Gabelli's Recent Buys: Merger Arbitrage and Defensive Retail

by: Zvi Bar

Mario Gabelli is a well-known and respected fund manager and a billionaire. Mr. Gabelli’s wealth largely comes from his mutual fund company, GAMCO (NYSE:GBL). Mr. Gabelli usually prefers value investments and those with strong fundamentals. Gabelli’s funds made some new acquisitions in 2011, which you may find helpful in identifying where value investors are now looking. These investments appear to indicate a reluctance to take on any additional risk.

The Positions

The first large investment by Gabelli was in Atheros Communications Incorporation, a provider of semiconductor and system solutions for networks. Qualcomm (NASDAQ:QCOM) acquired Atheros, and made it a wholly owned subsidiary. This investment by Gabelli appears to be a merger arbitrage position, where Gabelli invested after the announcement but before the completion of the acquisition. This strategy often provides investors with a relatively high short-term return in exchange for the risk that the M&A activity will not go through. This one did.

The next large investment by Gabelli was in Beckman Coulter Incorporation (NYSE:BEC), a manufacturer of biomedical laboratory testing equipment. Danaher (NYSE:DHR) is anticipated to acquire Beckman Coulter, so this investment appears to also be a merger arbitrage investment.

The third large investment by Gabelli was in Lubrizol (LZ) is a specialty chemical company that makes distillates and compounds for engine oils, lubricants, coatings, medical products and other uses. Lubrizol has been in the media since Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) announced a buyout and then because David Sokol had to resign due to undisclosed personal investments in Lubrizol. Similarly, Paulson & Co. acquired a large position in Lubrizol during the first quarter of 2011. Both managers appear to be making merger arbitrage investments.

O’Reilly Automotive Incorporation (NASDAQ:ORLY) is a U.S. retailer of automotive parts, tools and accessories. This investment may be seen as defensive, as this retailer is likely to do better in an environment where individuals repair older vehicles rather than buying a new one. The company has more than doubled since the start of 2009, and institutions have owned a large percentage of O’Reilly for a while.

Gabelli and his funds appear to prefer the small, but relatively likely short-term appreciation in merger arbitrage investments. Three of the four new positions are merger arbitrage investments, indicating that Gabelli is not finding many great new places to park money. The fourth investment is in a defensive retailer. While these defensive investments may not double in a year, their relative margin of safety and probably increased returns appeal to the value orientation of Mario Gabelli.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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