Google Won on a Big Day for Mergers and Acquisitions

 |  Includes: GOOG, RIG, TWC
by: Benjamin Goldman

Monday was a big day in mergers and acquisitions. Google (NASDAQ:GOOG) bought Motorola Mobility (NYSE:MMI) for $12.5 billion, Time Warner Cable (NYSE:TWC) bought Insight Communications for $3 billion, Cargill purchased Provimi for $2.1 billion, and Transocean (NYSE:RIG) offered a $1.43 billion bid for Aker Drilling. I believe Google was Monday's big winner followed by Transocean, if its bid closes. Time Warner Cable and Cargill both made good strategic acquisitions, but I do not believe they will get a lot of value with their moves. In this article, I analyze each of these four M&A events and provide insight on what each move means for today’s market.

The biggest acquisition announcement was Google’s purchase of Motorola Mobility. The company paid a hefty premium of 63 percent and paid cash for the $12.5 billion acquisition. GOOG experienced a decrease of 1.16 percent and MMI’s shares increased at a whopping 55.73 percent. This move allows Google to enter the hardware industry and vertically integrate its position in the smartphone industry. This positions Google to better compete with Apple’s (NASDAQ:AAPL) iPhone as it will be able to manufacture its own phones for the Android platform, although other smartphone makers will still be able to run the Android software. I was personally surprised by this move, and expected Microsoft to strike first with the acquisition of a phone maker since the Windows Phone is struggling and the company will have to make a strong strategic move if it hopes to improve market share. It is useless to evaluate this acquisition based on earnings since Motorola Mobility’s value is in its patents and it has not recorded a profit as of late. It will be interesting to see if Microsoft follows Google’s lead and acquires a phone manufacture, as the market speculated with the sharply rising stock prices of Research in Motion (RIMM) and Nokia (NYSE:NOK).

Time Warner Cable purchased Insight Communications, a private cable provider, for $3 billion in cash. This example of horizontal integration allows Time Warner Cable to expand market reach and add 750,000 subscribers to its base of 14.5 million subscribers. TWC decreased by only 75 basis points, which shows how investors believe that this was a good acquisition. At a price of $4,000 per subscriber, I believe that this is a pretty high price to pay for expansion. However, with cable companies being in a mature market threatened by substitutes including Verizon (NYSE:VZ), DirecTV (DTV), and Dish Network (NASDAQ:DISH), I expect more cable companies to merge in the next couple years and cut costs to stay competitive.

Cargill expanded its international business and its animal feed business by acquiring feed producer Provimi, based in the Netherlands, for $2.1 billion. Cargill is the world’s largest privately held company with revenue of $119.5 billion in FY 2011, but with a small profit margin of only $2.69 billion in net income. The majority of Cargill’s expansion comes from mergers and acquisitions activity and most of its recent purchases have been international ones. However, if Cargill plans to be successful, it has to be able to quickly integrate the acquisitions into existing lines of business and ensure that the company operates as one so that economies of scale and synergies allow it to profit from the acquisition growth strategy.

Transocean placed a $1.43 billion bid for Aker Drilling Monday, and its share price still outperformed the market at an increase of 2.97 percent. I believe that Transocean is an undervalued company and will be able to boost EPS back to levels over $10 in the next few years. Its involvement in the Gulf Coast Oil Spill will become a thing of the past and it will make the right strategic moves to succeed. Oil demand will continue to increase in the future and deep ocean drilling will become a safer and more acceptable method for oil companies. The potential acquisition of Aker shows its commitment to invest in the business and expand.

Many experts believe that Monday’s market gains were largely driven by this M&A activity and it will be interesting to see if last week’s volatility ends as a result of companies becoming more confident in spending their money in a market trading at very low earnings multiples. In my opinion, all four moves were strategically sound, with Google’s move being by far the most risky, but with the potential to generate the most earnings in the long term. I will check back on these companies periodically to see how their moves play out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.