Buyout or Sellout?

From tiny acquisitions to massive combinations, Wall Street's urge to merge remains strong. How can we tell the dealmakers from the deal breakers?

Breaking down the buildup
To help, we'll turn to the 120,000-plus investors in Motley Fool CAPS. Our data suggests that top-rated stocks offer the best oppportunity to earn the best returns. A combination of two companies with high CAPS ratings should bode well for the new company, 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 are a handful of recently announced deals, and the ratings for participating companies on CAPS' five-star scale:

Acquirer

CAPS Rating

Target

CAPS Rating

Deal Price

PNC (NYSE: PNC  )

*

National City (NYSE: NCC  )

*

$5.2 billion

CenturyTel

***

Embarq (NYSE: EQ  )

**

$5.8 billion

Ebix

*****

Healthaxis

NR

$7.5 million

Adrenalina

NR

Pacific Sunwear (Nasdaq: PSUN  )

**

$329 million (proposed)

Johnson & Johnson (NYSE: JNJ  )

*****

HealthMedia

NR

Not disclosed

Clinical Data

*

Avalon Pharmaceuticals

NR

$10 million

PepsiCo (NYSE: PEP  )

*****

Spitz

NR

Not disclosed

Syngenta (NYSE: SYT  )

****

Flower business of Yoder Brothers

NR

Not disclosed

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

While I was tempted to include all the top banks that the government forced into giving up an equity stake, we'll stick with the more conventional merger arrangements taking place in the equity markets.

A merger of equals?
CAPS member eahanson warned that National City might be acquired on the cheap. Oops! Now some analysts see this deal as a forced panic sale and agree that it just might be a "boondoggle" for National City shareholders.

The primary risks on this stock are the possible cost of greed in management and a possible low-cost buyout when the stock dips down. Otherwise, in the 2-4 year range, with the market share and banking model, I would expect good returns as the banking industry recovers.

PNC, on the other hand, looks to be getting the best of all possible worlds with the deal. It's acquiring an otherwise well-managed company and getting a huge tax break. A recent ruling by the Internal Revenue Service eliminates the cap on the buyer's (PNC's) taxable income that the seller's (National City) operating losses can immediately offset. According to one analyst, that may be as much as $5.1 billion that PNC can take advantage of immediately, instead of having to space it out over several years.

CAPS member Theresewin only sees PNC growing.

With the purchase of NCC and use of the TARP [troubled asset relief program], PNC is now the 5th largest bank in the US. They have held up pretty well so far and I see them getting stronger.

A shot of something
With a pipeline that's deeper than that of other pharmaceuticals and growth that is likely to continue, Johnson & Johnson has attracted a broad following on CAPS, where more than 96% of the more than 10,000 members rating it expect it to outperform the market. Members like Jedge3 simply find that its products are necessary and it has a history of being a well-run business.

Makes products everyone needs, has [had] positive earnings and cash flow for the last 10 years. They have the cash to turn it around.

A small, ancillary business like HealthMedia -- it provides online programs to manage health conditions -- ensures that customers remain loyal to its products.

A value-added offer
What's your take on these deals? Let us know on Motley Fool CAPS. And while you're there, you can start your own research on these or other stocks. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. There's more than you think.

Pacific Sunwear is both a Motley Fool Hidden Gems Pay Dirt and a Stock Advisor pick. Johnson & Johnson is an Income Investor recommendation. Ebix is a Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days.

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


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2008, at 3:17 PM, davidpthomassr wrote:

    I obviously am a fool!!!!! I bought NCC when stocks were down hoping for a long term investment in a very good bank.

    The money MY TAXDOLLARS ARE PAYING FOR IS NOT TO BUY UP BANKS THAT CAN WELL STAND ON THEIR OWN!!!

    I hope everyone in this deal gets colon cancer

  • Report this Comment On November 06, 2008, at 2:49 PM, SeanDix wrote:

    While I wouldn't reccomend shorting J&J stock I would consider divesting of it as J&J is in for a very serious legal battle in the coming years. To read about the legal battle that is unfolding please read "Sean Dix The American Dream and Justice (Part one)" you can find this by Googling "J&J CNN" or simply going to the articles section on my website at www.FlossRings.com and clicking on Rense/Sparrowdancer. The estimated damages for maliciously suppressing FlossRings... The Biggest Innovation in Oral Care since the Toothbrush...clinically proven to remove 31 percent more plaque than J&J's floss alone at Indiana University can be arrived at using the following logic. The former worldwide director of Licensing and acquisitions from J&J (Brian Bootel) documented in a letter posted on my website (under letters) that the Conservative value of the FlossRings & Sterilized FlossSegments was $50-100 million a year. Considering that J&J has suppressed the FlossRings even threatening to kill me for pursuing justice since 1994 you have simply to multiply the potential yearly losses either on the high side or the low and then factor in punitive damages which is usually called treble damages or times three. If you do the math I think you will see the bigger picture. Once again you can read "Sean Dix The American Dream and Justice" on www.FlossRings.com or on www.Sparrowdancer.com as Mary Sparrowdancer was the first Journalist in 12 years to accurately detail the facts and evidence of this matter. You can also see the article by googling "J&J CNN"

    Sincerely,

    Sean Dix

    The FlossRing Company

    145 East 15th Street Apt. 12-A

    New York, NY 10003

    212-254-7563

    www.FlossRings.com

    E-Mail SeanDix@FlossRings.com

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