We’ve had a flurry of mergers and acquisition activity in the last several days. Today alone we had a few big buyouts announced, so let’s get caught up and see whether this new activity presents any buying opportunities:
International Business Machines Corp. (IBM) grabbed headlines today with its announcement that it is a buying out SoftLayer for $2 billion. Based in Dallas, Texas, SoftLayer is the largest privately-held operator of a public cloud infrastructure. SoftLayer currently operates 13 data centers across the U.S., Asia and Europe. And it is clear that IBM is serious about moving to the cloud—over the past few years it has spent billions more acquiring several cloud businesses.
Even so, shares of IBM retreated modestly following the news, and I’m not surprised. At the end of the day, it is paying about eight times SoftLayer’s revenue. And that’s a tall order for IBM, which hasn’t been able to get a handle on its own sales. If you plug IBM into my Portfolio Grader tool, you’ll see that it receives a D-rating for sales growth. And I don’t expect this underperformance to change anytime soon—this year, the tech giant is headed towards flat sales. IBM is a D-rated sell, and I don’t expect this billion-dollar acquisition to change this anytime soon.
Salesforce.com Inc. (CRM) announced another big cloud acquisition—this time, it is scooping up ExactTarget Inc. (ET) for $2.5 billion. Salesforce.com is currently the world’s leading CRM platform, and it hopes to solidify this lead by adding ExactTarget’s leading digital market capabilities.
While shares of ET skyrocketed over 50% today, shares of CRM retreated nearly 8%. If that isn’t enough of a red flag, consider this: Both ET and CRM are also D-rated stocks. Interestingly enough, both companies are doing well in terms of sales growth, with analysts calling for 27% sales growth from Salesforce.com this year and nearly 29% growth from ExactTarget.
But when it comes to earnings, the picture isn’t so clear: ExactTarget is expected to be the red through next year. Couple this with poor cash flow and return on equity and you have an open and shut case for why you should stay away.
Finally, the much-anticipated Anheuser-Busch InBev (BUD) merger with Grupo Modelo S.A.B. de C.V. has come to a close. This deal, valued at $20.1 billion, creates a beverage behemoth that produces 400 million hectoliters of beer each year. The company will also be responsible for five of the top six most valuable beer brands in the world, including Corona.
I’m largely on board with this merger. Anheuser-Busch is doing well in growing profits, and it boasts a strong cash flow and return on equity. So BUD is a B-rated buy right now. Analysts have upwardly revised this year’s and next year’s earnings estimates higher after hearing of the merger, and I agree that this company’s brand power presents a compelling profit opportunity.
The Bottom Line
When you own a stock that is involved in a merger or acquisition—or even if your stock has rumors of M&A activity—it can feel like winning the lottery. However, even if a company is high in the headlines, I recommend that you run each and every one of your positions through my Portfolio Grader tool to assess their long-term fundamental health and upside potential. By doing so, you can avoid M&A blunders like IBM and CRM while taking note of better opportunities—like what we saw with BUD today.