Profiting from Megamerger Mania!
What do eBay, Louis Vuitton Moet Hennessy (LVMH), Charles Schwab, Fitbit, TD Ameritrade, and Tiffany all have in common? Cannibalism! It’s mergers galore, buyouts are in, and investors are looking for a way to play it!
Investors buy stocks for millions of reasons. One day, it’s an economic indicator — the next, rash conviction. In recent days, however, it’s been because companies are targeting other companies for acquisition, resulting in target firms’ stock prices rocketing. Thanks to tax reform and more cash to splash, the US Federal Trade Commission (FTC) has already wed 2.49-trillion-dollars’ worth of corporate couples this year.
As an example, fashion group LVMH got down on one knee to offer Tiffany & Co. $135 per share. She said yes, sending the jeweler’s shares up from $125 to $135. Charles Schwab also just bought TD Ameritrade in a goliath deal for the brokerage industry. Valued at $26 billion by Schwab, TD shares boomed 16%. The stock of the acquiring firm usually drops owing to the debt and uncertainty it saddles its investors with for a big sum.
16% is still not bad for a day’s work, right? But these relationships rarely work out. The Harvard Business Review pegs their “failure” rate at 70-90%, due in large part to executives overpaying for “synergy”, and hence creating these gains. It’s not their money, after all!
So, how do we play this madness? Getting in front of the gravy train and speculating on the next target company to-be is a dangerous game of chicken if talks fall through (Google the downfall of ‘Long Term Capital Management’).
Some are resorting to smaller stocks in quieter markets where investors are slower to wake up to rumors of a potential buyout. Others are “shipping” companies they think belong together for strategic reasons, and some are even getting into the weeds with the third or fourth orders of effects after a confirmed merger. No matter what your approach, it’s nice to know that if all else fails, your portfolio is always open to an out-of-the-blue bailout!
