Nalco Shares Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Nalco Holding (NYSE: NLC  ) surged 25% today after cleaning chemicals specialist Ecolab (NYSE: ECL  ) said it would buy the water-treatment technologist for $5.4 billion.  

So what: For each share owned, Nalco shareholders will receive $38.80 in cash or 0.7005 of an Ecolab common share, representing a 34% premium to Nalco's closing price yesterday. Ecolab is making the move to diversify its health care and hospitality-heavy customer base, but given its 8% share price drop today, Wall Street is obviously skeptical of the strategy.

Now what: I'd take Mr. Market's cue on this one and stay away from Ecolab right now. The company is essentially paying about $1.6 billion in cash and issuing about 70 million shares to plunge into a space that has represented a very small part of its success to date. While Ecolab management has identified roughly $150 million in cost savings from the deal, the possibility of "diworsification" is too high to really get excited about it.

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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days.

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Related Tickers

12/31/1969 7:00 PM
NLC.DL $0.00 Down +0.00 +0.00%
Nalco Holding Comp… CAPS Rating: ***
ECL $114.96 Down -0.39 -0.34%
Ecolab CAPS Rating: *****