Stocks With an Urge to Merge

The urge to merge continues to grow. Whether it's small "tuck in" acquisitions or large megamergers between industry giants, the M&A space is crowded.

Yet it's not always easy to tell the good deals from the bad. In addition to having to pass regulatory scrutiny and maybe even skeptical shareholders, joining forces is no guarantee that a merger will ignite those often cited and hoped for synergies. Instead, it could mire them in culture clashes or lead to what investing legend Peter Lynch called "de-worsi-fication:" marrying two or more unrelated companies to a businesses' core competency.

Breaking down the build up
How can we know a good deal from a bad one? We could read through the financials of both companies -- which is always a good idea. Any prospectus will tell us some of the risks involved and who stands to make out in the deal.

But we're going to take a much shorter route to decipher the good from the bad. We're going to survey the 29,000 ranked investors in the Motley Fool CAPS universe and see how they rate these merging companies. If two highly rated companies seek a better life together, we figure they might do better down the road. Conversely, if one company is highly rated and the other low, we might expect one set of investors to come out ahead of the other since those ratings forecast investor sentiment of future prospects.

Here's a handful of some of the recently announced deals and how the CAPS community rates the players involved on its scale of one to five twinklers (with five stars being the best):

Microsoft, though dominating in size, doesn't have the same prospects, according to CAPS, as aQuantive does. Since aQuantive shareholders undoubtedly will enjoy the fruits of the 85% all-cash premium Microsoft is offering to pay, it may be a good decision for them to accept the money and run. They would be able to deploy that capital elsewhere for better returns.

The general consensus on the Alcoa-Alcan proposal has been that it would be good for both companies (and the industry) if they got together. The CAPS ratings seem to bear out that this looks to be a merger of equals. Of course, there might be some high hurdles to leap to get the deal done -- from regulatory to political -- but as we've since learned, Alcan has rejected the offer as too low and Alcoa has refused (so far) to raise its bid.

What do CAPS investors think about these companies? Here's a sampling of their thoughts on the companies involved in the aluminum saga:

• Top-rated NoMoreGoodNames says; "Alcan has a long term contract for cheap electricity from Hydro-Quebec. It is buying electricity for cheaper than almost anyone can produce it anywhere in the world. With rising energy prices, it is getting a moat that no one else can possibly have unless energy prices pull back."
  
  
• Industry analyst and research firm NetScribes says; "The story of Alcoa, Inc. affirms its extensive voyage ahead. With major production operations being spread across the United States and Europe, the company has become the world's leading producer of primary aluminum, fabricated aluminum, and alumina, and is active in all major aspects of the industry including technology, mining, refining, smelting, fabricating, and recycling. With an estimated 24% of the world's bauxite reserves and production across 42 countries, Alcoa enjoys a dominant position in the industry."

With the offer now formally rejected, the prospects for BHP Billiton (NYSE:BHP) or Rio Tinto moving in to make a bid on one of the players -- or both -- grows. And both of those companies, by the way, sport excellent CAPS ratings.

What's your take on these deals? Should investors accept the cash or take stock in the new company if offered? Tell the CAPS community whether the urge to merge is good to go or would it be better to fight for independence.

aQuantive is a recommendation of Motley Fool Rule Breakers where a 30-day free trial lets you see just how David Gardner manages to pick industry leaders of tomorrow today. Microsoft is a recommendation of Motley Fool Inside Value.

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.