In a reminder that the world doesn’t revolve around Federal Reserve dot plots or the machination of Greek bailout negotiations in Brussels, there has been a surge of merger news as companies quietly go on doing the good work of capitalism: Expanding, buying, selling, and trying everything possible to boost profits and maximize shareholder wealth.
Homebuilders Standard Pacific (SPF) and Ryland (RYL) last week agreed to a $5.2 billion marriage to create the country’s fourth-largest company in its industry. RYL builds homes targeted to entry-level buyers as well as first- and second-time move-up buyers. SPF is more focused on move-up buyers in metropolitan areas in California, Florida, the Carolinas, Texas, Arizona and Colorado. Geographic and product diversification were given as the justification for the tie up.
This is a sign of confidence in the health of the housing market, something that was corroborated by an increase in homebuilder sentiment to the best level since September.
Next up, Dealertrack (TRAK) agreed to be acquired by Cox Automotive for $4 billion. TRAK is a leading provider of software and services for car dealerships while Cox operates Kelley Blue Book and Autotrader among its businesses. With auto sales running at the best pace in 10 years, this is also a sign of confidence in the industry.
In the retail space, Target (TGT) sold its pharmacy and clinics business — with more than 1,660 pharmacies and 80 clinics — to CVS Health (CVS) for $1.9 billion. The deal benefits both as CVS is suddenly free of the specter of developing a large number of new pharmacies while the cash will be immediately accretive to TGT’s bottom line.
Merger activity is also red-hot in the managed care arena with Cigna (CI) reportedly turning down a $175 a share offer from Anthem (ANTM). UnitedHealth (UNH) reportedly has an interest in both Cigna and Aetna (AET). And both Anthem and Aetna are reportedly considering bid offers for Humana (HUM).
All this goes to show that even if investors are frightened by the prospect of the start of higher interest rates or a Greek debt default, corporate cash balances will remain a strong supporter of stock market valuations for the foreseeable future. CFOs are in a shopping mood, both in buybacks of their own stocks, and now their rivals’ stocks.
You can see this in the chart above from FactSet research showing the swelling average price-to-earnings multiple of M&A deals. At present the health care and tech industries are the main beneficiaries, but in the future I would expect to see much more in other areas, such as tech and regional banks.
Thinking About Value
Let’s say that we can all agree — yes, I’m voting on your behalf — that once this whole Greek thing is put to bed people will look around and realize that euro-zone stocks are too cheap. Doesn’t it make sense to start considering right here, right now, which ones or which countries should rebound best?
When you think about it, once the Greek thing blows over, the euro zone will still be pumping money into the Continent via quantitative easing. As the ECB grows its balance sheet, euro-zone stocks should wake up and benefit.
This line of thinking, sparked by comments by TIS Group analysts, got me musing about the whole concept of value. The U.S. is up 210% from its lows of 2009, but Europe and India are only up 75%, Japan is up 125% and China is up around 145%. Brazil, a very nice country with beautiful beaches and stunning commodity riches, has fared much worse, as are most other emerging markets.
Areas of the market that are cheap are also the most hated and the least respected. That’s how they got cheap. Expectations are low. If I say that now is the time to add iShares Brazil (EWZ), I’m sure you would give me a big eye roll. The idea that it might turn around seems ludicrous as “everyone knows” that corruption, an over-reliance on energy and agricultural commodities, and an anti-capital government will forever keep the country down. Expectations are low, in other words.
On the opposite side of the spectrum are ideas that most investors agree are fair and true. A few are: Central banks always get their way, so QE will always work; interest rates will be low for years; biotech has entered a new era of long-term strength without bounds; and mergers always create value.
The chart above shows how a love for Brazil and abhorrence for biotech dominated the nine years from 2002 to 2011. More recently the tables have completely reversed. Will the new love of biotech and hatred for Brazil persist, or could it reverse when no one is looking? Something to ponder.