American companies are on a shopping spree for foreign companies. Four of the largest acquisitions of overseas companies in history were announced within the last five months.
Qualcomm (Nasdaq: QCOM) announced its $47.7 billion acquisition of NXP Semiconductors (Nasdaq: NXPI) in October just a month before Praxair (NYSE: PX) offered $44.8 billion for Linde.
Kraft Heinz (Nasdaq: KHC) agreed to withdraw its $143 billion acquisition offer of U.K.-based Unilever (NYSE: UL) earlier this month but it set the stage for American interest in foreign companies.
The takeover would have been the third-largest in history and the largest ever purchase of a foreign firm by a U.S. company.
These aren’t random buyouts for isolated reasons.
U.S. firms are looking at strategic advantages and some strong macro-level factors are driving the buying spree across multiple sectors.
These larger forces could lead to more announcements soon, driving headlines and prices for foreign companies.
The Big Picture Driving The Buyout Search Abroad
While the three examples above are from completely different industries, there are bigger forces making foreign acquisitions a smart move for U.S. firms. A strong dollar, available cash, business confidence, and the potential for tax reform that could make it easier to bring foreign profits back home are creating the perfect scenario for American companies abroad.
The U.S. dollar index has surged to a 14-year high and the pound sterling-dollar exchange rate has sunk to its lowest point in three decades. This makes foreign assets cheaper in dollars, allowing U.S. corporations to snap up foreign companies at a discount.
The Republicans’ plan for tax reform includes a border tax adjustment and an effort to drive the greenback higher to compensate for higher import prices. That could make foreign assets cheaper still and drive even more U.S. interest in foreign firms.
Private equity data from Preqin shows that available capital for investment in the United States jumped 27% last year to a record $1.6 trillion, with PE firms accounting for just over half the total. In addition the bursting vaults at private equity firms, American companies are sitting on hundreds of billions in balance sheet cash. Even with the potential for higher rates this year, borrowing costs remain at historic lows.
Confidence in U.S. economic growth and the potential for tax reform that could cut corporate taxes and make it easier to repatriate overseas profits is also driving the buying interest. Confidence by small business owners reached its highest since 2004 in January according to the National Federation of Independent Business. The Organization for Economic Cooperation and Development (OECD) reports business confidence well above the long-term average in both the United States and Europe.
Three Brands That Could Be Coming To America
Stocks of companies in Europe and the U.K. look to be relatively attractive on low valuation multiples and weaker currencies. They offer potential buyers access to large, developed markets. Even with trouble around Brexit, the European Union is still the largest economic area in the world, measuring $19.2 trillion in output last year.
Ireland-based Perrigo Company (NYSE: PRGO) is a leader in over-the-counter (OTC) pharmaceuticals and infant formula. Shares have been hammered along with the rest of the industry and trade for just 11.8 times trailing earnings.
The recent acquisition of Omega makes the company a major player in the European OTC market, with 43% of total sales coming from outside the United States. Perrigo would be a particularly attractive target for drug companies to diversify into generics and reduce revenue losses when major drugs come off patent protection.
Carnival plc (NYSE: CUK) is the world’s largest cruise operator. The company would be a large acquisition at a current market cap of $39 billion, but strong demographic drivers and a weak pound could bring out a buyer. Shares trade for just 14.6 times earnings against a five-year average of 22.9 and currently pay a 2.6% dividend yield.
The company’s size helps it achieve the lowest unit-costs in the industry and Carnival has recently made progress in underrepresented Asian markets. Cash flow from operations has grown by 80% over the last three years and Carnival returned $3.3 billion to investors last year, a cash return of 8.4% on the current market cap, through a buyback and dividend.
InterContinental Hotels Group plc (NYSE: IHG) is a mid- and luxury-level hotel company based in the United Kingdom. The company has a $9.2 billion market cap and operates just over a third (36%) of total rooms outside the Americas. Shares trade for just 8.6 times earnings against a five-year average of 17.5 times. Recurring managed and franchise fees (95% of operating income) provide for a stable source of cash that could be attractive to a buyer.
Intercontinental operates across 10 brands, including Holiday Inn and lifestyle brands Indigo, Hualuxe and Kimpton. Brand strength is improving with 16% growth in loyalty members last year. The company also managed to increase its online booking ratio to 21.4% of total bookings.
Risks To Consider: Investors should not invest exclusively on the hope of a buyout offer rather look for companies with strong fundamentals that could become targets.
Action To Take: Position ahead of the U.S. buying spree of foreign companies with stocks headquartered in the U.K. and Europe.
— Joseph Hogue
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Source: Street Authority