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5 Companies With the Urge to Merge

Whether it's small "tuck in" acquisitions, large megamergers between industry giants, or even just taking significant stakes in other companies, the urge to merge remains strong.

We can't always tell the good deals from the bad. While we might get "synergy," we can just as easily get what investing legend Peter Lynch called "de-worse-ification": weakening the core competency of an existing business by grafting on wildly unrelated subsidiaries.

Breaking down the buildup
We're going to take a shortcut to separate the good deals from the dealbreakers. We'll see how interested investors from the 70,000-member Motley Fool CAPS universe rate the companies hooking up. If two highly rated companies seek a better life together, we figure they might also do better down the road. Conversely, if only one company is highly rated, we might expect one set of investors to come out ahead, since those ratings forecast investor sentiment of future prospects.

Could troubles in the capital markets finally be taking their toll in the M&A arena? The deals won't stop, but with the loss of easy credit, we can expect to see more stock swaps play a role in financing transactions.

Here are some recently announced deals, and the CAPS community's ratings for the companies involved, on its scale of one to the maximum five stars:


CAPS Rating


CAPS Rating

Deal Price

Honeywell (NYSE:HON)


HandHeld Products


$390 million

Electronic Arts (NASDAQ:ERTS)


VG Holdings


$860 million

Danaher (NYSE:DHR)


Tektronix (NYSE:TEK)


$2.9 billion

Apria Healthcare (NYSE:AHG)




$350 million

RR Donnelly (NYSE:RRD)


Cardinal Brands


$130 million

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

While merger activity has slowed to a relative trickle, with only $192 billion in deals being consummated in September, the first nine months of 2007 have still been the busiest ever. According to Thomson Financial, for the year to date ending Sept. 30, more than $3.6 trillion in deals were made, surpassing the figure for all of 2006 and nearly doubling 2004's hectic pace. Dealogic also reports that more than $13 trillion worth of deals have been made since 2004, making this the richest period since the tech boom at the turn of the century.

Getting the information flow
So what do CAPS investors think about these targets and acquirers? While these deals might not be bigger than some we've seen in past weeks, the companies are generally well-liked, with most of the publicly traded companies garnering three stars or better.

It's "game on!"
It's one of the larger buyouts, and the Electronic Arts bid for VG Holdings is also one of the more interesting. The game maker will be getting both BioWare and Pandemic Studios, developers of several popular games including Destroy All Humans! and Baldur's Gate. VG Holdings had been the first deal put together by Elevation Partners, a private equity firm that includes Bono, the lead singer of U2. Elevation has recently agreed to acquire 25% of Palm (Nasdaq: PALM  ) .

Complicating the deal was the presence of EA CEO John Riccitiello, who had previously been a managing partner at Elevation and was instrumental in putting BioWare and Pandemic together. Furthermore, prior to joining Elevation, Riccitiello had been EA's president and COO. The ties were so close that Riccitiello had to recuse himself from the negotiations.

Game makers generally, and Motley Fool Stock Advisor recommendation EA in particular, should prosper because of dropping console prices, as CAPS All-Star Firesale notes.

Its time to get into gaming stocks because overpriced console [costs] are dropping. Sony cut PS3 by $100, Microsoft will follow (even if they say they won't), and the Wii is on fire. This translates into greater consumer consoles and gaming purchases. This gaming cycle will last longer than previous years because exorbitant price will take several years to steadily decline (PS2 are still selling). ERTS is best of breed and sports a PE [as of July] of nearly 200, but the [projected forward P/E] one year out is only 25. With titles such as EA Sports (e.g. Madden), The Sims, Medal of Honor, and millions this year to establish their online gaming footprint the future looks bright.

A value-added offer
What's your take on these deals? Should investors accept the cash, or take stock in the new company if offered? Only at Motley Fool CAPS is your opinion as valuable as the pros'. Tell the CAPS community whether the urge to merge is good to go, or whether it would be better to fight for independence.

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