27th February 2017 -IAM
Erika Mesmer, Client Relationship Manager
A few days ago Kraft announced a bid for Unilever. Although it quickly became clear that it, at this stage at least, will not take place, it highlights a number of interesting things:
First many companies have a lot of cash and additional funds are easily available in this low interest rate environment. They are looking for potential targets in order to increase the variety of their product range or reduce production costs by benefiting of economies of scale. Then there are companies, which are financially very healthy, which have strong market shares and which currently are increasing their volumes of production and sales. This environment is hence favourable for increased merger and acquisition activities.
And as an investor and shareholder, what does all this imply? Well, being a shareholder of a company being targeted by another company is interesting, as the buyer generally will offer a premium when doing its bid.
However while corporate actions can be nice to have, the current economic environment is attractive in itself. The prospects for companies, especially in Europe, are very positive: many have published excellent results for the last year and they have strong market shares. In addition, due to political risks which darken the picture for many investors, valuations for European companies remain attractive.
At IAM, we like to invest in good quality companies with a strong management, which are leaders in their sector and which have regular and predictable revenues. Looking back at the second half of 2016, cyclical companies were very much favoured by investors, as equity markets rallied. Although this temporarily did not favour our investment style, we remain true to our convictions and we strongly believe, that quality stocks will continue to beat more cyclical stocks over the long term in the future, as they have in the past.
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