Martin Marietta Materials (NYSE: MLM), a company that earned our coveted Low Risk rating as of 22-Jun-11, announced yesterday that it had delivered a proposal to acquire Vulcan Materials (NYSE: VMC), a company we rated as Medium Risk - Negative Bias. Considering the dramatic underperformance we've observed in our Medium Risk - Negative Bias stocks in comparison with those we rate as Low Risk, investors will want to closely evaluate the [supposed] benefits received from the Vulcan acquisition. We have our doubts as to whether they will match the expectations proclaimed by MLM management. Here's why --
- Since 2006, VMC has reported more than $5 billion in business and asset acquisitions - acquired operations are difficult to integrate and more often than not fail to produce expected results
- VMC recorded a $253 million goodwill impairment charge in 2008 - such charges are indicative of poor capital allocation
- VMC is involved in ongoing litigation relating to alleged environmental contamination - MLM could be assuming a significant liability associated with these proceedings
In addition to the aforementioned risks MLM would assume in connection with its acquisition of VMC's operations, investors should also be aware that most acquisitions fail to produce the benefits and synergies expected at the outset of the transaction. Given the size of the proposed deal (VMC has a market cap of more than $5.0 billion, while MLM has a market cap of just $3.4 billion), that's a significant risk for MLM to take.
In a press release regarding the proposal, MLM stated that it expected $200 million - $250 million in annual cost synergies and that it intended to maintain its current $1.60 annual dividend.
VMC reported that its board would review the proposal and provide its recommendation to shareholders within ten business days.