The surge in M&A activity over recent years is a strong indicator that there are pockets of value across markets, according to Nick Train (pictured), who said 2017 has been a particularly prolific year for mergers already. 
He said a prime example is Kraft’s recent bid for Unilever, which is the largest individual holding across three of his four portfolios. While the merger failed, the fact it nearly sold for a sum of £120bn suggested to the manager that the consumer goods giant is being undervalued by the broader market.
Given M&A activity has picked up so much recently, Train argued there are indeed opportunities in the market and currently has more active portfolio ideas than he has had for a number of years (as detailed in an article earlier this week).
This is despite the fact many investors are concerned about toppy valuations, with the FTSE 100 up 16.63 per cent over the last year.
Performance of index over 1yr
Source: FE Analytics
“When you look at the numbers, M&A activity has been more of a global thing more than specifically a UK thing,” train said. “I suspect if you strip Unilever – which obviously didn’t happen – out of the UK numbers, the UK’s M&A activity hasn’t been anything particularly remarkable.
“It’s more a big upsurge in M&A activity in the US and Asia as well, of which not the biggest, but maybe the most ‘sit up and take notice’ in the last few weeks or so was Amazon going for Wholefoods.”
He said there are a number of factors contributing to this trend. Firstly, he said globalisation is the biggest explanatory factor behind the upturn in M&A.
“Corporations don’t work on the same cycles as politicians do,” Train explained. “Politicians are perhaps thinking about electoral cycles and how to maintain their popularity for the next few years in order to get their party re-elected.
“Companies, in contrast, are thinking about strategy on a decade-long view or longer. I think it’s clear that companies are acutely conscious of the opportunities presented by globalisation – getting their products or services out there to more and more potential customers.
“I think companies are also aware of the risks presented to them by globalisation as well, which is new and unthought of competition in domestic markets.”
As the world becomes more of a single market and the combination of threats and opportunities therefore increase, the manager said businesses combine in a bid to make themselves more relevant over the long term and to protect themselves in their domestic markets.
“Another factor is that the digitisation of business is offering opportunities for cost savings that didn’t exist 10 years ago,” Train continued. “It is just possible for more and more companies to be run efficiently as they become increasingly virtual businesses.
“When you have this latent cost-saving opportunity, I think it must be very tempting if you’re running a corporation to think, ‘we have a cost-saving opportunity here but, my goodness, the cost-saving opportunity if we put ourselves together with another company, is even greater.”
A third factor, according to the manager, is how cheap the cost of borrowing is currently and how this increases the margin of safety for businesses looking to make an acquisition.
In fact, his research shows that 2015 was the biggest-ever year for global M&A, 2016 was the second-biggest year for M&A and, if 2017 mergers and acquisitions continue at their current run rate, it will beat 2015 to be the biggest-ever year for business activity.
Even if interest rates start to rise – as many economists believe they will over the short-to medium term – Train said M&A activity is still likely to remain prolific because the other contributing factors are such strong drivers.
“As a businessman, I would imagine that half of you is scared to do a deal because you worry that you’re going to get it wrong or overpay, or maybe the economy has a hiccup at some point,” he reasoned. “On the other hand, you might be thinking that interest rates can’t stay this low forever and, before interest rates start going up again, you must get this deal done and act now.
“Another thing here – I’ve always had the view that so-called ‘big’ companies, let’s say companies in the FTSE 100 towards the top 20 of the index, are actually not that big by global standards. It’s fascinating to see these truly, truly gigantic companies being created by tech. It’s the race now to be the first company with a $1trn market cap.”
Train believes companies will continue to grow in size exponentially over the next thirty years, which could indeed spell good news for genuinely long-term investors. However, he pointed out this can also work against the investor in some cases if a business is bought by an overseas company and is therefore removed from their investable universe.
“As an investor, I view it as an encouraging backdrop that corporations clearly see opportunities to do things around the world. That suggests to me as a portfolio investor that there are probably opportunities to make smart investments,” Train said.
“If corporations are looking to do deals, it implies that the stock market is not correctly pricing companies because, when a deal gets done, it tends to get done 30 per cent or 40 per cent higher than stock market value before the deal is rumoured.
“I guess the obvious thing to say is, it’s a complete lottery of course, but it just means that if you’re in the market, you have a chance that maybe tomorrow it’s going to be your company.
“Sometimes we really hate it when companies we invest in get bid for because you worry that they might get taken away from you at a price which is still low. But of course, it’s every investors’ dream that there’s a bid on a 70 per cent premium for something that you own.”
Since the turn of the century, FE Alpha Manager Nick Train has outperformed his peer group composite by 322.61 percentage points with an average total return of 502.21 per cent.
Performance of fund vs sector and benchmark since 2000
Source: FE Analytics
His five crown-rated Finsbury Growth & Income trust is trading on a 0.7 per cent premium, yields 1.8 per cent and has an ongoing charge of 0.74 per cent.