3 Industries and 3 Stocks Riding a 2012 M&A Boom

NEW YORK (TheStreet) -- A hot start to some dealmaking sectors in 2012 is helping to push up biotech, chemicals and engineering stocks. Smart traders can ride the wave as prices push up on deal speculation.

Overall, biotechnology is leading the deals way with $9.1 billion worth of U.S. announced mergers disclosed in 34 deals, according to data compiled by Bloomberg. The chemicals industry has seen $4.5 billion in deal activity on 11 tie-ups and the engineering sector has re-emerged as rife for consolidation.

Companies benefitting from the fastest first month start to the Standard & Poor's 500 Index in 25 years also may see shares leap if bids and bankers jump back into the M&A fray.

Globally, January M&A volumes of $148.2 billion were the lowest monthly volume since the summer of 2009 and a 45% drop from the same time in 2011, according to Dealogic. In the U.S., $57.8 billion worth of January deals represented and even greater 53% year-over-year drop. European deals markets fared even worse, hitting January lows not seen since 2003,Dealogic data shows.

Nevertheless, consolidation is a trend worth watching because of the premiums being paid in takeovers and the continued need for some companies to grow through mergers. For instance, the largest U.S. deal of the year, Roche's $5.7 billionhostile offer to buy hostile offer to buy Illumina(ILMN) was cut at an over 33% premium, with many investors and analysts expecting an even higher bid to emerge.

Meanwhile, Eastman Chemical's(EMN) $3.4 billion acquisition of specialty plastics and chemicals maker Solutia(SOA) took the sector out of the merger "penalty box" according to industry analysts, pushing competitor shares higher. ABB's(ABB) $3.9 billion deal for U.S. power distribution equipment specialist Thomas & Betts(TNB) may also could spark more deals, according to analysts.

Here's a look at the hot 2012 industry sectors and three potential deals to watch for.

For more on M&A see, 10 top Morningstar M&A picks and 5 big deals that may flop in 2012.

3. Biotech and Idenix Pharmaceuticals

It was a roller coaster January for hepatitis C drugmakers after Bristol-Meyers Squibb(BMY) bid $2.5 billion forInhibitex(INHX), launching a Hep C "deal-a-palooza" that pushed competitor shares higher.

After the deal, investors focused on whether other independent drug makers with Hep C drugs in development could be targets to a larger industry player looking add drugs as others go generic. While Achillion Pharmaceuticals(ACHN) emerged as another possible takeover candidate, analysts and investors focused on Idenix Pharmaceuticals(IDIX).

Idenix Pharmaceuticals may be the next hepatitis C acquisition in the biotech space after the Inhibitex deal, according to a research note published by Wedbush research analyst Duane Nash. There was plenty of pent up demand for Inhibitex, which received 5 competing bids to go with Bristol-Meyers Squibb's winning offer, according to a regulatory filing.

At a January industry luncheon discussing hepatitis C drug development, a poll by ISI Group biotech analyst Mark Schoenebaum of 120 participants showed that Idenix Pharmaceuticals had a greater than 50% chance of being acquired.

The size of the commercial opportunity for new all-oral Hep C treatment regimens is a much-debated topic, with many seeing big sales numbers. Forty eight percent of the investors at the January meeting predicted worldwide Hep C drug sales between $8 billion and $10 billion by 2019.

Idenix Pharmaceuticals shares surged on Bristol Meyers Squibb's Inhibitex purchase, which was cut at a 163% premium to the company's share price prior to the deal announcement. However in February, Idenix shares dropped from post-crisis highs earlier after results from a competing hepatitis C treatment by Gilead Sciences(GILD) raised questions about the need for Idenix's IDX-184 drug in development.

Other potential deals in the healthcare sector include a potential takeover of clinical research providers Covance(CVD) andCharles River Laboratories (CRL), according to a February research note from Sterne Agee analyst Greg Bolan. Jefferies analysts also pointed to Wuxi PharmaTech(WX) as a potential private equity target.

In Roche's hostile offer for Illumina, investors bid the genetic sequencing machinery maker's shares far higher than the $73 offer price after large cap healthcare equipment makers like Siemens Healthcare(SI), Johnson & Johnson(JNJ), Abbott Laboratories(ABT) and Becton, Dickinson(BDX) emerged as competing bidders according to analysts.

Nevertheless, even after deal announcements there are still risks for investors betting on M&A in the healthcare and pharmaceutical space. In January, Valeant Pharmaceuticals (VRX) withdrew its hostile $7.5 a share offer for ISTA Pharmaceuticals (ISTA) after making little progress on takeover negotiations. A mega-merger between Express Scripts(ESRX) and Medco Health Solutions(MHS) could still be iced on antitrust scrutiny.

