Buy 168 Companies Like E*Trade With M&A Potential, Goldman Says

U.S. companies will use mergers and acquisitions to boost growth even amid volatile markets, creating opportunities for investors to profit from deal strategies, Goldman Sachs Group Inc. said in a note yesterday.

Corporate cash balances grew more than 50 percent between the fourth quarter of 2007 and the second quarter this year, stocks are below historic valuation levels and forecasts for earnings growth have declined, supporting an appetite for M&A, according to Robert Boroujerdi, Goldman’s co-director of Americas equity research.

Boroujerdi recommends a portfolio of companies in which Goldman sees at least a 15 percent chance of deal activity in the next 12 months, including Federal-Mogul Corp. (FDML) and GenOn Energy Inc.

“We see several drivers that can support appetite for the ‘right’ consolidation opportunities,” New York-based Boroujerdi said in the note. “For many companies M&A will act as a means of enhancing growth and margin profiles, diversifying revenue streams or consolidating weaker competitors.”

Announced M&A volume fell 20 percent in the third quarter from the previous year, Goldman said. The Standard & Poor’s 500 Index fell 14 percent in that period, the most since 2008, amid signs U.S. economic growth was slowing and concern the European debt crisis would spread. The Bloomberg Consumer Comfort Index dropped to its second-lowest level on record last month. Volatility was high as well, with a gauge of the intraday change in the S&P 500 having an average over the past 30 days of 3.12 on Sept. 12, its highest level since April 2009.

Goldman’s “GSRHACQN” basket of recommendations includes 168 stocks, up from 165 in a March rebalancing. Of those, 51 are new. The average market value of a company in the basket is $4.2 billion, Goldman said. That compares with a mean of $23.1 billion for stocks in the S&P 500 (SPX), according to Bloomberg data.

Goldman put the stocks into two categories -- those labeled as having a 30 percent to 50 percent chance of M&A in the next 12 months according to the firm’s analysts, and those with a 15 percent to 30 percent chance.

Goldman Sachs’s List of Stocks With 30% to 50% Probability of M&A in Next 12 Months Included in GSRHACQN (tickers in parentheses)

BroadSoft Inc. (BSFT US)
Motorola Mobility Holdings Inc. (MMI US)
Fusion-io Inc. (FIO US)
ExlService Holdings Inc. (EXLS US)
Motricity Inc. (MOTR US)
Netspend Holdings Inc. (NTSP US)
Sapient Corp. (SAPE US)
Aeroflex Holding Corp. (ARX US)
STEC Inc. (STEC US)
Varian Semiconductor Equipment Associates Inc. (VSEA US)
Leap Wireless International Inc. (LEAP US)
Alexion Pharmaceuticals Inc. (ALXN US)
Pharmaceutical Product Development Inc. (PPDI US)
Computer Programs and Systems Inc. (CPSI US)
Cepheid Inc. (CPHD US)
Health Net Inc. (HNT US)
Universal American Corp. (UAM US)
WellCare Health Plans Inc. (WCG US)
Edwards Lifesciences Corp. (EW US)
MAKO Surgical Corp. (MAKO US)
Volcano Corp. (VOLC US)
Medicis Pharmaceutical Corp. (MRX US)
Airgas Inc. (ARG US)
Joy Global Inc. (JOYG US)
SunPower Corp. (SPWRA US)
Cabot Oil & Gas Corp. (COG US)
GenOn Energy Inc. (GEN US)
Federal-Mogul Corp. (FDML US)
Beam Inc. (BEAM US)
Mead Johnson Nutrition Co. (MJN US)
Sara Lee Corp. (SLE US)
P.F. Chang’s China Bistro Inc. (PFCB US)
Family Dollar Stores Inc. (FDO US)
Barnes & Noble Inc. (BKS US)
E*Trade Financial Corp. (ETFC US)
TMX Group Inc. (X CN)
East West Bancorp Inc. (EWBC US)
Brookdale Senior Living Inc. (BKD US)
CBL & Associates Properties Inc. (CBL US)
Prologis Inc. (PLD US)

To contact the reporter on this story: Joanna Ossinger in New York at jossinger@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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