If you’re looking for the best place to invest in 2018, one of your best options is to put on your investment banker hat and go for “mergers and acquisitions” – mergers and acquisitions.
The biggest of 2017, the proposed $ 52 billion deal between Disney and Twenty-First Century Fox, is just the beginning.
Tax reform is one piece of the puzzle. It promises to free up billions in corporate cash in offshore accounts and reduce the corporate tax rate to 21%.
The attitude of American consumers is another component. Consumer spending hit a month-long record that had not been seen since 2009, when the US economy was emerging from recession and financial crisis.
But the key element is what I will call corporate sentiment. In other words, CEOs and their boards of directors go through their own cycles of optimism and pessimism, which affects how a company decides to put its excess cash to work.
2018: the year of mergers and acquisitions
The change is evident in a recent Deloitte “M&A 2018” survey of 1,000 executives from large corporations and private equity firms.
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On the one hand, a growing number of companies, two-thirds of those surveyed, say their cash reserves increased and that “the main intended use of that cash is for M&A deals.”
In recent years, companies indicated that they were more likely to seek organic investments (growing an internal business) as the most likely use of their cash reserves.
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But as the report notes, “That is no longer the case. Predominantly, companies now say they are looking for M&A opportunities, with 40% citing it as their number one intention.”
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In addition, almost two-thirds of companies “anticipate that the average size of transactions in the next 12 months will exceed last year.”
We have already seen an increase in mergers and acquisitions as the year draws to a close. Research firm Dealogic pegged November as the second-largest month for M&A activity since it began keeping records in 1995.
A low risk play
What is the best way to play this type of trend?
You can bet on individual stocks. For example, Bristol-Myers Squibb Co. (NYSE: BMY) and Biogen Inc. (Nasdaq: BIIB) are sometimes mentioned as potential buyout candidates in the pharmaceutical sector.
Among the most affected retail sector, Nordstrom Inc. (NYSE: JWN), whose shares have fallen 40% since 2015, has been mentioned as a potential buy target.
In the technology sector, shares of Akamai Technologies Inc. (Nasdaq: AKAM) rose 14% on Monday on rising prospects for a purchase.
But such investments are all-or-nothing bets. A better way is to invest through an exchange-traded fund (ETF), such as the IQ Merger Arbitrage ETF (NYSE: MNA). It has increased 5% this year and 24% in the last five years.
The ETF, developed by New York Life Investment Management LLC and managed by IndexIQ Advisors LLC, invests in a variety of publicly announced M&A candidates. It’s a good, low-risk way to play the next deal explosion in 2018.
