Forced Feeding

Ways to Profit from Takeover Targeting



By Anthony Rhodes



One would imagine that competitors of Disruptors (those companies whose indomitable success disrupts industries) would give just about anything to be able to go back in time and purchase these would be behemoths, before becoming the proverbial thorns in their sides. An IBM, for example, would not hesitate to snatch up a then relatively unknown Microsoft, before Bill Gates became the titan of the software world, and Barnes & Noble would absolutely revel in the opportunity to acquire a once obscure bookseller called Amazon, prior to Jeff Bezos reducing them to a mere husk of their former self. But without the means of doing so, such companies must instead evaluate the lessons learned from missing out on these grand opportunities. Although no two Disruptors are identical, there are similar attributes which they all tend to share, and the ability to detect these qualities can provide their competitors with a measure of redemption; principally by purchasing tomorrow’s Disruptors today, in the hopes of making amends for the errors of yesterday.

This pursuit of redemption can also prove lucrative for investors, but not in the manner in which you might think. Instead of blindly attempting to locate the next batch of Disruptors (which can prove to be a fool’s errand), why not look at the issue from an entirely different perspective, and allow those with a vested interest in identifying them, do the job for you. During this week’s installment of How To Invest, we’ll focus on ways of doing just that. With the motivation of redemption being our catalyst, we’ll attempt to play the role of lamprey to corporate America’s Great White sharks, and not just align ourselves closely with those companies with the most to lose by the introduction of these Disruptors, but to also benefit from their redemptive need to feed on such companies, before these would be leviathans approach their maturity, and become Great White’s themselves.

Big Fish, Small Pond

Of the throngs of companies which exist within our stock market universe, the ones most likely to be susceptible to Disruptors, are those whose primary business model revolves around a niche product or service (why attempt to reinvent the wheel, when you can simply make a better tire?). Due to intense competition within a finite market, these rivals must employ a laser like focus to maintain market share, and are far more likely to recognize ground-breaking entries into their field of business. By monitoring these industries, you may not only be able to benefit from possible mergers from the existing players, but to also recognize the newer entries (IPO’s) who may have developed innovative techniques to dominate the space. These small fish are more likely to be gobbled up by the major players within the group, and you, as the investor can also benefit, as the takeover of the company is announced, and, as is often the case, the stock of the would be Disruptor skyrockets.

Jaws 2.0

As I mentioned earlier, the companies most likely to suffer from this redemptive need to feed, are those whose industries have already been disrupted by the Disruptor. Although this behemoth may occupy the dominant position in the space, anti-trust regulations prohibit them from gaining a complete monopoly within the industry, which opens the door for its competitors to either merge with one another or to consume other businesses, in order to remain relatively competitive. This aggressive need creates opportunities for investors, as these companies are highly motivated not to repeat the failures of the past. When evaluating their places among the hierarchy, it won’t take long for such companies to realize that they need to feed in order to survive, which positions you very well to anticipate which companies will provide them with the advantage required to remain a functioning concern.

All too often, when the topic of Disruptors arises, it’s generally presented from the perspective of the Disruptor, which serves no monetary purpose for those who failed to own the stock before to its meteoric rise. We collectively applaud their ingenuity or ability to transform entire industries, but speak little about those competitors who were left in their wake, which may provide more potential upside for those investing in the here and now. Maybe our desire to shower praise on the victor propels this direction, and allows us to simply ignore all who failed to obstruct their seemingly inevitable success. Or perhaps we find little interest in second or third place candidates, whose story is not nearly as engaging as that being told about the front-runner. But before you begin to dismiss these contenders, let’s not forget that in America, second or third tier companies can be worth multiple billions of dollars. And that while some are off espousing greatness upon the corporations who have already realized their historic growth, the wise are laying in wait and preparing for others who have yet to achieve theirs.

(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com)

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