by Marc Bastow | November 13, 2012 12:05 pm
Monday’s burst of merger and acquisition energy is a welcome sign on Wall Street because M&A is often viewed as a leading indicator for optimism and market improvement. Of course, it’s also a way for companies to use some cash sitting idly in market instruments earning ludicrously low interest. But no matter — at least M&A gets people sitting up in their chairs.
Companies get acquired for all sorts of reasons by all sorts of buyers. One typical scenario involves a company that’s been struggling but still offers an acquirer something it can use to increase its own value, if not immediately then perhaps down the line. And such struggling outfits also usually have a beaten-down stock price, making a desirable takeover target easier to swallow financially.
But for any company to be acquired, it has to be desirable in the first place. It has to offer a buyer some value proposition that makes a deal compelling. However, plenty of struggling companies that would do well to get swept up by a white knight will be ignored because a cheap stock price isn’t enough to justify buying them.
Here are three such companies in the news lately that could use the strong arms of a healthy acquirer, but will likely have a hard time finding one: Dell (NASDAQ:DELL), RadioShack (NYSE:RSH) and Groupon (NASDAQ:GRPN). All are caught in the middle of what might be charitably described as difficult situations. A more accurate description would be desperate.
Suffering from losses, bleeding cash and stuck with business models that are either outdated (Dell and RadioShack) or unproven (Groupon), each might need a buyer if it’s to have any future. But really, what do any of these guys have to offer? Breakthrough technology? Bricks-and-mortar real estate? Discount coupons for dinner?
Let’s take a look.
The deck is now stacked against Dell on almost every front. It’s not a mobile player like Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG). It doesn’t compete in software like Microsoft (NASDAQ:MSFT). And it doesn’t have the heft of Hewlett-Packard (NYSE:HPQ), another struggling tech giant.
In a shrinking PC world, Dell continues to pump out products that fewer and fewer people will buy, evidenced by three of the last four quarters showing negative growth, and at an EBITDA margin that has slowly eroded over the last four quarters, now just below 8%. In fact, Dell hasn’t shown double-digit growth since January 2011.
Dell’s year-to-date market return of minus 35% virtually mirrors its one- and three-year returns. The stock is down almost 65%, including dividends, over the last five years.
The good news for any possible suitor is the stock is cheap, so much so that it has seen an uptick in options trades, according to Nasdaq.com. Dell also sits on over $11 billion in cash. Free cash flow has been up and down, with the most recent quarter showing just over $500 million, so Dell isn’t going away anytime soon.
Which is a good thing, because I see no company ready to shell out the $20 billion or so it would likely to take to buy the PC maker.
Beleaguered retailer of all things electronics, RadioShack (NYSE:RSH) is one of the poster children for companies running out of time as its business model falls further and further behind the curve. Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZ) are just two of the many competitors that are crushing RadioShack because you can find nearly any item it sells cheaper at Walmart and more easily via Amazon.
RadioShack is bleeding red all over the place, with sales, profits, cash, cash flow and stock price all trending the same way: down.
RSH shares are down nearly 85% over the past year, Chief Executive Officer James Gooch stepped aside in September, cash and equivalents are down around $500 million and the company is saddled with $750 million in debt.
The only good news is that RSH managed to secure a $100 million five-year term loan with Wells Fargo (NYSE:WFC), but at the steep cost of 11%.
According to a Saibus Research report on Seeking Alpha, RadioShack is teaming with China-based Foxconn (PINK:FXCNF) to expand its Chinese store base, and in a worst-case scenario RadioShack could look to Foxconn to take it over. What are the odds of that actually happening?
Oh, where to start with the discount-coupon king? From social media highflyer just one year ago when it went public and saw its shares climb as high as $27, the stock now lies just below the $3 mark, down nearly 90% over the last year.
Ouch. Accounting problems, financial statement do-overs, drinking-game parties and, of course, a spurned offer of $6 billion from Google (NASDAQ:GOOG) in 2010 are just a few egg-on-your face moments. It also doesn’t help when competition comes barreling in, with LivingSocial — and lots of others — now in the same market. Of course, LivingSocial hasn’t been wildly successful, either.
Groupon’s third-quarter earnings release can’t give anyone cause for short-term hope. The company announced higher revenue but alas just breakeven earnings and a downer forecast for the rest of the year. The end result was a slew of brokerage downgrades and a slumping share price.
Want worse news? As cited in the Jacksonville Business Journal, a Raymond James (NYSE:RJF) report found that “out of 115 merchants surveyed 39 percent would not run another Groupon promotion, citing high commission rate and low rate of repeat customers as the top reasons why.”
Few repeat customers for merchants casts serious down on Groupon’s model, and its questionable financials all add up to a business that isn’t likely to attract any fixer-upper acquirer.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long AAPL and MSFT.
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