Big Wall Street Buyouts Might Be a Bullish Sign

by Jeff Reeves | February 14, 2013 10:47 am

Warren Buffett is officially on the prowl again. The big-time investor teamed up his Berkshire Hathaway (NYSE:BRK.A[1], BRK.B[2]) with 3G Capital to purchase consumer staples icon H.J. Heinz (NYSE:HNZ[3]) for $23 billion.

This is an interesting deal for many reasons. First, it is an interesting move that is closer to Berkshire Hathaway’s roots after the company started making some big portfolio changes in recent years. It has drawn down some longtime positions like Johnson & Johnson (NYSE:JNJ[4]) and General Electric (NYSE:GE[5]) to move into companies like mid-caps like medical stock DaVita Heathcare Partners (NYSE:DVA[6]) or Liberty Media (NASDAQ:LMCA[7]). It’s good to see that long-term value philosophy is alive and well at Berkshire.

Secondly, it’s intriguing because 3G Capital has a majority stake in Burger King (NYSE:BKW[8]) after taking the company public once again in 2012[9]. The complementary nature of a ketchup business and a burger maker cannot be overlooked.

But most importantly, investors should be interested because we’ve already seen a host of deals in 2013, and we aren’t even seven weeks into the year. This could be a very bullish sign if it keeps up.

A short list of big deals just since Feb. 1 include:

And those are just the multibillion-dollar deals. According to Bloomberg data, announced deals are up 25% year-to-date compared with this time in 2012 and total almost $285 billion so far. In fact, if you add up Heinz to that short list above, you get more than $95 billion changing hands in just two weeks!

It’s early, yes, and this little flurry of news might not keep up. But the trend is noteworthy.

In fact, one industry expert told American Banker[24] that financials could be the next big target of buyouts. Martin Friedman, co-founder of FJ Capital, said that “the next M&A cycle will rival the last major U.S. bank consolidation wave in the mid-1990s.”

So if you’re a retail investor, how do you play this trend?

Well, it’s impossible to swoop in and buy a stock right before a big deal like this is announced unless you have a crystal ball. However, broadly speaking, it’s a pretty bullish sign that private equity firms are on the prowl and that big blue chips are looking to snap up competitors or complimentary businesses.

Think back to 2009, when Pfizer (NYSE:PFE[25]) paid a stunning $68 billion for rival Wyeth[26]. Part of that was strategic, yes, but it also was because the company figured Wyeth was a deal after the market meltdown — and it should act while valuations were in its favor. The deal was announced shortly before the bear market bottom, and the major indices have more than doubled since then.

Same for Kraft (NASDAQ:KRFT[27]) and its late 2009 bid for Cadbury[28]. Ultimately, the deal closed at $21.8 billion, and Kraft has subsequently spun off its international snack food biz in Mondelez (NASDAQ:MDLZ[29]). But there’s no doubt Kraft got a better price because of the timing of this big-time deal.

There’s no guarantee a big merger or private buyout is good for individual investors with a stake in those companies. Furthermore, it’s no sure thing that big buyouts portend a big move in the markets.

But recent history in the wake of the financial crisis shows that corporate executives and hedge fund managers sometimes represent the first wave of investment. Just as you don’t want to buy a top, neither do they. And just as you want to swoop in while bargains last, they feel the same way.

Consider that mega-brewer Anheuser-Busch InBev (NYSE:ABV[30]) is so eager for a buyout of emerging-market beer stock Grupo Modelo (PINK:GPMCF[31]) that it is willing to essentially give away the Corona brand to a competitor[32] just to make sure its $20 billion purchase gets past regulators.

That could be desperation. But that also could be a sign that the rush to invest, buy out and merge is on.

Related Reading

Jeff Reeves[36] is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[37] Write him at[38] or follow him on Twitter via @JeffReevesIP[39]. As of this writing he did not own a position in any of the stocks named here.

  1. BRK.A:
  2. BRK.B:
  3. HNZ:
  4. JNJ:
  5. GE:
  6. DVA:
  7. LMCA:
  8. BKW:
  9. taking the company public once again in 2012:
  10. CAG:
  11. A week or so ago:
  12. LBTYA:
  13. VMED:
  14. AAMRQ:
  15. just announced a deal to merge:
  16. LCC:
  17. ORCL:
  18. APKT:
  19. DELL:
  20. will go private for a whopping $24.4 billion:
  21. MSFT:
  22. CMCSA:
  23. for $16.7 billion:
  24. told American Banker:
  25. PFE:
  26. a stunning $68 billion for rival Wyeth:
  27. KRFT:
  28. late 2009 bid for Cadbury:
  29. MDLZ:
  30. ABV:
  31. GPMCF:
  32. essentially give away the Corona brand to a competitor:
  33. Is “Merger Monday” making a comeback:
  34. will last through 2015.:
  35. let’s not read too much into the almost yearly merger news:
  36. Jeff Reeves:
  37. “The Frugal Investor’s Guide to Finding Great Stocks.”:
  39. @JeffReevesIP:

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