Caltex Australia Limited & Santos Ltd are among Credit Suisse’s top takeover target picks

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Investors can expect a pick-up in takeover activity this year as strong business sentiment and cashed up corporate balance sheets are likely to tempt boards to look at acquisition opportunities to grow profits in this relatively benign growth environment.

What’s more, risk appetite is rebounding from the last few years when companies were more conservative and focused on efficiencies to drive profit growth.

That strategy proved quite effective in driving share prices of companies in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) higher, but with valuations starting to look full, companies will feel increasing pressure to deliver more growth to justify their share prices.

Today’s National Australia Bank Ltd.’s (ASX: NAB) business conditions survey has only reaffirmed my prediction that merger and acquisition (M&A) activity will increase this year after a relatively slow start in 2017 for large cap M&A that has been headlined by the takeover bid for Westfield Corp Ltd (ASX: WFD).

Business conditions are the best in more than 20 years and the strength is spread across just about every sector with leading indicators increasing this month, including a significant rise in forward orders.

Coincidentally, Credit Suisse has released a long list of companies that it believes are the most likely takeover targets for 2018.

Among the large caps, the broker highlights fuel refiner and retailer Caltex Australia Limited (ASX: CTX), oil and gas group Santos Ltd (ASX: STO), miner Whitehaven Coal Ltd (ASX: WHC) and the rebounding free-to-air television company Nine Entertainment Co Holdings Ltd (ASX: NEC).

It is worth noting that the competition watchdog has blocked the sale of Woolworths Group Ltd’s (ASX: WOW) petrol stations to BP plc, which would limit interest in Caltex from large and established players in the industry.

Other large caps that are among the 31 likely takeover targets from Credit Suisse’s list include paint maker DuluxGroup Limited (ASX: DLX) and cement supplier Adelaide Brighton Ltd. (ASX: ABC), which saw its biggest shareholder, Barro Properties Pty Ltd, increase its stake to 40% at the start of this month from 38%.

I wouldn’t invest in a stock just for its takeover appeal, although any large M&A will further trigger animal spirits and support our bull market.

This should be a pretty good year for equities and those looking for buying opportunities outside of the M&A thematic should listen to what the experts at the Motley Fool have to say as they have picked three potential disruptors that are well placed to outperform over the short to medium-term.

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Motley Fool contributor Brendon Lau owns shares of Caltex Australia Ltd. and National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Westfield. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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