The year was 1992 and young Jan Koum had nothing...
He was 16 years old and, with his mother and grandmother, had
just left their native country of Ukraine to move to California.
They made ends meet with the assistance of food-stamps and a
grueling work schedule of cleaning and babysitting. It wasn't
exactly the lifestyle of the rich and famous that he probably
witnessed on American TV.
But today, Koum's net worth exceeds $6 billion.
Many of you are probably more familiar with the acquisition of
the mobile-messaging company Koum founded, WhatsApp, than you are
with Koum himself. Thanks to the $19 billion acquisition of
WhatsApp by Facebook (Nasdaq:
) in February, Jan Koum achieved the American Dream.
It's a lot easier said than done to build a company from
scratch like Koum did and sell it for millions or billions of
dollars. And Mr. Koum isn't the first person to strike it rich
when his company was acquired by a larger company. Nor will he be
The acquisition of WhatsApp by Facebook was just one of the
many merger & acquisitions (M&A) stories that have
bombarded the headlines recently. M&A have been heating up...
You might recall the Buffett-led takeover of condiments king
Heinz, or Comcast's pending acquisition of Time Warner, or
AT&T's bid for DirecTV. The most recent to make headlines is
Sprint gunning for T-Mobile in the telecom space.
It seems that companies are finally beginning to feel more
comfortable with today's economy.
Since the lows of the financial crisis in 2008 and 2009, the
total value of M&A deals has nearly doubled
. In the U.S. alone, M&A activity exceeded 10,500 deals,
topping $1.1 trillion in total value in 2013 -- up from the lows
of 7,500 deals and $659 billion in 2009. 2014 is already on a
So what does this tell us and should we care?
First, it speaks volumes about how companies are beginning to
feel about the economy. At the start of 2014, non-financial
companies in the S&P 500 were sitting on $1.41 trillion in
cash -- way above normal. And they are now willing to unleash
this cash, most notably in the form of scooping up other
companies, rather than just sitting on all that money earning
next to nothing in this low-interest environment.
The other great thing is, with M&A beginning to pick up
steam, you don't have to build the next WhatsApp to reap the
profits. Every investor can participate in the M&A space
without coughing up hundreds of millions of dollars. You only
have to know when and where the next acquisition might take
place... and be on the right side of it.
As difficult as it is to predict where or when the next merger
or acquisition might take place, you can still invest alongside
the big boys without actually having a seat at the table... by
investing in two funds that do all the work for you.
But before I tell you the exact funds that are nailing down
the M&A space, let's examine why investing in M&A can be
When a merger or acquisition is announced, the stock price of
the company being acquired typically pops. That's because the
acquiring company usually makes a bid above the targeted
company's current valuation, so they pay a premium. If the stock
that is being acquired is publicly-traded, then its shares
usually start trending toward the offered premium price.
Let's take a look at one of Dave Forest's recent
recommendations to see what I mean. In his premium newsletter,
Junior Resource Advisor
, he recommended EPL Oil & Gas Inc. (NYSE:
) back in December of 2013. Another company Dave follows, Energy
), made an offer to buy EPL at $39 a share. EPL's stock was
trading at $27 at the time, so leading up to the completion of
the deal, the stock began to rise toward the $39 bid price,
leading readers who followed Dave's recommendation to a quick 30%
gain in 3 months.
Here's another example. The pharmaceutical space is notorious
for its merger and acquisition activity. Amgen (Nasdaq:
) -- the world's largest independent biotechnology firm -- bought
out Onyx Pharmaceuticals (Nasdaq:
) for $10.4 billion in 2013. ONXX shareholders enjoyed the
acquisition announcement as shares soared on the news.
That's an incredible 56% jump the day the acquisition was
Shareholders of these companies enjoyed quick gains soon after
news was announced that they were going to be acquired. Like I
mentioned before, it's hard to know exactly which company could
be bought out next. So in order to reap the rewards from the
M&A plays, we turn to two funds:
The Merger Fund (
The Arbitrage Fund (
In her premium newsletter,
Stock of the Month
, Amy Calistri calls these the "
Two Unique Funds That Almost Never Go Down
." Here's what she had to say about them in her report:
The Merger Fund (
) and, The Arbitrage Fund (
) are equity mutual funds that invest primarily in companies
that are being acquired. To purchase a company, the acquiring
company usually has to pay a premium. Academic studies have
found that the average takeover premium in the United States
over the long run is roughly 45%.
When a bid for a company is first announced, the company's
stock rises, approaching the premium bid price. It, approaches,
it -- but usually doesn't reach the bid price. After all, there
is still a small, but finite, possibility that the deal will
fail to close.
Merger-arbitrage funds like MERFX and ARBFX buy the shares
of acquisition targets below the bid price and ride the rest of
the way up until the deal is finalized -- making a small
percentage off each deal. The more merger and acquisition
(M&A) deals that are done, the more money they make.
As we mentioned before, M&A activity is heating up. So
this makes now a good time to take a look at these
Another bonus about these two funds is their resiliency to a
down market. Amy touches on this in her report as well when
explaining how they performed during the financial crisis:
But two unique equity funds held their ground. And this was
no fluke. These two funds employ a strategy that ignores market
conditions and appreciates even in the worst of times.
As you can see from the chart below, they barely broke
stride during the onslaught.
These two funds are a great way to get a piece of the M&A
action, and keep your portfolio afloat during market
Amy does warn her readers that because these funds take a more
active investing approach in their search for companies being
acquired, the expenses are a bit higher than normal. They also
throw off quite a bit of short-term capital gains, so they are
best held in a tax-advantaged account.
Past performance doesn't predict future success, but
considering that these two funds weathered one of the worst
financial disasters since the Great Depression, it speaks volumes
about how well their strategy has been working. And with M&A
dominating headlines and showing no signs of letting up, these
funds are a great way for us to get a piece of the pie.
-- It's no surprise that Amy found a unique way to profit from
M&A activity... In fact, it's one of many ideas that she's
profiled in her
Stock of the Month
newsletter that you won't hear about anywhere else. And her
unorthodox approach is working -- leading to a win rate of nearly
85%, and making gains of 40%, 65% and more for her readers. To
find out more about Amy and how her "secret obsession" has been
the key to her success,
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