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The writer is a long term value investor (over 10 years experience) seeking both value in long and short ideas. Besides stock positions, the writer likes to work with options to enhance the risk/return profile of the ideas. Disclaimer: This article provides opinions and information, but does not... More
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  • Merger And Acquisition Recap - Part III

    This week I will run you through the most important mergers and acquisitions for the week of June 4th till June the 8th.

    Walker & Dunlop (WD) entered into an agreement to acquire CWCapital LLC which is currently owned by Fortress Investment Group. Walker & Dunlop will pay $220 million for the company. The acquisition will be financed with $80 million in cash and $140 million in stock. The deal will create one of the "largest commercial real estate lenders in the United States." Walker expects to close the deal between 90 and 120 days, depending on regulatory approval. Shares of Walker jumped over 7% on the back of the deal on Friday, narrowing year to date losses to 4%.

    Salesforce.com (CRM) agreed to acquire Buddy Media, the social media marketing platform in a deal valuing the company at $689 million. The acquisition, which is expected to close in the third quarter of this year will be financed with $467 million in cash and $222 million in equity and option grants in Salesfore.com. The acquisition of Buddy is the latest in a string of acquisitions of Salesfore.com which has acquired 20 companies since 2006. Salesforce's acquisition strategy of acquiring small promising companies before they go public highlights the company's greater tolerance for risk. Shareholders applaud the deal as shares have returned 34% year to date already.

    Laboratory Corp of America (LH) the clinical laboratory company announced that it will acquire MEDTOX (MTOX) for $27 per share, in a deal valuing the diagnostics company at $241 million. The purchase price of $27 per share represents a 37% premium compared to the close on the day before the announcement. The board of MEDTOX unanimously approved and recommended the deal to its shareholders. The deal is expected to close in the third quarter of 2012. Shareholders in MEDTOX have almost seen the value of their holdings double in 2012, with shares returning 90% year to date.

    Universal Health Services (UHS) the operator of hospitals and health centers entered into an agreement to acquire Ascend Health Corporation in a deal valuing the company at $517 million. UHS will pay $500 million in cash and assume $17 million in Ascend's debt. Ascend has psychiatric facilities in Texas, Arizona, Utah, Oregon and Washington. The addition of Ascend represents a sizable acquisition for UHS which has a market capitalization of $3.8 billion. Shares of UHS returned 6% this week, outperforming the wider market.

    Starbucks (SBUX) the roaster and marketer of coffee announced to acquire privately held bakery chain La Boulange in a deal valuing the company at $100 million. Starbucks plans to roll out La Boulange's pastries in its retail outlets in the coming years. The company hopes to aggressively grow its current $1.5 billion sales in food items in the United States. The acquisition is expected to be closed in the fourth quarter of 2012 and dilute earnings per share by $0.02 in the second half of 2012.

    Nordson (NDSN) the manufacturer of dispensing, testing, inspection and surface preparation equipment announced to acquire Xaloy Superior Holdings. Nordson will pay $200 million for Xaloy, the manufacturer of melt delivery components for the global plastic processing industry. Nordson will finance the acquisition from its current credit facilities. Both companies expect to close the deal in the third quarter of this year.

    Activity levels in the merger and acquisition market picked up in the recent week. The number of acquisitions picked up slightly and the total announced deal size is about $2 billion. In general, most acquisitions in the sample above have been nice little additions to the company's operations.

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

    Jun 12 9:49 AM | Link | Comment!
  • Is The Spanish Resolution Just A Weak Compromise?

    Finally, Europe made some progress in tackling its financial problems. After an official request by the Spanish government, the finance ministers of the Eurozone countries offered the country a lifeline of 100 billion euro which it can use to stabilize its banks.

    Europe throws in money...

    For a change a weekend resolution was already reached on Saturday instead of a last-minute Sunday deal. Spain made an official request for assistance early on the day and hours later the finance ministers of the Eurozone threw the country a 100 billion euro lifeline. According to good Eurozone tradition the money will come from European rescue funds such as the ESM and ESFS. These rescue funds have been set up with contribution pledges from all Eurozone countries. So essentially Spain is financing its own bailout, at least partially.

    The capital will be used to cover the capital shortfall of the Spanish banking sector which is a complete mess after a decade long real estate boom, bad accounting rules and political influence in many regional cajas. The 100 billion euro should be more than enough to shore up the banks and provide the market with an additional margin of safety.

    But what are the guarantees?

    The most surprising part of the announcement is the fact that there will be no additional constraints or austerity measures demanded from Europe. The official statements only include the usual comments. "The Eurogroup will closely monitor the progress Spain is making in its attempt to lower the budget deficit and make structural reforms in its economy."

    The Spanish Finance minister Guindos noted that the assistance was different from the aid packages of Greece, Ireland and Portugal. Rather than a rescue he described the deal as a loan to Spanish banks under favorable conditions, and it would "alleviate market pressure on Spain."

    His boss, Prime Minister Rajoy said just two weeks ago that Spain would not need external aid in order to recapitalise its banks.

    Size matters

    The final rescue, bailout or aid package, depending how you like to call it of 100 billion euro should be sufficient to cover the worst possible outcomes in the cost of recapitalizing the Spanish banking sector. Last week the IMF estimated that the Spanish banking sector would need 40-60 billion euro in order to shore up its books. However the total costs of the Bankia rescue, the merger result of a range of local cajas, have already run up to 23 billion euro.

