Acquisitions Bolster Portfolio Returns;
This Year is No Different

An important component of our portfolio returns is the contribution from companies being acquired for a premium to the current stock price. In our small cap Emerging Growth strategy, we typically have a few companies acquired every year. So far this year, we have had two companies announce they are being acquired: Akorn and NxStage Medical. In 2016, IntraLinks and Ruckus Wireless announced they were being acquired. 2015 was an even busier year with four portfolio companies announcing they were being acquired. Since 2014, the typical premium (difference between the acquisition price and most recent stock price at the time of announcement) has been approximately 30%. In our large cap Total Quality Management (TQM) strategy, portfolio companies are far more likely to be an acquirer. That said, TQM portfolio companies can still be acquired as evidenced by acquiring Whole Foods Market earlier this year. Emerging Growth Acquisitions and Mergers

We are investors, not speculators, so we will not buy a stock based solely on the possibility of an acquisition. That said, it may be part of our investment thesis. In addition, the attributes that cause us to invest in a company are often the same characteristics that make the company a strong acquisition candidate: a unique product offering, compelling market opportunity, good profitability (or potential profitability) and a stock price below intrinsic value.

All of the portfolio companies acquired over the last four years have been acquired by a strategic buyer such as a competitor, partner or a company in an adjacent market. A strategic acquirer may pay a higher price than other potential acquirers in light of cost synergies, potential cross-selling opportunities and the purchase usually strengthens the acquirers strategic positioning.

Sometimes the financial press may report on a potential acquisition and the stock price may rise on speculation. When this happens, we may sell a portion or the entire position if we no longer view the risk-reward as favorable. For example, in our large cap TQM strategy we sold our entire Nordstrom position in August because the market was pricing in the potential for the Nordstrom family to acquire the company, which we viewed as unlikely under current market conditions. Then in October, the stock price declined after the Nordstrom family announced they were no longer considering acquiring the company this year.

Looking forward, we believe the environment for additional merger and acquisition (M&A) activity remains favorable with strong corporate balance sheets, low interest rates and a more favorable regulatory environment. Furthermore, a lower tax rate for repatriated foreign cash could bring more cash into the U.S. and accelerate the pace of M&A. Bigger picture, we continue to have a positive outlook for the stock market. We believe stocks can grind higher as corporate earnings growth remains strong, interest rates remain low and corporate tax rates could decline. That doesn’t mean there won’t be surprises and volatility, but the global economic backdrop is constructive and suggests further gains ahead.

—Dan Garofalo & Adam Engebretson
Senior Portfolio Managers
October 2017

Kopp Investment Advisors 8400 Normandale Lake Boulevard Suite 1450 Bloomington, MN 55437 Tel: 952.841.0400 / 800.333.9128