Companies are buying each other at the fastest pace since before the Great Recession. Investors lucky enough to own stock in a company being bought are pocketing big money.
Since November, U.S. companies have announced a dozen purchases worth $3 billion or more in mining, food, technology, airlines and other industries. Stocks of the acquired companies have soared 20 percent or more above where they were trading before the deals were announced.
On Thursday, billionaire Warren Buffett added to the frenzy. His company, Berkshire Hathaway, joined another investment firm to buy all the stock of H.J. Heinz Co. for $23 billion, or $72.50 per share. That was 20 percent higher than the ketchup maker's share price the day before.
A week earlier, another group of shareholders scored. In an echo of the big leveraged buyouts of the boom years, Michael Dell and an investment firm offered to take his publicly traded computer company private for $24 billion, most of that borrowed money. That translates to $13.65 per share, a 25 percent gain for stock owners, but they may get even more. Two big Dell investors are protesting that the offer is too low, raising the possibility of something rarely seen in M&A these days—a bidding war.
Investors are watching this deal closely for another reason: They hope it inspires investment firms to attempt other big leveraged buyouts—risky takeovers that use lots of borrowed money from banks and bond markets. The Dell deal would be the first large leveraged buyout since before the recession.
"We're finally dusting off the cobwebs," says R.J. Hottovy, a director at Morningstar, a research firm. "It shows that banks are willing to take risks."
Most deals have been companies buying each other in the same or similar businesses, with investment firms, and their heaps of borrowed money, playing no role. The companies often tap banks for money but usually use more of their own cash and are considered safer.
Still, CEOs have hesitated to strike deals because they were unsure they could count on the economy to help lift profits and absorb the costs of combining two companies. Now, that fear apparently is ebbing.
"It's a sign that Corporate America believes that the expansion is going to accelerate," says Peter Cardillo, chief market economist at Rockwell Global Capital.
The deals follow other signs that confidence is returning. So far this year, initial public offerings of stocks have raised the most cash in two decades; small investors are putting money into U.S. stock mutual funds at the fastest pace in five years; and professional investors are borrowing more to finance their trades because they are not as fearful of losing money.
The last time so many companies paired off, in 2006 and 2007, stocks were surging and investors were pocketing big gains on takeover news.
Now a few lucky investors are finding they're reliving the boom years. Here are some recent deals raining riches on shareholders, according to Dealogic, a data provider:
— ConAgra Foods Inc., maker of Chef Boyardee, announces a $5 billion deal to buy private-label food maker Ralcorp Holdings. Within hours, Ralcorp shares rise 26 percent to $88.80.
— IntercontinentalExchange Inc. offers to buy NYSE Euronext, owner of the iconic stock exchange on Wall Street, for $8 billion. Premium to NYSE shareholders: 43 percent.
— Mining giant Freeport-McMoRan Copper & Gold says it is buying oil and natural gas explorer Plains Exploration & Production Co. for $17 billion, handing Plains shareholders a 44 percent premium.
So far this year, $219 billion worth of deals have been announced, more than double the level over the same time last year, according to Dealogic. The value of deals is also slightly above the same period in 2007. And that turned into a record year, with the value of deals reaching $1.6 trillion.
Those looking to profit on deals by picking companies before they're taken over should know it's not easy. But there are guidelines for choosing possible M&A targets. One is a reasonably valued stock, not so high that it's likely to scare off buyers.
Other signs are low debt and a history of generating lots of cash. Those are key for buyers who borrow heavily to finance deals, says Hottovy, the Morningstar analyst. Their debt can be repaid with the money coming out of target companies.
Among the picks in a Morningstar report co-authored by Hottovy last month:
— Kohl's: The department store chain has strong cash flow and its stock trades at 10.7 times per share earnings in the previous 12 months, which Morningstar considers attractive. The average for S&P 500 companies is 17 times.
— Chesapeake Energy Corp.: The second-biggest U.S. gas producer is a target of investors looking to get the share price up. Embattled CEO Aubrey McClendon was pushed out last month. The stock is down 12 percent in the past 12 months.
— City National Corp.: Morningstar likes that the Los Angeles-based bank courts wealthy business owners as customers and has increased earnings per share by 63 percent in two years. The stock is up 17 percent in the past 12 months.
Conditions seem ripe for plenty more deals.
Borrowing money to buy has rarely been cheaper since interest rates are near record lows. And many companies can pay for M&A out of their own pocket. Companies in the Standard and Poor's 500 index have more than $1 trillion in cash on their books, up 66 percent in five years.
If the means are plenty, so are the motives.
Before the Great Recession, buyout firms raised hundreds of billions of dollars from investors. They promised to use the money to buy companies within a set time or return it. Some of those deadlines are fast approaching. As of September, buyout firms had $193 billion left to spend by the end of 2013, according to Triago, which helps raise money for the industry.
About a quarter of the money spent to buy U.S. companies this year has come from leveraged buyout firms. That is about the same as before the recession, according to Dealogic.
The Dell deal recalls the era of the super-sized buyouts, a heady time before the recession of bidding wars and overpriced purchases. The motive was to cash out after a few years by flipping the acquired company to another buyout firm or by selling stock in a public offering.
Most buyout deals today, though, are smaller and involve much less debt.
Experts say many companies are buying rivals in the hope that the combined businesses will quickly add to profits. For years, companies have been cutting staff and squeezing workers. Now they are finding that path to higher earnings is tough. Earnings in the first quarter are expected to increase less than 1 percent from last year for companies in the S&P 500, according to FactSet, a financial data provider.
Morningstar's Hottovy cautions investors not to get too excited about a big year for deals. Despite the good signs, CEOs can sour on M&A if their confidence evaporates. He says a flood of deals about a year ago turned into a trickle on fears that the European debt crisis would hurt U.S. companies.
"We thought we were back," Hottovy says. "But then Europe put a halt to all that."
AP Business Writer Steve Rothwell contributed to this story.