2. Chemicals and Huntsman

After Eastman Chemical(EMN) announced a $3.4 billion acquisition of specialty plastics and chemicals maker Solutia(SOA), rival chemicals makers like Huntsman (HUN), Albermarle(ALB), Celanese(CE), Cytec(CYT) and OMNOVA Solutions(OMN)emerged as potential takeover candidates in analyst reports.

"2011 was an unusual year, in that chemical companies that conducted large M&A did not remain in the penalty box for long," wrote Jefferies analyst Laurence Alexander, in a note reacting to Eastman Chemicals bid, signaling that the industry may see added deals to go with Eastman Chemicals' bid and a hostile $1.2 billion offer by Westlake Chemicals(WLK) for Georgia Gulf(GGC). At a market cap of $3.25 billion, Huntsman was one of the larger-cap chemicals companies that could find takeover interest, according to Alexander's note.

Jefferies expects that U.S companies may cut deals to add hard to get emerging market chemicals growth, while Asian and Middle Eastern giants may look cutting deals to get a greater access to basic material supplies. "We expect consolidation to continue in the sector, with U.S. and European firms looking for scarcity value and market-leading positions, Asian firms looking for technology and Middle Eastern firms looking for vertical integration," wrote Alexander.

For Eastman Chemicals, the move to buy Solutia, which makes aftermarket materials like glass and coatings that are used by automotive and architectural customers, is expected to diversify the company's revenue further into emerging markets and boost earnings through cost synergies. Those businesses could also benefit from a continued post-crisis recovery in global auto sales and real estate construction.

In January, Goldman Sachs analysts pointed to European chemicals giants like Air Luquide and BASF as potential acquirers as they shift their earnings to downstream processes, on earnings volatility of chemical development. A continuation in chemicals deals would be a boost to the industry, which has faced a post-crisis M&A lull.

Since the financial crisis, there have been few notable U.S. deals outside of Berkshire Hathaway's(BRK.A) $9.2 billion acquisition on Lubrizol, CF Industries'(CF) $4.7 billion purchase of fertilizer producer Terra Industries and Cargill'sspinoff of Mosaic(MOS).

Hostile offers like Air Products & Chemicals(APD) $7.5 billion offer for Airgas(ARG) and Agrium's(AGR) $3.3 billion offer for CF Industries(CF) failed as targets fended off bids at what they called cyclically low and undervalued prices. In 2012, more buyers and sellers may come together on scarce opportunities in the sector as stock prices and balance sheets recover.'

1. Engineering and Tyco ABB Ltd.'s(ABB) $3.9 billion deal to buy power-distribution equipment specialist Thomas & Betts Corp(TNB) signals that European and U.S. engineering giants may jump back into engineering tie-ups to match growing demand.

ABB's purchase signals that some large international electrical engineering conglomerates -- weighed down by earnings and diversification needs -- may look to cut deals in the U.S. Deals may also be propelled by the fragmented nature of the sector, its low pricing power and a cyclical upturn, according to analysts.

As a result, Morgan Stanley analyst Nigel Coe highlights the remaining pieces of Tyco International(TYC) as the most likely takeover target in the space. What was once the $100 billion-plus market cap Tyco International(TYC) empire underwent an epic dismantling in two separate 2011 spin deals .

At a far reduced size of $23 billion, Tyco will further shrink in 2012 when the company spins its $3 billion North American ADT residential security business and $4 billion flow control division will create two new publicly traded companies. Those spun pieces of Tyco International, in addition to the company's remaining commercial fire and security division with $10 billion in annual sales andTE Connectivity(TEL), a unit spun in 2007, may find takeover interest.

The engineering sector didn't have a big M&A wave even as company valuations were cut during the recession because big players used their capital with discipline, leading to no post-crisis megadeals as of yet. It means that there are plenty of potential growth hungry buyers and attractively priced takeover candidates, according to Credit Suisse analyst Julian Mitchell.

General Electric(GE), Dover Corporation(DOV) and Danaher Corporation(DHR) are potential acquirers in the electrical engineering space according to Mitchell because of their muted deals stance in the second half of 2011. In Feb. 2011, Danaher bought Beckman Coulter for $5.87 billion, but may now be able to absorb a new deal.

Mitchell of Credit Suisse also notes that industrial products conglomerate SPW Corp.(SPX), which recently sold its auto's aftermarket diagnostics division, could enter the fray as a buyer or seller.

ABB's deal to buy Thomas & Betts also signaled that consolidation is "inevitable" in the electrical engineering space as companies try to become more "vertically integrated" while European conglomerates look for U.S. assets to hedge a Eurozone slowdown and falling euro, according to Barclays Capital analyst Scott Davis.

"Although hard to predict, we would expect any transaction to cause further consolidation within the industry. It's logical and timely," wrote Davis in a research note following the deal

Antoine Gara

02/06/12 - 12:57 PM EST