Sometimes the best stocks to buy are the companies that make the best acquisitions.
As we come to the end of the first half of 2019, several significant acquisitions have been announced or completed. The biggest being the $92.5 billion Bristol-Myers Squibb (NYSE:BMY) is paying to acquire Celegene (NASDAQ:CELG).
According to Factset, in the 12 months ended May 31, a total of 13,683 M&A deals happened in the U.S. with a total of 318 over $1 billion in value, 14.1% less than in the same period a year earlier.
When it comes to the total number of transactions (13,683) that have occurred over the past 12 months, they’re up by 9.8%, while the average transaction value is down by 15.5%.
Although large acquisitions tend to be a crapshoot, these seven stocks should continue to deliver the goods for shareholders as a result of their M&A deals.
1. Fiserv (FISV) & First Data (FDC)
Fiserv will pay First Data shareholders, 0.303 Fiserv shares for each share of First Data. Based on January 15 closing prices, the offer is worth $22.74 a share or $22 billion, a 29% premium. Fiserv shareholders will own 57.5% of the combined entity with First Data shareholders owning the rest. It’s expected to close by the end of the year. The combination of Fiserv (NASDAQ:FISV) and First Data (NYSE:FDC) will create one of the country’s leading financial technology companies capable of doing so much more for its respective customers together than they could do apart.
Some of the highlights of the deal include generating $4 billion in free cash flow by the end of the third year after the deal closes; cost synergy savings of $900 million within five years; and accretive to adjusted earnings by more than 20% by the end of the first year.
A big winner in the merger is KKR & Co. (NYSE:KKR) who own 39% of First Data. After the deal is completed, KKR, through its affiliate, New Omaha Holdings L.P., will own 16% of the combined company.
2. Danaher (DHR) & GE Life Sciences
GE Biopharma and the rest of General Electric’s (NYSE:GE) healthcare unit were initially going to be spun out by the industrial conglomerate into its own separately trading public company. However, GE CEO Larry Culp, who ran Danaher until retiring four years ago, managed to convince his old company to take another asset of his hands as he remakes GE into a more focused company.Danaher (NYSE:DHR) announced February 25 that it would acquire the Biopharma business of GE Life Sciences for $21.4 billion in cash. Subtracting tax benefits from the deal, Danaher will pay $20 billion or 17 times GE Biopharma’s 2019 EBITDA.
GE’s loss is Danaher’s gain.
“We expect GE Biopharma to advance our growth and innovation strategy in an important and highly attractive life science market. We see meaningful opportunities to harness the power of the Danaher Business System to further provide GE Biopharma’s customers with end-to-end bioprocessing solutions that help enable breakthrough development and production capabilities.”
GE Biopharma is expected to generate $3.2 billion in sales in 2019 with 75% of those recurring revenues.
The deal’s expected to close in the final three months of 2019.
3. Centene (CNC) & WellCare (WCG)
On March 27, Centene (NYSE:CNC) announced that it would pay $17.3 billion to acquire WellCare Health Plans (NYSE:WCG), a Tampa Bay-based company that provides government-sponsored managed care services through Medicaid, Medicare Advantage, Medicare Prescription Drug Plans, as well as individuals in the Health Insurance Marketplace.
The deal itself is cash and stock transaction with WellCare shareholders receiving $120 in cash and 3.38 shares of Centene common stock for each share of WCG stock. The offer is a premium of 32.1%. Centene shareholders will own 72% of the merged entity with WellCare shareholders owning the rest.
Shareholder advisor Institutional Shareholder Services recently gave the merger its blessing albeit with reservations.
“The company did not conduct an auction, and the merger consideration is below the company’s all-time high closing price,” ISS said. “However, the merger appears sound strategically and financially, and the merger consideration implies meaningful premia to the company’s historical valuation and its unaffected price. As such, support for the transaction is warranted.”
While carrying out an auction could have garnered a higher price, ultimately, the merged company should deliver more long-term value for WellCare shareholders than finding and accepting a higher bid.
4. Salesforce.com (CRM) & Tableau Software (DATA)
In November, I called Salesforce.com (NYSE:CRM) one of the best cloud stocks to own despite not being anywhere near one of the five largest. However, despite having a cloud business that was struggling to keep up with Microsoft (NASDAQ:MSFT) and Google, it did have top-notch free cash flow generation.
You can always make acquisitions to fill in holes in your business, but it’s much harder to grow free cash flow consistently. Over the past five years, Salesforce has grown free cash flow by 344%, 10 times Microsoft’s rate of growth.
Therefore, the June 10 announcement by Salesforce that it was paying $15.7 billion for Tableau Software (NYSE:DATA) was a very timely acquisition. It needed to get stronger in analytics and Tableau gives it that and then some.
Long thought to be against on-premises software, Salesforce CEO Marc Benioff has realized that the hybrid cloud is the future with large enterprises requiring both SaaS and on-premises software.
“I see the acquisition of Tableau by Salesforce as less about getting into the on-prem game as it is a reality of the world we live in. Salesforce needed a solid analytics tool that went well beyond their existing capability. Tableau was that tool,” said Tim Crawford, head of Avoa, a strategic CIO advisory firm.
In 2018, Tableau generated almost $1.2 billion in revenue. Joining a company whose market cap is nine times its own, Tableau will have the financial chops to grow more quickly while giving Salesforce agnostic analytics that works on any platform.
Sometimes one plus one plus one equals three. This is one of those occasions.
5. Pfizer (PFE) & Array BioPharma (ARRY)
On June 17, Pfizer (NYSE:PFE) announced that it would acquire cancer-drug specialist Array BioPharma (NASDAQ:ARRY) for $11.4 billion including debt. Paying $48 a share or a 62% premium for Array’s stock, Pfizer is seriously upping its came when it comes to oncology drugs.
In 2018, Array received FDA approval for its combination treatment of melanoma cancer. It’s currently working on triple combination therapy that would be used for patients with colorectal cancer.
”(The acquisition) sets the stage to create a potentially industry-leading franchise for colorectal cancer alongside Pfizer’s existing expertise in breast and prostate cancers,” CEO Albert Bourla stated announcing the deal.
Pfizer is looking to develop 15 experimental drug treatments over the next five years that each has the potential to reach $1 billion in sales. Buying Array speeds up the process significantly.
The deals expected to close in the second half of the year.
6. Newmont Goldcorp (NEM)
If you’ve been watching, gold prices have gradually risen over the past year. By bringing the two companies together, it will mine as much as seven million ounces of gold per year on several different continents.On April 18, Newmont Goldcorp (NYSE:NEM) was born, a $10 billion merger between Newmont Mining and Goldcorp. The deal made NEM the world’s largest gold producer by market value.
Most acquisitions boast about synergies and cost savings. In the case of Newmont and Goldcorp, the merger should create $365 million in pre-tax synergies with as much as $1.5 billion in asset sales over the next two years.
“We’ve met our goal to become the world’s leading gold business, and we’ll maintain that position by executing our winning strategy. That strategy focuses on constantly improving safety and efficiency at our current operations while we continue to invest in expansions and exploration to fuel next generation production,” said CEO Gary Goldberg in April.
Taking Goldberg’s place as CEO when he retires at the end of 2019 is Newmont COO Tom Palmer.
To be based in Vancouver, Newmont Goldcorp is the only gold producer that’s part of the S&P 500.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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