Ignore Icahn: Shark Tank Investors Have Mergers On Their Minds

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Carl Icahn made his fortune cutting up perfectly good companies like TWA, U.S. Steel and even eBay. Now he’s bet $400 million that the entire U.S. mall retail channel is ready for the corporate scrap heap.

I think he’s wrong on the mall strategy. While I laid out the logic in last week’s Millionaire Maker show, (Replay the episode) more broadly, this is not the time for Icahn’s reductive strategy.

The real money on Wall Street right now is not about finding the right giant to carve into easily digestible pieces like a Thanksgiving turkey. As we’ve seen this week, it’s all about pushing companies together to create scale and unlock the competitive landscape.

And until that blockbuster merger materializes, investors should spend their time feeding resources into the companies in their portfolio to nurture the organic growth cycle.

After all, the math is basic. When you get bigger, you generate wealth. Getting smaller may unlock that value, but that’s a one-time transaction where the Carl Icahn types cash out and everyone else goes back to the starting line.

This is a season of mergers, not divestment. Scale and synergy are worth paying for now. I’m thrilled. The people who invest alongside me should be excited as well.

M&A Speeds the Way

As I said on Reuters TV on Nov. 25, the next few months could unleash a big wave of mergers and strategic acquisitions. (Watch the segment.)

For one thing, financing conditions are unlikely to get any easier. The Fed might not be in a hurry to raise interest rates, but the futures market suggests that the cuts have stopped for the foreseeable future.

One way or another, the clock is ticking faster now on deal negotiations. Merger-makers have limited time to take advantage of what could be the lowest interest rates in our lifetime. Every month counts.

And in a world where organic growth is tepid at best, synergy is essential for any company that wants to show Wall Street real year-over-year progress. Sometimes, that means bolting competitors together to share costs and boost aggregate margins. Occasionally, more dramatic opportunities emerge.

We’ve seen French luxury conglomerate LVMH Moët Hennessy – Louis Vuitton SE (OTCMKTS: LVMUY) pay $16 billion, or roughly 3.5 years of revenue, for Tiffany & Co. (NYSE:TIF), largely to get that kind of bolt-on advantage.

While LVMH is doing fairly well with the elite retail brands it has, at this scale, it needs one acquisition like this every year just to maintain 7 percent sales growth. Joining the conglomerate may not have widened Tiffany’s margins more than 0.5 percent, but it was still enough to create an extra $20 million in pure profit.

That $20 million would not exist without this deal. If LVMH ever spins Tiffany back out Carl Icahn style, the synergies will evaporate. Value will be destroyed.

Then there are the more visionary combinations. Charles Schwab Corporation’s (NYSE:SCHW) purchase of TD Ameritrade Holding Corp. (NASDAQ:AMTD) is clearly in this category.

On their own, both of these brokerage firms are feeling the pressure from declining interest rates and their joint effort to cut commissions in order to compete for investor accounts. Together, they can squeeze enough income out of their staggering combined footprint ($5 trillion in client assets) to get growth back on their side.

Nobody else in their world has that scale. Whichever strategic course they end up setting, every other stock trading platform will need to make room for them. “Schwab Ameritrade” will call the shots. That’s worth the price of this deal.

We can contemplate similar mergers of near equals in any industry where leadership has stalled. Ultimately, I suspect that Uber Technologies Inc. (NYSE:UBER) and Lyft Inc. (NASDAQ:LYFT) will go this route.

Neither ride sharing company is making money on its own while they fight for a competitive edge. Together, they’re stronger and their combined resources can be harnessed more efficiently.

Meanwhile, established leaders in industries like biotech will keep absorbing the most attractive clinical programs at an early stage and at a bargain price when compared to what these therapies will be worth one day.

Sector by sector, theme by theme, it’s a great feeling when acquisitions accelerate. And it doesn’t have to be competitors who are doing the buying, either.

Walgreens Boots Alliance Inc. (NASDAQ:WBA) is apparently considering a takeover bid from private equity firm KKR & Co Inc. (NYSE:KKR). Those negotiations probably wouldn’t be happening if Walgreens and Boots hadn’t gotten together in the first place.

We’ll just have to see. While I don’t chase “likely acquisition targets” like a lot of investors, I always welcome the deals when they come. After all, I have a pretty good track record of picking the companies that will get acquired.

Over the last decade, I’ve found over 100 stocks for my subscribers that ultimately got acquired. These companies were generally acquired at a 45-50 percent premium above my initial recommendation price.

Most of them have come via the GameChangers list, but several have shown up on Value Authority screens as well. That’s one buyout every five weeks somewhere in my universe.

Let Carl Icahn try tearing great stocks down. We’ll only put them back together.


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