Buyout or Sellout?

From tiny acquisitions to massive conglomerate combinations, Wall Street's urge to merge remains strong. How can we tell the dealmakers from the dealbreakers?

Breaking down the buildup
To help, we'll turn to the 130,000-plus investors in Motley Fool CAPS. The combination of two companies with high CAPS ratings should bode well for the combined firm's future results, while a high-rated company that joins a lower-rated one may benefit one set of investors more than the other.

Despite troubles in the capital markets, the deals won't stop; they simply might involve more stock and less cash. Or, during some weeks, they might just slow to a trickle. Here are a handful of recently announced deals, and the ratings for each participating company on CAPS' five-star scale:

Acquirer

CAPS Rating

Target

CAPS Rating

Deal Price

Oracle (Nasdaq: ORCL  )

****

Sun Microsystems (Nasdaq: JAVA  )

**

$5.6 billion

PepsiCo (NYSE: PEP  )

*****

Pepsi Bottling Group

***

$3.1 billion

PepsiCo

*****

PepsiAmericas

*****

$2.9 billion

GlaxoSmithKline (NYSE: GSK  )

****

Stiefel Labs

NR

$2.9 billion

Broadcom (Nasdaq: BRCM  )

***

Emulex

**

$764 million

Chesapeake Utilities

***

Florida Public Utilities

NR

$73.5 million

CAPS ratings courtesy of Motley Fool CAPS; NR = not rated.

Let's make a deal
PepsiCo's decision to buy up its two biggest bottlers and consolidate the operations in-house gives investors a new taste test for the new millennium. They can choose the integrated model offered by Pepsi, or look to Coca-Cola (NYSE: KO  ) and its insistence on a decentralized strategy. Coke's CEO has said that keeping the flagship company separate from bottlers like Coca-Cola Enterprises (NYSE: CCE  ) works best.

There's a lot to be said for Pepsi's strategy, which seems a heckuva lot better than changing its logo from a wave to a smirk. By taking over its two biggest bottlers, Pepsi gains control over 80% of its North American distribution system, which could help the soda maker save some $200 million a year. Of course, investors should be used to grandiose claims of synergy when acquisitions are made, but bringing the distribution network closer to home also ought to help PepsiCo become more nimble.

But even before the acquisitions were announced, investors took note of the stockpile of cash Pepsi had built up on its balance sheet, which exceeded $2 billion at the end of 2008. CAPS member Alzo10 was tuned in to the possibility of acquisitions last week:

PEP is continuing to perform well during the recession (it's in a classic "recession proof" industry).

Their balance sheet is incredibly strong, as they have been building up a TON of cash for something. As an investor, ordinarily I wouldn't like the cash build-up, as I think it's an inefficient use of funds. However, in this market, it makes them less reliant on their banks for financing (significantly reduced risk in the credit markets). I have a feeling they will put that cash to great use (massive dividends, stock repurchases, or acquisitions of some severly undervalued companies) once the economy begins to recover.

A value-added offer
What's your take on these deals? Let us know on Motley Fool CAPS. While you're there, you can start your own research on these or other stocks. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola and PepsiCo are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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