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Corporate Takeovers: “Once-In-A-Lifetime” Investment Opportunities
by Alexander Green, Oxford Club Investment Director
Monday, May 4, 2009: Issue #989
Despite efforts by the Treasury Department and the Federal Reserve to thaw the credit markets, normal lending remains hamstrung.
This is a both a significant problem and an enormous opportunity.
The problem, of course, is that if manufacturers can’t borrow to buy from suppliers, and wholesalers can’t borrow to buy from manufacturers, and retailers can’t borrow to buy from wholesalers, then consumers can’t get auto loans, credit cards, and mortgages.
The economy faces a serious headwind.
The companies in the toughest position, however, are those that are highly leveraged. Even though interest rates have fallen substantially, they aren’t able to access the credit markets (at reasonable rates) or increase their bank lines to get the liquidity they need.
And therein lies an enormous opportunity for investors like you and me – profiting from corporate takeovers.
Corporate Takeovers – Solid Companies vs. Weak Competition
Companies that have solid balance sheets and high levels of cash are now in a position to scoop up their weakened competitors through corporate takeovers. That allows them to purchase assets on the cheap and potentially increase their profit margins – by eliminating the competition – at the same time.
Let me give you a few examples.
- In the U.S. recently, drug giants Merck and Pfizer have unveiled deals to buy Wyeth and Shering-Plough, respectively.
- Chinese companies, backed by the dollar-flush Chinese government, have been on a shopping spree lately. Already this year, Chinese firms have announced more than 300 takeovers totaling nearly $68 billion.
- In the pharmaceutical industry, there is plenty of fair game. Many small biotechs, for example, are running out of capital. This dovetails nicely with Big Pharma’s shrinking drug pipelines.
- The gaming industry, too, is hurting bad. For instance, credit downgrades and potential bankruptcy hang over companies like MGM Mirage and Harrah’s. But Penn National is in a fine position to buy them or other weakened competitors.
- Look at the oil equipment leasing industry. Nabor Industries carries $4 billion in debt. (Earlier this year it had to pay 9.25% to raise $1.1 billion.)
- But Patterson UTI Energy is laughing all the way to the bank. Its sound financial condition – and zero debt – are allowing it to invest millions in new equipment.
When the price of oil rebounds who will be in the best position to prosper? Clearly, it’s Patterson. That forces Nabor to at least consider the idea of putting itself up for sale.
This same corporate takeover scenario is playing out in multiple industries in markets all over the world.
How Many Potential Corporate Takeover Candidates Are In Your Portfolio?
Yet when I ask investors how many potential corporate takeover candidates they have in their portfolio, more often than not they simply shrug their shoulders and say “none.”
That’s unfortunate. Investor’s Business Daily recently reported a survey of institutional investors conducted by Boston Consulting. Over 80% of them agree that the current market represents a “once in a lifetime” opportunity for corporate takeovers.
My advice? Don’t rest on your laurels. Buy a handful of potential corporate takeover targets now – before all the new deals starting popping.
Good investing,
Alexander Green
Editor’s Note: To get all of Alexander Green’s latest stock picks, and the monthly Oxford Club Communique you can order here. If you’d like to find out more about one of his favorite “buy signals” and one of the strongest indicators you can get, take a look at his VIP service – The Insider Alert.
Today’s Investment U Crib Sheet
In the last few weeks, Alex Green has given readers a number of reasons to invest internationally. In Emerging Markets: 180,000 Investment Opportunities… A Day. He showed us how many Western firms are unable to accurately value many foreign companies and how many investors rush to sell when they should be buying – like now.
Just last week he gave us five reasons that we should be investing globally today in, “Investing Globally: The Risks & Benefits of Foreign Stock Diversification.” There are risks, but not as many as you might think. In fact, there’s no reason why up to half of your portfolio can’t be invested with international companies.
For more on the mix of asset classes in our model portfolio, see our Asset Allocation Model.
- Takeover Targets: 3 Steps To Finding Them & 3 Stocks For Any Portfolio
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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