Please enable JavaScript to view the comments powered by Disqus.

Mutual Funds

Profit From the Urge to Merge

Anticipating the next takeover is dicey, so stick with funds that invest in pending deals.

While economists wait for Main Street consumers to loosen their purse strings, corporate America has already started spending. A slew of mergers and takeover bids shows that executives are ready to ante up their stockpiled cash -- on the right deal.

Walt Disney Co. said it plans to buy comics king Marvel Entertainment for $4 billion. Xerox is buying Affiliated Computer Services, a business-services firm, for $6.4 billion in cash and stock. And Kraft Foods has a $17-billion hankering for Cadbury, the British chocolatier.

The pickup began in earnest in August -- about the same time the seedlings of an economic rebound started to take root. “Corporate America thinks we’ve begun the recovery,” says Andy Levine, a mergers-and-acquisitions attorney at Jones Day, in New York City. “Boards have a better sense of what the future holds. They think now is a good time to buy, at pretty good prices.”

The floodgates aren’t open. But given how slow deal-making has been through much of 2009, any pickup is significant. Through the third quarter, global mergers-and-acquisitions volumes totaled $1.46 trillion, according to Thomson Reuters, down 38% from the same period in 2008. U.S. volume was $601 billion, down 46%.


Meanwhile, companies have accumulated buckets of cash. And they’re not spending on dividend increases and share buybacks, both of which have fallen sharply. Cash on the books of nonfinancial companies in Standard & Poor’s 500-stock index hit a record $772 billion in June. Record buybacks a couple of years ago stuffed corporate treasuries with so many shares that cash and stock together amount to more than 22% of the aggregate market value of S&P 500 stocks, says S&P’s Howard Silverblatt.

That’s a formidable war chest. And there are lots of potential targets -- practically any company with too much debt, a weak profit outlook and a stock price that lags its peers. Financing is available but still iffy, so fewer takeovers will be done for quick financial gain. More will be strategic -- to acquire a competitor, say, or to absorb a complementary business. Look for a resurgence in hostile takeovers, according to analysts at Citigroup. Historically low valuations are tempting buyers, and once-popular takeover defenses have become less common.

Trying to pinpoint potential targets is too dicey a game for most investors. Stocks can soar on a rumor, then fizzle. But it never hurts to be aware of the M&A potential in areas in which you’re investing. S&P sees further consolidation in the drug and biotech groups, driven by slowing sales and impending patent expirations. In the energy sector, plays on shale may fuel buyouts of smaller exploration-and-production companies, especially those with high debt.

The best way to invest in mergers is through deals that have been announced. Two funds specialize in merger arbitrage, seeking to profit from the spread between an announced target’s trading price and the price at which the deal is completed: Merger Fund (symbol MERFX) and Arbitrage Fund ( ARBFX) (see our low-risk fund picks).