Is This Situation Special Enough?

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.

Company

CAPS Rating (out of 5)

Type of Situation

Terms

Apollo Global Management ** Acquisition Great Wolf Resorts (Nasdaq: WOLF  ) for $5 per share
Youku.com (Nasdaq: YOKU  ) **** Merger $1.1 billion purchase of Tudou

Source: Company filings.

Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.

A wolf in sheep's clothing?
Being a theme park operator is no easy task these days. Despite Great Wolf Resorts seeing revenues and attendance hit record levels last year, it hasn't posted a single profitable year in at least a decade. Six Flags Entertainment (NYSE: SIX  ) also has a spotty record of earnings and last year suffered attendance problems particularly as a result of Hurricane Irene. Only Cedar Fair was able to put together good park numbers and profits last year, though the latter seems to be a hit-or-miss proposition too.

But Great Wolf, with its unprofitable track record, found itself in an untenable position and saw its shares trading for less than $5 a stub at the start of the year. While Great Wolf's shares have been steadily climbing in 2012, Apollo Global Management saw fit to only offer a 19% premium in its bid to buy the theme park operator for $5 a share.

Great Wolf is trading over that price, perhaps in the belief someone else will come along and sweeten the pot. But the park operator has adopted a poison pill defense, preventing anyone else from acquiring more than 12.5% of its shares. If there's going to be a better offer, it's going to have to come from Apollo, but since management approved of the takeover, there's no reason for it to do so.

CAPS member ajsiegel pointed out just before Apollo made its offer that despite having a great product, it was too heavily laden with debt to survive.

More current debt due to be paid than cash on hand. That combined with a poor interest coverage ratio. Signs certainly point toward bankruptcy. Too bad as this is a good company with good values and a good product.

Let us know in the comments section whether someone will challenge the poison pill defense and try to make a better offer, then add the theme park operator to your watchlist to be alerted if someone makes a move.

Can you say Youku-Tudou 3 times fast?
Video hubs Youku and Tudou have used the absence of Google's Youtube in China to mass a commanding lead in streaming video. According to the market researchers at Analysys International, Youku owns 21% of online video views with Tudou second at 16%, which together will give the company a huge lead over third-place rival Sohu.com (Nasdaq: SOHU  ) at 13%, making it a formidable powerhouse.

Youku expects to generate those much-vaunted "synergies" of between $50 million and $60 million a year after the deal is completed, but with Sohu, Baidu (Nasdaq: BIDU  ) , and Tencent still assailing the gates, there's substantial pressure on the pair. And with analysts still expecting a loss this year from Youku, the purchase price may end up having been an expensive one to pay.

I rated Youku to outperform the market on CAPS after third-quarter results came out, and I felt it misread the accounting changes it made that resulted in the loss appearing bigger than it was. On an apples-to-apples basis, Youku beat expectations. However, I'll be closing out my pick because I think it's chewed off too much for too little payout. It may get some more mileage out of this hookup, but I think such big acquisitions just lead to indigestion.

Add Youku and Todou to your Watchlist to see whether the sum is greater than the parts, and let us know on the Youku CAPS page whether you think this acquisition was a smart move.

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 these 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.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, Sohu.com, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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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 March 16, 2012, at 1:21 AM, Mega wrote:

    "Youku expects to generate those much-vaunted "synergies" of between $50 million and $60 million a year after the deal is completed"

    Ha ha, what a pack of liars.

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