How to Profit From the Upcoming M&A Boom?

RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In spite of low interest rates, rising equity prices, and general economic improvement, mergers and acquisition activity has remained relatively weak for the past few years. Although we have seen a few deals surface this week, we, at Valuentum, believe activity could accelerate in the coming months, especially if companies begin to recognize the possibility of rising interest rates, as outlined in the following piece: “The Impact of the US Housing Recovery Cannot Be Underestimated.” Let’s take a look at some possible targets.


After going public via a spin-off from Kraft  just last year, Mondelez (NASDAQ: MDLZ) has already garnered attention as an acquisition target. Given the simplicity and historical legacy of many of its brands, including Nabisco, Oreo, Cadbury, and Trident, as well as the company’s exposure to emerging markets, we believe the company will garner a lot of attention from suitors for a potential merger.

Over the course of history, the brands of Kraft and Nabisco have been favorite acquisition targets. In fact, Kraft itself began as a roll-up strategy. We don’t anticipate that former owner Altria will be interested in making a bid, but we do believe snack and beverage giant Pepsi (NYSE: PEP) could be a suitor. In our view, several synergies exist between Pepsi’s enormous Frito-Lay snack business and Mondelez. CEO Irene Rosenfeld used to hold the chief executive position at Frito-Lay, making negotiations likely to occur. More importantly, we think Pepsi has an expertise in the emerging markets that Mondelez relies upon for growth.

Of course, an acquisition of Mondelez would be nothing short of a blockbuster for Pepsi. Even the “smaller” Mondelez currently sports an enterprise value of $71 billion. Any deal for the company would likely require a substantial equity portion. Still, shares of Pepsi have lagged both the S&P 500 and the Dow, suggesting a bold move could be in order.


Consolidation is a long-term trend in the luxury space, and American retailer Tiffany (NYSE: TIF) looks like it could be next. With an enterprise value of $10 billion, Tiffany is small relative to its European peers, and it has not pursued the same conglomerate-like growth strategy.

Richemont has all but eschewed the idea, labeling Tiffany as not “high-end” enough to be coupled with brands like Cartier, Mont Blanc, and its luxury watchmakers. Another competitor, PPR (possibly renamed Kering), doesn’t seem like a natural fit to us either. PPR owns dominant brands like Gucci, Saint Laurent, Bottega Vanetta, and Boucheron, but we aren’t sure if Tiffany would fit in to a very European-centric brand portfolio.

We believe a much more natural fit would be Louis Vuitton Moet Hennessey. LVMH  is the true juggernaut in the luxury space, and it has had no problems acquiring disparate brands ranging from Dior and Bulgari, to its merger with Moet in the mid 2000’s. While LVMH has a complex ownership structure and has also coveted Hermes in the past, we think LVMH could reduce overhead expenses at Tiffany with little difficulty. Tiffany also fits nicely into the discreet luxury category that is gaining steam in China—an area where LVMH’s products tend to be a bit more conspicuous.

We think any deal for the company would likely require a price tag upwards of $11 billion, which doesn’t leave tremendous upside from current levels. While an acquisition can often act as a strong catalyst for positive price movement, we consider it secondary to the firm looking undervalued on a fundamental basis, which Tiffany is not at this time. Therefore, we won’t be looking to add the name to the portfolio of our Best Ideas Newsletter.


As the market for Uggs has matured, footwear maker Deckers (NASDAQ: DECK) faces a litany of issues on the cost front. Essentially, the company is dealing with rising input costs with decelerating sales growth—a recipe for disaster. What the company needs is supply-chain efficiency gains in order to boost gross margins, and an international distribution network to pursue global sales growth. The market agrees, and retail conglomerate VF Corp continues to be floated as the likely suitor.

However, VF Corp is run by a strong management team, and we do not think the company has to make an acquisition. In fact, the company recently posted record first quarter results, and Deckers could put downward pressure on gross margins. We think there’s a strong possibility that Deckers is no longer an independent company by year’s end, but we’d need to see the share price fall so likely buyers like VF Corp and private equity firms would be able to score a better deal.

Boston Beer

With North American lager volumes stagnating, consumers (and brewers) are constantly in search for new, premium craft beers. Boston Beer (NYSE: SAM), the parent of Sam Adams, isn’t the underdog it once was, but compared to global giants like SABMiller and Anheuser Busch InBev, Boston Beer is a small blip on the radar. Still, we know ABI or Miller would love to get its hands on the powerful brand and its sales of potentially more than $600 million this year.

However, two large obstacles stand in the way of the deal. First, the anti-trust regulators already prevented a merger of Bud and Corona, citing that it would raise prices of beer, negatively impacting US consumers—even though independent brewers seem to be popping up left and right. We highly doubt a deal could get past regulators.

The other issue we see would be willingness to sell. Boston Beer already trades at 27x forward earnings, and we think investors would need to see an offer in the 40x-50x range to get excited. Shares have performed exceptionally well during the past five years, increasing 280%, and we think the board would be reluctant to cap further upside. Plus, we think the smaller company could develop new product lines or make smaller craft acquisitions that wouldn’t be shunned by regulators.

Putting it all together…

Although we love investing in situations where M&A is a potential catalyst, we only do so when the company is already undervalued. It is just too risky to bet on a takeover target that is already trading above its intrinsic value, so none of the above situations fit our criteria, a high score on the Valuentum Buying Index. Situations like Collective Brands and EDAC Tech, where we reaped significant gains in the portfolio of our Best Ideas Newsletter, exemplify the powerful combination of purchasing undervalued stocks with M&A catalysts (improving technical/momentum characteristics).

Our list of stocks with low EV/EBITDA multiples and high returns on invested capital highlights potential private equity investments. Bridgepoint and Monster (the jobs board) could make sense as private companies where management could simply harvest the cash flows without the market worrying about regulation (BPI) or fierce competition (MWW). Further, both firms could be scooped up for less than $1 billion, making financing for a deal fathomable. Still, neither looks cheap on a discounted cash flow basis, and we see long-term fundamentals trending downward.

PepsiCo has quenched consumers’ thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.

RJ Towner has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and PepsiCo. The Motley Fool owns shares of Boston Beer and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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