So far in 2012, merger and acquisition (M&A) activity has been fairly subdued. But the few deals that have been announced have taken the stocks of the firms being acquired much higher.

Recently, for instance, the largest U.S. oilfield operator National Oilwell Varco (NYSE: NOV) said it would buy Robbins & Myers (NYSE: RBN) for $60 per share in a $2.5 billion deal. This worked out to a 28% premium over Robbin’s stock price prior to the announcement.

Earlier this month, home improvement giant Home Depot (NYSE: HD) said it would buy U.S. Home Systems Inc. (Nasdaq: USHS), an installer of kitchen cabinets and countertops, in a $93.4 million deal for $12.50 a share, or a 38% premium. Also earlier this month, pharmaceutical giant Bristol Myers Squibb Co. (NYSE: BMY) finalized its acquisition of smaller drug maker Amylin for $31 per share in a deal valued at about $5.3 billion. Bristol Myers upped its offer a couple of times, and ended up buying the company for a 41% premium, a lot higher than the original offer of $22 per share.

These three examples clearly show that finding appealing takeover targets can represent one of the quickest and most lucrative ways to earn a huge premium on your initial investment.

Below are three candidates on my list for potential takeovers.

1. Avery Dennison (NYSE: AVY)
Business: Labels and packaging materials
Top on my list of potential takeover candidates is label and packaging materials firm Avery Dennison. Avery has market-leading positions in manufacturing pressure-sensitive labels and other items such as merchandise tags. It’s definitely mundane stuff, but it’s a very lucrative business. Last year, Avery reported just above $6 billion in sales and a free cash flow margin of 5% for nearly $300 million in profits, or $2.73 per share.

This sounds all well and good, but back in 2008, Avery’s sales stood at $6.7 billion and its free cash flow was $348 million, or $3.53 per share. Its management team has failed to make up for sales lost during the financial crisis and ensuing recession. The company’s struggling industrial clients are surely to blame, but rivals have had a much easier time recovering.

A likely acquirer could be label and adhesives giant 3M (NYSE: MMM), which, with a robust market cap of $63 billion, would have no problem digesting Avery’s $3.3 billion market value. It would easily be able to swoop in and cut overhead to boost efficiencies, as it has a reputation of doing.

2. Office Depot (NYSE: ODP) or OfficeMax (NYSE: OMX)
Business: Office supplies retailing
Back in 2007, the Federal Trade Commission (FTC) rejected a bid by office supply giant Staples (Nasdaq: SPLS) to buy out archrival Office Depot. During the 1990s, these retailers, along with OfficeMax, were rapidly expanding and the FTC feared Staples would grow too dominant and force OfficeMax out of business. As it turns out, Staples has still dominated the space and pushed its two smaller rivals into numerous restructurings and periods of operating losses.

Last year, Staples boasted $25 billion in sales and free cash flow of $1.2 billion, or $1.69 per share. In stark contrast, Office Depot logged $11 billion in sales and only $69 million in free cash ($0.19 per share), while OfficeMax reported sales of $7 billion and negative free cash flow.

The market is mature these days, so there are few prospects for ether of these smaller players to succeed on their own. Staples could help put them out of their misery, but would still have to do so for a hefty premium.

3. RadioShack (NYSE: RSH)
Business: Electronics retailing
A potential buyout of struggling electronics retailer RadioShack has become less likely in the near term, given that the founder of industry titan Best Buy (NYSE: BBY), Richard Schulze, is trying to use his 20% stake to take the rest of Best Buy private. But

Best Buy is struggling to compete against online rivals that include Amazon.com (Nasdaq: AMZN) and find another hit product to replace the recent flat-panel TV wave. Part of its explicit strategy has been to roll out smaller stores that specialize in selling mobile phones. And this is where Radioshack comes in. The retailer operates more than 5,000 smaller domestic stores and has settled on hawking cell phones. Acquiring RadioShack would help leverage the company’s fixed costs and market share presence.

Best Buy’s current market cap is more than $6 billion and dwarfs RadioShack’s $300 million market value. Best Buy also has plenty of cash (about $1.4 bilion) to easily take over Radioshack while working to improve its own fortunes in the process.

Risks to Consider: As noted above, investing in a potential buyout candidate takes patience. There is no assurance a deal will eventually be consummated with the above candidates, but Avery and RadioShack still throw off ample profits on their own and should be able to survive independently.

Actions to Take –> The fact that deal activity remains below average is not a cause of concern, but rather an indication that demand could be pent up. With any clarity on the sovereign debt worries in Europe, the political and budget situation in Washington D.C., or improvement in U.S. economic growth trends, could really set the M&A market ablaze. The stocks above represent some of the most compelling potential buyout candidates. If a deal happens, then these stocks could potentially jump 20%, 40%, or even more if shareholders try to raise the ante.