Mergers and Acquisitions (M&A) are a healthy component for a modern economy. In the simplest sense, M&As are designed to be accretive for the long-term prospects of the new company. In today’s global interdependent world, companies are almost forced to cut the fat and operate as efficiently as possible.
Sometimes the best way to accomplish this goal is to combine forces and merge with a competitor in order to take advantage of their existing strengths. Ideally, the new company emerges stronger after the dust settles and can compete more effectively in the global economy.
This can make for a big opportunity in the stock market, and it could soon be happening in a vital area…
Case Study: Airlines
The airline industry serves a great (and recent) example of how M&A activity has helped an entire industry grow its bottom line. For many years, airline stocks were under a lot of pressure because the airlines were losing money, and not able to grow their earnings on a consistent basis. There were simply too many airlines competing over the same routes.
Then, one-by-one, large airlines went bankrupt and could not compete. In order to survive, airlines began merging and today’s airline industry looks nothing like it did 10 years ago.
Concurrently, airline stocks soared over the past 18 months because airlines have pricing power again (due to less competition) and introduced fees that were once unheard of (fees for checking in bags, food, etc). The bottom line for shareholders is when the time is right, M&A activity can be healthy for an industry.
Next Area That Should Consolidate: Gold & Silver Stocks
One of my jobs as an investor is to look around the world for under-valued assets. Gold and Silver stocks are one area that I’m watching because the space looks ripe to consolidate. It is important to note that both Gold and Silver have been in bear markets (defined by a decline >20%) since 2011. As a result, many gold and silver stocks have fallen hard, even as the S&P 500 has soared during that time. Not only are these stocks considered cheap by value-investors (low P/E ratios) but the companies are suffering the same woes that the airlines did 10 years ago. Also, there is simply no need for all these companies in this space.
This is just one example of an area that should consolidate. The key is to be patient and pick your spots carefully.
