Price is what you pay, value is what you have

The second half of 2020 saw a string of mega deals, no less than 57, totalling €688 billion according to PWC. Most were designed to speed up transformation in terms of technology or know-how, while some were defensive, geared towards sector consolidation.

The recent mergers and acquisitions have rarely involved companies with undemanding valuation multiples. Quite the opposite in fact, confirming that share valuations are rarely a trigger for buyers. However, we can easily believe that valuation levels can be a powerful driver once the M&A movement is already under way.

On the other hand, the equity market is expanding under the impetus of IPOs and SPACs (special purpose acquisition companies), also known as blank-check companies (publicly-traded companies that are sponsored by individuals in the public eye and bypass the traditional IPO route to acquire unlisted companies). Since the equity universe is backed by real assets, it needs renewal and not just re-ratings to permit specific strategies with a long-term vision.

Lastly, spin-offs provide opportunities to focus directly on operations that are hard to see when they are part of a group and are often poorly identified in sum-of-the-parts calculations.

While they rarely make the headlines, spin-offs are an important indicator of companies' hidden value. Our Value Investment expert is always on the look-out for this type of opportunity, not especially to track future spin-offs, but to unearth nuggets that have slipped under the general radar. One good example is a major specialist in paper, which is hardly the most glamorous sector for investors. This company is accelerating its shift over to packaging that is tailored to current demands. A careful projection of this development could lead to the view that the value of its logging operations is barely priced in.

So, beyond the expected re-opening of global economies and the stimulus packages that will provide short-term impetus for cyclical or financial stocks commonly associated with the Value theme, all sectors hold re-rating capacities that could be missed if we rely on the conventional valuation multiples.

Completed on 6 april 2021

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