BALTIMORE (Stockpickr) -- 2014 is providing a perfect storm for M&A deals -- and as markets start to become choppy, these big buyouts could get you paid in the final months of the year.
Record low interest rates and record high corporate cash have been a big driver of merger and acquisition volume, better known as M&A. With many firms struggling to find growth internally, acquisition targets are providing growth opportunities right now, and they're pricing in relatively stable returns for the rest of 2014.
That means that there are some hefty merger premiums left in some of the market's biggest deals today, particularly those with completion dates further out. So, for investors who aren't afraid of some added event risk, merger arbitrage is a viable strategy for regular investors in 2014.
And there's no shortage of individual deals to spread the risk across. So far in 2014, we've seen $3.2 trillion in global M&A deal volume, a 62% increase versus this time last year.
Too often, investors think that there’s no money to be made once a deal has been announced, but that’s just plain wrong; between merger arbitrage opportunities and value creation for acquiring firms, it’s worth paying attention to Wall Street’s deal book. So that's exactly what we're doing this week.
With that, let’s take a look at four M&A deal stocks worth watching right now.
Up first is health care diagnostics stock Alere (ALR) . Alere develops diagnostic devices spanning specialties ranging from cardiology to oncology to diabetes. Those point-of-care testing tools let doctors bypass medical laboratories for some testing, bringing a revenue center back into the practice, and cutting the time patients must wait for results. It's a business that former CEO Ron Zwanziger likes so much that he's offering to buy Alere for $46 per share in a cash deal.
Zwanziger made the offer on Sept. 15 with a handful of other shareholders. He's already Alere's largest individual shareholder today, with 4.73% of outstanding shares. The going-private transaction makes that bet a whole lot bigger.
More important, there's still money to be made on the deal. As I write, Alere trades for $39.69, a price tag that leaves a nearly 16% premium priced into shares. That hefty premium comes from a combination of two factors: anxiety over the possibility that the deal falls through, and an uncertain closing date. Zwanziger and company are taking a month for due diligence -- a task that shouldn't be that involved considering his intimate understanding of ALR's business from his four year stint as chairman and CEO.
Buying Alere here isn't without risks, but a lot of the merger premium is going to evaporate when the variables get pinned down over the next month. There's still a lot of cash left in this deal.
Big tobacco is undergoing its largest consolidation deal on record right now, with the pending deal for Reynolds American (RAI) to acquire Lorillard (LO) for $27 billion in cash and stock. The deal makes a lot of sense for both companies. The U.S. cigarette business is dying a slow death as fewer people take up smoking, and joining forces means lower costs and bigger scale. Even better for Reynolds, Lorillard has been a best-in-breed tobacco name thanks to the growing popularity of menthol cigarettes (led by LO's Newport brand).
The deal doesn't include Lorillard's Blu brand of electronic cigarettes, the sole category in the tobacco industry that's actually seeing growth in 2014 -- that's going to Imperial Tobacco. But the prospect of owning the menthol cigarette business is an attractive one for RAI, and they're happy to pay for the privilege.
Reynolds' buyout offer to shareholders is made up of $67.12 as of this writing -- $50.50 per share in cash, and another 0.29 shares of RAI for every share of Lorillard owned. At current price levels, the deal leaves 12.4% on the table.
Right now, the deal is expected to close next summer, pending approvals from both sets of shareholders and the Federal Trade Commission. All of those approvals are set to get knocked out by the first half of November, putting a very limited shelf life on the huge premium that you can get by buying LO and selling RAI. It's worth watching closely this week.
International Game Technology
Walk into any casino in the U.S., and there's a good chance you'll find a gaming machine made by International Game Technology(IGT) - Get Report . The firm is one of the biggest manufacturers of video gambling systems, and it also sells hardware and software used by casinos' back offices. The firm also operates the online DoubleDown casino app on Facebook and mobile devices.
But IGT's days as a standalone company are numbered; the firm is in the process of being acquired by GTech (GTKYY) in a deal worth $6.2 billion. The buyout will pay International Game Tech. shareholders $13.69 in cash, plus 0.1819 shares of GTK for every share of IGT they own.
That means that investors can collect a 7% premium by the time the deal is expected to be completed next summer.
There's a lot of reason to like the gaming industry right now. More individual states are legalizing "Las Vegas style" casinos, which require big initial investments in gaming machines, particularly in places where table gaming isn't allowed. A similar piecemeal adoption of gaming rules for online services had the potential to drive revenues at IGT's DoubleDown unit.
For those reasons, IGT's acquisition price tag doesn't look particularly lofty right now. There was only a 15.8% premium in the deal when it was announced back in July, and half of that is still available to investors who go long IGT today.
Last up is real estate site Trulia (TRLA) , a name that's having a spectacular year in 2014. Shares are up 50% since the calendar flipped to January, boosted by a $2.3 billion acquisition deal from rival Zillow(Z) - Get Report . No, Trulia isn't the bargain that IGT is right now. Instead, this stock trades at a pretty lofty valuation. But that doesn't matter as long as Zillow's paying a lofty price tag to acquire shares.
Trulia's real estate search engine helps connect homebuyers with the properties they're looking for -- and it helps connect targeted service advertisers, like realtors, movers, and home inspectors, with those homebuyers too. That makes Trulia a logical acquisition target for Zillow right now, and Zillow is adeptly using its own status as a momentum stock to finance the deal.
Trulia shareholders will get 0.444 shares of Zillow for each share of TRLA they already down. At current price levels, there's a 5.75% risk premium baked into shares. That makes this the sole stock-only M&A deal on our radar today.
With a big shift away from momentum stocks this week, it's important to approach this merger arbitrage opportunity as a pairs trade. You want to offset your long position in Trulia with a short in Zillow in order to avoid the volatility and market risk that's been grabbing headlines in the tech sector. But with approvals set to be out of the way in a little over a month, the premium should narrow quickly for traders who take advantage now.
To see these M&A plays in action, check out the M&A portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji