The Best Way to Play Merger Mania

We’ve had a flurry of activity in the last several days—no surprise considering that corporations are awash with cash, and they are looking for a smart way to reinvest this money. Some corporations are using that cash to buy back their stock, while others are hiking up their dividend payments.

I’m a big fan of each of these strategies. They benefit the individual investor and my palms itch in anticipation of the impact on earnings and the profits that come from it. But there’s another very reasonable use for this cash that is becoming very popular right now and is making big splashes in the headlines—mergers and acquisitions.

Take a look at some of the latest deals hitting the market:

Today, Avago Technology (AVGO) confirmed plans to purchase Broadcom (BRCM) in a $37 billion cash-and-stock deal. It will pay $17 billion in cash and about 140 million Avago shares (about $20 billion). When this deal closes, it will create the most diversified communications company in the semiconductor industry, as Broadcom manufactures chips for tablets and smartphones.

Yesterday, Expedia Inc. (EXPE) revealed that its shareholders approved the merger of Orbitz (OWW) and Expedia. The two companies had previously announced their plans to merge in February. Expedia will acquire Orbitz for $12 per share, or $1.34 billion. Expedia is also in the process of buying Travelocity for $280 million. Once these mergers are completed, Expedia and Priceline will be the two remaining major players in the online booking industry.

Yesterday, Reynolds American Inc. (RAI) revealed that it expects to finalize its $27.4 billion acquisition of Lorillard Inc. (LO) in June, now that antitrust officials have signed off on the deal. The combined company will bring in more than $11 billion in revenue and $5 billion in operating income each year. Reynolds American is projecting $800 million in annual savings within the first year of the merger. With a 33% market share, Reynolds American will also catch up to Altria Group, the top tobacco company in the U.S.

On Tuesday, Charter Communications (CHTR) announced plans to buy Time Warner Cable (TWC) for $55.3 billion. Including Time Warner’s debt, this deal is valued at $79 billion. Charter is also looking to Bright House Networks for $10.4 billion. Once these three cable companies are integrated, Charter will second only to Comcast in cable and internet.

Last week, AT&T (T) announced that it’s buying DIRECTV (DTV) for $95 per share. The total value of the deal is $67.1 billion, including DIRECTV’s net debt. Three years after the companies are combined, AT&T expects annual costs saving of $1.6 billion. To help appease regulators, AT&T is divesting its interest in America Movil.

When you own a stock that is involved in a merger or acquisition—or even if your stock has rumors of M&A activity—it can feel like winning the lottery. However, although these companies are high in the headlines now, that doesn’t mean that all these stocks should have been purchased prior to their M&A activity.

In fact, only two of these companies earn A ratings—find out which three by visiting my Portfolio Grader tool.  


Louis Navellier

Louis Navellier

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