Merger and Acquisition is on Track for a Banner Year
Most Recent Notable Mergers
Signals of M&A Catalysts
In January of this year, KPMG estimated that 2015’s merger and acquisition activity would top the $1.62 trillion in marriages created in 2014. So far this year, Dealogic says global M&A is $593 billion YTD, up from $536 billion in 2014 YTD, and the highest since the $677 billion booked in 2007.
The industries expected to be very active are healthcare, pharmaceuticals, life sciences, followed by technology, media, telecom—and bringing up the rear—energy, oil and gas. And so far—at least as far as healthcare and media are concerned—that forecast is proving true.
Healthcare M&A stands at 464 deals, for $92.0 billion—up 63%; Technology M&A is down 5%, to $72.7 billion, but the number of deals—1,797—is 24% higher. Telecom M&A volume has dropped 59%, to $59.9 billion, but deals are up from 147 last year to 189 in 2015. Media combinations have risen 43%, to $3.8 billion, on 136 deals.
• AbbVie (ABBV) March 4 announcement that it would acquire Pharmacyclics (PCYC) for $21.0 billion. John McCamant and Jay Silverman of the Medical Technology Stock Letter recommended PCYC in Investment Digest 759, July 23, 2014 Mid-Year Top Picks issue.
• Hewlett-Packard (HPQ) announced plans to buy wi-fi network gear maker Aruba Networks (ARUN) for about $2.7 billion, also on March 4. Aruba was recommended in Investment Digest 749, September 18, 2013, by David C. Jennett in his Investment Letter.
• Warren Buffett’s Heinz announced $50 billion takeover of Kraft Foods (KRFT) on March 25. John Stephenson of the MoneyLetter recommended Kraft in our Dividend Digest 245, February 13, 2013.
Since the merger announcements, Pharmacyclics’ shares have risen 18.4%; Kraft’s are up 45.3%; and Aruba’s shares haven’t done much since the announcement, but have increased 34.7% in 2015 (perhaps the word got out early?)
With numbers like these, it’s no surprise that investors are always searching for companies that might be taken over at a premium. And in my years of investing, I’ve seen that happen a lot. In fact, several companies that I had recommended (including Justin Industries and Clayton Homes) became targets of Buffett’s Berkshire Hathaway, giving subscribers very nice double-digit returns.
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Of course, M&A is just one example of what I call “Special Situations” that can create immediate gains for shareholders. Others include spin-offs, special dividends, stock buybacks and private equity buyouts.
And if you are lucky enough to be an investor in one of these companies, you may see some hefty benefits in rising stock prices when such a catalyst occurs.
But astute investors don’t want to rely simply on luck for a successful investment strategy. Instead, they want to buy companies with all the right characteristics to benefit from one of these catalysts before the event happens. And while nothing is foolproof, there are a few indicators that might help you identify companies with the “right stuff” early, so you can get in before the big announcement that sends prices soaring.
I call these characteristics “Signals of Catalysts,” and they include:
• Rise in Institutional Interest
• Increase in Volume
• Sector/Industry Growth
• Market Share Leadership
• Large Cash Positions
• Change in Company Focus
• Need for Cash Influx
• New Management
There are many stock screeners (my favorite is finviz.com) that can help you filter several of these parameters, such as change in institutional interest, volume increases, and cash positions. For the others, you’ll have to rely on perusing 10-Ks and news stories, to find potential opportunities.
But before you invest in any stock, please recognize that even if a company meets all the above qualifications, there’s no guarantee that it will be bought, spun-off, issue a special dividend, etc.
Consequently, you want to first make sure that the company meets your essential requirements to fit into your portfolio for the long term—because it may be there for the long term.
So, run every stock through your investing qualifications first. And if it passes those tests, then use the above criteria to determine if the stock may fall into the “possible special event” category that could propel its shares to a new level—sooner rather than later.
Editor, Investment Digest and Dividend Digest
P.S. Don’t miss out on the opportunities to profit from the future mergers and acquisitions.
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