Mutual Fund Investors Reap M&A Rewards

Jun 25, 2014

Thanks to the recent spate of takeover deals, mutual fund investors have seen a new catalyst to higher stock prices and bigger portfolio gains. Judging from the building momentum, we may still be in the early innings as far as M&A is concerned.

Let’s take a look at the graph below to see how much announced M&A activity we have witnessed between Jan. 1 and Jun. 16 since 2007 and why we are on pace to have the best deal year since the financial crisis of 2007/2008.

From an investment banker’s perspective, putting out deal opportunities in this climate isn’t that hard; when you factor in the low interest rate environment, making deals is much easier to finance with cheaper debt. Also, it doesn’t hurt that corporate America is sitting on big piles of cash to sweeten the deal terms.

The Hillshire Brands Bidding War

Getting back to mutual fund investors, let’s look at some of the funds reaping nice rewards from some of the most recent high-profile deals. The bidding war for Hillshire Brands (HSH), won by Tyson Foods (TSN), was great for shareholders in American Century Investments Equity Income Fund C Class (AEYIX), owner of nearly 2M shares of HSH and whose fund is up over 7% YTD. American Century Funds in total own 4.4% of all Hillshire Brands outstanding shares, second only to Vanguard Group’s family of funds owning 5.67% of the company’s shares (as of Mar. 31, 2014).

Other mutual funds owning a decent chunk of Hillshire Shares and celebrating the bidding war that produced a $63 per share cash offer are below:

Other M&A Action

Another big deal grabbing headlines recently was Medtronic’s (MDT) $42.9 billion acquisition of rival Covidien (COV). Artisan International Value Fund Investor Class (ARTKX) investors enjoyed the share price pop as the fund is up over 6% YTD. Other mutual fund winners invested in Covidien include FPA Crescent Fund (FPACX-up 5.37% YTD) and FMI Large Cap Fund (FMIHX-up 8.05% YTD).

As we get deeper into the M&A cycle, Mondays should become even more entertaining. We had three deals announced this past Monday, with Wisconsin Energy’s (WEC) $9.1B bid for Integrys Energy (TEG) grabbing the biggest headlines.

Just to give everyone a sense of deal-related news we have seen push shares up, here’s a small sampling of what been driving shares and mutual fund performance.

Reynolds American (RAI) in potential talks to acquire Lorillard (LO)
Abbvie (ABBV) has made several offers to acquire Shire PLC (SHPG)
Carl Icahn taking a stake in shares of Family Dollar Stores (FDO) – private equity is another factor when it comes to deal-making!
Monsanto (MON) could be eying shares of Syngenta (SYT) as corporations look for an overseas tax haven acquisition partner
Japan’s Dai-ichi Life Insurance company has agreed to buy U.S. peer Protective Life (PL) for $5.7 billion
Priceline (PCLN) is buying OpenTable (OPEN) in a deal valued at $2.6 billion to add restaurant bookings to its travel business

Other company takeover rumors include: Clorox (CLX), Smith & Nephew (SNN), T-Mobile (TMUS), Dish Network (DISH), Madison Square Garden (MSG), and Anadarko Petroleum (APC), just to name some of the more recent active names in Wall Street’s garden of rumors.

Staying Bullish

The bullish thing for mutual fund investors to consider as well is that shares of acquiring companies are holding firm for the most part. It used to be that Wall Street and investors would sometimes cap acquirers’ share performance and sometimes push shares lower for the months after a deal was announced, but we have not seen that effect take hold. We could see that if investors and Wall Street start believing takeover premiums are getting a bit frothy or deal marriages become sloppy.

The Bottom Line

Anyway you spin the recent developments, mutual fund investors of all shapes and sizes may continue to see the benefit of being long-term investors if the trend can sustain for a period of time.