By Sarah Morgan
Google’s (GOOG) planned acquisition of Motorola Mobility Holdings (MMI) may be dominating the headlines, but it’s far from the only mergers-and-acquisitions activity in the marketplace. The number and dollar volume of deals has been rising for the past two years, with 2011 on pace to continue that trend. Already there have been almost $183 billion worth of U.S. deals in the third quarter through Aug. 15, according to the Wall Street Journal, making this the hottest summer for deals since 2007.
For the retail investor, there are a couple of ways to get in on the action. One strategy is to buy smaller companies that look like attractive takeover candidates, says R.J. Hottovy, the deputy director of equity research at Morningstar. While the tempting targets will be different in each industry, strong cash generation is always attractive to acquirers, he says. It’s very speculative to try to pick specific buyout targets, so stick with companies that would be good investments either way, says Karl Mills, the president of Jurika, Mills, and Keifer, an investment advisory firm based in San Francisco. That means small to mid-sized companies with strong balance sheets and leading positions in their markets, Mills says. “Buy good companies that you want to buy, and maybe somebody else will want to buy them too,” he says.
There are also mutual funds and ETFs that try to track M&A activity or replicate the kinds of merger-focused strategies hedge funds often use. For example, the Merger Fund (MERFX) is an actively managed mutual fund that invests in announced takeover targets. In the Google-Motorola deal, for example, they’d buy Motorola at its current price of about $38 and hold the stock until the deal closes, pocketing the $40 Google has offered per share, for a tidy 5% return. The chief risk, says portfolio co-manager Mike Shannon, is that a deal won’t close; about 90% of announced deals go through, but you can lose a lot of money betting on the deals that don’t, he says. The fund researches the likelihood of regulatory and shareholder approval, and the potential for material adverse events that would give the buyer an out, to try to avoid those losing bets, Shannon says.
There are indirect ways to benefit from the pickup in M&A without betting on specific or potential deals, Mills says. Buying an actively managed value fund that’s focused on small- and mid-cap stocks would be one option, he says. A good manager who researches stock picks thoroughly should end up with a portfolio of the kind of solid, attractively-priced businesses that make for good takeover targets, he says. Investors could also focus on the one party in an M&A transaction who makes money whether or not shareholders of the buyer or the target think it’s a smart move: The middleman. Mills says he likes the Blackstone Group (BX). “They have a lot of intellectual horsepower, and they’ll benefit from the M&A activity,” he says.