As the second longest bull market in history continues to age, (and hit all time highs), merger & acquisition or M&A activity continues to heat up. This can lead to some very nice short-term pops for investors in the company being acquired. However, I feel the need to warn investors to avoid buying shares of a company on takeout rumors, because such a strategy is a highly speculative one fraught with peril.
Take for example the recent 9% pop in Mondolez (MDLZ) on rumors that Kraft Heinz will buy out the cookie and cracker giant. On the surface it makes sense for a slow growing food conglomerate to buy another food giant, because organic growth is tough to come by in this industry.
BUT let’s not forget that Kraft, which was itself spun off from Phillip Morris (now Altria), then spun off Mondolez back in 2012. At the time management claimed this would unlock shareholder value, so I’m dubious as to how suddenly now repurchasing what Kraft once owned, for a likely takeout price of $82 billion, would be good for shareholders.
This actually gets at another important lesson investors need to consider. Just as it almost never makes sense to overtrade, it also doesn’t make sense for companies to constantly churn the same assets, buying, selling, and buying again the same brands, each time for a greater premium.
This results in a ton of goodwill on the balance sheet, which often ends up getting written off as a loss that delivers a big blow to earnings. That makes intuitive sense given that if a company spins off assets, and then buys them back later at a higher price, it’s the same as if management were buying high, and selling low.