Buyout or Sellout?

From tiny acquisitions to massive conglomerate 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 130,000-plus 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. Or, like this past week, they might just slow to a trickle. Here are 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

Cisco (Nasdaq: CSCO  )

****

Tidal Software

NR

$105 million

CVC Capital

NR

iShares from Barclays (NYSE: BCS  )

***

$4.4 billion

Pulte Homes (NYSE: PHM  )

*

Centex (NYSE: CTX  )

*

$3.1 billion

Spectra Energy Partners

*****

NOARK Pipeline Systems

NR

$300 million

Elbit Systems (Nasdaq: ESLT  )

****

Kinetics

NR

$110 million

Charles River Labs (NYSE: CRL  )

****

Piedmont Research

NR

$46 million

Campbell Soup (NYSE: CPB  )

****

Ecce Panis

NR

undisclosed

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

Into it deep
OK, let's see if I’ve got this right. Just two months ago, Pulte Homes CEO Richard Dugas told analysts that not only did the homebuilder have too much inventory, but that it also had more land than it could possibly need, considering the housing industry's current malaise. Now he's gone out and bought Centex, which is going to end up giving him an estimated eight years’ worth of land. On top of that, the deal is going to give the combined companies so much debt that it will result in one of the worst cash-debt ratios in the industry.

Merging Pulte Homes with Centex may make for the nation's largest homebuilder, but it's also quite possibly making for the largest housing disaster. Analysts, though, seem to like the proposal, saying a Pulte-Centex combination would create cost synergies for the builders, allowing them to get even better prices on materials. But really, just how much more can they possibly realize at this end? With each company building 20,000 homes last year, they've undoubtedly already got some hefty muscle in negotiating terms. It would seem far more of an incremental benefit than anything radical.

The companies also appeal to different constituencies. Pulte builds luxury homes, while Centex caters to first-time homebuyers. While some suggest that gives the builder an even broader swath of the market to target, it also sets up the potential for integration issues down the road as different cultures clash. And the deal is also predicated on a housing recovery that is not at all assured. A few anomalous upticks in statistics are nothing to build your future on.

And that slug of land they'll be carrying? Eight years’ worth seems like an awful lot to have hanging around doing nothing if this housing debacle drags on longer than the homebuilders can see. Sure, they've written off huge amounts of value associated with it already -- Pulte wrote off more than $424 million worth of land option contracts over the past three years, while Centex has written off around $500 million worth -- but there's bound to be more writedowns coming.

Falling home prices, a glut of foreclosures still needing to be worked through, and a bevy of structural problems in the industry don't foretell a rosy outcome. While CAPS All-Star Bojac3728 thinks the deal makes sense for the two, another top-rated All-Star, tonylogan1, believes that if this deal does actually go through, it's going to happen at a much lower price:

Merger does not happen until Q3, and my guess is that the deal gets done much cheaper, if at all.

Shorted this in real life with real money this AM.

A value-added offer
What's your take on these deals? Let us know on Motley Fool CAPS. And while 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.

Try any of our Foolish newsletters today, 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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