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With mergers and acquisitions up over 10% year-over-year in 2013, are we buying into a market with justified valuations?

It seems to be a distant memory where the titans of Wall Street pulled in multi-million dollar merger and acquisition deal fees. It almost seems to be out of style. Then why are we hearing rumors of wars rumbling the Street all the way uptown through Park Avenue?

The easy answer is this: Merger and acquisition activity…is back. The first quarter of 2013 dialed in $542 billion in merger and acquisition deals, which represent a 10% increase over the first quarter of 2012. Over $128 billion of that number comes from emerging markets like Brazil. According to the S&P, the investment banks have fared poorly in this increase in activity, booking first quarter fees 11% lower than the same quarter last year.

Leading the charge in mergers and acquisitions are the following sectors: energy and power, real estate, and technology.

Sector

M&A Increase (YoY)

Energy & Power

13.4%

Real Estate

13.2%

Technology

12.3%

Source: Thompson Reuters

The energy and power sector got a nice boost in merger activity through the merger of Copano Energy (NASDAQ:CPNO) and Kinder Morgan (NYSE:KMP). This deal is valued at around $5 billion with Citigroup (NYSE:C), Barclays (NYSE:BCS), and Jefferies (JEF), as advisors.

Real estate valuations were buoyed in 2013 by rising new home sales figures and healthy merger and acquisition activity. One such deal is General Electric's (NYSE:GE) sale of NBCUniversal's floors in 30 Rockefeller Center and CNBC's headquarters to Comcast (NASDAQ:CMCSA). This deal is worth $16.1 billion, and is valued as the third highest so far in 2013.

The tech sector, a laggard in these rising markets, saw its fair share of M&A activity early on this year, with Michael Dell taking his company, Dell (NASDAQ:DELL), private for over $21 billion. In a note to shareholders, the board of Dell opines, "While we continue to recommend the current Silver Lake/Michael Dell transaction, and to work toward completion of that transaction, we will also work with Blackstone (BX) and Icahn to seek to develop a definitive alternative proposal that provides an even more compelling value proposition for Dell's shareholders. Our goal was, and remains, to ensure that whatever transaction is consummated is the best possible outcome for Dell's shareholders."

So what do we have to look forward to for the rest of the year?

To date, the four biggest deals on Wall Street have contributed approximately $100 billion to the 2013 aggregate deal value. That is a small drop in the bucket for the expected activity for this year. According to the IMAA Institute, the announced worldwide merger and acquisition activity should venture over $2 trillion. This number is over 50% lower than 2007 levels, where the Dow Jones Industrial Average topped out just over 14,000. Greater levels now should indicate a higher number of transactions and aggregate value.

(click to enlarge)Source: IMAA-Institute

Even with the numbers giving mixed messages, we have to focus on the fact that merger and acquisition activity is off to the quickest start since 2000, according to DealLogic.

Right now, companies looking to acquire or merge should be taking advantage of low financing costs. As we witness the growth in M&A activity, we can see the following:

  1. Leading indicators that there is sustainable economic growth
  2. Strength in the equity markets
  3. Renewed corporate confidence
  4. Companies are flush with cash

All of the above points are good signs for equity investors. And if we look at the current rumors surrounding future mergers and acquisitions, the news keeps getting better.

So far we hear Hulu is on the short list of targets by companies like DirecTV (NASDAQ:DTV) and Time Warner Cable (NYSE:TWC). Even AT&T (NYSE:T) is reported to have an interest in the online video-streaming site as well. The deal is currently at $1 billion, which is the offer DirecTV has made, according to Bloomberg News.

Honeywell & Alere Merger Possibility?

Honeywell's (NYSE:HON) HomMED division is reported to be looking into acquiring patient monitoring companies like ActiveCare (OTCQB:ACAR) and Alere (NYSE:ALR).

(click to enlarge)

This small division of Honeywell is part of a growing trend towards active, real-time patient monitoring.

Honeywell HomMed provides products, software, and peripherals for telehealth and remote patient care applications. It offers, amongst other related services, a remote patient care monitor that provides Web-enabled, on-demand access to disease-specific symptom management and measures heart rate, blood pressure, and weight. The company also provides health center kiosks that enable corporate and healthcare-related facilities to monitor the health of their residents, employees, and members. In addition, it offers Sentry, a telehealth monitor that collects and transmits data on heart rate, blood pressure, oxygen saturation, temperature, and other vital signs; Genesis, a telehealth monitor that automatically prompts in-home users when it's time to take their vital signs and accommodates multiple medical peripherals; and Central Station, a diagnostic software for managing patient care that records and tracks the information collected on a patient. The company serves patients and families, physicians, home health care clients, and senior living communities.

