One of the most challenging aspects of building a successful business, especially in a heavily regulated industry, is gaining the regulatory approvals necessary to create something large enough to provide significant financial returns to its investors. Increasingly, as the economy continues to recover from the Great Recession, companies are finding ways to merge and create larger entities that branch out into existing industries.
Recent Mergers and Acquisitions
There have been a number of landmark mergers and acquisitions in the past 2 years. American Airlines (NASDAQ:AAL) and US Airways Group (formerly LCC) merged to form the world’s largest airline (in terms of fleet size, customers served, scheduled miles flown and number of employees) in October of 2015.
Around the same time, Google restructured itself into an arm of Alphabet (NASDAQ:GOOGL). This article, covering the earth-shattering shift, discusses how Google repositioned itself to better focus its broader efforts and create a service-centered company structure.
After its acquisition of companies like Nest and YouTube, it’s clear to see that the next evolution after a series of mergers is structuring the company around its various missions. For Alphabet, these missions fall into four categories: consumer internet software, internet hardware, venture funding and business technology.
Google has mastered the art of acquiring a diverse range of companies and taking on multiple missions without losing focus and becoming a Jack of all, Master of none company.
It’s not just transportation and technology companies that are entering the merge and refocus cycle. According to Forbes, MGM Resorts International (NYSE:MGM) acquired the remaining 50% share of the Borgata Hotel, Casino & Spa. After the acquisition is finalized, MGM will immediately enter the refocus phase of the merger/acquisition cycle by transferring ownership of the property to their property investment arm: MGM Growth Properties LLC.
Profiting from the Merger and Refocus Cycle
As an investor, every time I hear about a merger or restructuring I wonder how I can profit. In some cases, I’ll invest in the companies that are about to be acquired. For example, LinkedIn’s (NYSE:LNKD) shares rose in January based on the speculation that activist investors would take hold of the company. Then, as Microsoft (NASDAQ:MSFT) announced its intent to purchase LinkedIn, the shares jumped once again.
When I look for companies that are likely takeover targets, I try to avoid repeating the mistakes of past markets - as with steel stocks:
“The cyclical [negative] trend of steel stocks has resulted in the suffering of steel manufacturers in the U.S. This is in part due to the flooding of cheaper steel imports from different countries around the world.”
The steel industry at the turn of the century had a similar profile to many tech stocks meeting their end in lucrative buyout.
Is Groupon (NASDAQ:GRPN) the next Nucor Corporation (NYSE:NUE)? Will these floundering tech giants, the market darlings of yesteryear, be able to pull themselves up by their bootstraps? Or, as in Nest’s case, be acquired by a much bigger player in the market?
Investing in struggling stocks, with the hope that a lucrative buyout will come down the line and provide an infusion of cash, is a risky game. But, it could be lucrative if you can get the timing just right. Twitter (NYSE:TWTR), Yahoo (NASDAQ:YHOO) and Groupon are at the top of my watchlist.