3 Ways to Win the M&A Game

Rudy Martin


Those aren’t gunshots from one of my favorite mystery stories. They’re a quick way to summarize what happened to my friend Phil’s stock portfolio a few years ago.

Phil lived to tell the story. In fact, he wants more such "bangs." Here is what happened …

BANG! One of Phil’s stocks got a tender offer and the shares vaulted more than 25% overnight.

BANG! About a month later, a private equity partnership aimed a cash buyout offer at another stock Phil owned. His shares jumped almost as much the last one.

BANG! Not long after that, one of Phil’s portfolio components sold part of itself to a larger firm, rewarding shareholders with a generous special dividend.

BANG! Top executives at one of Phil’s smaller stocks offered to buy the whole company at a significant premium over the market price.

In just a few months, Phil raked in gains that usually take years to accumulate. He treated me to dinner at an upscale New York City bistro to celebrate his four-way bonanza.

Naturally, my first question was, "How did you pick all those acquisition candidates?" I had missed them all in my own portfolio. Phil’s answer made me feel better …

"I had incredible luck."

Now, I am not a fan of relying on — or even considering — luck as an investment strategy. But every day you should be doing something to move the odds in your favor.

Right now, global mergers and acquisitions are grabbing headlines again. With investment banks and other companies looking to put investment capital to work before interest rates rise, it makes sense to stay up-to-date on the deals that are taking place … and to look for ones that might be on the horizon.

In fact, just this month:

  • Verizon (VZ), which already owned a big part of Verizon Wireless, bought the remaining shares from UK-based Vodafone Group (VOD).
  • Microsoft (MSFT) acquired the mobile devices and services business of Finnish manufacturer Nokia (NOK).
  • Founder Michael Dell and a private equity group beat back a challenge by corporate raider Carl Icahn to buy Texas-based computer maker Dell (DELL).

M&A activity tends to come in waves as competitors react to the changing landscape. I’m watching this trend closely for my Global Trend Trader subscribers.

My friend Phil was partly right. Getting in successful deals before they happen involves being in the right place at the right time.

Some might think of it as luck. But the truth is, careful decisions put him in the right stocks at the right time … in industries that were either seeing strategic consolidation or where well-capitalized companies saw big opportunities in smaller, nimbler names.

Here are some ways to tilt the M&A odds a little more in your favor.


The first thing you can do is obey Flip Wilson’s Law. "You won’t hit the jackpot unless you put a few coins in the machine."

The late TV comedian’s advice definitely applies to investing. If you don’t own any stocks, you won’t own any takeover targets.

Last week I shared some diversification lessons from an Iranian friend. Following them will give you a better shot in the M&A game, too.

  • Diversify by sector: While Verizon and Nokia are both in the telecommunications technology sector, a sustained merger trend will likely spread to other industries. Spreading your bets to different sectors will help your odds of hitting a merger jackpot.
  • Diversify geographically: Many recent transactions included international players like Vodafone and Nokia. Any company on the planet can find itself "in play." Diversified global exposure can get you closer to a big payoff.
  • Diversify by size: The recent players — Verizon, Microsoft and Vodafone — are all big boys, by any measure (as was Nokia in its heyday). Much smaller firms are cheaper and easier targets. The trend could turn their way soon.
  • Diversify by volatility and style: A growth company makes a great trophy for an acquirer, but predators like to keep low-volatility value stocks in the cross hairs, too.


Where is the big money? As my friend and colleague Tony Sagami showed you in his August 26 column, more than half the world’s population and a large part of its wealth lives in Asia — particularly China.

What does Asia need?

  • Resources for its industrial base, including ores, coal, hydrocarbons and other minerals.
  • Food products for the quickly expanding franchised restaurants that feed its giant population.
  • Automobiles and luxury goods demanded by China’s growing affluent and middle classes.

The same food, resource and retail stocks U.S. investors consider ugly ducklings may look more like beautiful swans to dollar-laden Asian wealth funds.

One recent example is U.S. pork purveyor Smithfield Foods (SFD), whose $4.7 billion acquisition by China’s Shuanghui International Holdings Ltd. is clearing regulatory hurdles.

If approved by shareholders, as expected, Smithfield will be the biggest Chinese buyout of a U.S. company. It won’t be the last.

In addition, U.S. technology giants like Microsoft and Apple (AAPL) have foreign cash hoards because of U.S. tax laws. Buying non-U.S. companies would be a great way to use this exiled wealth.


Patents, especially for some software applications, can be worth millions. Creative marketers can rebuild dormant brand names. Warren Buffett loves companies that are protected by "wide moats" that deter competition.

Investors can forget about these "hidden assets" when bad management or other circumstances cover them in fog. Those patient enough to wait for the sun can get a handsome takeover payout.

Following these tips can help make a big difference in the acquisition game. I practice what I preach in the diversified Global Trend Trader model. I don’t bet on one of our holdings getting a boost from a merger offer, but I know that it’s usually very good for the stock if it does happen!

Bottom line: Aim for steady growth and stay invested; that’s the key to potential M&A success. Hockey great Wayne Gretzky said it best: "You miss 100% of the shots you don’t take."

Good luck and happy trading!

Rudy Martin

P.S. My friends James DiGeorgia and Geoff Garbacz just led their subscribers to five winning trades in a row, with potential gains of 16.9% … 20.3% … 24.3% … 28.7% … and 50.7% … just in the space of a few weeks! How did they do it? Find out here.