According to recent figures, U.S. companies hold an astounding $1 trillion in overseas bank accounts. The reason for holding this ungodly amount of money overseas? Because bringing the cash back to the United States would require a rather significant tax hit.

So what are these companies doing with all this cash? Well, up until recently, not a lot. But that’s beginning to change and it’s one reason why individual investors should pay very close attention to this phenomenon…

First, some background… This $1 trillion is a result of profits earned from overseas subsidiaries of global giants like Microsoft (Nasdaq: MSFT), GE, (NYSE: GE), PepsiCo (NYSE: PEP) and others and were already taxed by a foreign government. Corporations often don’t repatriate most of these funds, as it would result in double taxation. Current U.S. tax laws require paying a corporate tax rate as high as 35% — regardless of whether taxes have already been paid in another country. As a result, many companies are choosing to keep the cash outside of the United States, and it’s hard to blame them.

In many cases, the cash is almost literally burning a hole in the pockets of global corporate treasury departments and waiting to be spent. As a result, it encourages U.S. companies to invest overseas. Most recently, Microsoft announced it would use $8.5 billion of its estimated $13 billion in overseas cash to purchase Skype, which happens to be based in Luxembourg. The $13 billion in overseas cash amounts to about 26% of Microsoft’s $50 billion in total cash.

PepsiCo (NYSE: PEP) is also using international funds to fund the purchase of dairy firm Wimm-Bill-Dann in Russia.

Unless and until the U.S. government announces another tax holiday to allow corporations to bring international funds home, there should be plenty more international merger and acquisition activity. Here are three potential buyout candidates.

1. Qiagen
Business: Biotechnology
Headquarters: Netherlands
Market Cap:  $4.5 billion

Qiagen (Nasdaq: QGEN) is a rapidly-growing biotech firm that sells assay kits that help research labs test biological materials for drug development and other medical reasons. Customers include pharmaceutical companies, academic research labs and diagnostic firms. Its kits and testing technologies continue to be widely adopted — sales have grown more than 22% each of the past five years and reached $7.5 billion during the past twelve months. Sales have grown more than 18% during the last 10 years and earnings have grown 16% annually during this period. The firm is also extremely profitable: net income reached $1.3 billion last year, giving the company a net margin of more than 17%.

U.S.-based medical supply firm Becton, Dickinson and Co. (NYSE: BDX) generates 55% of its sales overseas, while Thermo Fisher Scientific, Inc. (NYSE: TMO) generates 33% of its sales internationally. Both have billions of dollars (Becton had $1.9 billion and Thermo had $2.8 billion as of the end of the most recent quarter) in excess cash to use to fund an acquisition, though they would also need to issue shares, as Qiagen’s current market capitalization is about $4.5 billion. Overall, a deal would make sense and boost both Becton’s and Thermo’s size by 25%, adding exposure to a fast-growing and appealing segment of the market and given the fact a large percentage of their cash likely resides overseas.

2. Xyratex
Business: Data Storage Technology
Headquarters: United Kingdom
Market Cap:  $290 million

The largest tech firms in the United States are flush with cash and have been lobbying Washington for a tax holiday to repatriate their overseas cash. Cisco (Nasdaq: CSCO) and Oracle (Nasdaq: ORCL) are two of the largest companies currently lobbying for a tax holiday, while Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq:DELL) have billions in cash targeted for deals and do a majority of their business internationally as well.

M&A activity in the data storage space has settled down a bit after a busy period that saw HP and Dell fight over 3Par while Dell acquired Compellent Technologies for $960 million. After the Compellent deal late last year, Dell said it was on the lookout for more buys. U.S. storage firm NetApp (Nasdaq: NTAP) has been mentioned in takeover rumors and thus makes U.K.-based Xyratex (Nasdaq: XRTX) a logical target, given its sells data storage systems and disk drive equipment and resides outside of the United States. As such, any of the major tech players could use their international funds to snap it up for a reasonable current market cap of less than $300 million.       

3. Dr. Reddy’s Laboratories Ltd
Business: Generic Drugs
Headquarters: India
Market Cap:  $6 billion

Large pharmaceutical companies are also flush with international cash and looking to boost their growth prospects with new business. Back in 2005, European pharma giant Novartis (NYSE: NVS) acquired U.S.-based Eon Labs and German-based Hexal AG for $8.3 billion total to create one of the world’s largest generics drugs firms and diversify its revenue streams.

A purchase of India-based Dr. Reddy’s Laboratories Ltd (NYSE: RDY) would add appealing generics production capabilities. In the healthcare space, generic drug manufacturers are going to steal market share in the coming years because billions of dollars in patented drug sales, including Pfizer’s (NYSE: PFE) cholesterol drug Lipitor and Eli Lilly’s (NYSE: LLY) antipsychotic drug Zyprexa, will lose their market exclusivity and face generic competition in the next few years. It would also add exposure to a rapidly growing emerging market in India, so this move has a couple of big potential positives. Pfizer is a likely candidate to purchase Dr. Reddy’s, given it was one of the recent lobbyists to push for a tax holiday and could easily handle the $6 billion price tag, based on Reddy’s current market cap. 
 
Action to Take –> Despite the push for a tax holiday to allow U.S.-based multinationals to bring billions of dollars back to the United States, there doesn’t appear to be much political motivation for Congress to allow it. The government is facing budget shortfalls and looking for additional revenue sources. Therefore, the most logical use for these funds is to continue to invest overseas, and acquisitions of rivals will be a primary way to grow market share on a global scale. The largest healthcare and technology firms remain the most flush with cash, so look for deals in these industries in particular.

If forced to choose the likeliest buyout candidate, my money would be on Xyratex, given the consolidation in the data storage industry taking place. Overall, I would be comfortable owning any of the three names above even if they aren’t acquired any time soon. As standalone companies, they continue to grow and generate solid and growing profits for shareholders. An acquisition from a larger rival would just be icing on the cake and carries the potential for about 30% upside on average, should a buyout come to fruition.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…