Why Dealertrack Technologies, Inc. Shares Jumped

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 Dealertrack Technologies, (NASDAQ: TRAK  ) spiked more than 12% Friday after the auto dealership software specialist announced it has agreed to acquire privately held Dealer.com in a cash and stock transaction valued at more than $1 billion.

So what: Dealertrack will fund the transaction with approximately 8.7 million shares of common stock and $620 million in cash. Recalling Dealertrack held just under $146 million in cash and equivalents at the end of its most recent quarter, the company expects to finance the cash portion of the deal through a combination of cash on hand and with fully committed debt financing.

Now what: Noting the complementary nature of its acquiree's products, Dealertrack Chairman and CEO Mark O'Neil weighed in, "By joining forces with Dealer.com, we will be able to provide dealers, OEMs, and other industry partners with a deep and broad array of integrated solutions."

After today's jump, the stock has risen nearly 70% so far in 2013 on the heels of the company's solid quarterly earnings results last month. However, investors should recognize there are risks involved with Dealertrack -- a $2 billion company -- taking on new debt and diluting shareholders to absorb another $1 billion business.

With this in mind, the acquisition is expected to close during the first quarter of 2014 and should be accretive to Dealertrack's adjusted net income per share going forward. As a result, and assuming Dealertrack can successfully navigate the challenges of integrating the two businesses, it's hard to blame investors for bidding up shares today.

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