The Globe and Mail (Tim Shufelt – Investment Reporter, September 19, 2013)
The bookends to the post-Lehman Brothers era were remarkably level.
From the time the investment bank filed for the largest bankruptcy in U.S. history to the five-year anniversary of the collapse this past Sunday, the S&P/TSX composite index was more or less flat.
In between, however, a bunch of stuff happened – the greatest financial crisis since the Depression, the violent upheaval of stock markets, trillions in wealth vaporized.
With extraordinary market volatility came a great shakeup of corporate fates. There were big winners and big losers.
The intervening five years can be split into two phases. The first, from the bottom of the recession through 2011, was good for cyclical stocks.
Economic expansion in China and other emerging market economies resumed in full, sustaining convalescent Western economies while monumental stimulus gave stock markets a jolt. Energy and materials sectors soon bounced off the bottom and surpassed pre-Lehman levels.
Then, in mid-2011, the U.S. economy faltered, resources peaked, and the market’s good graces again favoured defensive sectors.
As a result, the stocks posting the biggest gains within the S&P/TSX composite index over the past five years are spread across a variety of sectors: health care, information technology, materials, industrials, energy and consumer staples.
But if there is a common thread to post-Lehman stock success, it’s that companies that successfully executed aggressive consolidation strategies performed well.
Among the top 10 performers are several that grew exponentially by pulling off major takeovers. They include Catamaran Corp., Valeant Pharmaceuticals International Inc., Constellation Software Inc., Alimentation Couche-Tard Inc. and CGI Group Inc.
Big strategic acquisitions are risky. The companies that do the acquiring often overpay; they then face the complicated task of merging two large enterprises. But done right, an acquisition strategy is the best way to get big fast, especially when stocks are cheap and credit is plentiful.
“They’re taking advantage of depressed stock prices, easy financing because of record-low interest rates, cheap acquisition targets and the ability to drive some synergies,” said John Zechner, chairman of J. Zechner Associates.
Catamaran, formerly SXC Health Solutions Corp., built itself from a software startup into a major player in the U.S. pharmaceutical space.
Capping off its rise to a full-service pharmacy benefits manager, Catamaran nearly doubled in size last year with its $4.4-billion (U.S.) acquisition of Catalyst Health Solutions. Over the past five years, the company’s share price has risen more than 1,200 per cent.
Integrating acquired companies has been unusually smooth for Catamaran, which developed the software its targets already used. “Catamaran owned the plumbing, if you will,” said Tom Liston, managing partner at Difference Capital Financial. “The main problems with integration are usually back office and technology.”
Valeant, Canada’s largest drug maker, has a long record of successful acquisitions and is still on the hunt, even after its $8.7-billion purchase of eye care products company Bausch & Lomb Inc., announced in May.
Software developer Constellation had already made about 90 smaller acquisitions when Mr. Liston first evaluated the company several years ago. He said he identified just two that didn’t quite work out. Since then, the company has bought 70 or 80 additional companies. “I’ve called them in the past the best allocators of capital I’ve ever seen,” he said.
Couche-Tard, the Quebec-based convenience store chain, made a big move into Europe with its takeover of Norwegian gas-station operator Statoil Fuel and Retail ASA for $2.8-billion.
And Montreal-based IT services company CGI expanded its reach with a $2.7-billion (Canadian) acquisition of British competitor Logica.
A portfolio heavily based in these companies could have produced staggering returns, but selecting such a diverse group of companies would have required supernatural prognostication, said David Baskin, president of Baskin Financial. “You’d have to have a really, really shiny crystal ball to pick more than three or four of those stocks five years ago. They’re all over the place.”
Despite their meteoric market performance, many of these companies could still face the risks that go along with blockbuster acquisitions, Mr. Baskin said.
Many of them took on substantial debt to finance the deals, which could strain finances once interest rates rise. “If it’s floating-rate bank debt, they’re absolutely vulnerable,” he said.
The dangers of consolidation are exemplified on the losing side of the scoreboard. Among the worst-performing stocks of the last five years are Kinross Gold Corp., which got battered by investors for its 2010 acquisition of the Tasiast gold mine in Mauritania, and Thompson Creek Metals Co. Inc., which poorly timed its takeover of the Mount Milligan copper and gold project in British Columbia.
“You’re buying at peak multiple, then when multiples imploded, you’ve got your debt to cover and your stock takes the brunt of the downturn,” Mr. Zechner said.