The market for mergers and acquisitions just is not what it used to be. Corporations are now often larger in market capitalization than the GDP of many nations. The costs of financing a merger with debt are much higher than they used to be with higher interest rates. And the current administration in the U.S., as well as regulators abroad, detest mergers over fears of less competition, more powerful control on markets (and prices) and because they can lead to layoffs.
2024 was supposed to be the year that investment banking came back into the fray. There has been a recovery in the IPO market, and stocks being at all-time highs has to leave room for companies to issue more stock or take on debt. This just hasn’t translated into a major recovery in the mergers and acquisitions (M&A) divisions for the major investment banks.
Earlier in 2024, Morgan Stanley called for M&A volume to rise as much as 50% from depressed levels in 2023. That view certainly came with no guarantees or assurances. And we have to remember that the coming interest rate cut cycle and the subsiding inflation are just taking longer to come to fruition than they were at the start of this year.
Oggonomics wanted to review the M&A deals (at least Morgan Staley’s screened potential deals) that could be coming down the pipe if the economy holds up. After all, inflationary pressure has eased somewhat, and interest rates are down from their highs. The $35 billion takeover of Discover Financial Services (NYSE: DFS) by Capital One (NYSE: COF) was one thing. Discover’s year-to-date (YTD) gain is now 22% versus just 10.3% for Capital One. That was a very specific merger that should not have been interpreted as an “All-Clear” sign for M&A growth. Ditto for the Walmart Inc. (NYSE: WMT) $2 billion deal to acquire Vizio for TVs.
MORE TAKEOVERS PLUS M&A
M&A was stronger in the oil patch and the potential private equity buyout of Macy’s (now torpedoed) offered some hope that the M&A winter was thawing. Morgan Stanley had pointed out at the time that companies around the globe have $5.6 trillion in cash while private market investors have another $2.5 trillion in cash as dry powder. Another boost was expected rate cut wave coming from the U.S. and Europe. Again, the report came with no guarantees any deal would come to fruition — and you might want to see how badly some of the stocks have performed in 2024.
Morgan Stanley named multiple potential takeover targets. Just be advised that this was a list from a screen rather than a list put together by investment bankers looking into M&A. The screen was based on companies with attractive book value and earnings valuations than peers, smaller companies that could be acquired, come with lower dividends and other criteria.
Oggonomics is focused solely on the U.S. companies which made the list. The list is in alphabetical order to prevent any perceived ranking or order of importance. And all that is being represented here in July is the year-to-date (YTD) gain and the market capitalization of each company. How you choose to read into the screened list is entirely up to you as an investor and your financial advisors.
THE ACTUAL LIST
Here is the screened list of stocks Morgan Stanley provided in March:
Domino’s Pizza, Inc. (NYSE: DPZ)
-Market Cap: $16.8 Billion
-YTD Return: +17.2%
Harley-Davidson, Inc. (NYSE: HOG)
-Market Cap: $4.7 Billion
-YTD Return: -4.5%
Hertz Global Holdings, Inc. (NASDAQ: HTZ)
-Market Cap: $607 million
-YTD Return: -58.9%
Kohl’s Corporation (NYSE: KSS)
-Market Cap: $2.4 Billion
-YTD Return: -23.7%
Murphy Oil Corp. (NYSE: MUR)
-Market Cap: $6.5 Billion
-YTD Return: -0.8%
Nordstrom Inc. (NYSE: JWN)
-Market Cap: $3.7 Billion
-YTD Return: +23.6%
Scotts Miracle-Gro Co. (NYSE: SMG)
-Market Cap: $3.5 Billion
-YTD Return: -2.7%
Teladoc Health Inc. (NYSE: TDOC)
-Market Cap: $1.6 Billion
-YTD Return: -57.0%
Under Armour Inc. (NYSE: UA)
-Market Cap: $2.8 Billion
-YTD Return: -23.6%
Victoria’s Secret & Co. (NYSE: VSCO)
-Market Cap: $1.4 Billion
-YTD Return: -31.9%
Wingstop Inc. (NASDAQ: WING)
-Market Cap: $11.3 Billion
-YTD Return: +50.5%
IN THE END
Would a “strategic bull” looking forward from this date simply criticize how the 2024 gains for these stocks have been? Maybe, or maybe looking forward rather than looking backwards is better. This strategic bull might be more inclined to look at the companies where the share prices have fallen and then the ones which still have a positive track to deliver on solid revenue and/or earnings growth in the years ahead.
Morgan Stanley was not giving “Buy” and “Overweight” ratings on these stocks, and no investor should consider the information in here as a recommendation to buy or sell any of the stocks mentioned in this report.
