5 Companies With the Urge to Merge

Whether it's small "tuck-in" acquisitions, large megamergers between industry giants, or even the act of 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 "deworsification" -- weakening an existing business's core competency by grafting on wildly unrelated subsidiaries.

Breaking down the buildup
Taking a shortcut to decipher the good deals from the deal breakers, we'll see 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 be taking their toll in the M&A arena? While deals won't stop, the loss of easy credit could prompt more acquiring companies to use their stock to finance 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:

While merger announcements have risen so far in November to $435.3 billion, U.S. deal volume declined 73% year over year to $51.1 billion, bringing it back down to the lows reached in August and September. That's also reflected in the light volume of deals announced over the past week, especially compared with the week before. Yet as the credit crunch deepens, a number of investors want back out of previously announced deals. Private equity firms may soon have to convince boards of directors that they won't flee from acquisitions when things get tough.

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

A bright idea
In an era of $100 oil, incandescent bulbs are going the way of the buggy whip. Lighting giant Philips has been juicing up the idea of low-cost efficient lighting. It bought out solid-state LED lighting leader Color Kinetics earlier this year, and it's now moving swiftly into the commercial field with its acquisition of fixture manufacturer Genlyte. Consolidation is happening rapidly in the market, as big players -- including General Electric (NYSE:GE), among others -- gobble up efficient lighting manufacturers. While analysts didn't see the Philips-Genlyte merger on the power grid, investors will probably continue to observe a lot of movement in the field.

More than 350 CAPS players have rated both Philips and Motley Fool Stock Advisor recommendation Genlyte, with a combined 96% of them viewing the two as an outperform. CAPS All-Stars, those players with the best investing records, are also enthusiastic about the two, with a similar number giving them an outperform endorsement.

CAPS investor rduff10433 sees improvement in commercial construction as one reason to give Genlyte the thumbs-up, noting that it is insulated in large part from the housing-sector meltdown:

The Genlyte Group Incorporated engages in the design, manufacture, marketing, and sale of lighting fixtures, controls, and related products in North America. With the slow down in the housing sector, Genlyte, which is more focused in the commercial sector, should be able to capitalize on the improved commercial performance which should take place as a result of the improved competitiveness and availability of ... resources as the housing sector slows down. Business leaders with available resources should be taking advantage of this opportunity and preparing for the economic resurgence which should return in the next 12-18 months.

CAPS star adallik lists Philips' diversity among the reasons why it should be able to fend off any weakness it encounters:

Philips is a leader in consumer electronics, lighting, and medical equipment. Weakness in any one area can be offset by strength in other divisions.

With that, I'd say anyone who doesn't see the value in this merger is a dim bulb.

A value-added offer
But maybe I'm the dim bulb. 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.