With bullish economic data emerging from China and record capital inflows into the world's exchanges, there should be even more takeover activity around the globe in 2013, particularly in the energy sector.
Compared to other countries, China has a stronger currency, $3.2 trillion in foreign reserves, billions more being booked each month in export earnings, and an even more powerful demand for oil, coal, copper, and other commodities. It is not just China, either, as private equity groups and hedge funds around the world are taking advantage of low interest rates to pursue deals. Knowing what to look for can assist shareholders and others in profiting from global mergers and acquisitions activity.
It seems that three of the most attractive sectors for mergers and acquisitions are commodities, health care, and technology. China has been very active in the energy sector. China National Offshore Oil Company (CNOOC) bought Canada's Nexen for $15.1 billion cash. Opti Canada, an oil sands operator, was also purchased by CNOOC for $2.1 billion. Sinopec (SHI) bought the British division of Taliman Energy for $1.5 billion.
It is not just the insatiable need for energy that is driving dealmakers, however.
ObamaCare in the United States has American healthcare firms looking for opportunities abroad. United Health Group (UNH), the biggest insurer in the United States, bought 90% of Amil Participacoes, Brazil's largest health care network. Amil Participacoes has 5 million customers, 22 hospitals, and two more under construction.
In the pharmaceutical sector last year, there was a total of $146 billion in deals. Some of the major ones:
*Watson Pharmaceuticals (WPI) acquired Actavis for $5.9 billion
*GlaxoSmithKline (GSK) purchased Human Genome Sciences for $3
As to the high tech arena, 70% of SprintNextel (S) is being acquired by Softbank, a Japanese telecommunications company, for $20.1 billion. The Cloud drove many smaller deals, last year. The allure of the spectrum should result in even more takeovers for wireless companies.
While each suitor is looking to fill unique, compelling needs, there are ways to prepare to gain from being the owner of a takeover candidate. A key consideration is a lack of debt. Buyers want capital to go to expanding the business operations, not paying off creditors. Certainly, there are exceptions, as Sprint-Nextel is larded up with debt, but this is important factor, particularly for targets with modest capitalizations.
Also critical for smaller entities is a lack of pending legal action or regulatory proceding. This has throttled many potential takeovers. Buyers can deal with a balance sheet that is not pristine, but no company wants to pay a premium for unknown legal or regulatory liability.
There are no secrets as to which businesses will see the most corporate transactions. With The Patent Cliff, drug companies need to fill out their pipelines with products from other firms. China's unquenchable thirst for commodities has it looking for buys around the world. The Cloud and Big Data will have high tech concerns searching for entities to expand their offerings. Natural gas is cheap, but the pipeline networks in China and India are minimal, resulting in the companies that can build them out being very attractive. With quantitative easing by global central bankers unleashing floods of paper monies, gold and silver firms are very much in demand, especially by larger firms in those industries with declining production of the metals.
For both the employees and shareholders, being taken over can be a very lucrative exit strategy. Like anything in investing, it is all supply and demand. The most voracious demand around the world now is in the commodities, technology, and healthcare sector. The firm that provides that supply will be able to command a premium in the marketplace.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.