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M&A Stocks Have More Room to Rally - 6946 views
By Jonas Elmerraji
Posted on Aug. 25, 2010
Mergers and acquisitions (better known on Wall Street as M&A) hold a special place in investors’ minds. After all, generous buyout offers are one of the most immediate ways for shareholders to see massive gains in their positions. Despite the relative drought of organic M&A activity following the credit crunch of 2008, even the most conservative companies have been lured in by the discounted valuations potential acquisition targets are offering right now.
Part of the push to take on new M&A deals is coming from shareholders. According to some estimates, U.S. firms are sitting on more cash than any other time in history -- a total of $1.84 trillion. But while cash in the coffers does ease liquidity concerns, shareholders don’t like seeing their cash sit unused.
As a result, $85 billion in M&A deals were announced last week, making it the biggest single week for M&A announcements since late 2009, when equity valuations were near their lowest following 2008’s market sell-off.
While the stocks being acquired have already seen monumental jumps in share price, it’s unlikely that investors have heard the end of their rallies. Shareholders know that their stakes are undervalued right now, and they’re demanding even higher prices, sometimes inciting bidding wars. Sure enough, many buyers are capitulating, raising their stakes.
With all of that in mind, let’s take a look at a handful of the stocks that saw buyout offers last week.
By far, last week’s biggest deal was a $40 billion buyout offer for Potash Corp. (POT) from suitor BHP Billiton (BHP). The $130 per share cash offer, which was summarily rejected by Potash’s board, would have given Potash shareholders a 20% premium on their share prices, but shares of the company have since rocketed past the offer price. In total, shares of Potash are up more than 51% in the last month.
The reason behind the jump above the offer price was the instant interest that Potash got from other firms potentially interested in acquiring Potash for a higher price. Potash is an industrial fertilizer producer, mining potash and producing phosphate and nitrogen at facilities spread throughout North and South America. The company’s long-life assets make an attractive buy for a company like BHP, which is in the process of expanding its own potash mining operations. For those reasons, competitors don’t want to see the Australian mining giant’s hostile takeover bid go through.
Potash management has already recommended against tendering shares to BHP -- and announced that they’re in talks for competing offers. Right now, Chinese petrochemical producer Sinochem and a private equity firm look like they might make a move to usurp BHP’s offer. With BHP investors losing patience in chasing an unwilling Potash, it remains to be seen whether the firm will be willing to up its offer in the coming weeks.
Not all of last week’s M&A activity was quite so contentious, however. Shares of anti-virus software developer McAfee (MFE) are up more than 47% this month following news that the company was being acquired by Intel (INTC). The chip giant paid $48 per share in cash, a $7.7 billion deal. Unlike Potash, where shares surpassed the offer price on hopes for a better deal, shares of McAfee are still pricing in around $1 per share of risk. That phenomenon will likely offer some trade potential for amateur merger arbitrageurs.
McAfee’s business provides Intel with product differentiation as the chipmaker adds more software offerings to its lineup. It also presents the possibility of adding advanced security features to Intel’s next-generation microchips, an option that competitors won’t be able to replicate easily.
The McAfee acquisition also helps Intel move toward a bigger presence in mobile computing devices -- such as smartphones and tablet PCs -- that pose bigger security risks simply because of the nature of data that they store. If Intel can carve out a niche with the industry’s most secure chip offerings, it’s likely to generate a revenue stream that will easily eclipse McAfee’s acquisition price.
The biggest gainer of the group in the last month, though, has been 3Par (PAR), a tech firm that develops utility data storage systems for enterprise customers. Shares of 3Par stock are up more than 184% in the past 30 days on news of a buyout offer from Dell (DELL).
But 3Par's future is far from locked in. A bidding war among tech giants is breaking out right now for this small-cap stock’s storage technology. On Monday, Hewlett-Packard (HPQ) announced a $24 per share offer for 3Par, outbidding Dell’s $18 offer. 3Par is currently trading at around $27, a phenomenon that suggests that the Street is pricing in potential new offers, whether a re-up bid from Dell or a completely new third party offer. Investors would do well to keep their ears to the market right now.
Ultimately, while M&A is on the uptick this month, shareholders of potential acquisition targets aren’t letting their stakes go without a substantial premium. More than a few stocks are fundamentally undervalued on Wall Street right now, and their owners know it.
To see these M&A plays in action, check out the dedicated portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.