Acquisition Rumors Of The Week

by: Brian Nichols

Since last week, there has been a number of high profile rumored acquisitions that the market has attempted to price into various stocks. Of course the chances of these acquisitions taking place are always rare, but in the last year we have seen rumors turn to reality quite often. Earlier in the year I said there was absolutely no chance that large pharma would acquire Inhibitex (NASDAQ:INHX) and publicly called investors crazy for buying at such a high premium. But boy was I wrong! And with the latest round of acquisition rumors it is up to you to decide whether or not it's all hype or if the smoke suggests fire.

Samsung (OTC:SSNLF) Buying Nokia (NYSE:NOK)

On Friday shares of Nokia traded with gains of 6% as rumors sparked that the South Korean electronics company Samsung was considering a purchase of the troubled company. This rumor has developed before but is always shut down the minute it develops. And once again, Samsung spokesperson stated, "the rumor regarding the acquisition of Nokia is groundless". Therefore leading to losses of 8% on Monday's trading day.

This particular rumor is somewhat difficult for me to digest -- on the surface it seems obvious that Samsung would have no interest -- if you dig deeper you could see why the company would be interested. Nokia is losing market share to the likes of Apple (NASDAQ:AAPL) and Samsung and despite major cuts in its workforce the company was still negative nearly $600 million in operating cash flow last quarter. Yet one can't deny that Nokia has produced over $30 billion in revenue over the last 12 months, has retained earnings of more than $10 billion, has tons of patents, along with a very low debt-to-assets ratio. Of course these positives do not erase all of its problems, but the stock is trading at 15 year lows and could be acquired very cheap. Therefore, I think there could be something to the rumor. It's not uncommon for companies to deny acquisition rumors, and even if Samsung isn't the buyer I wouldn't doubt if there is another large tech company that is showing some interest. As a result I think it is a situation to watch closely.

Rite Aid (NYSE:RAD) To Be Acquired - By Who?

This story has received very little coverage, and may not even be worth mentioning, but did point out an acquisition comment in a research report. In the report by Credit Suisse, which also reiterated its Outperform rating (with a $2.00 price target), an analyst stated:

We believe the stock represents an attractive near-term buy as it stands to capitalize on the WAG/ESRX dispute, the generics wave, and company sales initiatives. The stock could also benefit from continued M&A speculation (we believe a takeout by Walgreens could eventually make sense).

Let me start by saying this has all the makings of being all hype without any hype actually being present. Why in the world would Walgreens (WAG) purchase Ride Aid? If we look at the positives then sure RAD does have $26 billion in revenue, is increasing revenue, inching towards profitability, an enterprise valuation of $7.67 billion, and a market cap of just over $1 billion. Therefore WAG could acquire this company, which operates over 4,500 stores, for less than $2 billion. However, it would also be acquiring a company with very little cash, a debt-to-assets ratio over 75%, and a company with a book value per share of NEGATIVE $3.11! The company's balance sheet is a mess and furthermore it would be quite challenging to integrate the two companies. I just don't see how it could benefit WAG. At this point, I'd say RAD is on its own, until it either cleans up and become profitable or files for bankruptcy, it's on its own.

Google (NASDAQ:GOOG) and Twitter - An Expensive Match Made In Silicon Valley

Last year Google apparently offered Twitter somewhere around $10 billion to purchase the social media company. Obviously, the deal fell through, but somehow both companies have still managed to survive. However, last week a report from Business Insider reopened this door, as a Twitter source told Business Insider that the door was still open, case in point Business Insider reopened the door. Furthermore the Business Insider piece explains the reasons of why it would make sense, and how the two companies are connected, also how each could benefit from the other.

The last month has been exciting for Twitter: The company's revenue is growing rapidly, it surpassed the 400 million tweets-per-day barrier, and it got a new bird (logo). But more importantly the cards are aligned to make this Google rumor a reality. Due to the Facebook (NASDAQ:FB) IPO fiasco the company may be more eager to sell for the easy cash, to a company such as Google that could integrate its services easily and is willing, and able, to significantly overpay for its services.

If I were a Google shareholder then this is an acquisition rumor that I would expect to become a reality, but what's unknown is the price that Google will have to pay. Twitter has been growing revenue rapidly and has figured out how to succeed in producing revenue in the mobile space, a difficult task for other social media companies. Yet even with its growth the company's sales are modest compared to its alleged worth, as one analyst projects Twitter to reach $1 billion in revenue by 2014. Therefore, if Google were to pay $12 billion to acquire the company (20% more than last year's offer) then it would be paying a future price/sales of 12, more expensive than FB, meaning this would be a very expensive deal, mirroring that of the dot-com era. And although Google has a lot of cash this is one acquisition that it better be certain that it can grow, integrate, and utilize with its own services.

Disclosure: I am long AAPL.

Disclaimer: This article is for informational purposes only and should not be used to make any investment decisions.