4 Industries Where Mergers and Acquisitions May Become the Norm

Source: Flickr user Nguyen Hung Vu

Global dealmaking is on the rise, and with a growing U.S. economy there's nothing to signal that the scope of mergers and acquisitions we're witnessing will slow anytime soon.

Through early April, the deal value of mergers and acquisitions activity, also known as M&A, totaled around $1 trillion. Per Business Insider, M&A activity is expected to hit $3.7 trillion in 2015. If these estimates prove true, 2015 would be the most robust year for M&A activity based on deal value since 2007, when $4 trillion worth of deals were conducted.

What's notable about some of the deals we've witnessed since the beginning of 2014 is their size. Of the 10 largest mergers and acquisitions deals since 2009, seven of those deals have occurred in 2014 or 2015. 

M&A deals are typically viewed as a positive by the stock market and investors because it implies that an acquiring company is willing to take on the risk of purchasing a rival, and that it obviously has a clear and optimistic outlook for both growth and possible cost savings derived from the M&A activity.

Four industries where mergers and acquisitions may become the norm
Of course, in the real world companies merge and acquire one another for other reasons too. Changing market dynamics, for instance, could necessitate the desire for companies to "buddy up," so to speak.

Today, we'll take a look at four industries that I believe are ripe for M&A activity and examine the "why" factor behind my reasoning. Please keep in mind that buying a stock to bet solely on a buyout is rarely, if ever, a smart move. Also, I don't have a crystal ball, so understand that my M&A suggestions are merely that: suggestions! In other words, not a single deal that I mention may materialize.

Source: Centers for Disease Control and Prevention via Facebook

1. Health insurers
Why?The implementation of the Affordable Care Act, known better as Obamacare, brought millions of new enrollees into the fold for health insurers. Unfortunately, Obamacare also meant that insurers could no longer turn away people with pre-existing conditions, and it requires insurers to spend a minimum of 80% of their premium dollars received on patient care. Long story short, it caps insurers' profit potential short of squeezing out additional cost savings from M&A. With the Supreme Court saving Obamacare once again, insurers have been given the green light to commence M&A activity.

Stocks to watch: There's not too much mystery here as we have a number of potential deals in the works. Anthem has made an offer to acquire Cigna, UnitedHealth Group has been cozying up to Aetna, and could be eyeing Cigna, and Aetna may have eyes for Humana. Over the long run Anthem is my personal choice for the stock with the most potential upside, and adding Cigna should help lower costs and boost profitability both within and outside of Obamacare's sphere of influence.

Source: Pfizer via Facebook

2. Biotechnology
Why? Having more than six years of record-low lending rates and a bull market allowed a parade of biotechnology companies to go public and raise cash to develop their pipelines. Unfortunately, the drug development process is long, arduous, and incredibly expensive.

We're also witnessing an unprecedented time where big pharmaceutical companies and larger biotech companies are seeing their growth slow, or head in reverse, due to patent expirations, increased competition, or product portfolio maturity. Turning to mergers and acquisitions would alleviate cash concerns for smaller biotech companies and potentially provide a new stream of products down the road for Big Pharma and large biotech firms.

Stocks to watch: On the buying end don't discount giants like Pfizer, which is desperate for growth following a bounty of patent expirations from the likes of Lipitor or Celebrex, or Gilead Sciences, which is rolling in more cash flow than it knows what to do with thanks to the resounding success of its hepatitis C duo of Sovaldi and Harvoni.

On the buyout front, there are too many companies to mention, but the first that comes to my mind is Jazz Pharmaceuticals, the drug developer behind rapidly growing narcolepsy drug Xyrem. It could be a hot acquisition target since it's based in Ireland where corporate tax rates are considerably lower than in the U.S. (hello tax inversion!).

Source: Peabody Energy

3. Coal
Why? In terms of thousand megawatt hours, coal comprised 38.7% of net energy generation in 2014. In 2005, coal represented nearly half of net energy generation! In short, coal is being replaced by cheap and cleaner natural gas, which is hurting demand and both thermal and metallurgical coal pricing. Coal companies can choose to cut costs and production a bit, but the smarter move may be to combine their forces in order to reduce competition and enhance savings until coal prices eventually find a bottom. Keep in mind, though, that 38.7% represents a substantial amount of energy generation, so coal isn't going to disappear overnight. 

Stocks to watch: Among mergers and acquisitions the coal sector is the riskiest, because it's possible some of these companies may not survive over the long haul. Peabody Energy, Arch Coal, and Alpha Natural Resources are all suffering big losses and are in need of finding ways to curb their costs over the coming two or three years. It's possible a merger here could alleviate some of their cash outflow, but even that may not guarantee their long-term survival.

Source: MyFuture.com via Flickr

4. Regional banks
Why? According to a survey released last year from Harris, more than half of all Americans share a distrust for national banks and prefer to keep their money in local financial institutions. At the same time, we're also witnessing a revolution among the banking industry whereby consumers are moving away from traditional bricks-and-mortars banks and toward the convenience of mobile banking. These two factors offer regional banks a way of attracting consumers away from national banks, but many lack the deep pockets to tackle the marketing needed to sway new customers. That's where M&A could come into play! M&A should boost profitability, and more importantly regional banks' customer base, to better compete against national banks in the region.

Stocks to watch: If you thought there were a lot of biotechnology stocks that could be on the M&A block, then possible M&A activity in the regional banking industry dwarfs that of biotech. One company I've got my eye on as a possible acquisition target is First Niagara Financial Group, a retail and commercial banking and lending institution in the Northeast.

First Niagara spent $1 billion (which is a lot for a bank its size) to acquire more than 100 branches from HSBC in the Northeast three years ago, but First Niagara's earnings results post-HSBC acquisition haven't lived up to expectations. A mid-cap or large-cap bank with operations on the East Coast or in the Northeast would instantly gain a solid presence by purchasing First Niagara, and it could be the perfect way for a larger institution to chip away at the presence of national banks in the region.

Remember, I offer no guarantees that any deals will happen. However, if you're looking for industries where mergers and acquisitions are expected to thrive, then these four would appear to fit the bill.