Already, 2014 is shaping up to be an exceedingly robust year for merger and acquisition (M&A) activity. Announced deals so far this year total $1.6 trillion globally, up a whopping 79 percent from last year’s tally. North America, Europe and Asia Pacific regions have seen dollar value increases of 83 percent, 96 percent and 68 percent, respectively as of this writing. Clearly some investors will be amply rewarded during this banner year for corporate deal-making.

Important deals this year include Pfizer Inc’s proposed takeover of British drug maker AstraZeneca, Albertsons buying rival grocery store chain Safeway, Inc and AT&T’s $48.5 billion bid for DirecTV, which has been accepted by the staellite TV company. Over in Europe, where M&A has historically been less popular, change is underfoot. Many of this year’s top deals, in fact, involve European companies. French media conglomerate, Vivendi announced the sale of its telecommunications unit to the Netherlands’ Altice while General Electric and German industrial titan Siemens are engaged in a bidding war for France’s Alstrom, maker of railroad cars and related equipment.

The global economic recovery is underway but progress remains sluggish. Larger companies therefore frequently resort to buyouts as a key strategy for generating the growth needed to placate impatient investors and activist shareholders. At the same time, corporations are sitting on record amounts of cash and record low interest rates mean creditworthy buyers can also finance deals on very attractive terms.

Another reason for the surge in deals includes the unevenness of tax brackets among different countries coupled with the massive amount of cash held overseas by America’s largest corporations. Goldman Sachs estimates that the 55 global companies with the largest cash positions hold approximately $700 billion, or 75 percent of their liquid balances offshore. That is by design as the US taxes its corporations at rates up to 40 percent. American companies with global reach regularly consider reincorporating in lower tax jurisdictions such as Ireland, the UK and Bermuda. However, in recent years Congress and the Internal Revenue Service have been targeting against this practice, referred to as inversion.

Corporations paying high tax bills have lately been buying their way out of the lofty brackets through carefully targeted acquisitions and thereby skating around inversion laws. According to a recent Bloomberg story: “Each rule-making effort has made inversions more difficult though not impossible. Nowadays, most companies use an exception to a 2004 anti-inversion law that allows them to take a foreign address during the course of a merger with a non-US partner that’s at least 25 percent of their market value.”

In this year’s biggest attempted buyout, Pfizer makes no bones about targeting a British company in order to redomicile in the UK and thereby take advantage of the country’s relatively low 21 percent corporate tax rate.

While the Pfizer deal is exciting, the bid by healthcare company Valeant Pharmaceuticals International Inc to buy Allergan Inc is more controversial. In this case, Valeant, in combination with William Ackman’s Pershing Square hedge fund, is attempting to buy the California-based Botox-maker in a combined cash and stock deal. Ackman was allowed to legally accumulate an equity position of almost ten percent in the targeted company as an insider prior to the deal’s official announcement. His hedge fund profited handsomely shortly thereafter when the Allergan’s stock price spiked up into the official offer announcement.

Owning stocks of companies which are being bought out is generally a profitable event, but lately the stock prices of some acquiring companies have also benefited. At the end of March, medical device industry leader Zimmer Holdings saw its shares surge ten percent after it agreed to acquire privately held competitor, Biomet. The deal worked well for the buyer in this particular case.

Unfortunately, knowing which companies might to be taken over and having a sense of when the event might occur is a rather tricky feat. In fact, knowing the specifics of a deal before it happens is extremely unlikely and usually illegal if it happens. A better strategy might be to hold equity positions which make attractive buyout candidates. Typical attributes for targeted companies include having a leading market position, low debt ratios, high cash positions, an attractive product mix and trading at reasonable valuations. Or, essentially those qualities which make for sound investment over the long haul are generally the same as which allow an investor to participate in the occasional deal event!

Another way to play the M&A trend is by participating in those entities which broker the deals and provide financing. Most of the large, global banks have significant investment banking (IB) operations which benefit from various aspects of the corporate deal flow. However, lately markets have been punishing the large banks due to their volatile earnings and legacy lawsuit expenses. The largest IBs clearly possess a lot of moving parts, but the recent sell-off in the sector might be an attractive entry point for a sideways play on the M&A game. The purest large cap plays in this arena include Goldman Sachs and Morgan Stanley. Bermuda-headquartered Lazard, Ltd is a smaller cap IB which has been steadily delivering results.

While deals can be intriguing on an individual basis, some experts believe the equity markets as whole will benefit from the M&A trend as blue-chip names steadily disappear. The basic economics of supply and demand imply that a lower number of publically-traded stalwart companies should make those left on the table more valuable.

The World Federation of Exchanges reports the total number of companies listed on the New York, American, and Nasdaq exchanges fell to just 5,008 last year after peaking in 1997 peak of 8,823. Presently, 43 percent fewer companies are now available for investment as the action of new companies issuing stock through initial purchase offering (IPOs) has failed to keep up with the number of companies delisted through buyouts.

At LOM, our strategies have profited by holding equities involved in M&A deals over the past months as well as from holding positions in some of the more dependable global banks. Furthermore, our funds have remained close to being fully invested. This tactic has helped relative performance as positive macroeconomic fundamentals and corporate actions continue to drive markets forward.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.

This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.