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Merger & IPO Mania on Investors Radar

by on August 03, 2014 7:00 AM

With large cash stockpiles, high stock markets and low interest rates, IPO and merger mania is in full swing.

I recall the other heydays of the markets that brought unbridled enthusiasm for all new issues and companies.

A perfect example is the tech bubble, where companies without business plans or profits could come to market and make a killing.

I don't see that sort of 'irrational exuberance' currently but when stocks are hot, a corporation can make a large profit for those who took a chance early in the development of the company.

Corporations are looking at going public because the economy is improving and the stock markets are near highs. As they say, 'Strike while the iron is hot.' The airlines have been holding strong with both Jetblue (JBLU) and Southwest Airlines (LUV) up over 30% so far this year.

They are so strong that Richard Branson's Virgin America is planning a U.S. Initial Public Offering. No date, ticker symbol or exchange is set yet but the company indicated the maximum offer would total $115 million.

A few notable restaurant chains went public this year. Potbelly (PBPB) and Papa Murphy's (FRSH) haven't fared well after their public debut. A recent big winner in the restaurant IPO sector debuted in July 2014, El Pollo Loco (LOCO). The Mexican restaurant chain popped 60% on its first day in trading.

On Thursday, when this column was written, Mobileye's IPO hit the markets. It is expected to make a huge splash due to its technology. Mobileye (MBLY) is an Israeli company that develops ADAS or "Advanced Driver Assistance Systems." These are the cameras and software in cars that help drivers avoid accidents and will eventually lead to driverless cars.

One of the most anticipated debuts is a Chinese company, Alibaba. The offering is expected in late summer or fall and may be one of the largest for a tech stock. Why the huge interest? Alibaba is a Chinese e-commerce behemoth. Alibaba is one of the reasons that Yahoo (yhoo) has performed favorably as it owns a 24% stake in Alibaba.

American Funds compared the sales from Alibaba on "Singles Day" to our Black Friday and Cyber Monday. Singles day is celebrated on 11/11 in China and singles buy themselves and friends gifts to celebrate being single. Alibaba did $5.7B on Singles Day in 2013, which is almost double sales in the U.S. on Black Friday ($1.2B) plus Cyber Monday ($1.7B) in 2013.

There are many reasons for companies to merge -- cost savings or to diversify their holdings. The most recent spate has been all about tax savings.

Inversion Deals, as they are called, combine a U.S. and foreign company or subsidiary with the goal being to alter the U.S. Corporation's citizenship to a lower tax country. The United States boasts the highest tax rate among developed countries at 39.1%.

In the last 18 months, 20 American companies have struck these deals and reincorporated overseas. Two popular countries to relocate to are the Netherlands and Ireland.

The most popular is the United Kingdom partly due to American executives' comfort level with British English and the location. The U.K. is also particularly favorable for pharmaceutical companies due to a special tax break for patents that exists there.

A perfect example of the advantage is the largest of the inversions completed so far by AbbVie (ABBV), which purchased Shire (SHPG) and plans to reincorporate in the U.K. Abbvie looks to reduce its tax rate from 22% to 13%. Britain's tax authority promotes, "... the U.K. tax system should not act as a disincentive to locating (in the U.K.)" I think the United States could learn a little something from that particular statement or we face many more of these departures. A change to the tax code only makes sense to remain competitive.

At this time, the stock market has pulled back slightly due to international issues and profit taking on earning's reports but mergers and IPOs continue to roll along.

(Nothing in this column should be interpreted as a recommendation for the purchase or sale of any security of sector. Investors are advised to conduct their own independent research when making investment decisions and past performance is no guarantee of future price appreciation.)

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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