10 Companies With the Urge to Merge

Whether it's small "tuck in" acquisitions, large megamergers between industry giants, or even taking significant stakes in another company, 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 an existing business's core competency by grafting on wildly unrelated subsidiaries.

Breaking down the buildup
We'll take a shortcut to decipher the good deals from the dealbreakers, by seeing how the 75,000 investors in the 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 one company is highly rated and the other low, 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 take their toll in the M&A arena? While deals won't stop, the loss of easy credit could prompt stock swaps to play a greater role in financing transactions. Here's a handful of some of the recently announced deals, and the CAPS community's ratings for the players involved, on its scale of one to the maximum five stars:

Acquirer

CAPS Rating

Target

CAPS Rating

Deal Price

GlaxoSmithKline

****

Reliant Pharmaceuticals

NR

$1.65 billion

Applied Materials
(NASDAQ:AMAT)

***

Baccini

NR

$330 million

Celgene (NASDAQ:CELG)

****

Pharmion

*

$2.9 billion

Knight Capital Group
(NASDAQ:NITE)

****

EdgeTrade

NR

$59.5 million

Middleby

*****

New Star Holdings

NR

$188 million

3M (NYSE:MMM)

*****

Aearo Technologies

NR

$1.2 billion

Pfizer (NYSE:PFE)

***

Coley Pharmaceutical

**

$164 million

Dynamic Materials
(NASDAQ:BOOM)

****

DYNAenergetics

NR

$96.6 million

Microsoft
(NASDAQ:MSFT)

***

Musiwave

NR

$46 million

Gerdau

*****

Automotive Unit of Quanex

****

$1.67 billion

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

While merger activity ticked up in October to $73.6 billion, perhaps suggesting an end to the lull in recent activity, the first 10 months of 2007 have still produced more than $4 trillion in deals. The past week was pretty active compared with the week before, with more than a dozen sizeable deals announced. Yet as the credit crunch deepens, a number of investors are looking to back out of previously announced deals. Private equity may soon have to prove to boards of directors that it won't bail out of acquisitions when things get tough.

So what do CAPS investors think about these targets and acquirers? While these deals are somewhat larger than we've seen recently, with a handful exceeding $1 billion in value, most of the companies doing the buying are generally favored by investors, having garnered ratings of three stars or better.

Pfinally pfinding Pfizer
The lifeblood of a pharmaceutical company is the pipeline of drugs it has to generate future revenues. Pfizer, as the world's largest pharma, is facing a large number of patent expirations on blockbuster drugs, including its top-selling Lipitor in 2010. To shore up those gaps, pharmaceuticals often buy up smaller rivals that have potential big sellers in their own pipelines. Pfizer is doing so here with its bid for its old friend Coley Pharmaceuticals; both firms have been working on Coley's toll-like receptors (TLR) to target cancer and asthma.

Of the nearly 2,700 players who've rated this Motley Fool Inside Value recommendation, 85% believe it'll outperform the market. CAPS All-Stars, those players with the best investing records, are slightly less certain, with only 82% voting "outperform." Pfizer bulls include sandvig, with a 98.03 player rating:

Cuivis dolori remedium est patientia -- Patience is the cure for all suffering.

The current dividend yield is over 5%. They generate all kinds of cash. If the economy heads for a recession, people will probably still buy their medicine. Their drugs treat a very broad range of maladies, which provides an additional cushion of safety. On the downside, I hear concerns that generics will cut into their sales and that their "pipeline" is not as strong as other companies.

On balance, I am swayed by their ability to generate cash. It gives them lots of competitive options.

One of those options may be for Pfizer to buy its way to a stronger pipeline. CAPS player UCLAHoops thinks investors should consider that while they collect its 5.1% dividend: "Pfizer will add to its pipeline through smart acquisitions. Dividend and free cash will keep investors happy in the meantime."

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? At Motley Fool CAPS, your opinion is as valuable as the pros'. Tell the CAPS community whether the urge to merge is good to go, or would it be better to fight for independence?


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