You can learn some important investing lessons by considering fish barf.
If you've fished northern pike, for example, and seen the size of the recent meals they'll eject into the bottom of your boat, you know that sometimes predators are forced to cough up their prey. Some meals are simply too big to digest.
On the other hand, sometimes the big can, and do, thrive after swallowing prey near their own size. Otherwise, why try at all?
The fish-barf analogy is stretched, however, if we try and use it to examine today's Foot Locker (NYSE: FL) bid for Genesco (NYSE: GCO). Genesco is not only a pretty big target, it looks like it's getting bigger even as Foot Locker is trying to force it down.
The unsolicited bid for Genesco, which runs a variety of mall-based peers of/competitors to Foot Locker's biz, comes to $46 per share. But the offer pushed Genesco's stock to more than $49 a stub. Mr. Market obviously believes that Foot Locker will have to sweeten the deal. In these markets, mergers and acquisitions have become something of a feeding frenzy.
Therefore, there's no reason to allow yourself to get caught unless it's on the best terms you can extract from the increasingly desperate predators out there. Especially when you, like Genesco, look like the better-run business.
Genesco's not only been growing the top line at a healthier clip than Foot Locker; by my math, it also sports better returns.
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Genesco
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FY Ended 2/1/03
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FY Ended 1/30/04
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FY Ended 1/29/05
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FY Ended 1/28/06
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FY Ended 2/3/07
|
|
ROE
|
21.0%
|
14.7%
|
20.0%
|
20.2%
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18.1%
|
|
ROIC (Lease-Adjusted)
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9.8%
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8.7%
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9.9%
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9.4%
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9.0%
|
|
Foot Locker
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FY Ended 2/1/03
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FY Ended 1/31/04
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FY Ended 1/29/05
|
FY Ended 1/28/06
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FY Ended 2/3/07
|
|
ROE
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15.4%
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16.8%
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15.9%
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13.6%
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11.4%
|
|
ROIC (Lease-Adjusted)
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8.4%
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8.8%
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9.3%
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8.5%
|
7.9%
|
Remember, it's not so long since Foot Locker was rumored to be among the sluggish fish that private-equity leviathans were looking to nab -- no doubt so they could trim some fat and produce more cash. Let's face it, Foot Locker doesn't really seem to be competing all that effectively against the likes of Finish Line (Nasdaq: FINL) and Dick's Sporting Goods (NYSE: DKS).
If Foot Locker can hook Genesco, get rid of the duplicate administration, and find a few synergies (yeah, the word makes me cringe, too), it may turn out to be quite a catch. But Foot Locker shareholders had better hope that part of the digestion process means figuring out just what it is that Genesco is doing better, and leaving that alone.
Comments? Bring them here.
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At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.
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