Buy Out or Sell Out?

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

Breaking down the buildup
To help, we'll turn to the 83,000 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

Amazon.com (NASDAQ:AMZN)

**

Audible (NASDAQ:ADBL)

***

$300 million

Aurora Capital

NR

NuCO2

*

$487 million

Consol Energy

***

CNX Gas

***

$932 million

PayPal division of eBay (NASDAQ:EBAY)

***

Fraud Sciences

NR

$169 million

Greenbrier Companies

***

American Allied Railway Equipment

NR

$83 million

Inverness Medical Innovations

****

Matria Healthcare (NASDAQ:MATR)

**

$900 million

Allis-Chalmers Energy (NYSE:ALY)

*****

Bronco Drilling (NASDAQ:BRNC)

*****

$438 million

GSI Commerce

****

e-Dialog

NR

$157 million

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

So what do CAPS investors think about these targets and acquirers? None of these deals exceeds the $1 billion threshold, but most of the companies have earned ratings of three stars or better.

I hear ya!
In an effort to kindle an interest in buying more books, Amazon has decided to acquire the best-seller in audiobooks on the Internet, Audible. The company's $100 million in annual revenues ought to fold in nicely to Amazon's income statement, as Amazon focuses on its new wireless reading device, Kindle. But although you might soon see Audible as yet another dog-eared section on Amazon's website, the proposed deal could cause some bumps in the road for the audiobook seller's business.

Audible currently sells its books through Apple's (Nasdaq: AAPL  ) iTunes store, and the computer maker would like nothing more than to unseat Amazon's growing role in delivering digital media. Yet with Amazon thumbing through Audible's selections now, it's questionable whether Audible can stay on good terms with its other partner.

CAPS investor smartSheep was thinking about a buyout a few months ago as he pondered Audible's fate.

I'm jumping on the downloadable content bandwagon, and I think audible's relationship with Apple -- the big "Audiobooks" tab in the iTunes Store will drive more and more traffic to their site. I'm confident in the future of Apple/iTunes, and audible's deal is good until 2010. After that, I'm not sure how easily they'll get squeezed out if larger companies (Amazon and perhaps Apple itself) decided to sell audiobooks on their own; I'll hope for a takeover.

Another CAPS player, demeye, foresaw a buyout as an opportunity for Amazon to increase its presence in this growing space. "Audiobooks are a very strong growing market," demeye says. "The market will grow much more because of the ipod generation."

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 companies involved to remain independent.


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