Every week, it seems, brings news of a corporate coupling (or at
least an invitation). Buyouts are brisk in industries ranging from
technology to health care, from finance to consumer goods. To get
an idea of the frenzy, consider the food fight Hillshire Farms got
caught up in as a bidding war for the sausage maker broke out
between Pilgrim's Pride and Tyson Foods. That followed Hillshire's
bid for Pinnacle Foods, known for Vlasic pickles and Duncan Hines
Halfway through 2014, U.S. companies had announced more than
9,000 deals (counting minor ones, including those for parts of
businesses), with a collective value of more than $771 billion.
That compares with 8,600 deals worth $488 billion in the first half
of 2013. "We're on track for the first trillion-dollar year since
2007," says Richard Peterson, who tracks merger activity for
S&P Capital IQ. He says the value of U.S. deals for the full
year could reach $1.5 trillion, compared with $1.7 trillion in
A number of factors are behind the boom. Firms have an abundance
of cash on corporate balance sheets--some $2 trillion for
nonfinancial companies in Standard & Poor's 500-stock index.
Credit is easy, with interest rates low and demand for corporate
bonds robust. And with stock prices at record highs, companies can
pay for acquisitions with inflated shares.
Taxes are also playing a part. Some U.S. companies are bidding
for overseas firms so they can change their country of
incorporation in a quest for more-favorable income tax rates. For
instance, Minneapolis-based Medtronic recently announced that it's
buying Covidien, another medical device maker, for $43 billion in
cash and stock. Covidien has offices in Mansfield, Mass., but the
company is registered in Ireland. In addition to the tax advantage,
the companies have complementary product lines.
Shareholders, sometimes spurred by activist investors, support
the takeover trend. Companies that made an acquisition in 2013 saw
their stock increase by an average of 48% for the year, says Bank
of America Merrill Lynch.
Investors looking to cash in on the merger boom might consider
stocks in companies with a track record of successful acquisitions.
Valeant Pharmaceuticals (symbol
, $126) recently garnered headlines for its hostile bid for
, $169), the maker of Botox. But the firm has executed an
aggressive acquisition strategy, almost flawlessly, for years, says
Morningstar analyst David Krempa, thus boosting profit margins and
reducing the risk of expiring patents. Danaher Corp. (
, $79), which manufactures everything from industrial tools to
dental supplies, is a master at consolidating businesses, achieving
synergies and maximizing productivity. Danaher acquired 14
businesses in 2013; roughly 75% of its sales growth during the past
five years has come from acquisitions.
Deal adviser Lazard (
, $52) could see double-digit-percentage revenue growth this year
as its investment-banking unit profits from a pickup in dealmaking,
says S&P Capital IQ, which rates the stock a "strong buy."
Finally, consider Merger Fund (
), a member of the
. The fund invests in stocks of announced takeover targets.