Should you dive into M&A stocks? That is to say, stocks of companies involved — either as buyers or sellers — in merger and acquisition deals? Granted, with the novel coronavirus, deal flow took a breather. It may be a while before large companies are again chomping at the bit to acquire other businesses.
Yet, Wall Street’s M&A bankers aren’t twiddling their thumbs. While less than before, transactions are still happening. On top of that, several pre-pandemic merger deals remain pending. So, as an investor, how do you play these opportunities?
Notice that is “opportunities” with a plural. There are many ways to trade and invest in M&A stocks. Firstly, there are some merger arbitrage plays. What’s merger arbitrage? That’s when you buy shares in companies subject to takeovers or mergers.
Granted, this isn’t the easiest strategy to pull off as a retail investor. With institutional investors crowding these trades, your mileage will vary when it comes to risk/return. But, as I said above, there are other ways to play M&A stocks.
Secondly, you can buy shares in companies rumored to be a takeover target. A current example is Kansas City Southern (NYSE:KSU).
Finally, you can buy shares in acquirers. Namely, companies making potential game-changing strategic buys. Think Visa’s (NYSE:V) acquisition of Plaid from earlier this year.
With multiple ways to play M&A stocks, here are seven opportunities to consider in today’s environment:
- Analog Devices (NASDAQ:ADI), Maxim Integrated Products (NASDAQ:MXIM)
- Anheuser-Busch InBev (NYSE:BUD), Craft Brew Alliance (NASDAQ:BREW)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Fitbit (NYSE:FIT)
- Kansas City Southern (NYSE:KSU)
- LVMH (OTCMKTS:LVMUY), Tiffany & Co. (NYSE:TIF)
- Mastercard (NYSE:MA), Fincity
- Sorrento Therapeutics (NASDAQ:SRNE), SmartPharm
M&A Stocks: Analog Devices (ADI), Maxim Integrated Products (MXIM)
Back in June, chip makers Analog Devices and Maxim Integrated announced an all-stock merger deal. Once complete, the combined companies will become a major force in the chip space, with the scale to compete with larger rivals like Texas Instruments (NASDAQ:TXN).
But, that’s the not the only benefit from the transaction. With projected cost savings of $275 million, the deal is accretive to Analog Devices. Add in the chip space’s autonomous vehicle and 5G tailwinds, and this lesser-known semiconductor play may be a name to buy and hold over the long term.
Sure, both stocks are a bit too hot to touch right now. ADI stock and MXIM stock both trade at a premium to similarly sized rivals like Microchip Technology (NASDAQ:MCHP).
But, on a post-deal pullback, shares in Analog may be a buy. Before and after the Maxim deal closes. Keep this on your radar, but take your time before diving into shares.
Anheuser-Busch (BUD), Craft Brew Alliance (BREW)
As mentioned above, merger arbitrage is one of many ways you can play M&A stocks. Typically, while a deal is pending, shares in the selling company trade at a slight discount to the final deal price.
For example, Anheuser-Busch is acquiring Craft Brew for $16.50 per share (subscription required). But, due to antitrust concerns, it has taken a long time for the deal to finalize. Announced last November, the transaction is still pending.
As a result, BREW stock today trades for around $15 per share. In other words, investors buying today could see an 11.4% return — potentially in a matter of months — if the deal goes through. Granted, the flip side is that the deal gets terminated, and merger arbitrage investors dump their positions. This could push shares down to much lower prices.
But, given that experts like Cowen analyst Vivien Azer remain confident the deal will go through, this may be a relatively low-risk opportunity. With the deal expected to close by the end of the year, this could be a solid way to generate a short-term return of 11.4%.
M&A Stocks: Alphabet (GOOG, GOOGL), Fitbit (FIT)
Like with BUD and BREW, this is another merger arbitrage situation. Late last year, Alphabet inked a deal to buy all outstanding shares of FIT stock for $7.35 per share. Yet, with regulatory hurdles and the pandemic, investors have remained skeptical the deal will go through.
In short, there remains a large spread between Fitbit’s share price (around $6.50 per share) and the final transaction price. In other words, around 11% upside if the deal gets done in the next few months.
