By Bernard Condon, APNEW YORK -- If stock investing is like playing the lottery, your odds of winning the jackpot just got a little better. Companies are buying each other at the fastest pace since before the Great Recession. Investors lucky enough to own stock in a company being bought are pocketing big money. So far this year, $219 billion worth of deals have been announced, more than double the level over the same time last year, according to Dealogic. The value of deals is also slightly above the same period in 2007. And that turned into a record year, with the value of deals reaching $1.6 trillion. Those looking to profit on deals by picking companies before they're taken over should know it's not easy. But there are guidelines for choosing possible M&A targets. One is a reasonably valued stock, not so high that it's likely to scare off buyers. Other signs are low debt and a history of generating lots of cash. Those are key for buyers who borrow heavily to finance deals, says Hottovy, the Morningstar analyst. Their debt can be repaid with the money coming out of target companies. Among the picks in a Morningstar report co-authored by Hottovy last month:
- Kohl's ( KSS): The department store chain has strong cash flow and its stock trades at 10.7 times per share earnings in the previous 12 months, which Morningstar considers attractive. The average for S&P 500 companies is 17 times. Chesapeake Energy ( CHK): The second-biggest U.S. gas producer is a target of investors looking to get the share price up. Embattled CEO Aubrey McClendon was pushed out last month. The stock is down 12% in the past 12 months. City National ( CYN): Morningstar likes that the Los Angeles-based bank courts wealthy business owners as customers and has increased earnings per share by 63% in two years. The stock is up 17% in the past 12 months.
Since November, U.S. companies have announced a dozen purchases worth $3 billion or more in mining, food, technology, airlines and other industries. Stocks of the acquired companies have soared 20% or more above where they were trading before the deals were announced. On Thursday, billionaire Warren Buffett added to the frenzy. His company, Berkshire Hathaway ( BRK.A), joined another investment firm to buy all the stock of H.J. Heinz for $23 billion, or $72.50 per share. That was 20 percent higher than the ketchup maker's share price the day before. A week earlier, another group of shareholders scored. In an echo of the big leveraged buyouts of the boom years, Michael Dell and an investment firm offered to take his publicly traded computer company private for $24 billion, most of that borrowed money. That translates to $13.65 per share, a 25% gain for stock owners, but they may get even more. Two big Dell ( DELL) investors are protesting that the offer is too low, raising the possibility of something rarely seen in M&A these days -- a bidding war. Investors are watching this deal closely for another reason: They hope it inspires investment firms to attempt other big leveraged buyouts -- risky takeovers that use lots of borrowed money from banks and bond markets. The Dell deal would be the first large leveraged buyout since before the recession. "We're finally dusting off the cobwebs," says R.J. Hottovy, a director at Morningstar, a research firm. "It shows that banks are willing to take risks." Most deals have been companies buying each other in the same or similar businesses, with investment firms, and their heaps of borrowed money, playing no role. The companies often tap banks for money but usually use more of their own cash and are considered safer. Still, CEOs have hesitated to strike deals because they were unsure they could count on the economy to help lift profits and absorb the costs of combining two companies. Now, that fear apparently is ebbing. "It's a sign that Corporate America believes that the expansion is going to accelerate," says Peter Cardillo, chief market economist at Rockwell Global Capital.
The deals follow other signs that confidence is returning. So far this year, initial public offerings of stocks have raised the most cash in two decades; small investors are putting money into U.S. stock mutual funds at the fastest pace in five years; and professional investors are borrowing more to finance their trades because they are not as fearful of losing money. The last time so many companies paired off, in 2006 and 2007, stocks were surging and investors were pocketing big gains on takeover news. Now a few lucky investors are finding they're reliving the boom years. Here are some recent deals raining riches on shareholders, according to Dealogic, a data provider:
- ConAgra Foods ( CAG), maker of Chef Boyardee, announces a $5 billion deal to buy private-label food maker Ralcorp Holdings. Within hours, Ralcorp shares rise 26% to $88.80. IntercontinentalExchange ( ICE) offers to buy NYSE Euronext, owner of the iconic stock exchange on Wall Street, for $8 billion. Premium to NYSE shareholders: 43%. Mining giant Freeport-McMoRan Copper & Gold ( FCX) says it is buying oil and natural gas explorer Plains Exploration & Production for $17 billion, handing Plains shareholders a 44% premium.