9 Companies With the Urge to Merge

Whether it's small "tuck in" acquisitions, large megamergers between industry giants, or even taking significant stakes in another company, the urge to merge remains strong.

We can't always tell the good deals from the bad. While we might get "synergy," we can just as easily get what investing legend Peter Lynch called "de-worse-ification": weakening an existing business' core competency by grafting on wildly unrelated subsidiaries.

Breaking down the buildup
We're going to take a shortcut to decipher the good deals from the deal breakers. We'll see how the 70,000 investors in the Motley Fool CAPS universe rate the companies hooking up. If two highly rated companies seek a better life together, we figure they might also do better down the road. Conversely, if one company is highly rated and the other low, we might expect one set of investors to come out ahead, since those ratings forecast investor sentiment of future prospects.

Could troubles in the capital markets finally be taking their toll in the M&A arena? While deals won't stop, the loss of easy credit could increase the number of stock swaps that play a role in financing transactions. Here's a handful of some of the recently announced deals and the CAPS community's ratings for the players involved, on its scale of one to the maximum five stars:

Acquirer

CAPS Rating

Target

CAPS Rating

Deal Price

Penn West Energy Trust (NYSE:PWE)

*****

Canetic Resources Trust (NYSE:CNE)

*****

$3.79 billion

SPX

*****

APV

NR

$510 million

Greatbatch

*****

Quan Emerteq

NR

$55 million

Iron Mountain

****

Stratify

NR

$158 million

Computer Sciences (NYSE:CSC)

**

First Consulting Group (NASDAQ:FCGI)

****

$352.3 million

McAfee (NYSE:MFE)

**

ScanAlert

NR

$51-$75 million

Bracco Diagnostics

NR

E-Z-EM (NASDAQ:EZEM)

***

$230.5 million

Nycomed

NR

Bradley Pharmaceuticals (NYSE:BDY)

**

$346 million

Platinum Equity

NR

Covad Communications

NR

$304 million

CAPS ratings courtesy of Motley Fool CAPS; NR = not rated.

While merger activity has slowed to a relative trickle, with only $192 billion in deals being consummated in September, the first nine months of 2007 have still been the busiest ever. According to Thomson Financial, for the year to date ended Sept. 30, more than $3.6 trillion in deals were made. That just surpasses the figure for all of 2006, and nearly doubles 2004's hectic pace. Dealogic also reports more than $13 trillion worth of deals made since 2004, making it the richest merger era since the tech boom at the turn of the century.

So what do CAPS investors think about these targets and acquirers? While these deals, as we've seen in recent weeks, are not particularly large -- only the Penn West acquisition exceeds $1 billion in value -- most of the companies are well liked, with a number of the publicly traded companies garnering an average of four stars or better.

Penn West moves north
Canetic itself was formed by the merger of two trusts to create the largest oil and gas trust in North America; its acquisition by Penn West will create a behemoth on the continent. The combined trust will be worth over $15 billion and will have equivalent production of more than 200,000 barrels of oil per day. The merger includes interests in western Canadian oil and natural gas pools, along with opportunities in oil sands, coal-bed methane, shale gas, and enhanced oil recovery.

Over 400 players have rated Penn West, with 97% of them viewing it as an outperform. CAPS All-Stars, those players with the best investing records, are even more positive about its future -- 99% of them weigh in with an outperform endorsement. Not even a change in Canadian tax laws dampens the enthusiasm CAPS investors like All-Star jester112358 have for Penn West.

Wow, what a dividend. Better than any utility in the U.S. Unfairly beaten down over worries about taxation which won't occur until 2011. Can worry about value of equity then.

Those sentiments are similar to another All-Star, Allstar13913, who writes:

Canadian Oil Trust. Pays a great dividend. I believe this stock is currently undervalued and pays a great dividend for this bear market.

I'm unafraid of the new tax rules for these trusts, which do not take effect for another year and a half.

A value-added offer
What's your take on these deals? Does the tax law mean trouble? Should investors accept stock in the new company or sell now for cash? Only at Motley Fool CAPS is your opinion as valuable as the pros'. Tell the CAPS community whether the urge to merge is good to go or if it would be better to fight for independence.


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