Buyout or Sellout?

From tiny acquisitions to massive conglomerate combinations, Wall Street's urge to merge remains strong. How can we tell the dealmakers from the deal breakers?

Breaking down the buildup
To help, we'll turn to the 115,000-plus investors in Motley Fool CAPS. Our data suggests that top-rated stocks offer the best oppportunity to capture the best returns. 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 are 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 merger of equals?
Nothing like a little financial meltdown to cause companies to speed up their game of musical chairs to see who will be left standing and who will be out of the game. Merrill Lynch surprised everyone when it announced that it was being sold to Bank of America, but a bit of merger arbitrage suggests that the market isn't so convinced the details have been hammered into stone.

Bank of America CEO Ken Lewis was roundly criticized for buying a bit of a pig in a poke in Countrywide, and now many are questioning why he moved so fast to acquire Merrill. Though Lewis has a history of making big buys and turning doubters into believers, CAPS member LodestarX2 feels the banking giant could have gotten a much better price had he only waited.

No question but [Bank of America] overpaid for [Merrill Lynch], by a large amount. If you're going to take the bad parts of [Merrill], with no gov't backing, what was the risk in waiting until the stock went down to $5, or $4? Do you see anyone else waiting to buy [Merrill]?

All this talk about being too big for the gov't to let fail is unreal-that's what people said about AIG and [Lehman Brothers] just a few weeks ago-and look where common shareholders are now.

Anyway, good stock, good company, but the dillution from the [Merrill] purchase is going to hurt.

When Blockbuster (NYSE:BBI) moved to buy stumbling electronics retailer Circuit City (NYSE:CC), it was touted as a way to create an electronics and entertainment "global enterprise." The market, however, never understood the concept of two failing businesses coming together to form a whole that would succeed, and it seems Best Buy has figured out a better -- and cheaper -- way to create the same thing. Its purchase of Napster gives it a foothold in the digital music subscription market that will compete not only against iTunes, but also Rhapsody, showing that the niche is a burgeoning one.

Yet CAPS member alstry writes in his CAPS blog that the deal is just another way for Best Buy to put up a smoke screen to hide significant cash flow issues.

Remember, banks were telling you they were well capitalized right before they went bankrupt. Once people start looking at the balance sheets......they will realize how unbalanced their retirement accounts.

BestBuy has little cash now and depends to a large extent on its customers obtaining credit....at a time when the economy is slowing and this management keeps patting itself on the back for spending away $5 Billion dollars of shareholder money.......and they just bought Napster yesterday for cash????

Imagine what happens if sales come in this quarter slower than expected with lots of inventory and little cash???

A value-added offer
What's your take on these deals? Let us know on Motley Fool CAPS. And while there, you can start your own research on these or other stocks. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. There's more than you think.