Merger and Acquisition. When Two Becomes One

Buy me . Buy me, please !

Seriously, that is what happening these days. Corporate America has been making acquisition to grow bigger. For the past year, I have been wondering what corporate America will do to its burgeoning cash pile. Profit is increasing, sales increases somehow while cost-cutting continues to bear fruit. Will they hire more workers, expand capacity, give out dividends, buy back shares? It turns out they do all the above. But, some of them also spend their money making acquisitions. Here is the list of companies that are being bought over the last three months: PeopleSoft, Nextel, Western Wireless, Veritas Software, Gilette, and even AT &T. Furthermore, there are good indication that MCI (Yes, the cooking-the-book MCI) will be swallowed as well.

So, what's the trend here? It looks like merger and acquisitions are happening in wireless, telecom, software and consumer-product as well. Instead of internally expanding and hiring more workers, big corporation acquire other well-established companies while at the same time cutting cost. Pretty clever, eh?

Shop till you drop

I sense more buying coming. Corporate America can't just let those cash pile sitting around. And, if your competitors grow bigger, then you need to do something. So, I try to compile a lists of companies that will be acquired and those that will be the acquirers. In my experience, acquired companies normally get between 15-30% premium from its market price. Therefore, if the companies are acquired within a year, then that is the return we should expect. All right. Without further ado, this is the list of possible take-over targets:

CHD, CLX, ACV in the consumer products sector. Gillette is sold to Procter and Gamble for 22 times book value and 5 times sales. These four companies are selling way below Gillette multiple. Most likely acquirers are: KMB, CL and UN.

Gillette of course is a brand name household with excellent profit margin. Therefore, these companies will not be sold with the kind of valuation that Gillette obtains. Assuming these companies are bought for say 10 times book value and 2 times sales (half of Gillete's valuation), here is the potential appreciation for these stocks.

Church & Dwight Co Inc. (CHD-Current price$ 36.14 )

Best known for its Arm & Hammer brand name, it is currently trading around 5 times BV and 1.63 sales. It has the potential to be bought at $44. A 22% appreciation from the current price.

Clorox Corporation (CLX-Current price $ 59.25)

The biggest companies out of the three, it is currently trading at 8.11 times book value and 2.88 times sales. If it is sold for 10 times book value, the share price can rise to $73 (a 23% appreciation). However, at 2.88 times sales, the price might be too steep for buyers. My guess is that buyer is still willing to buy at 15% of current stock price.

Alberto-Culver company (ACV-Current price $53.60 )

With low valuation of 5.0 times book value and 1.49 times sales, ACV is the most attractive take-over targets. However, lack of brand name recognition might prevent buyers from snapping it at 2.0 times sales and 10 times book value. Assuming purchase price of 1.8 times sales, ACV still has a 20% potential price appreciation here.

Telecom Land

Meanwhile, the telecom land is littered with acquisitions with targets such as Western Wireless, Nextel, AT&T Wireless and even AT&T itself. However, a lot of these companies are incurring a lot of debt and I do not recommend speculating on takeover for telecom companies.

Conclusion

My guess is that Church & Dwight Co Inc. has a greater chance of being bought due to its brand name recognition and lower market capitalization. Even though Clorox is a take over target, it can also possibly be an acquirer of the other two companies. I guess, we will know in the next 6 to 10 months.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Gillette (G), Clorox (CLX) or other securities.

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