Dealmaking surge confirms the stock market got far too cheap after late 2018 sell-offs: Cramer
The recent surge in U.S. dealmaking activity is a byproduct of stocks becoming too cheap to ignore in the tail-end of 2018, argues CNBC’s Jim Cramer.
Speaking after stocks rose Wednesday on strong earnings from a few top banks, Cramer said “stocks got too mutilated” in the months after Federal Reserve Chair Jerome Powell indicated that more interest rate hikes were on the horizon.
After Powell’s remarks in October, the market saw a multi-month breakdown. But the start of 2019 seemed to breathe new life into stocks as investors witnessed a wave of high-profile mergers and acquisitions.
Just since the start of the new year, at least four massive, market-moving deals have been struck on Wall Street.
In biotech, Bristol-Myers Squibb announced it would buy Celgene for $74 billion; pharmaceutical giant Eli Lilly said it would pay $8 billion for the cancer-focused Loxo Oncology; gold producer Newmont Mining made a $10 billion deal to buy Goldcorp; and Fiserv unveiled a $22 billion all-stock deal to buy First Data.
This happened because stocks were “so cheap that opportunistic buyers would have to be crazy not to pounce,” Cramer said on “Mad Money.” “Deals that were simply unworkable because of price four months ago are now being done with alacrity, and you know what? I bet this merger mania is just getting started.”
The reason for this uptick in M&A is simple: shares of the companies being bought reached wildly enticing levels, so enticing that not buying them might’ve been detrimental to the acquirers, the “Mad Money” host explained.
First Data, for example, is being acquired by Fiserv for $22.74 a share, well below where First Data was trading in September — roughly $26 a share — before it reported an earnings miss.
“The top dogs at Fiserv probably loved First Data’s credit merchandising business, but they didn’t want to pay $32 a share for it, which would’ve been a reasonable price tag back then,” Cramer said. “Now they’re paying $10 bucks less.”
Lower stock prices are also enabling Newmont’s deal for Goldcorp to be “immediately additive” to earnings, Cramer continued. It wouldn’t have been if Newmont had bought Goldcorp at a premium to its July price of $13.61 a share, he noted.
While Eli Lilly’s deal to buy Loxo seemed expensive — it paid $235 a share when Loxo’s stock was trading at just $139 the week before — Lilly also took advantage of the discount, the “Mad Money” host explained.
“Back in July, Loxo traded at $192. I’m sure Lilly looked it over and passed based on how much it would’ve had to pay at the time,” he said. “But Loxo’s stock crashed from $192 to $139, and that was an opportunity for Lilly because it meant that this acquisition was suddenly affordable.”
Finally, Bristol-Myers’ acquisition of Celgene was simply too good a deal for the biopharmaceutical giant to pass up, Cramer said.
“The darned thing was just too cheap for Bristol-Myers not to buy it, and it was too cheap because biotech had fallen out of favor with the Wall Street fashion show,” he said. “Bristol-Myers doesn’t care about the fashion show; it cares about earnings and new drugs in the pipeline. Celgene’s got both, which is why this deal will be so beneficial to Bristol-Myers’ shareholders.”
So as investors prepare for more deal activity, Cramer reminded them who’s really running the show when it comes to stock prices.
“How do you determine when a stock has gotten too cheap? Who’s the arbiter? The companies, that’s who: the companies that buy other businesses at substantial premiums to where their stocks had been trading,” he said. “All of these deals tell you the stocks got too cheap.”
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