Medallia Is Being Acquired: Here Are 2 Stocks to Buy Instead

Experience management software company Medallia (MDLA) is being taken private by Thoma Bravo. Looking for a new place to put that cash? In this Motley Fool Live segment from "The Five" recorded on Sept. 16, Fool.com contributors Jason Hall, Clay Bruning, and Nicholas Rossolillo discuss two different alternatives you might want to invest in instead.

Jason Hall: Let's go ahead and talk about Medallia. Nick, this is a company that's in the middle of being acquired, right?

Nicholas Rossolillo: Yeah, it sure is. They are being taken private by private equity firm Thoma Bravo, which does a lot in the tech sector. Medallia competes with a company called Qualtrics (XM). Maybe that's a more familiar name. They help with the customer. Basically, they measure when someone logs on to an app or interacts with the business on the internet. They measure the quality of the interaction and help businesses find ways to improve that interaction in various ways. So yeah. They're being taken private, though. I think the second-quarter earnings results are not super helpful. But they are being acquired for $34 per share in cash. If you happen to own Medallia, the stock is trading for basically that right now. So not a lot of upside there. I think the last news item to keep track of, they did have a go-shop period that ended on Sept. 4. No one else came to the table with a higher offer by Sept. 4. So now this offer from Thoma Bravo is kind of what shareholders would need to vote on whether or not to approve this to go forward.

Hall: I'm going to share a chart here to just show you. It's pretty obvious when the deal was announced, right here. The stock price just looked like a scary EKG, and then it just flatlined right there. So I think, some helpful thought here about this company, because I know it's been recommended in a couple of portfolios. And there's probably some investors trying to decide what to do. And I just want to throw some insights out here that I think can be handy.

Clay, Nick, I'm going to put you guys on the spot here. I'm going to ask you to think about, if you were an investor that owned Medallia and you're going to sell, what would you do with that capital? What would you buy? We're just going to have a little fun and let you guys think about it, while I just offer some thoughts here?

So this is a stock that was, for members, both times it was recommended, it was back in 2019. Most members who bought it based on a portfolio recommendation did it more than a year ago. But if you've transacted in it within the past 12 months, here are the implications for what you might want to think about deciding what to do. It's being taken private. You're just going to get cash. You can wait till the transaction closes with all your cash. Key, there are some brokerage accounts are going to charge you a fee, because they can, so wait. If your brokerage is one of those, and they charge you a lower trading fee or no trading fee, it might be smart to just go ahead and sell. The other thing, too, is there's a little bit -- what's the buyout price, Nick?

Rossolillo: Thirty-four dollars per share.

Hall: Thirty-four? I think we're actually above that right now. I think it's trading for a premium. No, it's just below, it's $33.91. There's just a little bit of a discount, which is normal. The closer we get to the close, the more of the price will move closer and closer to it. If you're looking to squeeze every penny out that you can, the incentive is to wait as close to the deal as you can. But what you have to think about if you've transacted anytime in the past 12 months is what are the tax implications. If you own this in a taxable account and you bought it and you're going to profit -- let's say you're going to profit -- and you've held it for less than a year -- this is for U.S. investors -- and you sell it at a profit, your gains are going to be taxed at your marginal income tax rate. For most of us, that's higher than 15%, which is the long-term capital gains rate. For anybody that's close to that point of being able to get over a year, it's beneficial to do that, because instead of paying your marginal income tax rate, you pay 15%, for most folks. If you're in the highest tax bracket, you'd be paying, like, a 39% marginal rate. You pay a 20% capital gains rate. There's some tax arbitrage to think about in terms of when to transact.

There might be some investors that bought this year that are going to lose money. Then you're just thinking about capturing that tax loss. At this point, I think that's the largest thing to think about. Besides, do you have an idea of what you're going to do with that capital? Do you have something in mind to do when you deploy it? Clay, you're not muted. Give us an idea.

Clay Bruning: Yeah. Just to give you a little bit of my personal modus operandi when it comes to this is, when I see it's an all-cash deal, I personally have no reason why I would sit on it. In this case, so you had 10 shares, it's 9 cents off that transaction price -- you're missing out on 90 cents. At a certain point, there's an opportunity cost of deploying that capital in a different situation, and I will use the Slack and Salesforce (CRM 1.65%) acquisition, for example -- that's a situation where I know I'm going to get shares of Salesforce, and assuming at the time I didn't believe in that acquisition, that's a transaction where I'm willing to wait so I can ensure that I guess, those Salesforce shares, rather than increasing my portfolio turnover or anything like that -- in terms of what I would do, like I said, I would certainly sell the shares rather than saving a couple of pennies or a couple of dollars. I think it depends if you want to stay in the same space.

But one interesting name to me that I've recently caught up with them is Fulgent Genetics (FLGT -0.14%). It's a very small-cap company, I think under $3 billion. They spent a million dollars to create a COVID test last March. That has since generated, probably at this point, close to a billion dollars in revenues for them.

Hall: It's incredible, yeah.

Bruning: Just if you ever want to study return on invested capital, take a look at Fulgent Genetics in terms of their COVID test. It's absolutely incredible. Then their core business, which is more so genetics testing, is making very nice strides. I think they grew their genetic testing something like 250% last quarter. They just acquired complementary business in oncology to have more diagnostics, excuse me, on the cancer side of things.

This is a very young company. Like I said, I think they are around $3 billion or less at this point in terms of total market cap. That's one that I've really been keeping my eye on, especially when you have testing seemingly coming back quite nicely with that, and having more mandates on vaccines and testing and stuff like that. You have schools recently reopening, and they have a bunch of school contracts. That's one of my favorite names right now that I'm watching and hoping to add to in the coming weeks.

Hall: I think you can look past the COVID testing as its business and think about it as a perfect model of how good their IP is at developing and acting really quickly. You look at their core business, and it's growing, it's doubling. Their core business outside of that one COVID test has been so cash-rich, it's wonderful. I love this business for the next 20 years. I love that. Nick, you've got a 60-second pitch for us on one?

Rossolillo: Sure. I already mentioned Qualtrics. If you want to stay in the experience management space, selling Medallia, Qualtrics had its IPO early this year. It has a pretty young track record of providing financial quarterly updates for shareholders. But so far, it's growing at a much more fast pace than Medallia was. It's a bigger business, too, is the leader in that -- standalone leader in software-based experience management. Yeah, if you're just looking for a like type of replacement, that's where I'll start.

Hall: It's an easy ticker to remember, too. XM, experienced management. That's cool.