Who keeps saying stocks are expensive? If they are so expensive, then why are we seeing such large takeovers and why do they make so much sense, at least if you judge the stock price of the acquirer. When the buyer's stock goes higher or at least stays in the realm, that's a sign that the market approved and applauds, and that's a big reason why we could rally now.
Sometimes deals make so much sense it's astonishing to think about why they didn't happen before. When discount broker Robin Hood eliminated commissions, counting on credit balances -- your assets -- to make money, it was a natural that all the discounters had to follow so, of course, their stocks were clocked.
Charles Schwab (SCHW) , with $3.8 billion in assets under management, took advantage of the sad state of the stock prices and swooped in to buy TD Ameritrade (AMTD) at a nice price of $26 billion and, voila, now they have $5 trillion under management. I remember a time when Goldman Sachs (GS) debated buying little Charles Schwab. Look out $80 billion Goldman, Schwab's only $20 billion less and gaining on you, although I have to wonder if a Schwab doesn't have a better business model than a Goldman right now and, unless the credit card with Apple (AAPL) turns out to be huge, Goldman has some real catching up to do, as it could double assets under management and still not be near the new colossus.
Lots of critics sneered at how much LVMH Moët Hennessy Louis Vuitton (LVMUY) had to pay up for Tiffany (TIF) , $16 billion, or $135 a share, given it was at $90 a little more than a month ago. But if it were such a bad deal, why would the stock of the acquirer go higher like it did? I think Tiffany, which had pretty horrible numbers worldwide, didn't understand the new world, which is one of personalization and high touch. For years, Tiffany has missed numbers, frequently blaming the strong dollar, which hurts tourism. It went to extremes at one time when it blamed Trump tower traffic after the election.
What a crock. Do you think Estee Lauder (EL) , which sells a huge amount of expensive cosmetics in Hong Kong, used the riots as an excuse this quarter? They hurt sales, but EL has such good businesses around the globe it didn't matter.
Both EL and LVMH know about high touch. Now Tiffany will learn. What's really worth noting here is that LVMH was a marque account that was lauded at Salesforce.com's (CRM) Dreamforce last week. LVMH salespeople seem to know everything about you when you shop at one of their stores. Tiffany seems to draw a blank when you walk in. I don't know a soul who, when you spend that kind of money at Tiffany's, doesn't want both recognition and help. Watch that store's numbers go way up all over the world.
How should the stock of an acquirer act after it agrees to a price for a company that's 340% above where it was trading at when the year began? How about higher? That's what happened when Novartis (NVS) announced it was buying the stock of Medicines Company for $9.7 billion this weekend. This is a huge one, because The Medicines Company (MDCO) has a shot that lowers your cholesterol that needs to be given twice a year. The current standard of care for how you lower cholesterol requires two shots a month and is very difficult to get insurance approval. Novartis is developing a considerable heart franchise and this one fits into that agenda perfectly.
Now here's what happens when other businesses see stocks go higher after buyers shell out big bucks. They get interested, too.
So you can expect more mergers going forward.
What industries are likely to have more activity? Let me give you some sectors that would make sense.
First: Retail. We are seeing a series of haves and have nots in retail, and you know we are overstored. No, that does not mean that Kohl's (KSS) , Gap (GPS) or Macy's (M) will get bids. They are cheap and profitable, but I don't know if any company can figure out how to reverse its fortunes. But there are some underperforming retailers that represent attractive opportunities. I can't believe how cheap Foot Locker (FL) is, even as it had terrific comps. I know the Nordstrom brothers don't want to sell, but that quarter wasn't greeted with the love it should have gotten given that the company now has a very good off-line and online.
There are way too many cyber security, call center and data mining companies. Splunk (SPLK) just reported a fantastic quarter. It could be a consolidator. Should New Relic (NEWR) , Cyberark (CYBR) , Fortinet (FTNT) , Crowdstrike (CRWD) , FireEye (FEYE) , Zendesk (ZEN) , RingCentral (RNG) and Five9 (FIVN) all be independent? I don't think so.
There are so many biotechs out there that have so much going for them with stocks that should be much higher. How does BioMarin (BMRN) stay this low, with a solid business and an amazing pipeline? If Biogen (BIIB) does have the answer to Alzheimer's, it is worth a lot more than $54 billion. Look at how great the stocks of AbbVie (ABBV) and Bristol-Myers Squibb (BMY) have done after their acquisitions.
We have about a thousand more banks than we need. I know a lot of that is because of fear that the regulators won't allow the big dogs to buy anyone. But banks with terrific technology can crush it if they buy banks with inferior tech. Payments? We have too make payment companies and I think that if Square (SQ) doesn't get its price higher that's a natural to be acquired. It's got a fantastic installed base and is loved.
You know that there needs to be consolidation in the food delivery business. Can you imagine what would happen to the stocks of Uber (UBER) and GrubHub (GRUB) if GrubHub were to buy Uber Eats? It would be incredible.
I know that semi deals are problematic, because of the need for Chinese approval. If Nvidia (NVDA) were ever able to buy Mellanox (MLNX) you could take numbers up dramatically. But it sure would make sense for NXP Semiconductors (NXPI) , Qorvo (QRVO) , and Skyworks (SWKS) to make some combinations happen. There are just way too many of them.
They don't all have the beautiful synergy of Schwab-Ameritrade, where you can cut your ad budget, reduce your tech spend and fire an immense number of people. They don't have the elegance of marrying LVMH's sophisticated tech with Tiffany's brand name. You don't always get a whole new pipeline for $9 billion the way Novartis did.
But my first point remains the same. While it is absolutely true that a company that may have too big a market cap will never get acquired, there are thousands that don't and, after today, I am tired of hearing how expensive they are. Yes, many companies aren't worth anything to anybody, because they are doing so badly, but many, many more are doing well and we just need to open our eyes to know that's exactly where we are.
