DreamWorks, American Eagle Attractive M&A Targets, Report Says

Companies from DreamWorks Animation SKG to American Eagle Outfitters Inc. (AEO) are attractive takeover targets because they have cash-heavy balance sheets and their stocks have declined, said Morningstar Inc. (MORN)

While deals valued at more than $10 billion may be put on hold until next year amid economic concerns in the U.S. and Europe, companies with market capitalizations below that level offer “ample opportunities” for buyers to expand vertically or gain footholds in emerging markets, Chicago-based Morningstar said in a report yesterday.

“The small- to mid-cap names on our takeover list shot up the rankings,” said Morningstar director R.J. Hottovy, the report’s editor, in a telephone interview. “These are more feasible targets given the current environment. We still expect M&A activity to happen, but largely small-cap, all-cash deals.”

Of 25 deals worth more than $10 billion announced in the past 12 months, six were canceled, according to data compiled by Bloomberg. July was the fourth consecutive month in which fewer deals were announced than in the same month last year, Hottovy said.

“We expected a lot of blockbuster, transformational deals to happen, and certainly the credit markets seemed to support that earlier in the year,” said Hottovy. “But the recent market volatility we’ve had and fears about the credit situation in the U.S. and Europe have put mega-cap deals on the backburner.”

Riverbed, Sprint

Among the companies Morningstar ranked as “top takeover candidates” are Riverbed Technology Inc. (RVBD), which makes computer- networking products, clothing retailer American Eagle and oil producer SandRidge Energy Inc. (SD) Of the 13 companies on the list, 11 have market capitalizations less than $5 billion.

Morningstar analysts used characteristics such as a target’s size, leverage and cash flow to rank 88 takeover targets across eight industries. The authors also identified potential acquirers, including Sprint Nextel Corp. (S)

“While we think there is a reasonable chance that Sprint will pursue one of its smaller rivals in the near future, the firm could also become the prey of a larger firm,” the report said. “As the last independent nationwide wireless carrier around, a number of other financially strong firms could be interested,” Morningstar said, including cable companies such as Comcast Corp. (CMCSA) or another international operator looking to gain a foothold in the U.S.

American Eagle, based in Pittsburgh, plunged 25 percent this year through yesterday. The company, which has a market capitalization of about $2.1 billion, reported cash and equivalents of $389 million as of July 30. DreamWorks, based in Glendale, California, has a market value of $1.7 billion. The movie studio reported cash and equivalents of $113 million as of June 30. Its stock has tumbled 32 percent.

Below are the companies with the most potential to attract takeover bids, according to Morningstar:

Actelion Ltd.
Aerovironment Inc.
Akamai Technologies Inc.
American Eagle Outfitters Inc.
Cloud Peak Energy Inc.
Collective Brands Inc.
Leap Wireless International Inc.
Myriad Genetics Inc.
Range Resources Corp.
Riverbed Technology Inc.
SandRidge Energy Inc.
Synovus Financial Corp.
Ultra Petroleum Corp.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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