My grandfather was one of the wisest people I’ve ever known. And before he passed away, I was lucky enough to be able to get a lot of advice from him, some of which had to do with investing.
The point that he emphasized the most was to be patient. The market is impossible to predict, but if you can ride the ups and downs, you’ll be much better off.
He also stressed the importance of doing your research before making an investment. If you’re investing in a stock, you have to know the company well, and be able to interpret how it’s going to adapt to the future.
He was a smart investor, but even he was surprised when his company was bought out in his 40s.
This sort of event makes people lots of money all the time. But even if you don’t work for the company being bought, you can profit from the situation.
Big Markups Allow for Big Profits
There’s a whole trading strategy built around timing mergers and acquisitions.
For example, if you can buy a stock right before it gets bought out by a bigger company, it can have a huge payoff.
Say you buy shares of a cutting-edge tech company that makes a longer-lasting cellphone battery. There’s a good chance that company would be sought after by big cellphone manufacturers.
When a small company gets bought out, all of its stock gets bought at a certain price. That price is usually way above the current value, which means the profits get passed along to shareholders.
If that battery company was worth $1 billion, but they’re bought for $2 billion, that’s a 100% return for you if you had the stock.
Typically, the targets for these types of deals are small companies with low amounts of debt that are bringing in a lot of cash. So, a perfect example is a tech company that can make some kind of new technology for relatively cheap, and sell it for a huge markup because it isn’t available anywhere else.
It doesn’t need debt because its costs are low, and the big markup allows for big profits to come flowing in on a regular basis.
As simple as it sounds, this can be a profitable strategy. You can really hit it big if you find the right opportunities.
Deals All Over the World
There have been several huge examples of mergers and acquisitions in the past couple years alone.
2017 made history by having the most mergers and acquisitions in a single calendar year. In just that year, there were more than 50,000 deals all over the world, and their combined worth was over $3.5 trillion.
Over 25% of those mergers and acquisitions events took place in the United States, which gives us a distinct advantage when looking for opportunities.
In addition to the increase in overall merger and acquisition volume, we’ve seen the size of the deals go up as well. One example is Disney buying over $52 billion’ worth of Twenty-First Century Fox. That deal is not final yet, but it’s getting very close.
Another happened just a week ago, when a Japanese semiconductor company called Renesas bought an American semiconductor company called Integrated Device Technology for $6.7 billion. That has already sent the stock soaring 27%.
An area that’s specifically seeing a lot of mergers and acquisitions right now is oil. With the huge rise of shale over the past couple years, oil production in the United States has skyrocketed.
And of course, some smaller companies made it big by being the first ones to find huge amounts of oil. Now, the bigger companies are interested in buying them up to expand their own production.
A Quickly Growing Economy
Through August 1, over $120 billion’ worth of deals have been done so far this year in the U.S., which is up 17% from last year.
Looking outside of America, the mergers and acquisitions market is red-hot right now in India. Since it’s the third fastest-growing country in the world right now, there are companies all over the world looking to invest.
For example, last year there was a bidding war between Amazon and Walmart to buy an Indian company called Flipkart, which is like the Amazon of India.
When companies like that are competing over buying you, you know you’re doing something right.
Of course, with such a quickly growing economy, people have more money to spend online. That makes this a sought-after investment.
Actually, the bidding war got so heated that Walmart finally won with a bid of $16 billion. And that was only for 77% of the company!
Because of its rapidly growing economy, it’s no surprise that so far this year, India has seen over $100 billion in mergers and acquisitions activity — an all-time high.
How to Profit From Mergers and Acquisitions
Investing in potential merging companies can be a complicated and time-consuming process.
Luckily, there’s an exchange-traded fund (ETF) that can do all of that work for you.
So, if you want to get in on this trend and profit from the mergers and acquisition boom, I recommend buying the IQ Merger Arbitrage ETF (NYSE: MNA).
This ETF buys shares of companies that are expected to be bought out at some point in the near future. You can see a list of what it’s investing in here.
SMIN carries more risk, but can have a higher return because it’s invested in smaller companies.
Editor, Rapid Profit Trader