The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions

by Louis Basenese

The Coming Takeover Boom: 3 Sectors Ripe for Mergers & Acquisitions

by Louis Basenese, Advisory Panelist

Wednesday, April 22, 2009: Issue #983

On Monday, $24.8 billion worth of takeovers were announced. It was the third busiest Merger Monday on record in 2009. Yet most investors remain unimpressed....

They're convinced it's nothing more than a short-lived Darwinian event. Weak and unfit companies, exposed by a nasty recession, are simply being forced into the arms of the strong. Or as Jack Ablin, Chief Investment Officer at Harris Private Bank puts it, "A lot of these deals are motivated by self-defense."

But they're wrong.

Even though this Monday wouldn't even make the cut for the top 20 deal days during the last takeover boom (in 2007), it's more than just a function of survival or some freak bear market anomaly.

Another takeover boom is brewing. Here's how I can be so sure...

Takeover Boom Catalyst - Private Equity

We all know the catalyst behind any serious takeover boom is private equity. Because when they're flush with cash, competition for targets heats up and bidding wars ensure.

  • We also know such activity sputtered along in the first quarter.

  • Only $8.7 billion worth of private-equity-led deals were completed, compared to the $57.6 billion in the first quarter of 2008, according to Dealogic.

  • Moreover, private equity fundraising - the fuel for future activity - also fell off the cliff, dropping 81%, to its lowest level in over five years.

But those are only the headlines. And sadly, most investors stop there. Digging deeper, though, reveals a new trend is unfolding.

The number of firms hitting the pavement to raise new funds is on the rise. In January, there were 1,624 funds trying to raise $889 billion, a 25% increase from last year... and a 43% increase from 2007.

And they're enjoying success.

Morgan Stanley raised a record-setting $1.14 billion for its Private Markets Fund IV. Abbott Capital Management also raised more than $1 billion for their latest fund.

In other words, the next takeover boom is incubating. And it makes perfect sense. Despite such a challenging environment, the smart money knows it's time to make a deal...

Stock valuations rest at historically low levels. Financing, although hard to come by, is similarly cheap. And thanks to the bear market, every manager is amenable to a deal. In many cases, it's their only hope at quickly restoring shareholder value.

So if you're not preparing for the imminent takeover boom by investing in potential takeover targets now, you should be. After all, the institutional money is getting ready. And history proves the premiums will be rich and the opportunities plentiful.

Of course, half the battle is being prepared, like a Boy Scout. The other half is knowing where to look, a la G.I. Joe.

An Imminent Takeover Boom In These 3 Sectors

In my opinion, you should focus on the following three sectors because they will attract both private equity suitors and publicly traded competitors. Thus, bidding wars will erupt and premiums paid to shareholders will be the greatest.

  • Health care (specifically drug makers) - All major pharmaceutical companies are scrambling to replenish pipelines. Sure $150 billion worth of deals have already been announced this year. But the largest drug makers are still sitting on a $100 billion in cash and need to replace $84 billion in annual sales.

  • Energy - As famous oilman T. Boone Pickens famously acknowledged, it's much cheaper to drill for oil on Wall Street than in the ground. The pullback in oil and natural gas prices should entice cash-rich international giants to try to replenish reserves on the cheap.

  • Technology - This is another cash-rich sector with cheap valuations and technologies becoming more essential to everyday life. At the same time, the industry heavyweights are struggling to grow organically. Acquisitions are the only quick fix. Yet private equity shops are equally eager to pounce on the high margin, high penetration products in this sector.

Next week, I'll show you how to do identify the most attractive takeover targets in each sector. I'll even include three companies at the top of my list. So stay tuned.

Good investing,

Louis Basenese

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