M&A Still Thriving

11/28/2012 11:45 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

The flood of cheap money has allowed many companies to make new acquisitions, which MoneyShow's Jim Jubak believes is a trend that will continue as long as rates are low.

Just in case you were wondering what companies were going to do with really cheap money-and we've got really low rates around the world-one of the things they're doing, we've got a boom in mergers and acquisitions.

Just on the 12th, we've seen an offer from Precision Castparts (PCP), which is a big maker of parts for companies like Boeing (BA) and the airline industry, go out and buy Titanium Metals (TIE), a provider of titanium for the airline industry. The idea here is that you see consolidation in the number of suppliers to Boeing and more vertical integration.

Precision Castparts paid about a 44% premium on this deal, but the market liked it nonetheless, because it's almost immediately going to add to revenue and profits. So Precision Castparts actually did something that most stocks of companies that have made a big acquisition don't do: it went up. It went up about 5.5% on that day.

We've seen the same thing happen with Sherwin Williams (SHW). The big paintmaker went out and made an offer for the largest paint maker in Mexico. Again, a good premium, but Sherwin Williams sees its stock price go up, because hey, now they're gaining a big part of a vast growing Mexican market.

In both of these cases, these were both cash deals. The companies were either using cash they already have on their balance sheets, or going to the debt market. Sherwin is going to sell five-, ten-, and 30-year bonds to raise this money, and it's going to be cheap money.

So, these are good deals from Wall Street's perspective. These are good deals from the company's perspective, because they're gaining hunks of market. And it's a really good use from an investor's prospective-individual investors-because it answers the question of what are you going to do to get some growth in a world where growth in general-organic growth, growth that comes because of improvements in the economy-is really not all that high.

So, in these cases it's a good use for company cash, and I think you are going to see more and more and more of these deals.

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