Our passion and principals are constantly in a frenzy, but begin to shift and waver, as we return to reason’ – Laurence Sterne
Most investors like deals because a takeover or merger as well as a spin-off or a disposal suggests a level of dynamism from a corporate board. The reality is given a choice of the two areas, typically I prefer the investments that I own undertaking spin-offs or disposals rather than chest-beating mergers and acquisitions because – as many studies have shown – many takeover deals just don’t cut the mustard when looked at from the perspective of a few years.
We are all prone to the negatives of Empire building in even our personal lives but, in the corporate world with its incentives based on share price and power seemingly disposed to those with the biggest footprint or market share, this is even more extreme. And in the current backdrop of ultra-cheap money, financiers can make a sow’s ear look more like a silk purse just that little bit more easily.
Certainly this cheap money appears to have helped deal flow. There has been a lot of deal activity around the UK stock market over recent months with contested bids for names including GKN, Sky and a complex three-way discussion involving property names Hammerson and Intu. Then last week pharmaceutical name Shire was bid for again by a Japanese peer, Whitbread mused about the potential to spin-off Costa Coffee and over the weekend Sainsbury’s and the unlisted Asda (ultimately owned by the US food retail giant Wal-Mart) have announced plans to merge. Exciting times for dealmakers and investors alike.
Now normally I would be quite sceptical about all the above in line with the above but with regards to the UK I think there is something noteworthy going on. Among the inherently more likely to create value spin-offs and domestic food retail giants mergers, much of the other takeover activity around the larger cap UK market has focused on foreign (non-UK) buyers looking to step in.
This is very exciting – and also perfectly logical. Throughout the life of the Dynamic Opportunities Fund to date our largest individual geographic allocation has been to the UK, which may have been a bit surprising surprising to some given our global stockpicking reach. However you must always go where the value is and our observation has been a Brexit fearful and (from the perspectives of the global exchange rate markets) good value Pound stock market is throwing up a lot of opportunities for investors and acquirers alike – hence the flood of recent deals. We think this heightened interest in the UK market continues and are hopeful that our heavy allocation relative to many other typical global stockpicking funds will add value.
And if we are on the fortunate end of a deal or two for our preferred names then we will not complain either.
Meanwhile in portfolio activity we added a couple of new names to the Fund’s holdings in the last week buying positions in the US listed tobacco sector company Philip Morris International and the Danish diabetes company Novo Nordisk.