How to Profit From Corporate Mergers

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 cake mixes.

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 2007.

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 VRX , $126) re­cently garnered headlines for its hostile bid for Allergan ( AGN , $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. ( DHR , $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 ( LAZ , $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 ( MERFX ), a member of the Kiplinger 25 . The fund invests in stocks of announced takeover targets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Markets Videos


    Kiplinger is a Washington, D.C.-based publisher of business forecasts and personal finance advice, available in print and online. Get trusted advice on investing, retirement, taxes, saving, real estate, cars, college, insurance.

    Learn More