Some deals are so bad that you can see them coming a mile away. Unfortunately, as dealmaking among stocks ramps up this year, these potential duds may get more difficult to avoid: Martha Stewart Living Omnimedia (NYSE:MSO), Research in Motion (NASDAQ:RIMM) and GameStop (NYSE:GME), just to name a few.
The reason for the buzz over merger and acquisition deals why is simple: Mergers are seductive. Tens of billions of dollars are at stake. Thousands of jobs hang in the balance as do the financial futures of scores of shareholders. Moreover, it can be easier for companies to acquire someone else’s successful product rather than develop one of their own.
Many of these companies that may become overbought have well-known brands, which make them specializing tantalizing to buyers who figure they can realize more value from them through better management. Oftentimes, though that’s wishful thinking.
Here is our list of companies that may be overbought. They are in no particular order.
Martha Stewart Living Omnimedia Inc. (NYSE:MSO) has been treading water for years, posting net losses in three out of the past four quarters. Investors also have lost their patience with the domestic diva as well and have sent shares of her New York-based media company plunging 75% over the past 5 years. Indeed, MSO’s broadcasting and publishing business both posted losses of more than $1.8 million during the last quarter. The only brightspot was its merchandising business, which made $5.23 million, down slightly from $5.32 million a year earlier. MSO makes a lot more sense as a niche brand at a major media company than as a standalone firm. It’s just too small otherwise. Stewart the businesswoman will probably want to sell her company sooner rather than later before the ad market tumbles again. The price she will want will be steep and given her brand cache someone will pay it.
Research in Motion Ltd. (NASDAQ:RIMM) has been the subject of much merger talk. There has been oodles of speculation about a potential merger between RIM and Nokia Corp. (NYSE:NOK). Pundits are arguing that the two companies would do better working together to find the success in the smartphone market that has eluded them both. They both have a tough road ahead. Data released by comScore in April showed that Google (NASDASQ:GOOG) and its Android mobile OS gained 7 points of marketshare during the previous three months, while RIM’s share fell almost 5 points. Apple’s share was little changed. Meanwhile, Nokia’s marketshare has plunged back to 1997 levels. Rumors that Microsoft Corp. (NASDAQ:MSFT) would acquire Nokia’s headset business were dashed earlier this month. Besides, Nokia already agreed to use Microsoft’s mobile OS in its phones, so what would be the point. A RIM-Nokia merger has the feel of a shotgun wedding.
GameStop Corp. (NYSE:GME) is another toxic takeover stock. There have been rumors circulating around the Internet that Best Buy Co. (NYSE:BBY) would make a buyout offer for the entertainment software retailer since at least 2009. It hasn’t happened, of course, but the timing may be right now. First, GameStop’s shares are up nearly 13% this year and it recently reported record first quarter profits as it continues to invest in the digital business that Best Buy has coveted. Best Buy, meanwhile, is floundering. Its shares are down more than 8% despite the retailer recently hiking its dividend and announcing plans for a $5 billion share repurchase. The company’s fiscal first quarter earnings beat Wall Street expectations were awful, declining 12% while comparable store sales were down 1.7%. Investors’ patience is running thin with Best Buy and may wonder if GameStop will be hurt by shaky consumer confidence. The company’s best hope for growth may be by paying for future growth by purchasing GameStop. It won’t be cheap, and GameStop could be a far cry from the cure BBY needs. But don’t tell execs with itchy fingers that.
Sirius XM Satellite Radio Inc. (NASDAQ:SIRI) has been a cult stock because of its price, but little other reason. Remember when satellite radio was dead? Sirius CEO Mel Karmazin proved the naysayers wrong – temporarily – when he secured a $530 million loan from cable tycoon John Malone in 2009. Since then, Sirius has been on a tear thanks to the rebound in automotive sales. The firm looks set to conquer the used car market too. Sirius added 118% more subscribers in Q1 versus the same period a year ago. EBITDA rose by 15% to $181 million, a record. Karmazin may be looking to sell as he fights the lawsuit by Howard Stern and growing competition from Pandora (NYSE:P). Potential buyers include struggling PC makers such as Hewlett-Packard Corp. (NASDAQ:HPQ) and Dell Inc. (NASDAQ: DELL) that are looking for their next hot gizmo. Satellite radio could be part of the equation just like Palm was for HP in 2010. But like Palm, either tech stock would have a hard time figuring out just what the heck to do with SIRI after it owns the radio company.
Vonage Holdings Corp. (NYSE:VG), the pioneering VoIP company, has seen its stock almost double this year. That proves that reports of Vonage’s demise were premature, right? Indeed, it has managed to win 2.4 million customers in 60 countries. Shares have almost doubled this year. The company is a small fish in a very big pond. Comcast Corp. (NASDAQ:CMCSA) has almost 9 million voice customers. Microsoft’s new toy Skype says had an average of 145 million connected users per month in the fourth quarter of 2010. One telco that might be willing to take a shot at Vonage may be Sprint Nextel Corp. (NYSE:S), which is hemorrhaging customers and faces more losses should the AT&T Inc. (NYSE:T) –T Mobile deal be approved by regulators. But it would be a race to the bottom – a marriage of equals when it comes to sinking prospects.