It is always nice to have unexpected wins in a portfolio, like owning a company for fundamental reasons and then - out of the blue! - it gets acquired for a huge multiple. Some recent examples include Kraft being acquired by Heinz and 3G, FedEx acquiring TNT Express, Mylan acquiring Perrigo, Lexmark acquiring Kofax Ltd., and, Verisk Analytics acquiring Wood Mackenzie Ltd.
Global M&A activity is picking up and is expected to be strong through to 2017. (This was a theme we discussed in our 2015 Market Outlook Report). This year alone, total deal announcements in Q1/15 were up 25% year over year to $854 billion. Completed deals were up 12% in Q1/15 alone, the strongest deal closings since 2008.
If investors want to play the M&A theme, one approach is to buy companies that have the potential to be acquired. This is a tough game and one that we don’t tend to recommend. Investors should be buying stocks for fundamental reasons - not because there might be a chance of a takeover. We think a better way to get exposure to global M&A activity is to own companies that collect fees and provide advisory services to buyers and sellers. Large global investment banks are one way to go, but these firms have other lines of business such as trading, fixed income, foreign exchange, etc. A more interesting approach is to own independent advisors – this is a ‘pure play’ approach as the majority (if not sole) source of their business is advisory services, for which hefty fees are collected.
As we look at the trends in global M&A, two key areas stand out that we want exposure to: Europe and Energy. In the Aston Hill Growth & Income Fund, we are getting exposure by owning Lazard Ltd., which looks to us to be the best positioned independent advisor. Over 50% of the firm’s revenues are generated from Europe, and almost 40% from Energy deals. Lazard is involved in the most number of deals larger than $10 billion. It has one of the most impressive backlog of announced but unclosed deals amongst the independents, is the exclusive advisor to 3G/Buffett in the Kraft Heinz merger, and is advising on the FedEx/TNT Express transaction. Furthermore, we like Lazard from an income perspective, as the company pays a +2% yield and has a history of paying special annual dividends.
Making the right move
Unless you are lucky enough to own stocks that get taken out, investors can still benefit from the boom in global M&A by owning companies that offer advisory services. We are in a multi-year trend of a pickup in M&A, and independent advisor stocks are not overly expensive - plus they provide great upside as the cycle matures and most pay very attractive dividends.