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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
|Alibaba.com||****||Going private||Parent Alibaba Group to buy back 25% stake held by Yahoo! (Nasdaq: YHOO ) , leaving Yahoo! with 15% interest in Alibaba Group.|
|WebMD Health (Nasdaq: WBMD )||**||Stock tender||Modified Dutch Auction to repurchase $150 million in shares at $24.50 to $26.00 per share.|
Source: Company filings.
Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.
An exit strategy?
Alibaba.com may have been the one reason investors would want to buy into Yahoo!, but will investors realize enough of a return from the $1 billion that was sunk into the Chinese e-commerce site's parent, Alibaba Group, back in 2005 if it takes Alibaba.com private?
Yahoo! has been foundering for some time and could be seen as an eager seller trying to raise cash, meaning Jack Ma might not need to pay as much for its stake as he otherwise would. On the plus side, Yahoo! would still hold about a 15% share of the company that possesses burgeoning growth properties, including Internet retailer Taobao, which owns nearly 50% of the market; Taomail; Yahoo! China; and Alipay, an e-payment service similar to eBay's (Nasdaq: EBAY ) PayPal.
The deal with Yahoo! would be separate from the $1.74 per share that Alibaba Group is offering to pay Hong Kong-based shareholders of Alibaba.com. The Yahoo! deal has reportedly stalled over how best to value Taobao. But Yahoo! might not want to negotiate too hard. Alibaba saw subscriber rolls fall almost 3% in the fourth quarter and net profits fell 6%. With international financial worries and a slowing Chinese economy, Alibaba might undergo an upheaval similar to that experienced by eBay several years ago.
Yahoo!'s stock pulled back about 20% from recent highs and is trading almost 8% lower in 2012. Realizing some cash from its investment might help the portal reconfigure itself as it goes on a possible buying spree to make itself relevant once again.
Much of the commentary on CAPS revolves around Yahoo! actually being the one acquired, such as FuriousFuscia suggestion Apple would make a logical choice for a buyer.
It would make sense for Apple to buy Yahoo! for its technology and patents not even considering Apple's venture into the TV market and what Yahoo! has to offer to make it seamless creating a change from cable tv as we now know it.
Let us know in the comments section on what side of the M&A table you think Yahoo! will sit, then add the Internet portal to your watchlist to be alerted as soon as Alibaba makes a move.
Feeling under the weather
Considering online health information provider WebMD Health couldn't find anyone willing to pay up for the company, are its shares really that cheap that it should be buying back the stock itself? Carl Icahn's been buying, increasing his stake to more than 11%, and wants it to buy back up to $1 billion worth of stock, but WebMD took itself off the market because it couldn't find anyone that thought its shares were worth enough to accept an offer.
WebMD has other problems as well, including an inability to turn a profit this year along with its CEO resigning. WebMD relies upon the pharmas for its advertising, but also upon consumer product companies like Johnson & Johnson (NYSE: JNJ ) and Procter & Gamble (NYSE: PG ) whose products relate to health-conscious consumers. With shares down 57% from its high point, though, WebMD might have to fall further still to be a real value. Yet the stock is propped up at nearly $25 a share as a result of the tender range, which means it might not be worth adding to your portfolio now.
With just 60% of the CAPS All-Stars rating the information provider to outperform the market indexes, it underscores the lack of confidence represented by the two-star rating assigned to it. So add WebMD to your watchlist to see if it can return to health and let us know on the WebMD Health CAPS page if you think it's a tender issue to address.
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.
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