MKM Looked To The Options Market To Find Its Top 10 M&A Targets

Following Anthem Inc ANTM's bid for Cigna Corporation CI this past weekend, MKM Partners analyst Jim Strugger released a report focusing on the booming M&A environment. The report includes a customized stock screen that MKM performed to identify the top potential future M&A targets.

Learning From The Options Market

The screen that Strugger uses in the report focuses on information gleaned from the options market.

“We have previously discussed intelligence that can be culled from the options market to help identify potential targets, primarily focusing on volatility surfaces exhibiting inverted skew,” Strugger explained.

Screen parameters

According to the report, MKM’s M&A screen uses six options market factors: skew over one- and two-month timeframes, one-and three-month term structure, current put/call open interest ratio and its change over the past 30 days and the increase in call open interest. These factors are then weighted and used to rank more than 1,200 optionable U.S.-listed stocks with market caps over $1 billion.

Stugger believes that this screen and others like it that attempt to utilize option market data are one of the few tools that investors have for predicting M&A events.

The Top 10

MKM’s screen ranked the following ten stocks as the best potential M&A targets:

1. Starwood Hotels and Resorts Worldwide Inc HOT
2. NCR Corp NCR
3. Sonu.com Inc SOHU
4. Quest Diagnostics Inc DGX
5. Sprint Corp S
6. ONEOK Inc OKE
7. Atmel Corp ATML
8. Hilton Worldwide Holdings Inc HLT
9. Amicus Therapeutics Inc FOLD
10. Yelp Inc YELP</p