Buyout or Sellout?

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 "diworsification" -- weakening a business's core competency 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 110,000 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:


CAPS Rating


CAPS Rating

Deal Price

ON Semiconductor (Nasdaq: ONNN  )


Catalyst Semiconductor


$115 million

Teva Pharmaceuticals (Nasdaq: TEVA  )


Barr Pharmaceuticals (NYSE: BRL  )


$7.2 billion

SBA Communications




$257 million



Genentech (NYSE: DNA  )


$43.7 billion

Brocade Communications (Nasdaq: BRCD  )


Foundry Networks


$3 billion

Barrick Gold (NYSE: ABX  )


Cadence Energy


$408 million

Cisco (Nasdaq: CSCO  )


Pure Networks


$120 million

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

A generically good deal
While an impending merger is big news for Motley Fool Stock Advisor recommendation Barr Pharmaceutical shareholders, it's gotta be old hat for Teva, which has had a voracious appetite for consuming rivals. Dozens of acquisitions over the past few years have made Teva Pharmaceuticals a huge player in the generic drug market, with revenue of almost $10 billion in the past year. Although smaller bite-size deals can be digested without heartburn, the larger ones -- for example, its $8.5 billion purchase of Ivax a few years ago -- always pose the potential for a less-than-seamless integration.

The Barr deal gives Teva a bigger presence in the contraceptive market while providing a gateway to some new markets; Barr's Pliva acquisition will give Teva a foothold into Eastern Europe. CAPS member covariance0 feels that with more than $12 billion in combined revenue, Teva will be a force to contend with, even if an adverse court ruling puts short-term pressure on the stock:

Teva just aquired Barr Pharm, making it a true giant. However the Supreme Court judged against TEVA in a patent case involving a generic drug on Jul 21 making it a short term candidate for a drop off it's peak, and a rebound in the next few weeks. The short term drop will result in sharp increase in bargain seeking and the price will go back up.

It's in their genes
Play it again, Sam! Once again, Roche has decided to bring its partner Genentech back into the fold. It exercised options back in the late 1990's to gain control of the biotech, only to spin off a minority interest a month later. Now Roche again wants 100% control of the maker of cancer drug Avastin, in a blockbuster $43 billion deal. While the overall number of deals may be running slower than last year's pace, these megadeals are helping 2008 keep up in terms of dollar volume.

Genetech's management has its followers among investors, and to CAPS member PDTBiotech, the company is to biology geeks as Google is to computer nerds:

Timing probably isn't the best, but this is a long-term play-if I had more time I'd probably watch for a nice dip to buy on, but in the long haul Genentech is probably as safe a biotech company as you'll find as well as the best big cap bet to appreciate over the next half decade or so.... Their business model is extremely different from that of big pharma in that management lets their science lead the business, while most big drug companies' management run business with an iron fist.

A value-added offer
What's your take on these deals? 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 whether you think it's better for the firms involved to remain independent.

Barr Pharmaceuticals is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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