Whether it's small "tuck in" acquisitions, 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-worsi-fication:" weakening an existing business's 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 31,000 ranked investors in the Motley Fool CAPS universe rate these companies. 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 is low, we might expect one set of investors to come out ahead, because those ratings forecast investor sentiment of future prospects.

Merger activity remains high this week. Here's a handful of some of the recent announcements, and the CAPS community's ratings for the players involved on its scale of one to five stars (with five stars being the best).


CAPS Rating


CAPS Rating

Deal Price

Energy East (NYSE:EAS)




$4.5 billion

Dobson Communciations (NASDAQ:DCEL)




$2.8 billion



Western Digital (NYSE:WDC)


$1 billion

Meridian Gold* (NYSE:MDG)


Yamana Gold (NYSE:AUY) and Northern Orion


$3.1 billion

*proposed; not a formal offer

Despite the thought that mergers may slow, there's still plenty of action, including in private equity. According to Thomson Financial, private equity investments in them have tripled from last year to $281 billion and account for 35% of all mergers and acquisitions. That's more than double the 16% they represented last year.

While the boom still goes on, public company cash hoards also are fueling the M&A boom. According to a representative from the Cullen High Yield Value Equity fund, the companies on the S&P 500 had $1.2 trillion in cash on their balance sheets, accounting for 21% of their market value and apparently burning a hole in its collective pocket.

Digging for gold
So what do CAPS investors think about these targets and acquirers? Feelings seem pretty well divided, with a few at the top, a few at the bottom, and a few middling ones with three stars.

The proposed three-way deal among Yamana, Meridian, and Northern Orion is perhaps the most interesting deal, though Meridian hasn't yet received a formal offer. Yamana Gold has offered to buy fellow Canadian mining company Northern Orion Resources, which would then acquire U.S.-based Meridian for $3.1 billion, though Meridian says no formal proposal has been made yet.

Combined, the companies would have six "core" mines and development projects, along with projected production of 1.4 million ounces of gold by 2009, making it a major gold producer. Considering the three companies are all closely rated, it might also make the best combination. Investors in Northern Orion and Meridian seemed to like the offer, bidding their shares up, but Yamana shareholders saw their stock fall, undoubtedly because the deal would dilute earnings until around 2010, when Northern Orion's Argentinean project begins.

  • CAPS All-Star rd80 noted just before the merger announcement: "I may be a little early with this one, but I believe there are four solid reasons Yamana, and gold in general, will outperform.
    1. It's had a nice pullback
    2. The [government] emphasizes "core" inflation, which has been benign. However, core inflation doesn't include food and energy, which have been going up quite a bit. Since most of us actually buy food, put gas in our cars and pay electric or gas bills, core inflation has been understating the true inflation rate. When that catches up, gold will perform well.
    3. Sadly, I believe the dollar is in a long-term decline.
    4. China and other developing countries are likely to create demand for gold, both from their citizens buying it and from governments adding it to their reserves.

    Yamana is supposed to be one of the most efficient gold producers out there."

Although Yamana's stock price took a small tumble with the announcement, the factors rd80 cites haven't changed.

  • Bears, however, have taken a more technical look at the stock. For example, Claudio1d sees this for Yamana: "While there's no denying that gold will eventually go higher in the very long term, that cloud [No.] 9 gold scenario will have to take a breather for a while and AUY fill around 6 lower GAPS. Since AUY was gapped down from a closing price of $15.37 [on Feb. 26, 2007] and an open the following day at $14.78 on triple normal running volume for February, 2007, with money flow dropping ever since, it would be fair to assume that AUY is headed towards filling those lower gaps dating back to 2005. ... While I won't bet my life on my current analysis, I would surely bet against AUY for at least one year. Long-term gold prices look promising, with bumps along the way, but AUY prospects short [to] midterm would surely put the stock price where it belongs. And that would be around $7."

A Foolish offer
What's your take on these deals? Should investors accept the cash or take stock in the new company if offered? Are these offers just fool's gold? Tell the CAPS community whether the urge to merge is righteous or if these companies are better off fighting for independence.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.