Sure, the regulatory risk with this merger arbitrage situation may be significant. The European Union’s intense scrutinizing of the deal over antitrust concerns could further extend the closing date. Or, push Alphabet to scrap the deal entirely.
With this in mind, even today’s 11% spread may not be enough to make this a solid opportunity. Tread carefully, but there could be opportunity with this M&A stock.
Kansas City Southern (KSU)
Granted, this is more of a reach than the pending deals already discussed. KSU stock is more of a takeover target play. But, there is a great deal of validity to the recent takeover talk.
As the Wall Street Journal reported late last month, private equity buyers Blackstone (NYSE:BX) and Global Infrastructure Partners are interested in making a bid for the railroad operator. News of the deal sent shares up 9.7% on July 31.
Yet, that doesn’t mean shares have topped out. In today’s low-interest environment, infrastructure plays have become hot investment vehicles for institutional investors like pension and sovereign wealth funds. This could mean rival bids from other big infrastructure investors, like Macquarie (NYSE:MIC).
Also, rival Class I railroad operators like Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) BNSF, Canadian Pacific (NYSE:CP), or Canadian National Railway (NYSE:CNI) could make a bid as well. However, a deal from a strategic buyer would face far more regulatory scrutiny than a private equity bid.
Sure, it’s risky to chase takeover targets like KSU stock. But, keep this opportunity on your radar.
M&A Stocks: LVMH (LVMUY), Tiffany & Co. (TIF)
Yet another merger arbitrage play, but this time, with potential pandemic-driven risks. With the novel coronavirus severely affecting retail sales, LVMH CEO Bernard Arnault started to have doubts over his company’s pending $135-per-share deal for Tiffany & Co. Yet, the merger arbitrage community remains confident the deal will close.
Why? Although it is a headline-making deal, acquiring all of Tiffany’s isn’t exactly a big bite for LVMH. And, with the purchase price small potatoes for the company, there’s a low chance LVMH will come back with a lower offer price (say, $125 per share instead of $135 per share).
Even so, the spread between the current price of TIF stock — around $125 per share — and the deal price remains wide. For those interested in a merger arbitrage play, this deal could be worthwhile. Regulatory delays may have extended the merger closing date.
But, given a deal will likely close by the end of the year, buying today for a 7.7% return in a matter of months may be a strong opportunity. Keep in the mind the risks of retail investors dabbling in merger arbitrage deals. But, compared to the other pending deals, there are fewer regulatory hurdles at play.
Mastercard (MA), Fincity
As InvestorPlace’s Joel Baglole discussed July 23, Mastercard is following rival Visa in making a forward-looking move into fintech. With its pending $1 billion deal for Fincity, the company is staying on top of emerging trends in the world of banking.
It is paying a pretty penny of 50 times revenue. But, in the long term, it’s a smart move.
Why? Fincity’s specialty is open banking. As Baglole discussed, open banking gives customers more control when it comes to linking their bank accounts to fintech services. As tech and financial services continue to intertwine, Mastercard is protecting itself from obsolescence.
Like with Visa, its legacy business continues to be a cash cow. But, without heavy investments in fintech innovations, it could join many old-school institutions in losing out due to massive technological changes.
In short, this deal is a long-term positive for MA stock. With this fintech buy, the company is staying on top of its game.
M&A Stocks: Sorrento Therapeutics (SRNE), SmartPharm
As InvestorPlace’s Chris Tyler discussed July 20, SRNE stock has been on a wild ride this year. After rejecting a buyout deal, shares fell significantly during March’s pandemic-driven selloff.
But, with the potential for its Abivertinib treatment to help coronavirus patients, shares soared yet again, rising from less than $2 per share, up to around $11.80 per share today. Yet this isn’t the only upside catalyst for Sorrento stock.
A few weeks back, the company announced a deal to acquire SmartPharm, a developer of gene delivery platforms that could help win the war against Covid-19.
Before you rush to put in a “buy” order, exercise some caution. Sorrento has jumped on the coronavirus bandwagon. But that doesn’t mean it will find success developing a vaccine or treatment. If the company’s pandemic catalysts fizzle out, shares could fall back to where they were earlier this year.
In short, the risk/return proposition today may not be in your favor. Yet, shares could be worthy of consideration on a pullback.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.