Posted November 03, 2023
By Zach Scheidt
The Next Buyout Frenzy Is Imminent
This week I had the chance to talk about one of my favorite topics… buyouts!
My colleague James Altucher and I sat down on Wednesday to record our monthly live call for James Altucher's Buyout Trader.
On the call, I shared why I believe we’re approaching a turning point in the market for buyouts.
Below you can watch a clip from our call where I explain what could drive a flurry of buyout activity over the next several weeks.
Looking at the current state of buyouts, the main thing to realize is that there are companies that do have a lot of cash, and these companies are seeing opportunities in the market right now.
In some cases, it actually helps for a stock to trade lower before a buyout takes place because it gives the buyer more incentive to pull the trigger and make the buyout.
To make a comparison, it reminds me of the first time I bought a car. I was fresh out of college and barely had any money, but I had saved up enough for a used car.
I looked online and found a Honda Civic that was being offered for $1,200 or so. The seller was an 18-year-old looking to sell the car so his dad could buy him something better.
After test-driving the car, I told him, “Hey, I like the car. But I don’t want to spend that much on it. What’s the lowest amount you’re willing to accept for it?”
He told me, “Well, I’d take $800 for it, but I’d really like to sell it for more than that.”
So I said, “Okay, I’ve got $800 right now that I’ll give you for the car.”
He looked panicked and said, “Oh, no no no no no… I’d like to get more, but that’s just the lowest I’d go.”
Suffice it to say that I walked away with the car and only spent the $800 from my first offer.
Now this may sound like a silly comparison, but this story is relevant to buyout deals in the market today.
Over at James Altucher's Buyout Trader, we identify companies that look like prime buyout candidates.
With the right investment timed just before news of a major acquisition, these buyout trades can lead to massive gains overnight.
It’s not unusual for these potential buyout targets to trade lower, especially in such a volatile market. And this is certainly disappointing to see.
However, a lower stock price gives buyers more incentive to write a check and trigger a buyout, which always happens above the market price.
In other words, I hate to see our buyout targets trading lower. But it means a company like Microsoft or Alphabet can afford to offer a 50% premium on the buyout.
And this could finally lead to a buyout deal, resulting in a big jump in the stock once the announcement goes public.
One other thing that’s important to note from the broad market perspective is that interest rates have been rising. And higher interest rates naturally drive the prices of growth stocks lower.
We don’t need to get into all of the mathematical reasons why this happens. But we don’t need to get too far into the weeds here.
Just understand that high interest rates put pressure on growth stocks in particular.
The Federal Reserve has recently paused two times in a row, which means we’re starting to see rates peak before rolling back over.
Once that rollover starts to happen, that’s when I believe there will be more pressure on large companies to pull the trigger on buyouts.
Because if they don’t, they risk having to pay more for an acquisition once the stock prices rebound. Remember, a buyout will always happen above the current market price of a stock.
Bottom line, I believe we’re approaching a turning point for buyout activity in the market.
Over the next several weeks as we see interest rates level out and potentially trade lower, we should see an uptick in buyout activity.