Nobody Does M&A Better Than Buffett and Southwest Airlines

NEW YORK (TheStreet) -- Low interest rates have engendered a high level of mergers and acquisitions activity with Amazon (AMZN), Apple (AAPL), BHP Billiton (BHP), Google (GOOG), Tyson Foods (TSN) and many others buying. But the shareholders of Amazon, Apple and the others should not rejoice: Studies have shown that the great majority of mergers fail.

Arguably the two publicly traded companies with the best track record for M&A are Berkshire Hathaway (BRK.A), headed by Warren Buffett, and Southwest Airlines (LUV), with its unmatched streak of profitability for its industry. Most intriguing is that each approaches acquisitions with a diametrically opposing philosophy.

About buying another firm, Buffett has been quoted as saying, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." When an entity is acquired, management is left in place. Berkshire Hathaway operates as a holding company for the many different entities it has acquired, ranging from Burlington Northern Santa Fe railroad to Lubrizol, an industrial lubricants firm, to the chain of Dairy Queen Restaurants.

It is exactly the opposite for Southwest Airlines.

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The 2010 purchase of Air Tran serves an example. Southwest Airlines bought Air Tran when it had plunged to under $5 a share in 2010. In 2008, it bought the assets of ATA out of bankruptcy. Any planes that are not a Boeing 737 of the purchased airline are leased out or sold. Air Tran's Boeing 717s were transferred to Delta (DAL).

So what should investors look for to profit from mergers and acquisitions?

Obviously, it is best to own the shares of the acquired company since a premium is almost always paid by the buyer. Certain industries at certain times are in play.

A recent report from Jim Cramer of TheStreet stated that hospitals will be the next sector to undergo heavy mergers and acquisitions activity. That certainly makes sense with The Affordable Care Act insuring more Americans, which means millions more will be utilizing the services of hospitals.

Small cap oil firms appear to be an undervalued play.

Big Oil stocks have done very well due to rising energy costs. Investors are spending billions on oil and natural gas assets, especially in North America. An article in The Wall Street Journal reported that just the Chinese alone have spent over $44 billion since 2008 buying up energy interests in the United States and Canada. BHPBilliton, the world's largest natural resources company based in Australia, has spent $20 billion to increase its oil and natural gas holdings. Despite the rising energy prices and billions in buying, small caps with appealing holdings such as Americas Petrogas (APEOF) and Octagon 88 (OCTX) are both trading well below 52-week highs, making each an attractive takeover target.

What makes a stock alluring to a suitor?

A low level of debt is appealing. Assets that have long-term value will entice buyers (Tyson Foods), as will advanced technology (especially attractive to tech suitors like Amazon, Apple and Google). Sectors that are stable such as health care and energy when undervalued are very tempting. Options activity can also be an indicator that a company will be bought out, according to Dr. Joseph Louro, who heads Investview (INVU), an investor education and financial technology firm. No matter what methodology is used, there will be ample opportunities for investors to profit from mergers and acquisitions activity in the future, no matter which company is involved!

Jonathan Yates does not have a position in any of the stocks mentioned in this article.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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