My 3-Step Process for Profiting from the M&A Boom

By Lou Basenese, on Tuesday, January 14, 2020

In my article last week, I predicted that private equity funds would be big buyers of companies in 2020.

The next day, I saw this news headline: “Private equity group hunts $1 billion biotech buyout.”

Such funds have $1.5 trillion they need to spend — so get ready for hundreds of similar headlines.

The thing is, to profit from this activity, we need to identify takeover targets before these funds swoop in.

So, today, I’ll reveal my 3-step process for identifying the double- and triple-digit winners.

Step #1: Follow the Consolidation

When a big company gets gobbled up by a private equity fund, a sort of frenzy takes hold.

First, to stay competitive, other private equity firms jump in and do deals, too…

And after that happens, all the operating companies jump in and they start buying, too.

Simply put, deal making leads to more deal making!

Thus, Step 1 of identifying potential takeover targets is to focus on the sectors undergoing the most rapid consolidation. In today’s market, this often leads us to two particular industries:

  1. Biotech — Big pharma companies are desperate to fill their pipelines with new drugs. The quickest remedy for them is to buy compelling biotech firms.
  2. Semiconductors — In the first eight months of 2019, more than 20 semiconductor acquisitions were announced worth a combined $28 billion. This has become a hot sector.

In anticipation of a frenzy in these two industries, private equity firms are already scooping up companies.

As an investor, you just need to get there first. (More on that in a minute.)

Step #2: Focus on “Priceless” Assets

Beyond biotech and semiconductors, we look more broadly at tech companies that own something priceless.

Many times, that “something” is a critical enabling technology. For example, look at a tiny Florida-based company called Authentec. This company developed and patented a best-in-class fingerprint-reading technology, which left Apple no choice but to acquire it for $356 million.

Without this deal, Apple wouldn’t have been able to launch its Touch ID fingerprint recognition feature — a wildly successful feature that’s, simply put, priceless.

That “something” could also be a big, fast-growing network of users. For example, Facebook plunked down $1 billion for Instagram, and more than $20 billion for WhatsApp.

Why? Because it needed to protect its competitive moat!

This explains why private equity funds are screening the universe right now for assets that are vital to the success of mega-cap operating companies like Facebook or Apple: if they can acquire the right assets early, they know they can “flip” them to these operating companies for a fortune.

It’s my job to identify these assets before the private equity funds do…

That’s how I can help you make double- and triple-digit profits.

Step #3: Insist on “Insurance”

But perhaps the most important step in the screening process is this:

Don’t invest in a company simply because it could be a takeover target!

Only invest in a company if it has strong fundamentals — for example, strong earnings growth, a pipeline of new product launches, or growing market share.

If you invest in a company with strong fundamentals, you’ll always have an “insurance policy” in your pocket.

So even if a takeover never materializes, you’ll still have invested in a company that should lead you to profits.

And as an investor, that’s what matters most.

Ahead of the Tape,

Lou Basenese

Ahead of the tape,
Lou Basenese
Lou Basenese

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Tags: M&A Profits

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