By Sverrir Sverrisson, Equity Analyst at Saxo Bank

Sony, LG Display or Barnes and Noble could all be attractive takeover candidates in the year ahead, according to the Saxo Bank stock screener.

In order to determine the takeover candidates we looked for stocks that are expected to be unprofitable in FY1 but turn to profit in FY2, companies who have a relatively low enterprise value compared to their EBTIDA, and being traded below the book value per share. Based on our universe, 13 stocks fulfill these criteria.

With the energy and telecommunication sectors being amongst the top targets in 2011, our screening shows different sectors for potential 2012 activity. The result is dominated by electronic and technology stocks, including big players such as Sony and LG Display.  Even though Sony might seem too large and too diverse to be taken over by another giant in the market, LG Display could be an attractive target. As the tech market has seen increased competition within the smartphone and tablet markets, and more recently started a new battle within Smart TVs, LG Display might be a catch for the large players using their technology. LG has seen its profit margins being squeezed in recent years, with rather stable earnings and increasing cost levels. As both before mentioned stocks are big players, some smaller, more concentrated technology firms, such as Leap Wireless Technology, NEC Electronics or Micron Technology, could be of more interest to the industry leaders.

Another potential takeover candidate or even a turnaround candidate is the bookseller Barnes & Nobles (BKS). BKS, who is famous for its traditional retail bookstores, have seen a decline in their retail business, whereas other segments as college and .com have been booming in recent years, counting for 37.7 percent of total revenues in 2011 (chart 1). Two years ago BKS launched their own tablet, competing against Amazon's Kindle and Apple's bookstore, which has helped the company growing revenues. However, with significant increase in their cost structure and decreasing margins, BKS failed to profit in 2011. As the bookseller sees significant growth potential within the e-marketplace, the company hinted they want to spin off their .com segment in order to cater for even better digital business growth. Should that happen, BKS would be left with the old-school retail business where their inventory of merchandise alone exceeds their current market value.

Backing up the result of our overall screening, we have Winn Dixie Stores Inc sitting at the top of our list (ranked by low EV/EBITDA). Winn Dixie Stores is the operator of retail self-service food stores, who has recently been bid on by Bi-Lo LLC, a privately owned supermarket chain, with a 75% premium over the market price. Whether any the other 12 stocks will be taken over in 2012 is hard to tell, but indeed they fulfill a simple "takeover criteria" from a fundamental perspective.

Looking back at 2011

With nice profits from 2010 companies were thought to be sitting on the fence with piles of cash looking for new growth opportunities and strategic acquisitions in 2011. Thus, the expectations for M&A activity in 2011 were high, with volumes expected to be close to 3 trillion USD. Despite a few "high fly" mergers in 2011 such as HP acquiring Autonomy Corp and Microsoft acquiring Skype, the total volume fell short of expectations. The total volume of completed M&A deals in 2011 amounted to 2.1 trillion USD (21.106 deals) which is slightly below the 10 year average volume of 2.2 trillion USD (22.500 deals) (chart 2).

Despite being below the 10 year average, which is highly influenced by the booming years in 2006-2008, the total deal volume has slightly picked up after a significant drop in 2009. If we are bullish on a larger wave of M&A activity in 2012 than 2011, despite the on-going economic uncertainties, investors might look for attractive potential take-over candidates hoping to cash in on a generous premium offered by the acquiring company. The average premium paid to investors last year was 24 percent, which is well above the 20 percent historical average (chart 3).