In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlighted the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and he achieved 50% annualized returns for a decade investing in them.
We'll look at some announcements presenting an opportunity for profit and pair that with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.
But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence is needed on your part.
CAPS Rating (out of 5)
Type of Situation
|Kellogg (NYSE: K )||****||Acquisition||Purchasing of Pringles brand from Procter & Gamble (NYSE: PG )|
|McGraw-Hill (NYSE: MHP )||**||Spinoff||Tax-free distribution of textbook publisher|
Source: SEC filings.
Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.
It didn't take Diamond Foods (Nasdaq: DMND ) long to go from acquirer to takeover target. After it bungled its purchase of the Pringles brand of chips from Procter & Gamble by paying nut growers cash to manage its earnings, cereal maker Kellogg stepped in and said it will buy the potato chips for $2.7 billion -- and might just add Diamond to the mix to boot.
Procter & Gamble has been looking to focus its operations sans the food business and was hoping it could get rid of Pringles quickly. Investors weren't all that happy with the original deal since it meant they'd have to accept some shares of Diamond Foods. When the improper payments came to light, it gave the consumer products giant an avenue of escape, which it readily took.
Pringles will triple the size of Kellogg's international snack food business, and now that the company will be second to only PepsiCo's (NYSE: PEP ) Frito Lay snack division in size, suddenly Diamond Foods looks appetizing, too. Kellogg's CEO says it would be a natural fit though he hasn't said whether he'd actually pursue it just yet. With the government scrutinizing its finances, Diamond will probably sit in limbo for a while.
To buy Pringles, though, Kellogg will be borrowing $2 billion and cutting back on the amount of shares it buys back for the next few years. Shares of both Kellogg and Diamond jumped 5% yesterday, while P&G was virtually unchanged.
Highly rated CAPS All-Star TMF1000 just rated Kellogg to outperform the market, believing the addition of Pringles to be a smart move: "So this acquisition will help them increase earnings and sell more of their own snacks and products by giving them entry into other countries. They paid 1.8 times sales for the Company which I think is a real bargain for adding this quality company to their business portfolio."
Let us know in the comments section if you think a play on Diamond will be made, then add Kellogg to your watchlist to be alerted if it makes a move.
To the head of the class?
The divisions weren't exactly incongruous, but McGraw-Hill's units focusing on capital markets and education served wildly divergent customers. Splitting them up into two separate publicly traded companies makes a lot of sense.
McGraw-Hill Education, as it will be called, will continue to publish textbooks for the K-12 market and will be the second largest such publisher behind the U.K.'s Pearson. With emerging markets like China, India, and Brazil expected to experience double-digit growth, MHE believes it can better capitalize on the opportunities there as a separate company. Pearson recently bought Global Education & Technology, a Chinese English-language educator.
McGraw-Hill Markets will have under its umbrella the Standard & Poor's brand, competing against the likes of Dun & Bradstreet and Moody's. While MHM expects to drive double-digit sales and revenue growth going forward, revenues took a hit last quarter as all the players felt the impact of tougher competition.
CAPS member youyi believes McGraw-Hill's global ambitions are the right move for it to make, though the sleepy world of publishing makes it difficult to see the lofty gains he predicts: "Going Global... publishing in more languages and digitizing the content will equalize the world of education in the next 5-10years. If MHP continues to innovate, invest, and stay focused on the student then stock price will be an 100 bagger over 7 years."
Add McGraw-Hill to the Fool's free portfolio tracker and keep track of its published developments.
Checking the mercury
Digging into these deals is exactly what the analysts at Motley Fool Special Ops do every day, finding the best situations to invest in. It's a special opportunity worth taking a 30-day risk-free trial in.
Both of the companies discussed today are leading names in their industries, but The Motley Fool has identified one stock it says is the best retail opportunity for 2012. Order the report today and find out which company is set to dominate Latin America. It's absolutely free.