Buy Out or Sell Out?

From tiny acquisitions to massive 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 "de-worse-ification" -- 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 105,000 investors in Motley Fool CAPS. A combination of two companies with high CAPS ratings should bode well for the new company's 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 ratings courtesy of Motley Fool CAPS; NR = not rated.

A bear of a time
Although we've seen a number of deals pending, the first quarter's $736 billion is actually the smallest global dollar value amount in six years. The total number of deals is up 14% to more than 9,100; 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).

Jamming coffee into the Pampers
Think of it as “less is more.” Even though J.M. Smucker is buying Folgers coffee from Procter & Gamble, the consumer-products giant will have the jelly maker sticking to it. To finance the $3.3 billion deal (including acquired debt), Smucker is giving up control of the company to P&G, which will become the majority shareholder with a 53% ownership stake.

To make it a tax-free deal for P&G shareholders, P&G will first spin off Folgers to them and then will merge the coffee company simultaneously with Smucker. To qualify for tax-free treatment, P&G shareholders had to end up with majority control of Smucker, which is also giving its own shareholders a special $5-per-share dividend.

Investors remain impressed with the incredibly broad portfolio of consumer products that Procter & Gamble owns. Top-rated CAPS All-Star xthecritic noted last February that with such market dominance comes pricing power:

P&G is a blue chip stock with a tremendous portfolio of consumer products brands. I am consistently impressed/appalled by their products/pricing. (such as when I purchase a 12 pack of Mach 3 razors for $25) Consumer staples have outperformed since August and will continue to outperform in the next 12 months as we deal with an unstable macroeconomic environment.

Not only does P&G have its own great products, but as stockworldpicks points out, the Smucker deal gives it still more brands besides the jelly jar:

Along with owning great consumer brands like Tide, Pampers, Gillette, and hundreds of others, you as a stockholder will now own part of Smuckers Company. Smuckers owns Pillsbury, Jif, Crisco, and Folgers. This is going to be a great long term play for Procter and Gamble.

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 companies involved to remain independent.