Merger Monday: Who’s the Big Winner?

by Dan Burrows | June 10, 2013 1:22 pm

Merger Monday: Who’s the Big Winner?

The return of volatility[1] to the stock market hasn’t been doing deal activity any favors, but for today, at least, Merger Monday was back.

A spate of big-name mergers and acquisitions hit headlines for the first time in a couple months. And even if the size of the deals paled in comparison to April’s activity, M&A usually is taken as a bullish sign for equities in general.

The latest Merger Monday gave us the following deal news:

No, the total deal value isn’t much compared with recent Merger Mondays. In mid-April, one trading week kicked off to M&A announcements totaling nearly $40 billion[8]. And since all the target companies are privately held, the acquisitions won’t take shares out of the market, which helps stocks generally since it reduces the total supply of equities.

Although the deals all look like smart strategic moves for the acquirers, whether they’ll prove to deliver shareholder value over the long run is in doubt (by that measure, most M&A fails).

With that in mind, here’s a rundown of Monday’s deals — and a look at which one appears to be the best bet for shareholders going forward:

Google/Waze

If you follow the tech press, you’ve been hearing a lot of recent speculation regarding Wave. The Israeli software company makes a crowdsourced mapping app that incorporates real-time traffic data and social media features. Reports have had everyone from Apple (AAPL[9]) to Facebook (FB[10]) showing interest in scooping up the tiny startup.

Although the search giant can easily afford the price tag, it’s impossible to say what this could do to the bottom line.

Google’s No. 1 in maps, and to maintain that position it needs to keep developing the service for the increasingly critical mobile platform. Buying Waze not only eliminates the upstart as a would-be competitor, but also keeps it out of the hands of Google’s rivals. Thus, it seems a defensive move intended to keep rivals (read: Facebook) from making inroads into Google’s mobile-maps business.

Yes, it’s a smart strategic move, but with only about 15 million active users out of a total of 47 million, Wave serves more to protect Google’s market share than add to it.

AstraZeneca/Pearl Therapeutics

One of the biggest challenges for pharma companies is keeping their pipelines stocked with new — hopefully blockbuster — drugs.

That’s why AZN will pay $560 million up front and another $590 million if Pearl hits certain regulatory milestones and sales targets — money that could be very well-spent.

The deal adds a range of drugs for respiratory illnesses, such as emphysema and asthma, to AZN’s arsenal. And the company very much needs the help. Sales are under pressure now that blockbuster drugs like Crestor have gone off-patent.

Most importantly, Pearl is developing treatments for chronic obstructive pulmonary disease, which is forecast to become a $13 billion market by 2020. If AZN can grab a fraction of that — and that’s a big “if” — the Pearl Therapeutics purchase could prove to be a slam dunk.

IHS/R.L. Polk

From aerospace to healthcare to transportation and shipping, IHS provides data, analytics and solutions for a wide range of industries. Snapping up R.L. Polk beefs up IHS’s already-deep bench of services for the automotive industry.

Polk is best-known for Carfax, which generates history reports on used cars and helps dealers and consumers avoid lemons. But the privately held company also serves up a trove of critical industry information on which manufacturers and dealers have come to rely.

Best of all, Polk booked about $400 million in annual revenue and is growing rapidly. Indeed, IHS says the company is expanding sales at a mid-to-high-single-digit percent rate.

Analysts, on average, already expected IHS’s revenue to jump 9% next year to $1.83 billion. The Polk deal should push the company past $2 billion — which means Wall Street is already updating its discounted cash-flow models.

The Winner

Google is wise to play defense with Waze, and AZN’s strategy of buying up rather than building out the drug pipeline looks clever as well.

But the big winner is IHS. The Polk deal fits well with its existing auto industry services, and the addition of Carfax gives the company a consumer-facing business.

Usually a stock drops when a company makes an acquisition, but shares in IHS rallied as much as 5% on the Polk news. The market loves this deal. Given what it’s poised to do for sales and profitability almost immediately, IHS investors should love it, too.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. return of volatility: http://slant.investorplace.com/2013/06/june-is-do-or-die-for-stocks/
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. for $1.1 billion: http://www.reuters.com/article/2013/06/10/us-ar-google-waze-idUSBRE9580AD20130610
  4. AZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AZN
  5. for up to $1.15 billion: http://dealbook.nytimes.com/2013/06/10/astrazeneca-in-1-15-billion-deal-for-pearl-therapeutics/
  6. IHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=IHS
  7. for $1.4 billion: http://www.usatoday.com/story/money/business/2013/06/10/ihs-rl-polk-carfax-sale/2407739/
  8. M&A announcements totaling nearly $40 billion: http://investorplace.com/2013/04/mondays-mega-deals-u-s-ma-is-back/
  9. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  10. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB

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