Merger and acquisition activity is heating up in 2016. Just in the last month, in fact, we've seen $324.8 billion in announced deal value in the U.S., a 45% increase over the same period last year.
That huge uptick in merger and acquisition announcements brings 2016's year-to-date total to $1.8 trillion. The increase in deals is also turning into a very good thing for investors this year: With an average premium paid of almost 47%, acquisitions are one of the few big drivers of returns during a flat market.
It's no coincidence that we're seeing deal flow increase this year.
With record cash on corporate balance sheets at the same time interest rates are skittering along record lows, companies are trying to figure out a strategy to earn meaningful returns on those piles of cash. One big solution to that problem has been M&A activity. By buying other businesses, management gets to justify holding onto those record cash reserves. So, big M&A deals have been getting more frequent and more lucrative for investors.
Here's the thing: Contrary to popular belief, you don't need to have a crystal ball and get in ahead of the next big acquisition announcement to profit from the M&A trend.
In fact, some of the biggest deals already announced on Wall Street are currently pricing in hefty premiums for investors willing to stomach the headline risk right now.
Today, we'll take a closer look at four big deals that could pay you a big premium this fall.
A big merger is creating a big potential opportunity -- the biggest, in fact. The $107 billion acquisition of Time Warner Corp. (TWX) announced by AT&T (T) last month is the largest M&A transaction announced so far this year. But Wall Street doesn't have this one figured out just yet. Because of that, shares of Time Warner still trade for a steep discount to AT&T's offer price. There's still a 20% upside baked into shares if the deal gets done.
Make no mistake, there's a good reason for the discount: With the election cycle grabbing the headlines, the buyout is getting politicized at the same time AT&T and Time Warner need a big regulatory thumbs up to get their deal done. TWX's 20.44% discount to the current deal price represents the risk that it gets held up.
But there's still a big opportunity here. While analysts are painting about a 75% probability that the AT&T/Time Warner deal eventually does happen, the markets are currently only pricing in 32% odds that the deal gets done, according to Bloomberg. It's a textbook definition of an asymmetric bet: "heads I win a lot; tails I don't lose much."
The deal is all the more attractive for Time Warner shareholders because AT&T is arguably overpaying for it. Time Warner includes some flagship assets like HBO and CNN that are likely helping to drive AT&T's willingness to pay more than another content company would. There's certainly headline risk here, but it's likely to dissipate somewhat after election day. In the meantime, AT&T and Time Warner look likely to pass their first round of anti-trust scrutiny later this year.