Over the past 18 months, the financial media has had its hands full, to say the least.
First, Lehman Brothers collapsed ... then taxpayers were forced to “bail out” AIG (NYSE: AIG ) and Fannie Mae (NYSE: FNM ) ... and to top it all off, some coked-up bald guy got carted off to jail -- along with tens of billions of dollars of other people’s money.
So it’s no surprise that most investors haven’t heard much about another ongoing development that’s about to shake up the investing world in a major way.
A few billion down, a few trillion to go
Sure, you probably know about Kraft’s (NYSE: KFT ) $17 billion bid for Cadbury, Buffett’s $34 billion offer for Burlington Northern, and ExxonMobil’s (NYSE: XOM ) $31 billion bid for XTO Energy (NYSE: XTO ) -- but chances are you don’t realize just how big the coming M&A boom is going to be.
JPMorgan and ThompsonReuters project that global M&A activity could reach a whopping $2.6 trillion by 2011. And, frankly, that’s no surprise.
Shrewd executives have realized that if the economy continues to limp along, the only way to grow their top and bottom lines will be through acquisitions. So, for the past year or so, they’ve been slashing budgets, cutting costs, and raising capital.
In fact, according to ThompsonReuters, the cash held by S&P 500 companies has risen from $600 billion a year ago to more than $700 billion today. And analysts at Credit Suisse recently reported that “companies have the most cash in their arsenal targeted at growth strategies since 2001.”
Buy, buy, buy
Now we’re about to see what could be one of the biggest buyout booms in recent history.
But be warned ... buying a stock simply because someone tells you it might be a takeover target is an absolute sucker’s bet. Trust me, I would know.
A few years back, I scooped up a few dozen shares of ValueClick solely because online marketing companies were getting taken out right and left by the likes of Google, Yahoo! (Nasdaq: YHOO ) , and Microsoft (Nasdaq: MSFT ) -- and, oh yeah, some loudmouth on TV just couldn’t shut up about how ValueClick was next.
Well, it wasn’t -- and I’m still sitting on a big loss.
How you can play it a lot smarter
At The Motley Fool, it is our firm belief that the only reason you should buy a stock is because you think it’s going to beat the market over the next three to five years.
That’s exactly why Motley Fool co-fonder David Gardner recommended Marvel Entertainment to his Stock Advisor members back in the summer of 2002.
David noted that Marvel’s $170 million market cap was “equivalent to a few weeks of box office receipts” of its most recent blockbuster film, Spider-Man. He also pointed out that Spider-Man was just one of more than 4,700 superheroes the company had the licensing rights to -- and that those rights extended far beyond box-office movies to toys, games, clothing, books and DVDs.
At the time, Marvel was selling for a split-adjusted $3.50 a share. Come summer of 2009 -- after a string of hits like Spider-Man 2 and 3 and Iron Man -- Marvel was selling for around $35 a share.
And then something unexpected happened
On Aug. 31, Disney offered to buy Marvel in a cash and stock deal that valued the company at nearly $50 per share, meaning those who bought back in the summer of 2002 were up over 1,400%, and as much as 279% in a single day.
I bring this up for two reasons. First, to prove that you can cash in on the M&A boom without making risky short-term bets, and second, because David Gardner has found another company that looks to be following right in Marvel’s footsteps.
Another blowout winner?
Hollywood blockbusters and stock market riches are probably the last two things you think about when you hear the name Hasbro -- but that’s about to change.
For one thing, between Transformers 2 and G.I. Joe, movies based on Hasbro characters pulled in more than $1.5 billion this year -- yet Hasbro’s market cap sits at just three times that (about the same size Marvel was when Disney made its offer). And, of course, just like Marvel, Hasbro’s licensing rights extend far beyond movies.
Two more major movies are already in the works, and a recent deal with Universal Pictures will bring another four movies to the box office over the next six years. Not to mention that Hasbro also recently inked a deal with Marvel -- giving it exclusive rights to manufacture some of the most profitable memorabilia tied to Marvel blockbusters like Iron Man and Spider-Man.
I almost forgot to mention
Hasbro just signed a 10-year deal giving it the right to manufacture toys based on Sesame Street characters -- a job that used to be held by its chief rival, Mattel. And, oh yeah, Hasbro also pays a 2.5% dividend.
But, of course, I wouldn’t want you invest based solely on what you’ve read here today.
So I’d like to invite you to take a free 30-day trial of Motley Fool Stock Advisor. In addition to David Gardner’s full research write-up of Hasbro, you’ll have access to every stock David and Tom Gardner are recommending – including their two top picks for new money.
Stick with it if you like it – pay nothing if you don’t. There is no risk, nor any obligation to subscribe. To begin your free trial, simply click here.
Austin Edwards owns shares of Google, ValueClick, Boardwalk and Park Place. Google is a Motley Fool Rule Breakers selection. Disney, Marvel, and Hasbro are Stock Advisor recommendations. Microsoft is an Inside Value pick. The Fool owns shares of XTO. As always, The Motley Fool has a disclosure policy.