Buyout or Sellout?

From tiny acquisitions to massive 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 120,000-plus investors in Motley Fool CAPS. Our data suggests that top-rated stocks offer the best oppportunity to earn the best returns. A combination of two companies with high CAPS ratings should bode well for the new company, 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 participating companies on CAPS' five-star scale:

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

While I was tempted to include all the top banks that the government forced into giving up an equity stake, we'll stick with the more conventional merger arrangements taking place in the equity markets.

A merger of equals?
CAPS member eahanson warned that National City might be acquired on the cheap. Oops! Now some analysts see this deal as a forced panic sale and agree that it just might be a "boondoggle" for National City shareholders.

The primary risks on this stock are the possible cost of greed in management and a possible low-cost buyout when the stock dips down. Otherwise, in the 2-4 year range, with the market share and banking model, I would expect good returns as the banking industry recovers.

PNC, on the other hand, looks to be getting the best of all possible worlds with the deal. It's acquiring an otherwise well-managed company and getting a huge tax break. A recent ruling by the Internal Revenue Service eliminates the cap on the buyer's (PNC's) taxable income that the seller's (National City) operating losses can immediately offset. According to one analyst, that may be as much as $5.1 billion that PNC can take advantage of immediately, instead of having to space it out over several years.

CAPS member Theresewin only sees PNC growing.

With the purchase of NCC and use of the TARP [troubled asset relief program], PNC is now the 5th largest bank in the US. They have held up pretty well so far and I see them getting stronger.

A shot of something
With a pipeline that's deeper than that of other pharmaceuticals and growth that is likely to continue, Johnson & Johnson has attracted a broad following on CAPS, where more than 96% of the more than 10,000 members rating it expect it to outperform the market. Members like Jedge3 simply find that its products are necessary and it has a history of being a well-run business.

Makes products everyone needs, has [had] positive earnings and cash flow for the last 10 years. They have the cash to turn it around.

A small, ancillary business like HealthMedia -- it provides online programs to manage health conditions -- ensures that customers remain loyal to its products.

A value-added offer
What's your take on these deals? Let us know on Motley Fool CAPS. And while you're 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.