Ah, acquisitions! The Wall Street equivalent of a mating ritual. But when love is in the air in New York's financial district, things can get very expensive for the acquiring shareholders. Let's consider a quite recent betrothal and see whether the union makes sense.
The pursuer
Motley Fool Inside Value
recommendation Omnicare (NYSE:OCR), America's leading provider of pharmaceutical services to long-term care facilities, specializes in the unique needs of the elderly. Its "unit-of-use medication delivery systems" -- a classic bit of jargon deserving of its own Dilbert cartoon -- means buying drugs in bulk and then repackaging them in single-serve dosages.
The pursued
NeighborCare (NASDAQ:NCRX) is the U.S.'s third largest provider of pharmaceutical services to long-term-care facilities.
Proposal No. 1
In May 2004, Omnicare attempted to woo NeighborCare by offering to buy the company for $30 a share in cash, plus the assumption of NeighborCare's debt. Valued at $1.5 billion, the offer represented a 70% premium over NeighborCare's closing price the previous day. That rich premium is Wall Street's equivalent of a Tiffany's diamond ring.
Rejection No. 1
NeighborCare publicly rebuffed the offer and revealed that its board had previously rejected Omnicare's advance. Apparently, NeighborCare's two-and-a-half-month swoon (see this chart) from $26.05 a share to $16.90 was not a concern -- at least to the board.
Proposal and rejection No. 2
Seven months later, in January 2005, only 34.6% of NeighborCare's outstanding fully diluted shares had been tendered. In other words, only a third or so of the company's shareholders had offered to sell their shares at $30. That means the vast majority of them thought that a better offer was coming. By early June 2005, more than a year since the original offer, the number of tendered shares actually dropped to 22%.
To revive investor interest, Omnicare raised its offer in mid-June to $32 a share. NeighborCare's board rejected this offer as well, in part because the stock had traded above the revised offer price and because it believed the combined companies' synergies warranted a higher price.
The betrothal
On July 5, both companies announced that they were discussing a $34.75-per-share offer price. And finally, last night, they confirmed that they had reached a deal at that price.
Are these two meant for one another?
Omnicare is buying NeighborCare for the equivalent of the latter's annual sales and has told its shareholders that the merger will be strongly accretive to its earnings. Is that possible, when Omnicare's total debt, which stands today at $1.3 billion and 65% of equity, is set to swell to more than $3 billion with this merger? In a word: Yes.
First, debt is relatively cheap these days. Next, NeighborCare has rising profitability, and analysts see that trend continuing. But the number that makes this deal interesting is NeighborCare's comparatively puny 5.7% operating margins. Omnicare's margins tip the scale at 10.4%. If the merger of the leading and No. 3 competitors in this marketplace creates economies of scale, then Omnicare shareholders stand to become Foolishly happy.
One caution to investors tempted to buy Omnicare: The stock has been hammered hard in the past when its earnings didn't meet expectations. The combined companies' operating margin will be highly dependent on Medicaid reimbursement rates. With budget woes in many states and most looking to keep health-care costs under control, Medicaid reimbursements will bear watching.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
