My #1 Strategy to Profit from 2020's Takeover Boom

By Lou Basenese, on Tuesday, January 7, 2020

There’s one key player behind any serious boom in M&A: private equity funds.

You see, such firms have just one way to use their pile of money: on acquisitions! So when they’re flush with cash, there’ll be a boom. It’s as simple as that.

Well, as it turns out, private equity firms are entering 2020 with record levels of cash.

And that’s why 2020 will be a record year for mergers and acquisitions.

Here’s my #1 strategy to profit from it.

$1.5 Trillion of Dry Powder 

According to Prequin, private equity funds ended 2019 with $1.5 trillion in cash.

To put that figure in perspective, last year, private equity funds did $450 billion worth of deals.

And that was a huge year for M&A.

So they currently have enough dry powder to fund more than three times last year’s deal volume.

And as mentioned earlier, such funds have just one way to use their pile of money: on acquisitions. Corporations could use their cash to pay a dividend, do a stock buyback, or invest in research and development. But M&A is the only thing private equity firms can do with their funds.

Furthermore, there’s also another factor that promises to fuel record M&A activity in 2020…

Confidence!

You see, despite the recent turmoil in Iran, market sentiment is favorable right now.

As Jason Thomas, head of research at private equity giant Carlyle notes, “We’re entering the year with people feeling much better about the economic and geopolitical outlook than was the case a year ago.”

And as Dave Tayeh, the North American head of private equity at Investcorp notes, “There are many tailwinds expected to drive healthy deal flow — from increased certainty around Brexit to continued low rates and ongoing technology disruption across sectors.”

This positive outlook gives deal makers the confidence they need to go on a buying spree.

And as you’re about to learn, the clock has already started ticking…

The “Shot Clock” Has Started

The cash that private equity firms are sitting on comes with a “shot clock.”

In other words, fund managers need to deploy their cash fast.

You see, most funds have a life cycle of five to ten years. So, to ensure the fund has adequate time to buy, manage, and then sell their acquisitions for a profit, they need to invest their cash quickly.

Add it all up — and now you understand why 2020 will be a big year for M&A, and why such acquisitions need to start happening ASAP.

And when they happen, early investors will make a fortune…

114% Takeover Premiums

According to a study from the Journal of Finance, historically, the average takeover premium (i.e., the amount an acquirer pays in excess of the target company’s current price) has been 38%.

And again, that’s just the average. Many deal premiums reach into the triple digits.

For instance, as I shared with you a few weeks ago, takeover premiums in the biotech sector are currently averaging 114%.

But to get access to these big, quick returns, you need to identify the market’s next takeover targets before private equity firms swoop in. That’s the trick.

So in next week’s column, I’ll share a simple three-step process to identify takeover targets early.

So stay tuned!

Ahead of the tape,
Lou Basenese

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Tags: M&A 2020

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