    Rating agency Fitch estimated that losses could be as high as 100 billion as the sector as a whole had about 180 billion in troubled assets on their balance sheets. The rating agency lowered the sovereign rating for Spain 3 notches on the back of its analysis to BBB, just two notches above the "junk" level. Furthermore, austerity measures would most likely imply that the economy would continue to be in a recession in 2013.

    The market needed a decent size package in order to prevent earlier mistakes of too small bailouts, which immediately cast doubt in financial markets. A number below the 100 billion mark would give speculators the chance to test the Eurozone's commtiment to Spain and Italy when markets open on Monday morning.

    The agreement would mark Spain as the fourth nation in the Eurozone which would accept a bailout. Portugal has received 78 billion euro, Ireland 85 billion and Greece some 240 billion euro.

    Market reaction

    Global equity markets have already rallied hard on hopes of a Spanish resolution over the last week. The Spanish IBEX 35 already trades up 10% from its lows and the S&P 500 gained 4% last week. At the same time yields on Spanish 10-year bonds have fallen from 6.7% by the end of May to 6.1% on Friday on hopes of a resolution for Spain.

    The fact that no additional austerity measures were demanded from Spain by Europe could indicate that the Eurozone might shift its focus away from austerity towards promoting economic growth, something proposed by French Prime Minister Hollande. Many international economists have also called for promoting growth as a solution rather than imposing solely austerity measures.

    However in Europe Germany pays. Either Angela Merkel has softened her stand towards Spain, or politicians are really scared for social unrest in a country with a 24% unemployment rate and youth unemployment being far higher.

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

    Jun 11 6:29 PM | Link | Comment!
  • Review Of Analyst Upgrades This Week - Part IX

    Analysts have been sending out research reports to their clients again this week. The following is a review of the most important upgrades for the week of June 4th till June 8th.

    Praxair

    R.W Baird raised its advice for Praxair (PX) from neutral to outperform with a $124 price target. Analysts see some 17% upside for the industrial gases supplier. Strength in North America and potential for improving trends in South America and Asia could be triggers for the stock in the short term, according to analysts. Shares trade flat so far this year after seeing a 10% correction in recent weeks when the stock fell from highs of $116 in early May to $106 at the moment.

    Audience

    Deutsche Bank initiated its advice for Audience (ADNC) with a buy rating and a $23 price target. Analysts see 15% upside potential for the provider of voice and audio solutions which improve users experiences in mobile devices. Shares gained 16% this week after analysts note that Audience is "expanding its presence among smartphone makers. The integration into Apple's A5 applications processor makes it a standard technology in all iPhones." Shares now trade up 17% compared to its public offering price of $17 in the beginning of May.

    Boeing

    Stifel Nicolaus upgraded its advice for Boeing (BA) from hold to buy with a $80 price target. Analysts see 14% upside potential for the company as they note that the speed-up of commercial airplane production protect the company from a downturn in defense spending. The company is on track to produce 10 new 787s per month by the end of 2013. Shares in Boeing have fallen 5% year to date amidst a 10% correction in May.

    Fusion-Io

    Sterne Agree raised its advice for Fusion-Io (FIO) to buy accompanied with a $24 price target. Analysts see some 26% upside potential for the provider of data-centric computing solutions. "The risk-reward is approaching an inflection point as the fundamentals remain well intact for the coming quarters." Shares have seen a 40% correction from $32 in March to $19 at the moment amidst worries about the company's valuation and a slowdown in key markets.

    Dick's Sporting Goods

    Wells Fargo raised its advice for Dick's Sporting Goods (DKS) from market perform to outperform. Shares have some 10% to 16% upside in the $52-$55 price range according to analysts. A number of catalysts could spur an upwards price move including a more appealing valuation on the back of the recent pull-back. Furthermore sales data indicates a re-acceleration in sales growth. Shares in the sporting goods retailer have returned 28% so far this year after the company announced a $200 million share repurchase program.

    W.W. Grainger

    UBS raised its advice for W.W. Grainger (GWW) from neutral to buy with a $225 price target, indicating some 18% upside potential. "The recent pullback created a buying opportunity in a high-quality growth story." Shares in the distributor of maintenance, repair and operating supplies are flat year to date after shares have seen a 15% correction in recent weeks amidst worries about slower economic growth.

    Jack in the Box

    Jefferies raised its advice for Jack in the Box (JACK) from hold to buy with a $31 price target. Shares of the owner of Jack in the Box and Qdoba Mexican Grill restaurants have gained 24% so far this year after the company issued a favorable full year outlook. Same store sales growth for 2012 is expected to come in between 3.5% and 4.5% and earnings per share are expected to come in between $1.28 and $1.50 for the full year of 2012. Analysts have "visibility that top-line drivers can continue to deliver outperformance and there will be margin expansion from refranchising and Qdoba acquisitions".

    Conclusion

    Stock markets have seen a strong rebound this week, trading up 4% on the week in the case of the S&P 500. Amidst the recovery in global markets brokers have sent out favorable research reports again to clients. Many of the recommendations were made after the release of earnings reports and often come after a large move to the upside. However on the day of the announcement, analyst recommendations can still move the stock price significantly.

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

    Tags: ADNC, BA, DKS, FIO, GWW, JACK, PX, long-ideas
    Jun 11 2:12 PM | Link | Comment!
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