Saturday, January 17, 2009

M&A May Become 2009's Only Positive

The economic horizon appears bleak. Yet many money managers reassure us the the market is a discounting  mechanism and will turn upward six months before the economy improves. At some point these optimists will be proven correct. But I fear that the second half of 2009 will not produce the market wide results they forecast.

The bright spot of 2009 will be in mergers and acquisitions. Only the strongest of corporations will be able to participate on the buy side as this year's buyouts will not be heavily debt influenced. The buyers will need strong balance sheets, lots of cash, and impeccable reputations that induce cautious bankers to lend. 

As the world's economies are in the midst of slowing business activity, corporate growth has to come from somewhere and many companies will choose to buy it as opposed to concentrating on organic growth. Strategic and bolt-on acquisitions will accelerate as the year develops. The strong will become stronger.  We will see similar combinations to Mars/Wrigley and InBev/Bud; substantial corporations becoming larger.

While owning the acquirers with their long term growth prospects and dividends is not a bad strategy, owning the Buds and Wrigleys of 2009 will go a long way to improve a portfolio's performance in a difficult year.

Pundits often opine that 2009 will be the year of the stock picker. But buy and hold stock pickers better be buying for 2010 and beyond and not troubled by further declines during the current twelve months. I'm more comfortable with lots of cash, a core portfolio of leading, dividend payers, a steady stream of covered call income, and finally, some selected buyout guesses and their advisor.

The buyout guesses are just that, guesses. Most will be wrong, so they still need to be worthy companies. Opportunities to extend a brand or add volume while minimizing duplication will look attractive as ways to keep excellent companies growing in a recession. Activist shareholders will do their part in prodding organizations to combine. Likely industries ripe for consolidation are energy, medical technology/instruments, and consumer staples. Lots of companies to choose from.

A narrower choice is among the helpers. Which bank will gain share at the expense of the American investment bank melt down? For reasons that I've mentioned before, Lazard's lack of proprietary trading and lending and their worldwide reach, LAZ will benefit from the most active part of the market in 2009-10. Buying the helper is easier than finding a seller, so that's what I'm doing.

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