Buy Out or Sell Out?

From tiny acquisitions to massive conglomerate combinations, Wall Street's urge to merge remains strong. Some of these deals might generate sought-after synergy, but others could create what Peter Lynch called "de-worse-ification" -- weakening a business's core competency by grafting on wildly unrelated subsidiaries. How can we tell the good deals from the deal-breakers?

Breaking down the buildup
To help, we'll turn to the 79,000 investors in Motley Fool CAPS. A combination of two companies with high CAPS ratings should bode well for the new firm's future results, while a high-rated company that joins a lower-rated one may benefit one set of investors more than the other.

Despite troubles in the capital markets, the deals won't stop; they simply might involve more stock and less cash. Here's a handful of recently announced deals, and the ratings for each participating company on CAPS' five-star scale:

Acquirer

CAPS Rating

Target

CAPS Rating

Deal Price

EMC (NYSE:EMC)

*****

Document Sciences (NASDAQ:DOCX)

NR

$85 million

Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)

*****

Marmon Holdings

NR

$4.5 billion

Brush Engineered Materials (NYSE:BW)

*****

Techni-Met

NR

$90 million

Royal Philips (NYSE:PHG)

****

Respironics (NASDAQ:RESP)

****

$5.1 billion

Eaton (NYSE:ETN)

*****

Moeller Group

NR

$2.23 billion

Eaton

*****

Phoenixtec Power

NR

$565 million

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

As we saw last week, deals are getting harder to come by. Still, as the credit crunch deepens, a number of investors are looking to back out of deals that were previously announced. Private equity firms may soon have to reassure target boards of directors that they won't back out of acquisitions when things get tough.

So what do CAPS investors think about these targets and acquirers? While these deals are in keeping with a trend we've seen recently -- two of them in excess of $1 billion are considered significant industry mergers -- most of the companies are well-favored by investors, having garnered ratings of four stars or better.

A buffet of Buffett
The genius behind Berkshire Hathaway continues to feast in a market where so many opportunities exist. By keeping a healthy supply of cash on hand, Warren Buffett has the wherewithal to pick and choose from tasty investments that others have to pass on because their own finances are so weak.

Berkshire's latest target is a conglomerate of 125 businesses run by the Pritzker family. By initially establishing a 60% stake in the holding company, Berkshire Hathaway will have a stronger presence in several industries, including wire and cable, transportation services, and industrial products. Berkshire plans to buy out the remaining 40% of the company over the next five to six years.

More than 3,500 CAPS players have rated Berkshire Hathaway, with 99% of them viewing it as an outperform. CAPS All-Stars, those players with the best investing records, are almost as unanimous in giving it the thumbs-up. Most of the sentiment for continued outperformance lies with Warren Buffett heading up the company. As top-rated All-Star PLynchJr says, "I'll take my chances with Warren outperforming the S&P500 Index."

All-Star dbhealy fleshes this opinion out:

When the market is down, the Oracle of Omaha always manages to find a bargain. The recent downturn has presented some unbelievable opportunities to get in cheap on fundamentally sound companies. No doubt Buffett and Munger have been anticipating this for awhile, and won't miss the boat!!.

Buffett's moving into bond insurance, too, starting an insurer today in New York that will guarantee municipal and state bonds. The profitable venture comes at a time when other insurers can't afford to move because they got too fancy for their own good. As the old Tammany Hall bosses might have said, "I sees my opportunities and I takes them!"

A value-added offer
What's your take on these deals? Tell the CAPS community whether the urge to merge is good to go -- or whether you think it's better for the firms involved to remain independent.

For every post you make to CAPS or any Foolish discussion board in the month of December, The Motley Fool will donate $0.02 to charity. So give us your 2 cents and we'll pay it forward!


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