Last week I covered some of the biggest buyout buzz on Wall Street. Since then, the first wave of mergers and acquisition activity has activated a domino effect, with even bigger deals being announced. So despite the looming sequester, Wall Street has risen to five-year highs as investors have focused on M&A mania.
What’s happening is that corporate America is taking advantage of ultra-low interest rates and borrowing on the bond market—to the tune of $2 trillion each year! Awash with cash, many big players are buying up, or merging with, the competition. Just since January 1, over $150 billion in deals have been announced.
I’ll happily take M&A activity because it tends to pique investor interest. However, as I mentioned last week, just because shares of a stock are rising after a deal is announced doesn’t mean it’s an automatic buy. Here’s my analysis of the two biggest announcements.
Buyout: Berkshire Hathaway Gets a Taste For Heinz
The big news last Thursday was that Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A, BRK.B) and a company called 3G Capital bought H.J. Heinz Company (HNZ) for $28 billion deal. Everyone knows Heinz for its ketchup—after all, the company sells 650 million bottles of it each year. But what some don’t realize is that this company is also behind other food products like Bagel Bites, Classico pasta sauce and Ore-Ida French fries.
With its strong cash flow and vast international operations, H.J. Heinz was an attractive takeover target. For these reasons and others, I actually added this stock to my Family Trust newsletter a few weeks ago. Following the announcement, I had my members sell their shares of HNZ because I don’t see the stock budging too much from the buyout price of $72.50 per share. If you’re a shareholder, I recommend you take profits as well.
Merger: OfficeMax and Office Depot
And of course everyone is talking about OfficeMax (NYSE:OMX) and Office Depot (NYSE:ODP), which soared after talk of a likely merger. The deal was officially announced today and the news is so big that even competitor Staples (NASDAQ:SPLS) was up on the news. (I have the full rundown on SPLS in today’s Stock of the Day).
Right now, Office Depot and OfficeMax are the second and third largest players in the office supply business. When the two companies combine, the new entity will operate approximately 2,000 stores across North America—more than the 1,872 Staples locations. On top of this, analysts forecast that a merger will generate as much as $580 million in cost savings over the next three years.
As exciting as this deal is, I will say this: The Office Supply industry still has some challenges ahead of it. As big-box players like Wal-Mart (NYSE:WMT) have started stocking office supplies, an already competitive market has become even tougher. This has weighed on all three of these companies’ financial statements.
So right now ODP is a C-rated hold thanks to lackluster fundamentals, and OMX, while an A-rated buy, is struggling in terms of sales growth and return on equity. So if you’re looking to buy into either of these stocks (I’d recommend OMX first), just keep this in mind.