Playing the Market’s Merger Mania
“M&A activity is back in a big way,” Cramer said Wednesday.
August, a typically slow month for mergers and acquisitions, so far has seen BHP Billiton bid for Potash, Intel buy McAfee and First Niagara pick up NewAlliance Bancshares, in addition to slew of smaller deals happening as well. Cramer isn’t basing his statement on purely anecdotal evidence, either, because the first seven months of this year showed a 14% increase in global deal volume from 2009.
“And I don’t think the pace of M&A activity will slow down any time soon,” Cramer said.
If investors want to play the trend, though, they shouldn’t waste time trying to guess the next most likely takeover target. They want to buy a company that facilitates these deals, the kind that rakes in big fees everything one of these acquisitions happens. And that’s Lazard .
Yes, on Tuesday the company’s shares ticked higher, however briefly, on takeover speculation—meaning Lazard would get a bid—but that’s not why Cramer likes it. This is the fifth-largest merger franchise out there, behind behemoths like Goldman Sachs , JPMorgan Chase , Morgan Stanley and Bank of America . But Lazard is small enough of a company, much smaller than these other banks, and mergers make up such a big part of the business, that the ramp up in M&A activity can really move the earnings needle.
Example: M&A accounts for 46% of Lazard’s business. Compare that to just 4% for Goldman, 2% for JPMorgan and 9% for Morgan Stanley.
“So a pickup in mergers will benefit Lazard,” Cramer said, “a whole lot more than anyone else in the industry.”
By the beginning of August, Lazard’s M&A fee backlog has risen to $310 million, up 81% since December 2009. And the CEO said to expect more deals in energy, health care and the financials now that the “legislative uncertainty,” as Cramer called it, is gone from those sectors. If the long-term average for deals, which was at a mere 5.37% of US gross domestic product in 2009, returns to normal at 10%, then Lazard stands to see a significant jump in business.
The stock is down 12% so far this year, and many analysts have given it a price target of $36. But that’s just 10% up from Wednesday’s close. Cramer said he thinks LAZ can go “much higher than that,” putting his own price target on the stock of $49. That’s a 47% jump, something Cramer thinks is entirely possible given that the estimates should prove “way too low with this level of deal-making in a sleepy summer.”
When this story published, Cramer’s charitable trust owned Bank of America, Goldman Sachs and JPMorgan Chase.
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