Hugh H. Mullin is betting that three of this year's biggest takeovers will help his Putnam Fund for Growth and Income outperform the Standard & Poor's 500-stock index for a sixth straight year.
Procter & Gamble Co., Bank of America Corp. and Johnson & Johnson account for 7.6 percent of the $17 billion fund, Putnam's largest. Mullin has added this year to his holdings of the three companies, which are buying Gillette Co., MBNA Corp. and Guidant Corp., respectively.
"The pickup in mergers and acquisitions indicates a little more confidence on the part of chief executives and that's good for the market," Mullin said in a telephone interview from his office in Boston. "We are pretty confident in the management of these companies and they are all growing organically as well as through acquisitions."
Putnam's Growth and Income Fund has gained 2.3 percent this year, exceeding the 1.9 percent advance of the S&P 500, including reinvested dividends. Mullin's fund rose at an annual rate of 2.9 percent from 1999 to 2004, compared with the 2.3 percent drop of the S&P 500.
During the past five years, the fund ranks seventh among 50 competing funds that invest in a combination of U.S. companies with above-average dividends and above-average earnings growth, according to data tracked by Bloomberg. The Scudder Large Cap Value Fund, managed by Thomas F. Sassi, is the top performer, rising at an average rate of 7.5 percent.
Mullin, who holds stocks for about 31/2 years on average, doesn't deliberately seek companies that are making acquisitions. He tends to invest in companies whose shares sell for a low price relative to sales or projected earnings.
P&G's purchase of Boston-based Gillette, valued at $57.1 billion, tops this year's list of corporate takeovers. U.S. companies have announced deals worth $687 billion, making it the busiest year for takeovers since 2000, Bloomberg data show.
Cincinnati-based P&G will be able to use Gillette's distribution system to tap growing markets such as India and Brazil, Mullin said. Sales for products such as Tide detergent and Pantene shampoo may rise 34 percent in the next two years, Lauren R. Lieberman, a Credit Suisse First Boston analyst, wrote in an Aug. 18 research report. Lieberman has a "neutral" rating on the stock.
"These two companies really create a powerhouse on a global basis and they compliment each other pretty well," said Mullin, whose fund owned 5.46 million shares of P&G as of June 30. "We expect to see a lot of value created in revenue opportunities, as opposed to a lot of other deals getting put together now, where the economics are more about cost savings."
To Robert F. Bruner, author of "Deals From Hell: M&A Lessons That Rise Above the Ashes," two aspects of the transaction raise concern. The payment in stock and the fact that the deal comes at a time of a pickup in takeovers increase the odds that P&G overpaid for Gillette, said Bruner, dean of the University of Virginia's Darden Graduate School of Business Administration.
"The mass of research suggests mergers and acquisitions pay off, but it's no money pump," Bruner said. "It isn't a guaranteed way to create value."
NationsBank Corp.'s $42 billion purchase of BankAmerica Corp. in 1998, forming what is now Bank of America, was a money- losing deal for investors. Profit fell in three of the first four quarters after the deal was completed as the company wrote off bad loans. The stock fell 25 percent for the three years through 2000; the S&P 500 gained 36 percent.
Mullin said he doesn't expect a repeat from the Charlotte-based bank's $33.1 billion takeover of MBNA, the biggest U.S. independent credit card company. The transaction will lower funding costs for Wilmington, Del.-based MBNA and allow Bank of America to cross-sell its services to owners of MBNA accounts, of which there are more than 20 million, he said.
"They have gotten much better about the price they pay for businesses," Mullin said.
Bank of America's stock is down 8.4 percent since the start of the year, compared with the 4.9 percent decline of the S&P 500 Financials Index.
Mullin said he was drawn to Johnson & Johnson, the world's No. 1 maker of medical devices, partly because of its consistent profit growth. The New Brunswick, N.J.-based company reported annual profit increases of at least 10 percent for the past 20 years, excluding charges.
The $24.2 billion purchase of Guidant, the No. 2 maker of implantable defibrillators, will help extend that streak by offsetting sales declines for some of its prescription drugs, Mullin said.
"They have been very successful in integrating prior acquisitions and in the case of Guidant, we anticipate more of the same," he said. Johnson & Johnson's stock is down 0.1 percent this year, trailing the 4.4 percent advance of the S&P 500 health care index.
Johnson & Johnson is waiting for U.S. antitrust clearance to acquire Indianapolis-based Guidant, the biggest takeover in its 119-year history.
"One of the interesting things is that you can never really go back and figure out what would have happened if they hadn't done the deal," Mullin said. "It's tough to say what if it had gone differently."