Forget the blue bird. These four companies might be ripe acquisition targets.
May 19, 2022
With as much attention as investors have given Elon Musk’s proposed acquisition of Twitter the past several weeks, it’s easy to forget there are literally thousands of other publicly traded businesses that are potentially attractive takeover targets.
In fact, in the first quarter of 2022, worldwide M&A activity exceeded $1 trillion for the seventh straight quarter (dating back to the second quarter of 2020), indicating the market’s appetite for acquisitions is still relatively insatiable — in particular as acquirers take advantage of a historic pullback in many previously high-flying growth stocks.
Still, “potential acquisition candidate” shouldn’t be a core piece of a viable long-term investment thesis. But it’s certainly a factor worth considering as you ponder where to put your money to work.
To that end, here are five companies I believe might be in the crosshairs of any number of worthy suitors:
Online education platform specialist 2U (NASDAQ: TWOU) has fallen nearly 75% from its 52-week highs amid not only a massive contraction in valuation multiples for high-growth tech stocks, but also concerns over slowing organic growth and nearly $1 billion in long-term debt.
To be fair, that debt was largely accrued through several enormous acquisitions of several other complementary education platforms — including $103 million for short course leader GetSmarter in 2017, $750 million for workforce accelerator Trilogy Education in early 2019, and most recently $800 million for massive open online course company edX late last year. Today, 2U’s entire market capitalization stands at just over $800 million, while its enterprise value (which takes into account both cash on hand and debt) is roughly $1.6 billion.
It seems that depressed price tag has attracted at least one potential buyer; Last week, Bloomberg reported India-based online education startup Byju is in discussions to acquire either 2U or fellow online education platform Chegg (NYSE: CHGG) in a deal valued at more than $2 billion. An expected offer could materialize within the next few weeks, according to sources familiar with the talks.
Depending on the synergies of such a deal and 2U’s ongoing progress toward sustained positive cash flows and profitability, such a deal could turn out to be an absolute steal for Byju down the road.
Short for “Social Finance,” digital banking and financial technology (fintech) company SoFi Technologies (NASDAQ: SOFI) is also down more than 70% from its 2021 highs, due to the same pullback in growth stocks and the impact of the ongoing student loan repayment pause on its student loan refinance business.
But why might SoFi — with its market cap of just over $5 billion today — represent an attractive acquisition candidate for the right purchaser?
For one, SoFi actually held acquisition talks with none other than Charles Schwab back in 2017 prior to going public via SPAC last summer. SoFi also received a $6 billion offer from an unnamed foreign bank at the time, according to the Financial Times, and would have considered accepting a deal in the $8 billion to $10 billion range.
Of course, with its recently approved national banking charter now in place, rapid customer growth (new members grew 70% year over year to just under 3.9 million), and several new digital financial products launched the past few years to help diversify away from its student loan refinance business, you can be sure SoFi would prefer to go it alone as it works to realize CEO Anthony Noto’s vision of becoming a top 10 U.S. bank.
But I’d also be willing to bet other larger financial institutions — such as Schwab, J.P. Morgan, and others looking to bolster their digital presence — may be chomping at the bit to snap up the company before it becomes an even bigger threat.
Though its stock is down nearly 90% from last year’s highs, I firmly believe Peloton’s fall from grace was merited given the company’s slew of PR missteps, swelling inventories, slowing growth, and widening losses. But it still boasts a reasonably strong brand, loyal customer base, and large subscription business that could be attractive under the wing of the right cash-rich buyer interested in the fitness space — perhaps Nike, Amazon, or Apple, to name a few.
That said, Peloton’s new CEO Barry McCarthy did shut down acquisition rumors in February, insisting he was brought in not to sell the business, but instead to turn it around. At the same time, the company was reportedly seeking to sell a minority stake of up to 20% only a few weeks ago in an effort to shore up its balance sheet. But if that plan falls through — and just as my colleague Anirban Mahanti predicted might happen — rather than buy a minority stake in a fledgling business with further to fall, another buyer might just seek to acquire Peloton outright at an even lower price than it trades today.
Finally, I think an acquisition of cloud- and edge-computing services company Fastly (NASDAQ: FSLY) might be imminent. I’d be remiss if I called this prediction entirely my own; my colleague and 7investing CEO Simon Erickson mused in July 2021 that Fastly was putting itself on the fast track to being acquired given its strong technology platform but also its history of operating losses (it would be better suited to operating under a larger acquiree’s wing), the resignation of its founding CEO Artur Bergman in 2020, and its hiring of a new CFO with a long history of ushering the sales of his previous companies.
So why am I refreshing the idea of Fastly being acquired now? For one, the company announced the resignation of its current CEO (who replaced Bergman in 2020) earlier this month in tandem with a quarterly report that sent the stock tumbling yet again (shares are down 80% since Simon’s musings last July). Last week Fastly also postponed a recent investor day previously originally scheduled for May 12, blaming the resignation and recent market volatility. I can’t help but wonder, though, whether potential acquisition talks could be a contributing factor as well.
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