Borrowing a line from Apocalypse Now, I love the smell of mergers and acquisitions in the morning. It smells like victory. Today we get three deals: Level 3 Communications (LVLT) will buy TW Telecom (TWTC) for $5.6 billion; SanDisk (SNDK) will buy Fusion IO (FIO) for $1.1 billion; and last but most important is the $43 billion takeover of Covidien (COV) by Medtronic (MDT). This marks the second consecutive trading session that one of our holdings is the subject of an acquisition. On Friday, it was Open Table (OPEN) which we held in our Restaurant & Food Chain Portfolio and subsequently sold that day. Today it is Covidien in our Equity Growth Portfolio.
Medtronic to Buy Covidien for Cash and Stock Worth $43 Billion
I had seen some value in Covidien several months ago and accumulated an average sized position. The stock for the most part traded in a range over that time but before the deal was announced, we were in the green and held it with an $80 year-end price target in mind. Apparently Medtronic thinks enough of Covidien to offer a package of stock and cash, which as of last Friday was worth about $93.22 per share. With Medtronic’s stock rising in the pre-market, the package deal for Covidien is worth slightly more than $93.22. Part of the motivation behind the deal was to enable Medtronic to domicile in Ireland and save on taxes. The other motivation was commercial in nature.
As for the other two deals this morning, Fusion IO has been a disappointing stock and perhaps SanDisk is getting some good technology. To be honest, I have no opinion either way on the Level 3 acquisition, although, the market is greeting it positively in the pre-market.
Market Environment is Perfect for More M&A
One has to ask, what does this merger & acquisition activity mean for the market? As most of these deals are for cash or cash and stock, it means that: companies have plenty of excess capital to invest; the cost of capital remains cheap with low interest rates; companies value one another more than the market does; and, the US tax code is so screwed up that it pays to move business offshore.
Today, Industrial Production and Capacity Utilization for May will have some fleeting impact on the markets. Expectations are that both metrics will rise over April levels. Once we get past Merger Monday (a throwback to the corporate raider and LBO days of the 1980s), we will focus on this week’s FOMC meeting. It does seem that the monetary authority’s policy is well defined heading into that meeting. Then on Friday, quarterly derivative expiration will capture trading activity. Throughout the week, we will keep one eye on the goings on in Iraq and Syria.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long COV — although positions can change at any time.
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