Investor Ken Fisher sees hot 2007 takeover market

NEW YORK (Reuters) - For Ken Fisher, the key to making money in the markets this year will be to think like a buyout pro.

Which companies are takeover candidates? Fisher, founder and chief executive of Fisher Investments, has some ideas, including Halliburton Corp. (HAL.N) and Steel Dynamics (STLD.O). But he says there could be many others in the current super-heated mergers and acquisitions environment. About a third of his $37 billion fund management firm, he says, is now invested in takeover candidates.

"I'm on the extreme side of bullishness right now," said Fisher in an interview this week. "We could have anything from a 10 percent (up) year to as much as a 40 percent year."

Fisher, a high-profile investment manager, author and commentator, sweeps aside concerns like high price-earnings ratios, volatile oil prices, government deficits and interest rate jitters that worry many investors in today's markets.

Instead Fisher believes more fundamental factors are driving the markets. Since 2003, it has been cheaper for companies to borrow money and buy equity than it ever has been before, across all global markets, he says.

In his latest best-selling book, "The Only Three Questions That Count," Fisher argues that low global interest rates that drive the current M&A market are being sustained by a substantial undercounting of the U.S. consumer savings rate, which drives global liquidity.

"People see Americans as profligate, but Americans actually save a lot. But savings rate data does not show that," says the 56-year-old investor, whose Woodside, California, firm advises a mix of high net worth and institutional

clients.

This savings glut and resulting cheap debt is driving an increasing spate of ever-larger mergers, leveraged buyouts and corporate stock buybacks, which is decreasing the supply of equity that is not being replaced by initial public offerings. And less equity with similar demand means higher stock prices.

"We're shrinking the supply of equity at the fastest rates in history," said Fisher. "This year globally between buybacks and takeovers, we're going to shrink the supply of equity somewhere on the high side of a trillion and a half dollars. That's five percent of the global stock markets."

Statistics bear up his arguments. Global mergers and acquisitions surged 23 percent to an eye-popping $1.2 trillion in the first quarter 2007 alone from a year earlier, according to Dealogic. And LBO value in particular rose 82 percent to $197 billion in the same period.

TAKEOVER CANDIDATES

For Fisher, the question is determining which company is likely to get taken out by either a private equity buyer or a rival company and invest in those companies.

Moreover, companies that feel threatened - either by hostile suitors or hedge fund activists - often respond by conducting share buybacks to raise their value. Either way, the investor wins.

"If you can borrow money and buy back your own stock and make your stock go up in this day and age, if you don't do it, someone else is going to do it to you," says Fisher.

Fisher says more CEOs should also be thinking of making game-changing acquisitions, rather than leave them to private equity firms, which buy companies based on their market prospects and often sell them to strategic acquirers in ensuing years anyway.

But at the very least, many companies should buy back their shares and jack up their share prices, says Fisher.

Steel Dynamics, he says, "is a great company with a great CEO, Keith Busse," But says Fisher, "Busse doesn't get the notion that he should be borrowing half his market cap and buying back half his stock and bidding it up."

"It's not an irreversible process," said Fisher. If the buyback fails to have the intended effect, companies "can sell their stock back to the market."

For Fisher, investors should get while the getting's good, because it isn't going to last forever. "This is going to blow up and be a disaster eventually. Every bull market leads to a bear market."