Buy Out or Sell Out?

From tiny acquisitions to massive conglomerate combinations, Wall Street's urge to merge remains strong. Some of these deals might generate sought-after synergy, but others could create what Peter Lynch called "diworsification" -- weakening a business's core competency by grafting on wildly unrelated subsidiaries. How can we tell the good deals from the dealbreakers?

Breaking down the buildup
To help, we'll turn to the 95,000 investors in Motley Fool CAPS. A combination of two companies with high CAPS ratings should bode well for the new firm's future results, while a high-rated company that joins a lower-rated one may benefit one set of investors more than the other.

Despite troubles in the capital markets, the deals won't stop; they simply might involve more stock and less cash. Here's a handful of recently announced deals, and the ratings for each participating company on CAPS' five-star scale:

Acquirer

CAPS Rating

(5 max)

Target

CAPS Rating

Deal Price

American Express (NYSE:AXP)

***

General Electric payment services

****

$1.1 billion

Monsanto (NYSE:MON)

****

DeRuiter Seeds

NR

$863 million

Tata Motors (NYSE:TTM)

*****

Ford's (NYSE:F) Jaguar & Land Rover

*

$1.7 billion

Teva Pharmaceutical (NASDAQ:TEVA)

*****

Bentley Pharmaceuticals

***

$360 million

Humana (NYSE:HUM)

***

OSF Helath Plans

NR

$90.5 million

Illinois Tool Works

*****

Quipp

NR

$8.5 million

BJ Services

****

Innicor Subsurface Technologies

NR

$55 million

Private equity group

NA

Gilat Satellite Technology (NASDAQ:GILT)

*****

$475 million

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

A bear of a time
Although there seem to be a greater number of deals pending, in fact, the first quarter's $736 billion is the smallest global dollar value amount in six years. The total number of deals is up 14% to more than 9,100 deals, but they're just worth less. The main reason is the 41% decline in U.S. deal values down to $204 billion, though some of the slack has been made up in both Russia (up 173% to $33 billion) and China (up 43% to $35 billion).

Motoring on
One of the deals that's been expected is Ford's decision to let go of two of its premium car name plates, Jaguar and Land Rover. The luxury associated with them has been lost on Ford for a while now. Jaguar's domestic sales fell 24% in 2007. Land Rover, on the other hand -- selling primarily gas-guzzling SUVs -- rose about 4%. If December hadn't been bad (sales fell almost 19%), the numbers would have been better. Ford will make a final payment to the units' pension funds and then say ta-ta for now, as India's Tata Motors picks them up.

Tata is purchasing the two brands for $2.3 billion, less than what Ford paid for either one. Ford purchased Jaguar for $2.5 billion back in 1989 and shelled out $2.7 billion in 2000 for Land Rover. Yet even at fire sale prices, the auto industry is stuck in the mire of a moribund economy. Ford's sales were off 14% in March, while General Motors and Chrysler were each down 19%. Even Toyota found sales down 10% for the month.

With Ford's share price stuck in the single digits, does that make it an attractive buyout candidate itself? Some investors like CAPS player SandboxJerry think there's a chance it will go the way of Chrysler. "Ford is becoming more and more attractive for a hedge fund to come, buy them out, layoff 30-40 percent more of their workforce and move their remaining operations across the bridge to Windsor Canada."

Conversely, CAPS investor LowercaseGrant finds Motley Fool Global Gains recommendation Tata Motors just waiting to rev its engines, in this pitch from a month ago.

The only thing keeping this stock from taking off right now is all the automotive giants playing "Johnny-Come-Lately" to all of Tata's ideas and markets. Tata keeps punching out the growth, even competing against the big dogs though. Good leadership with big eyes. Good bet.

A value-added offer
What's your take on these deals? At Motley Fool CAPS, your opinion is as valuable as the pros'. Tell the CAPS community whether the urge to merge is good to go, or whether you think it's better for the companies involved to remain independent.


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