Merger Mania Trumps Euro Concerns

As it becomes apparent that Greece is on the outs in the European Union -- the IMF is likely to stop providing bailout funds since the country isn't following the requirements to get bailed out -- the fear of falling dominoes is growing. The Dow tumbled 141 points yesterday, or 1.1%. Still, some stocks went even higher, many by double-digit percentages.

But resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Company

Yesterday's % Change

Price

CAPS Rating (out of 5)

GeoEye (Nasdaq: GEOY  ) 34.7% $20.43 *****
Genon Energy (NYSE: GEN  ) 25.8% $2.29 *****
RailAmerica (NYSE: RA  ) 9.8% $27.25 *****

It was merger mania today. Apparently it was the only thing that was keeping stocks from following the broad trend lower. All three companies today were the beneficiaries of buyout offers, which totaled $4 billion between the three of them. And while companies often talk up the "synergies" they expect to realize from their acquisitions, each of these really does seem to make sense.

On the up and up?
Even if it was a bit of gamesmanship, the acquisition of GeoEye by DigitalGlobe (NYSE: DGI  ) is smart, particularly when the government is cutting back spending for enhanced satellite imagery.

Back in May, GeoEye made a hostile $792 million bid for DigitalGlobe, which scoffed at the offer and said it showed how desperate its rival really was. There was already talk that the federal government would cut back the eye-in-the-sky program, and with GeoEye relying upon that largesse for around two-thirds of its revenues, the acquisition was needed to shore up what would quickly become a flailing business.

It might not have been so dire, but Digital Globe upped the ante by saying that as soon as the government made its decision known on what it was going to do with the Enhanced View program, it was going to make a counteroffer to buy its rival. Stick that in your GeoEye! And when the government said the following month it wasn't renewing GeoEye's contract, good to its word, DigitalGlobe agreed to buy it for $900 million, sending shares of both satellite shops higher.

Feel the power
For utility operator GenOn, its $1.7 billion offer to go to the altar today came from rival NRG Energy, which believes the union will save $300 million annually even as it creates the largest competitive power company in the United States.

The natural gas glut has weighed heavily on most of the industry, from drillers to transporters. The big winner has been the consumer, in the form of lower energy bills. But the merger also suggests we may see more such deals coming our way. CNOOC, for example, just made a $15 billion bid for Canadian oil giant Nexen. Exelon (NYSE: EXC  ) acquired Constellation Energy earlier this year, and GenOn itself was the result of a merger between Mirant and RRI Energy.

Analysts look favorably on the hookup, noting growing competition in the wholesale power markets and the retail power markets in deregulated states. NRG owns nuclear power plants, gas- and coal-fired facilities, solar and EV-charging stations, and a growing retail electricity business.

Do you see more consolidation in the space? Tell me in the comments section below or on the GenOn CAPS page who you think might be next.

Deadman's switch
Last is railroad operator Rail America, which agreed to be acquired by Genesee & Wyoming for $1.4 billion and in the process create a railroad operation that will originate or terminate 4% of all carload traffic in the country. While the effort is seen as a bid to leverage a recovery in the U.S. economy, similar to when Warren Buffett bought Burlington Northern, the risk here is the debt load G&W will be freighting.

To make the deal work, the railroad will be tripling the amount of debt it carries. And while there is some sense to combining operations -- the new combined company will have 111 railroads and 15,100 miles of track generating annual revenues of over $1.4 billion -- there's no guarantee we're coming out of this recession anytime soon. As a matter of fact, we could be on a runaway train to a new one: CNBC ran with a headline recently that suggested a recession was "fast approaching!"

Having saddled itself with a heavy burden, G&W may go from "I think I can" to "No way I can" in a hurry. Of all three deals yesterday, this is the one I have least confidence in seeing success, so I'm rating G&W to underperform the broad market averages. Will you be working on this railroad? Let me know below or on the Rail America CAPS page.

Whoa, Nelly!
None of the companies making deals yesterday pay their investors dividends, but most Dow stocks do. They're often a key component in one's portfolio, and a new Motley Fool report singles out the three Dow companies that dividend investors need to own. It's a free report, so check it out now.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio . The Motley Fool owns shares of RailAmerica. Motley Fool newsletter services have recommended buying shares of Exelon, GeoEye, and Genesee & Wyoming and creating a write covered straddle position in Exelon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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