M&A Just Beginning
Health care, energy, and tech--where the big companies have the cash, and the mid- and small companies have a lot of growth--are ripe for continued M&A activity, says Legg Mason ClearBridge's Evan Bauman.
Shannon Zimmerman: Just in terms of the category view, small caps have had a really nice run for a long term. Lots of folks are saying that large-cap growth looks like a very attractively valued area of the market. Again, I know that that's not the kind of work that you and Richie [Freeman of Legg Mason ClearBridge Aggressive Growth Fund] spend your time on, but from a point of view of an investor trying to put together a portfolio of funds, what's the case for aggressive growth? Maybe you are not even an aggressive growth kind of investor, but is there a reason to own a fund like this in a certain portfolio?
Evan Bauman: We refer to the fund as passive-aggressive sometimes in joking. It really is where we don't try to generalize in terms of market caps that are cheap or expensive. It's really bottom-up. If you look at some of the newer companies we've added, one was a $900 million small-cap biotech company. We added a company, a Human Genome Sciences, which is a mid-cap biotech. We added just around a $10 billion technology company. So, yes as a group, you can argue that large caps are cheaper, but they are not growing as fast as some of smaller companies. So, I think it's all risk-reward, and we just try to focus on the company level, companies that are attractively priced and that are growing fast.
One of the things we've seen is a lot of the larger-cap companies acquiring growthier mid- and small-cap companies, and as I said we have been privy to some of those deals.
Zimmerman: And you anticipate more of that?
Bauman: We think it's just beginning. With rates as low as they are, the Fed making it very clear they are going to keep rates extremely low for a long period of time. Companies that have the wherewithal are able to borrow very cheaply and aggressively, and we have seen deals. We own Genzyme in the portfolio. It's a name that we had owned since 1989 when it was a small-cap company, and we were one of the top owners of the stock when it got acquired by Sanofi-Aventis a couple of months ago. It was $20 billion cash deal that was announced for Genzyme, so yes I think health care, I think energy, I think tech--these are the areas where the big companies have the cash, and the mid- and small companies have a lot of growth. And it's natural that you're going to continue to see deals there.
Zimmerman: Let me ask you one more question coming out of that, and this is something that we've discussed in the past. So corporate America, bullet-proof balance sheets far and wide, being able to borrow at ridiculously low cost--some would say it would almost be mismanagement not to borrow at that level, but is there danger that comes along with that as well--the danger, for instance, of ill-advised acquisitions or ill-timed share repurchases? What's your take on that?
Bauman: If I'm on the right side of a deal, I don't really care if it works out. If it's a cash deal, and we get cash into our hands, I mentioned Genzyme--that put almost $800 million of cash back into our hands alone, which gave us the opportunity to buy into some new companies.
Yes, we don't believe in buying back stock just for the sake of offsetting dilution, but if you think your company's stock is cheap and your growth rate is going to accelerate, then we think they are well timed.
Bauman: But we've seen more and more companies making those types of acquisitions. There were over 300 cash deals in the last 12 months alone that were greater than $1 billion--cash deals alone. So, yes, I think there have been a number of deals. I think that's going to continue to accelerate, and if a company is growing at a low growth rate and they have the opportunity to acquire somebody growing faster--I think it makes a lot of sense.
Zimmerman: It's a way to create value for shareholders.
Zimmerman: Evan, thank you very much for being here and for the insights.
Bauman: My pleasure.
Zimmerman: For Morningstar, I'm Shannon Zimmerman.
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.