Their number one competitor in the patient monitoring space is Alere.

(click to enlarge)

This company earned well over $2 billion in revenue in 2012, which makes Alere a formidable player in this new, highly segmented and barrier industry of real-time patient monitoring.

(click to enlarge)

Where HomMED focus is on the more cardio-side of patient monitoring, Alere offers a diverse range of products and services that would complement Honeywell HomMED's portfolio perfectly.

Alere has taken the patient monitoring business seriously. Since the 2009 fiscal year, they have increased revenue by 50% to where it stands today, and kept gross margins at or above 50%. This steady increase in business, coupled with the current changing healthcare environment keeps Alere as the front runner into the eyes of potential acquirers.

The Salt Lake City patient monitoring company, ActiveCare (OTCQB:ACAR), has officially become the world's largest provider of cellular glucometers. Their reach into the horizontally juxtaposed business to Honeywell HomMED is the monitoring of diabetics. They have had tremendous success in penetrating that market as the flight to self-insurance has kept small and mid-sized businesses-along with government organizations and municipalities-in constant need of keeping their claims and coverage costs low. This success is evident in ActiveCare's bottom line, which has ballooned to a record-breaking first quarter for this company, posting $4 million in gross revenue.

The logic here is Honeywell HomMED is a small piece in a big puzzle that makes up the parent company, Honeywell. But this small piece accounts for a move into a field of patient monitoring dominated by GE and Alere. With only $13 million in revenues for this subsidiary of Honeywell, and a growing healthcare need for patient monitoring, it behooves HomMED to take close looks at their smaller, niche competitors to continue their penetration into this market without missing a step or wasting time and research and development costs.

"The purchase of ActiveCare or Alere, Honeywell would add tens of thousands of members to HomMED's patient/member base, which then they would be able to further monetize off of that member base, and possibly triple net revenue for this division," according to Michael Tu, buy-side analyst for BlueHill Strategic.

Is SodaStream A Buyout Target?

PepsiCo (NYSE:PEP) and SodaStream (NASDAQ:SODA) have been doing the M&A dance with rumors swirling around a possible $2 billion deal to purchase the in-home beverage maker, ironically following a decrease in U.S. soda consumption.

(click to enlarge)

SodaStream engages in the development, manufacture, and sale of home beverage carbonation systems that enable consumers to transform ordinary tap water instantly into carbonated soft drinks and sparkling water. It offers a range of soda makers, exchangeable food-grade carbon-dioxide cylinders and refills, reusable carbonation bottles, and various flavors to add to the carbonated water, as well as sells additional accessories, such as bottle cleaning materials and ice cube trays. The company sells its products through approximately 60,000 retail stores in 45 countries.

(click to enlarge)

The fact PepsiCo has been overtly looking into SodaStream at current valuations bids us to take a close look at the underlying financials of this pop-drink maker. Currently, it is trading close to 6 times Tangible Book Value while producing over $466 million in revenue. This places SodaStream at a marginal discount to their peers.

(click to enlarge)

With the market for soda becoming soft in the U.S., PepsiCo must make strategic investments into niche businesses in order to remain competitive and keep a steady customer base to maintain cash flow. Because SodaStream is cash positive by over $38 million in the twelve months ending March 2013, we can assume, without the need for advanced calculus, that PepsiCo would not only benefit from this business by filling a gap in their current line of products, but also add a growing business and consolidate efforts in over 45 countries, while building their bottom line through this acquisition.

Conclusion

Once again, we see big names entering the merger and acquisition arena. This bodes well for bullish investors that have been waiting for current market value justification and foundation. With the Dow Jones holding precipitously over 15,000, we have but one caveat: history suggests spikes in merger and acquisition activity are often followed by steep declines.

Nevertheless, the current trend of increasing M&A activity, market sentiment, and bullish "risk-on" trading will soon turn the big investment banks like Goldman Sachs, J.P. Morgan (NYSE:JPM), and Lazard (NYSE:LAZ), toward higher commissions. So as investors should, embrace the current market trend, but be weary of any bubble in the merger and acquisition market.

With the pace of activity well on its way to reach over 30,000 announced deals and $2 trillion in value, we still fall below the watermarks set in 2000 and 2007. I would safely assume there is no "spike" currently and we have more upside to enjoy.

Source: M&A Activity Makes Movers Out Of Shakers