The Chubb acquisition was an anomaly; it was the largest acquisition in property-casualty insurance history. The size of the other 2 recent Dividend Aristocrat acquisitions was much smaller. All 11 Dividend Aristocrats with a market cap under $15 billion (comparable in size or smaller than Sigma-Aldrich before it was acquired) are shown below:
– HCP, Inc. (NYSE:HCP) – $15 billion
– C R Bard (NYSE:BCR) – $14 billion
– Genuine Parts Company (NYSE:GPC) – $13 billion
– W W Grainger Inc (NYSE:GWW) – $13 billion
– Nucor Corporation (NYSE:NUE) – $13 billion
– McCormick & Company, Incorporated (NYSE:MKC) – $11 billion
– Cintas Corporation (NASDAQ:CTAS) – $10 billion
– Dover Corp (NYSE:DOV) – $10 billion
– Pentair plc. Ordinary Share (NYSE:PNR) – $10 billion
– Cincinnati Financial Corporation (NASDAQ:CINF) – $10 billion
– Leggett & Platt, Inc. (NYSE:LEG) – $6 billion
In addition to being small, a company must not be overvalued for it to be a potential acquisition target. Family Dollar had an adjusted price-to-earnings ratio of ~15.0 prior to its acquisition. Chubb had a price-to-earnings ratio of ~12.0. Sigma-Aldrich Corporation (NASDAQ:SIAL) is the outlier, with a price-to-earnings ratio of around 24.0 prior to its acquisition.
All of the smaller Dividend Aristocrats with a price-to-earnings ratio (FFO per share used instead of earnings for HCP since it’s a REIT) under 18 are listed below:
– HCP Inc. has a price-to-FFO/share ratio of 11.4
– Pentair has a price-to-earnings ratio of 15.4
– Cincinnati Financial has a price-to-earnings ratio of 15.6
– Dover has a price-to-earnings ratio of 16.2
– W.W. Grainger has a price-to-earnings ratio of 17.3
For a business to be acquired, it (usually) needs an acquirer that is significantly larger. HCP Inc.’s largest competitor has a market cap just 36% larger than HCP. W.W. Grainger is the leader in the highly fragmented MRO industry, making an acquisition unlikely.
Dover and Pentair both have several giant companies in their space that make an acquisition possible. The largest of these competitors are General Electric Company (NYSE:GE), 3M Co (NYSE:MMM), and Honeywell International Inc. (NYSE:HON).
There are a total of 4 (not counting Berkshire Hathaway, Chubb, and ACE) property & casualty insurers more than twice as large as Cincinnati Financial that could potentially acquire the company. American International Group Inc (NYSE:AIG) and Travelers Companies Inc (NYSE:TRV) are the two largest of these companies.
If the bull market continues, the next 3 most likely Dividend Aristocrats to be acquired are Cincinnati Financial, Dover, and Pentair. This doesn’t mean the odds are high that these companies will be acquired, but they have a greater chance of being acquired for a premium than other Dividend Aristocrats.
Back To the Sigma-Aldrich Acquisition
Sigma-Aldrich Corporation (NASDAQ:SIAL) is being acquired because of its valuable assets, strong cash flow generation capabilities, and potential synergies with Merck KGaA.
Chief among these assets is Sigma-Aldrich’s e-commerce site. The company owns the leading global life sciences e-commerce site which is used by: scientists, researchers, clinicians, engineers, and commercial manufacturers.
Sigma-Aldrich’s research and development and compliance departments will fit will with Merck KGaA. The acquisition was priced high… Merck KGaA is acquiring Sigma-Aldrich for a price-to-earnings ratio of around 34.0 (at current earnings). The high price shows the high value that Merck KGaA places on Sigma-Aldrich’s premium assets.
Acquisitions & Great Businesses
As a long-term investor, I don’t initiate positions thinking an acquisition will occur. With great businesses, you have the benefit of holding for the long-run. Eventually, a great business may be taken off the market for a steep premium – this is very beneficial for shareholders.
Not every Dividend Aristocrat is going to be acquired. By focusing on Dividend Aristocrats that have the potential to be acquired, investors get the potential of being bought out at above-market prices.
Disclosure: None
