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5 Big Deals That May Flop in 2012


4. Martin Marietta's Bid for Vulcan Materials.

In December Martin Marietta Materials (MLM) bid $4.9 for construction aggregates leader Vulcan Materials (VMC), a share offer valuing Vulcan at a 15% premium to shares in the 10 trading days prior to the bid. However shares of Vulcan Materials are well above the $36.69 bid price signaling that investors are betting on a price increase even as doubts on the hostile offer remail. If Martin Marietta were to withdraw the bid, it could be negative for Vulcan shares.

In the deal, Martin Marietta will contribute half of its shares to acquire Vulcan, which has nearly double its sales. While the combination values Vulcan at a premium, it was well below the company's 2011 highs and almost a third of pre-recession share price highs over $100.

Vulcan Materials has fought to fend off what it considers the low-priced bid. In late December, the company urged shareholders to reject takeover, calling it "illegal and opportunistic", citing a fairness opinion by Goldman Sachs (GS). Vulcan's management also said that tie-up created antitrust considerations, not to mention concerns surrounding the disclosure of confidential information.

In December, Vulcan filed a lawsuit contesting the terms of the merger and its process. In making a bid, Martin Marietta signed a non-disclosure agreement to keep private information obtained when analyzing Vulcan's books for a hostile bid. However, in making a share-exchange offer for the company, Martin Marietta may be compelled to release some information to satisfy SEC disclosure requirements.

Steven Davidoff, the "deal professor" of the New York Times wrote in a recent article that the claim was a potential "show stopper." for the deal. Since then, another hitch has emerged.

In January, the U.S. Department of Justice filed a second request for information on the merger, signaling an increased potential for the deal to face antitrust review. If combined, Vulcan and Martin Marietta would bring together the industry's top two companies, creating the largest construction aggregates producer in the world. The second request deals with information regarding Vulcan's top revenue-producing quarries in states like Texas, North Carolina and Georgia.

Vulcan Materials is expected to lose 38 cents a share, when it announces its fourth quarter earnings on Feb.1, according to consensus estimates from Zacks . Meanwhile, shares trade roughly in line analysts price targets of $41.08, according to consensus compiled by Bloomberg. Prior to the takeover bid by Martin Marietta, analyst price targets were below $34 a share, signaling a dim outlook on the company without a strategic buyer.

Vulcan Materials' largest shareholder Southeastern Asset Management with nearly 10% of the company's shares urged other investors to accept the takeover offer in January. The investment fund, which also owns over 13% of Martin Marietta's stock, said that if Vulcan doesn't resume merger talks, it will nominate a hostile slate of directors to move the bid forward.

While investors are betting on a price increase, watch for an a full antitrust review or a shareholder rejection of the bid to lead to an outright cancellation, which may hit shares.

For more on Martin Marietta see 20 top yielding materials construction stocks. For more on Vulcan materials see Eagle Investment Management's portfolio.

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