My current box set addiction is Deadwood – a TV series about a gold rush in the American mid-West, with desperate men panning the streams for gold and trying to stay alive as rivals move in. They spend hours sieving stones from the river bed looking to find glints of the shiny stuff. As a fund manager in these volatile times, I can feel more than a little empathy as I try to generate positive returns in what are likely to be flat or falling markets.
Never has investing purely in indices seemed less appropriate. We need to identify investments that will attract a premium in a world of instability and slower growth. The need to generate alpha – that rare beast – has therefore never been greater.
Of course, alpha can be generated by avoiding the disasters (something you can’t do with a tracker); this is an especially legitimate tactic in today’s world where earnings disappointment is punished heavily. But let’s try and be a little more proactive and take on one of the sacred cows of investing: targeting mergers and acquisitions.
Most, if not all, equity fund managers will deny they target possible takeovers, saying stocks must make it into the portfolio on its own merits. Takeovers are simply a bonus, they would argue. Others say they don’t like takeovers because they reduce portfolio diversification and a potential source of rising earnings. In fact, I can’t remember a manager stating they specifically look for companies that may be taken over...
Is this a cop out? Is it impossible? Is it legitimate tactic/strategy to look for stocks that could be “taken out”? If it is, how should one go about it?
Why do mega-caps take over small fast-growing companies? This is clearly slightly rhetorical, but my point is they do tend to be companies with slowing structural growth, looking for a catalyst to halt the decline. The history of markets is littered with poor acquisitions driven by desperate men and women panning for revenue growth.
I believe identifying key trends and – dare I say – fashionable thinking, are ways one can try to identify targets. ITV may be one example. ‘Quad play’ is the buzz phrase in the media sector at the moment. This is a marketing term combining the triple play service of broadband internet, television and fixed line telecoms with mobile phone businesses. With ITV’s back-catalogue of content and access to mainstream audiences, surely this would be an attractive addition to one of the giant media companies in the US. Could Netflix be a buyer, perhaps?
Spiv investing or a legitimate approach? I think the latter as one of a number of idea generators. Even if ITV is not taken over, it’s actually a really well-managed business with good prospects for revenue and margin growth. If there were two solid companies I liked, but one was a likely takeover target, I would prefer that one. It’s like a shiny stone in the sieve, perhaps.
At least in this game you don’t get shot by your competitors!
Have a happy Easter!
