Get Ready For A “Feeding Frenzy” Of M&A Deals — Here’s How To Profit…
Warren Buffett is at it again, folks.
After remaining quiet on the acquisition front for years, he brought out the big guns to go “elephant hunting,” as he once famously said.
The target: industrial/insurance conglomerate Alleghany (NYSE: Y).
The price: $11.6 billion.
The offer, if approved by regulators, would be Berkshire Hathaway’s largest deal since the acquisition of Precision Castparts for $37 billion in 2016. This comes after years of speculation as to whether the legendary 91-year-old investor had lost his touch. But after this latest deal, and with shares of Berkshire Hathaway (NYSE: BRK-B) outpacing the S&P 500 this year, it seems that the Oracle of Omaha is back to his winning ways.
But with a $150 billion cash hoard, could this just be the start of more deals to come?
This week, I turned to my colleague Nathan Slaughter to ask about Buffett’s latest deal and get his perspective on M&A activity in the markets – including how we can profit…
First of all, Nathan, why did Berkshire make the Alleghany acquisition? What does Buffett like about this deal?
This is a classic Buffett deal. Alleghany is a bit like a miniature Berkshire Hathaway in some respects. It’s a conglomerate that has operations and investments in a number of businesses, including insurance and industrial – even toy manufacturing.
The current CEO was also previously with one of Berkshire’s insurance units, General Re. And as we all know, Buffett has a lifelong love-affair with the insurance business.
What’s interesting about this deal is how this seemingly “boring” mid-sized insurance/industrial conglomerate shot up, practically overnight on the news…
To put it simply, this is why I get up in the morning. It’s why I spend so much time researching and writing about potential M&A deals.
I don’t know if this will be Buffett’s last big deal or not, but it wouldn’t surprise me if he had a few more tricks up his sleeve.
Tell us about the biggest win you and your subscribers have scored over at Takeover Trader.
That’s easy – it was with Roku (Nasdaq: ROKU). Back in the summer of 2020, the streaming equipment maker was making all the right moves and benefiting from the Covid “stay-at-home” trend.
I thought the company would be a perfect target for a larger media player, like Disney, for example. Sure enough, rumors leaked that the cable TV giant Comcast was taking a hard look at ROKU.
But here’s the funny thing about this trade… although the company was doing well, a lot of this price action was based on rumors. But even as we’re talking about this nearly two years later, Roku still hasn’t been bought out. And I’m completely okay with that, because we rode this one up to a 321% gain in just over a year.
So is it just as simple as scouring the rumor mill to be able to find gains like this?
I’m glad you asked that. I want to make it clear that we are not in the rumor business. To be sure, rumors and whispers often precede a buyout. And I might even share some of this gossip with Takeover Trader readers from time to time. But there will always be more concrete reasons behind the stocks we cover.
Plus, I never invest in a stock just because there is a possibility of a takeover. Sure, that’s the end goal. But it doesn’t always happen. So first and foremost, I only recommend companies that I am perfectly comfortable holding based on their own merits.
The traits I look for in a buyout target (strong cash flows, stout balance sheet, etc.) are the same ones you’ll find in most outstanding businesses. Worst case scenario, we end up holding a solid company that will likely perform well for many years. But when a suitor comes calling, we could make rapid gains like we did with ROKU (or others).
I want to ask you about the macro conditions for takeovers. With interest rates on the rise and global uncertainty, will companies still be on the prowl for deals?
Make no mistake, the macro conditions are red-hot. As I’ve said before, just like you and I are likely to spend more when our bank accounts are full, the same can be said for large companies.
And right now, S&P 500 members alone have a $2 trillion cash hoard. Globally, companies have over $6 trillion sitting on their balance sheets.
What’s more, rates are still relatively cheap right now, but they may not be for long. That means if companies want to go fishing for a deal, they better bait and set their lines fast..
There’s also one thing that never changes, no matter what kind of market we’re in. Executives are always under pressure to grow the bottom line, and the easiest way to do that is through a timely acquisition.
You’ve often said that some sectors prove to be more of a hotbed for M&A activity than others. Which ones do you think we’ll see the most activity going forward?
There are three sectors that stand out to me the most right now.
One of them is energy. I’ve already discussed this one quite a bit. So let’s just say that geopolitical trends right now, combined with the mind-boggling amount of recoverable oil and natural gas in the Permian basin in West Texas, make for the perfect recipe for deals in this sector.
Another no-brainer is the tech sector. All of the big boys in this space are sitting on unprecedented mountains of idle cash.
Apple: $200 billion
Google parent Alphabet: $169 billion
Microsoft: $132 billion
Amazon: $86 billion
It’s a safe bet that a sizeable chunk of this has been earmarked for wheeling and dealing. Just last month, Microsoft splurged with the $70 billion takeover of video game publisher Activision Blizzard (a 45% premium). Intel has unveiled plans to acquire Tower Semiconductor for $5.4 billion, or $53 per share (a 60% premium).
Personally, I think the sweet spot will be semiconductors. Analog Devices, Marvell, AMD, and others have already made multibillion-dollar deals, and I think there will be plenty more to come.
The other hotbed sector I’m looking at is pharmaceuticals/biotech.
All told, there were nearly 200 biopharma mergers in 2021 alone worth $150+ billion. They won’t be the last.
Facing the loss of patent protection for core drugs, many mature Big Pharma and biotech companies are gobbling up smaller firms with exciting new therapies to rejuvenate their pipelines. And they are often a smart match, considering well-funded buyers have deeper R&D resources, proven commercialization ability, and wider global distribution and marketing channels.
We’ve already seen a string of game-changing deals make headlines over the past few years. But for every mega-deal like these, there have been dozens of smaller “bolt-on” acquisitions that were just as rewarding for investors.
Editor’s Note: As Nathan just pointed out, companies are flush with cash and hungry for growth. And that’s why he thinks they’re about to unleash a “feeding frenzy” of merger and acquisition activity in the coming months…
Nathan has just released a brand-new report detailing his research into the coming boom, including picks for each key sector (named above).
If just a rumor of a takeover leaks out, investors could make triple-digit gains, practically overnight. So you’ll want to act fast before the crowd catches on.