The first half of 2012 was not without obstacles. High unemployment, weak consumer spending, a debt crisis in Europe and a stubborn economic recovery here in the U.S. have made investors and corporations cautious.
We saw this play out not just in the markets, with stocks pulling back sharply in April and May, but also in mergers and acquisitions (M&A) activity. Worldwide M&A activity fell a whopping 25% in the first half of 2012, down 44% from the same period last year, with just about $1 trillion in global deals announced by June 19, a decrease from the $1.33 trillion during the same time in 2011.
But a slow first half of the year doesn’t mean the next six months will follow the same script. In just two days this week, we’ve seen some big deals with WellPoint buying Amerigroup for $4.46 billion, Campbell Soup acquiring Bolthouse Farms for $1.55 billion, and Intel spending more than $4 billion to buy up to 15% of ASML.
There are a few signals telling me we can expect M&A activity to accelerate in the second half of 2012.
First, companies are sitting on a tremendous amount of cash. It reached the highest levels in more than two decades last year. When companies have stockpiles of cash, they put it toward business expansions, stock buy-backs, dividend increases, or, you guessed it – M&A activity. In an economic environment that makes it difficult to grow organically, many companies will use their piles of cash to go out and buy growth.
Second, prices are more attractive. With stocks having pulled back in recent months, companies are now cheaper to acquire, which spark buyers into action.
And third, the last half of the year, especially the fourth quarter, is historically the strongest for M&A activity. Now, you might shake your head at this if you remember 2011’s underwhelming final half of the year. I actually think it means there is pent up M&A activity that is brewing, and the stage could be set nicely for a pickup as we get into the third and fourth quarters. Let’s be honest: Bankers like to get paid come year-end, and that can also be a reason more deals get done.
For these reasons, now is a good time to consider whether a company is an acquisition candidate as you decide whether to invest.
As you can see in the chart below, M&A activity is coming back from its 2009 low and is slowly building momentum.
Source: Thomson Financial, Institute of Mergers, Acquisitions and Alliances (IMAA) analysis
Three Takeover Targets
As 2013 approaches, the following three companies that I like for a variety of reasons are also potential takeover targets. Their strong financials, growth potential and exciting innovations make these companies strong candidates for corporations looking to boost shareholder value and take advantage of the changing market conditions before the New Year.
- Regeneron Pharmaceuticals (REGN) is sitting pretty in a sector that has done well this year. This biotech company could attract buyer interest due to its star product, Eylea that is already generating a lot of excitement. Eylea treats neovascular (wet) age-related macular degeneration (AMD), the leading cause of acquired blindness in people over 65. It's the only FDA-approved treatment for wet AMD labeled for every-other-month dosing that was shown to be as effective as Lucentis, which needs to be taken every month. The profit picture is bright as well: first-quarter sales of $124 million led Regeneron to increase its full-year U.S. Eylea net sales forecast to $500 million-$550 million. With two other exciting products in the pipeline, a big pharma or bigger biotech could look to scoop up Regeneron with its growth potential.
- Cablevision’s (CVC) business is improving after a few rough years of losing customers, especially to Verizon and its Fios service. In its first quarter earnings report, the company noted the largest quarterly increase in its New York metro service area since Q2 2008, with 7,000 basic video customer additions. Other areas of the business, including High-Speed Data and Voice saw jumps in customer additions, and the average monthly revenue per Basic Video Customer (RPS) increased 1.9% compared to the prior year period. CVC is also working on efforts to strengthen customer relationships by making changes in the level of service and communication it provides. There have been talks of CVC being taken over before, including an attempt by the owners to take the company private back in 2007. Going private again remains a possibility, and it would have to be at a premium for shareholders to agree. This bodes well for the company’s long-term growth, and further outside investment would help CVC take off.
- M&T Bank (MTB) got good news in June from ratings agency Fitch, which revised its ratings outlook of the bank to Stable from Negative. This is a huge recognition of MTB’s consistently-sound financial performance in a difficult economic landscape. The bank is solid, with credit losses and problem assets much lower compared to its peers, and M&T’s good revenue diversification, solid franchise and experienced management team have the bank on solid footing; it is currently in capital building mode. With a market cap of $9.9 billion and a substantial 3.3% dividend, M&T is an attractive M&A candidate.
I'll keep you updated on this situation and alert you of the latest developments as they unfold.