It never fails.
Well, almost never. As a general rule, when Company A buys Company B, no sooner has the deal been announced than B's price skyrockets and A's price plummets. Why? Well, let's look at last week's deal by Ipsco (NYSE: IPS ) to illustrate.
Last Monday, the Canadian steelmaker announced a $1.5 billion takeover of Kentucky-based steel-pipe maker NS Group (NYSE: NSS ) , in which the former would pay $66 per share (in U.S. tender, not the funny money they use up north) to acquire NS's stock. That was a 43% premium to what NS's stock had been fetching on the Friday preceding the announcement, and true to form, NS's stock quickly rose 40%.
In contrast, Ipsco's own shares shed nearly 7% of their value on the day of the announcement, and even now that investors have had a full week to mull the terms of the buyout, the shares remain down 7% from their preannouncement price. The logical reason for Ipsco's falling stock price is fear among investors that the company is overpaying for NS. What's more, the price movements at NS support that view -- if investors thought Ipsco was getting too good a deal, they might have bid NS's stock up above the offer price in anticipation of a competing bid. They aren't, and so presumably, they don't.
So who's right? Let's take a look at the companies' stats, as relayed by Yahoo! Finance.
|
P/E
|
P/S
|
P/B
|
Profit Margin
|
Growth Rate
|
|
Ipsco
|
6.8
|
1.2
|
2.0
|
18.1%
|
4.5%
|
|
NS Group
|
10.6
|
2.2
|
3.9
|
20.2%
|
10%
|
All data based on trailing-12-month results; NS Group data based on price after post-acquisition news.
From the above, it's clear what's going on here: Ipsco is paying a premium to get in on NS's anticipated faster growth. Base it on any metric you like; Ipsco has valued NS's shares at multiples (to earnings, sales, or book value) far higher than Ipsco's own. NS is not much more profitable than Ipsco, but thanks to booming demand for oil and gas, pipeline maker NS is expected to grow much faster than Ipsco is. Backing up this view, Ipsco CEO David Sutherland declared, "This is actually a transaction that's all about growth."
If that's the case, though, a Fool has to wonder why it was NS, rather than rival pipe makers like Maverick Tube (NYSE: MVK ) or Lone Star (NYSE: LSS ) , that got Ipsco's attention. After all, both companies sell for lower price-to-sales and price-to-book ratios than does NS; analysts have Maverick pegged for 50% better long-term profits growth over NS; and although Lone Star lacks a five-year growth estimate, its analysts do expect to see 26.7% growth next year.
In Maverick's case, the answer is that this company already has a buyer: Luxembourg's Tenaris (NYSE: TS ) . But fast-growing Lone Star hasn't yet received its invitation to the acquisition ball.
Then again, with Lone Star selling for just a bit more than NS does today, that may just mean it's next in line to get snapped up by a growth-hungry rival. With its shares up 8% already in the wake of Ipsco's announcement, Mr. Market seems to agree with that theory.
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Fool contributor Rich Smith does not own shares in any company named above.
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