlington Northern, but to point out that Allstate is very probably undervalued.

Disclosure note: For clients and personally, I own shares of Nestle SA. One client of my firm holds Allstate. I have no long or short positions in any of the other stocks mentioned in this week’s column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

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To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

Last Updated: November 15, 2009 21:00 EST