The Deal Boom Is Back With A Vengeance

By Aaron Levitt | September 02, 2014 AAA

The calendar may say 2014, but investors are partying like it's 1999. That’s because merger and acquisition (M&A) activity, along with initial public offering (IPO) issuance, have returned to their former glory days. Firms- flushed with the most cash in history- are spending that cash on other rivals in a big way. The year is only a few months old and we’ve already seen plenty of deal activity.  

The best part is, you don’t have to be a private equity insider to cash in on the boom. Regular retail investors have plenty of opportunities to cash in on rising M&A. More importantly, jumping in on that activity could lead to some hefty portfolio gains in the year ahead.

Back To Pre-Crisis Levels

While low interest rates have been a pain when it comes to owning a savings account, it’s a huge tailwind propelling the recent deal boom. Companies within the SPDR S&P 500 (NYSE: SPY) continue to have a record amount of cash on their balance sheets. Meanwhile, low interest rates have allowed many firms- even those with less than stellar credit- to borrow at ridiculously cheap rates. Both factors are spurring buy-outs to levels not seen since before the recession.

Buy-outs such as generic drug manufacturer Actavis' (NYSE: ACT) recent $25 billion bid for Forest Laboratories (NYSE: FRX) or Facebook’s (NASDAQ: FB) $19 billion buy of WhatsApp have helped push M&A activity up 13% versus the same time period in 2013. According to M&A research firm Dealogic, there have been 4,880 worldwide deals so far in 2014- worth around $552.4 billion. That puts this year on pace with 2007’s record.

Meanwhile, new companies are hitting the tape at an equally impressive clip. IPO consultants Renaissance Capital report that 2014 is already shaping up to be a record year. Even with the whole month of March yet to go, the first quarter of 2014 has already seen more IPOs than Q1 2013. Additionally, the amount of initial filings so far this year has reached the biggest number in over a decade.

All of this buy-out and IPO activity is essentially a sign that optimism has returned to the global economy. It’s also a great way for investors to make money.

Buying Into The Buy-Out Binge

For investors, these recent trends in M&A and IPO activity could be great plays over the next few months. These market neutral strategies could be exactly what a portfolio needs as the market continues to return to its up and down patterns. Here's how to play them.

At its most basic, merger-arbitrage involves profiting from the difference between the deal offer price and the current stock price. Snag enough $1 or $2 differences and you start to make some serious profits. The Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE:CSMA) allows investors to play merger mania through this technique. The underlying index is rebalanced every five days, rather than monthly or quarterly, allowing the fund to capture these event-driven gains. Current Credit Suisse holdings include Foster Wheeler AG (NASDAQ: FWLT) and Norwegian drug maker Algeta. Expenses for CSMA run a cheap 0.55%. Investors can also use the IQ ARB Merger Arbitrage ETF (NYSE: MNA) to follow a similar strategy.

For those wanting to bet on future buy-out targets, the iShares S&P Mid-Cap 400 Value (NYSE: IJJ) and iShares S&P Small-Cap 600 Value (NYSE: IJS) are chock full of potential cheap candidates.

As for new stocks hitting the tape, the First Trust US IPO Index (NYSE: FPX) is an interesting choice. Eligible companies are added to the ETF on the sixth trading day after an IPO launch and remain in the index for 1,000 days. Current holdings include Facebook and Phillips 66 (NYSE: PSX). This strategy has produced some impressive gains, as FPX managed to return nearly 48% in 2013.

Another interesting pick could be the very firms doing the IPO selling. Private equity firms have been cashing in on companies made private during the last wave of buy-outs by once again making them public. These exit-events can mean some pretty big profits at the various PE firms. The PowerShares Global Listed Private Equity ETF (NYSE: PSP) is the easiest way to bet on a basket of these stocks.

The Bottom Line

With cheap available debt and large cash hordes, IPO and M&A activity is way up. Luckily for retail investors, there are ways to cash in on the deal boom.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
 

 

comments powered by Disqus
Related Analysis
  1. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  2. U.S. Restaurants Slog Through a Weak Industry - Industry Outlook
    Stock Analysis

    U.S. Restaurants Slog Through a Weak Industry - Industry Outlook

  3. This Once-Broken Social Media Stock Is Back On The Warpath
    Investing

    This Once-Broken Social Media Stock Is Back On The Warpath

  4. How To Earn 28% On This Once-Broken Social Media Stock
    Investing

    How To Earn 28% On This Once-Broken Social Media Stock

  5. Short This Overvalued Growth Stock Now
    Investing

    Short This Overvalued Growth Stock Now

Trading Center