IT'S TAKEOVER SEASON
Originally Posted May 5th, 2021: https://woodworthfund.blogspot.com/2021/05/its-takeover-season.html (Some links below may be broken)
Pandemic Season or Growth Season?
Markets value certainty. Whether terrible or euphoric, more certain outcomes make planning, valuing future revenues, and controlling for future costs much easier, and by extension makes valuing companies as a whole much more straightforward (as much as it can be). The corporate temptation of whether or not to merge, takeover, or take private becomes a much harder to ignore when the answer is seemingly self-evident.
It wasn't all that long ago that things were not so certain, and large companies already flush with cash were hoarding and expanding credit lines in anticipation of a string of very tough years. For some, such as those in the business of international travel and leisure, this has come to pass. But for many others, the vaccine rollout and an end to US pandemic restrictions mean they are facing a booming economy many were unprepared to see until at least 2022.
Corporate Cash on Hand hit record levels in 2020; Source: St. Louis Federal Reserve
As a result, many firms now find themselves seated atop a veritable warchest of liquidity with the economic winds unexpectedly filling their sails. This is compounded by record low borrowing rates, and made more urgent by a rush to head off potential increases in corporate tax rates before the end of 2021. Taken in total, there is a perfect storm for a rush to acquire as many high-quality assets as companies can get their hands on before the year is out. Liquidity plus scarcity of time and targets equals competition, and by extension a whole lot of market consolidation.
At our fund, we've already been on the receiving end of a merger. Recently, Canadian Paper Excellence confirmed swirling rumours of their intent to takeover Domtar (NYSE:UFS), a US fiber and pulp manufacturer. Any company with a decent balance sheet and underweight growth multiples could be next, but I am certain that whatever consolidations we see, firms are out to capture our post-pandemic economy's growth at any cost. Corporations have enough dry powder that this year's deal-hunting season could last for a long while yet.
About the Author: Drew Millegan with his brother, Quinn Millegan, (25 and 22 years old respectively) manage the Woodworth Contrarian Stock & Bond Fund, a hedge fund based in McMinnville, Oregon. They grew up in the finance world, and specialize in contrarian investment strategies in the US Public and Private markets.
