How you can profit from the merger surge

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Anne Kates Smith

Every week, it seems, brings news of a corporate coupling (or at least an invitation). Buyouts are brisk in industries ranging from technology to healthcare, from finance to consumer goods.

Halfway through 2014, U.S. companies had announced more than 9,000 deals (counting minor ones, including those for parts of businesses), with a collective value of more than $771 billion. “We’re on track for the first trillion-dollar year since 2007,” said Richard Peterson, who tracks merger activity for S&P Capital IQ.

A number of factors are behind the boom. Firms have an abundance of cash on corporate balance sheets — some $2 trillion for nonfinancial companies in Standard & Poor’s 500-stock index. Credit is easy, with interest rates low and demand for corporate bonds robust. And with stock prices at record highs, companies can pay for acquisitions with inflated shares.

High U.S. tax rates play a role

Taxes are also playing a part. Some U.S. companies are bidding for overseas firms so they can change their country of incorporation in a quest for more-favorable income tax rates.

For instance, Minneapolis-based Medtronic recently announced that it’s buying Covidien, another medical device maker, for $43 billion in cash and stock. Covidien has offices in Mansfield, Mass., but the company is registered in Ireland. In addition to the tax advantage, the companies have complementary product lines.

Shareholders, sometimes spurred by activist investors, support the takeover trend. Companies that made an acquisition in 2013 saw their stock increase by an average of 48 percent for the year, said Bank of America Merrill Lynch.

[Editor’s note: President Obama and some members of Congress are criticizing the mergers, noting they seem primarily designed to reduce the companies’ U.S. tax bill, which in turn will add to budget deficits here.

Others point out that U.S. corporate tax rates are the highest in the developed world and that corporate income is taxed twice, both at the company earnings level and when paid to stockholders as dividends.]

Trends of success

Investors looking to cash in on the merger boom might consider investing in stocks of companies with a track record of successful acquisitions.

For example, Valeant Pharmaceuticals (symbol VRX, $126) recently garnered headlines for its hostile bid for Allergan (AGN, $169), the maker of Botox. The firm has executed an aggressive acquisition strategy, almost flawlessly, for years, said Morningstar analyst David Krempa, thus boosting profit margins and reducing the risk of expiring patents.

Danaher Corp. (DHR, $79), which manufactures everything from industrial tools to dental supplies, is a master at consolidating businesses, achieving synergies and maximizing productivity. Danaher acquired 14 businesses in 2013; roughly 75 percent of its sales growth during the past five years has come from acquisitions.

Deal adviser Lazard (LAZ, $52) could see double-digit-percentage revenue growth this year as its investment-banking unit profits from a pickup in dealmaking, said S&P Capital IQ, which rates the stock a “strong buy.”

Finally, consider Merger Fund (MERFX), a member of the Kiplinger 25. The fund invests in stocks of announced takeover targets.

Anne Kates Smith is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.

©2014 Kiplinger’s Personal Finance; Distributed by Tribune Content Agency, LLC.