Investing in Possible Buyout Companies

Over the next several blogs I will be looking at how to invest in companies that are possible buyout candidates. Excluding the financial service companies, the world’s 1000 biggest companies by market capitalization have almost $3 trillion (with a ‘t’) of cash or cash equivalent on-hand based on their latest filings. The buyout deals in August 2010 totaled over $285 billion, the largest month of 2010 (over 68% of the deals were cash only). There is lot cash available to buy companies over the next several years.

What can companies do with their cash?

• Increase Research and Development (R&D), sales force, etc.- For example, companies could increase their R&D budget to develop and improve existing products by hiring new employees, hire more sales people to increase their market share / revenue, etc. Companies are very reluctant to hire new fulltime employees in the current micro/ macroeconomic environment.

• Start or increase dividend payout – Companies could start paying dividends or increase their dividend payout to investors with their excess cash. For many tech companies for whom buying companies has not gone well in the past this may be a better use of the cash. In the US starting in 2011 the tax rate could more than double for high earners whose dividend payouts are in taxable accounts.

• Increase capital or infrastructure expenditures – Spend money to get new hardware/software, build a new office building, buy new equipment, etc. to increase the efficiency of the company workforce, expand the business etc.

• Buy companies – Buy companies which can improve a company’s overall business.

• Invest the cash – Companies could continue to invest their cash or equivalent in this period of historic low interest rates. In the US there has been talk that the federal government may start taxing their excess cash to encourage the economic recovery. This would force the companies to invest their money for example in capital or infrastructure expenditures, hire new employees, etc.

Why do companies buy other companies?

· Increase market share of current business

· Increase overall revenue and revenue growth

· Eliminate a competitor

· Get into a new business sector

· Acquire the company’s assets - For example, key technology, management talent, customer list, support contracts, etc.

I will be researching what companies have the most cash available to buy other companies and have a history of doing so, what sectors (type of business) and what type of companies (for example market capitalization size), are possible buyout candidates and writing blogs on what I find out.



This is an exciting investment area that may have the best investment return opportunities over the next two or three years. I will use a limited amount of my investment portfolio to invest in possible buyout candidates (around 5%). Please do your own research before making an investment. Maybe I should start a hedge fund looking for possible buyout candidates?

Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?

© 2010 Paul Cusick