Updated Monday, July 28, 2014 as of 6:31 PM ET
Blogs - The Product Guru
M&A Funds Have More to Choose From in 2011
Bank Investment Consultant
Thursday, February 10, 2011
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Earlier this week, an email landed from Footnoted, unit of Morningstar that forecasts mergers and acquisitions, touting its record so far this year.

And it’s a pretty impressive record. In mid-January, it published a top-10 list of potential takeover targets for 2011. And now, less than a month later, just eight are left. Smurfit-Stone Container Corp. was the first one of its 10 to get acquired. Less then two weeks after the list came out, the cardboard company agreed to be acquired by RockTenn Co. for $3.5 billion. (A group of hedge funds that own about 9% of Smurfit are reportedly opposing the deal.)

Then Pride International, another company on the list, agreed to be acquired by Ensco for $7.3 billion. Both companies are in the offshore drilling industry.

So, two out of ten targets have been acquired in the space of a month. Pretty impressive, indeed. But since Footnoted has a strong focus on a bottom-up analysis and casts a wide net, it’s difficult to glean an overall lesson here. Its picks are across all sectors and range in market caps from $389 million to $6 billion. (Footnoted essentially pores over SEC filings and looks for clues of possible acquisitions, including changes in executive compensation agreements, purchases by large stock investors, and agreements with wholesalers.)

But others do take more of a macro view. According to Thomson Reuters, last year saw a 22% increase in M&A worldwide. And another 36% increase is expected this year driven mostly by financials and real estate, according to a spokeswoman, who cited its 2011 Outlook for Investment Banking Services survey.

Specifically, in 2010 there was a total of $2.45 trillion in M&A, compared to $2.0 trillion in 2009, according to statistics from Thomson Reuters. Although that increase still did not reach 2008’s level of $2.87 trillion, and fell far short of 2007’s $4.16 trillion, it still represents a major increase in a year-over-year view.

As always, the question for the individual investor and his advisor is this: How do I get in on the M&A action in a smart way? One thing you shouldn’t do is try to emulate Footnoted’s approach in looking for specific companies. Unless you or your client really have nothing but time on your hands, as well as an expertise in accounting and some fancy database skills, you’d be looking for needles in a haystack.

But there are various mutual funds that focus on M&A. Or, taking a page from Thomson Reuters’ survey, you could look at financials or the real estate sectors.

But even more importantly, make sure than any M&A investment makes sense in the clients’ portfolios. Make sure they view it as a way to diversify their portfolios since these investments are not likely to move in tandem with the overall market.

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