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 85,000 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:


CAPS Rating (out of 5)


CAPS Rating

Deal Price

KLA-Tencor (Nasdaq: KLAC)


ICOS Vision Systems


$467 million

WebMD Health (Nasdaq: WBMD)


HLTH (Nasdaq: HLTH)


$2.3 billion

Imperium Partners


ESS Technology


$58 million

Mobile Mini (Nasdaq: MINI)


Mobile Storage


$701.5 million

Novell (Nasdaq: NOVL)




$205 million

Hellman & Friedman


Getty Images


$2.4 billion

Electronic Arts (Nasdaq: ERTS)


Take-Two Interactive Software (Nasdaq: TTWO)


$2 billion

Cypress Bioscience


Proprius Pharmaceuticals


$75 million

Galderma Laboratories


Collagenex Pharmaceuticals cgpi


$420 million

R.R. Donnelly & Sons


Pro Line Printing


$122 million

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

So what do CAPS investors think about these targets and acquirers? It seems they generally approve of most of the companies, or so their average rating of three stars or better would suggest. But these are mostly small deals that should not dramatically impact the bottom lines of many of the companies.

Of that list, the one that interests me the most is the one that is still in limbo, Electronic Arts' hostile bid for Take-Two.

BioShock to the system
Take-Two is playing the protagonist in this version of its popular video game. It's in the unenviable position of having to fend off the mutant drone Electronic Arts as the latter attempts to win its unsolicited, unwanted bid for the dystopian game maker. Or maybe it's more like a blind-side tackle you'd see in EA's Madden NFL franchise.

Should Take-Two's shareholders accept this deal or not? On the one hand, they might just want to get away from the current management. A recent Wall Street Journal story pointed out how Take-Two's board of directors, despite continued losses at the game company, approved a plan to reward ZelnickMedia, the firm running Take-Two, with bonuses if the company gets taken over -- but this was done only after EA made its first bid for the company. Shareholders may want to cash out now, just in case. After all, they might not want to work side-by-side any longer with a management team that might not have their best interests at heart.

On the other hand, there seem to be signs of a turnaround. The long-awaited release date of Grand Theft Auto IV has been announced, and with BioShock and Manhunt 2 doing well and an exclusive development deal with Microsoft, the company could be on the verge of becoming great. Would a deal with EA be an advantage or not?

For their part, Electronic Arts shareholders would undoubtedly find the merger to their advantage. As CAPS player STA5248 foresaw, the industry is consolidating, and EA was on the prowl for someone. Its game lineup is in need of some overhaul to shore up margins that may be slipping:

The video game industry is ... seeing a rise of the smaller developers because of more casual games coming into the market. ... On the other hand, because of rising costs of making games on the console, you are going to see a lot of consolidation in the market. EA has been aggressively looking at many companies to buy, and the recent merger for Vivendi is a huge let down for EA. Additionally, contrary to popular beliefs, EA has seen profit margins on their major hits such as Madden erode away. ... On the upside, EA ... [has] also shifted their focus more on the Wii to take advantage of the huge audience. The management has also done some major overhauls to the business ... [broadening] it's product lineup by introducing new [games].

A value-added offer
What's your take on these deals? At Motley Fool CAPS, your opinion 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 firms involved to remain independent.

Electronic Arts and Mobile Mini are recommendations of Motley Fool Stock Advisor. Take-Two is a Rule Breakers selection. Microsoft is an Inside Value pick. You can get 30 days of free stock picks from any of the Fool's investment newsletters.

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.