Bed Bath & Beyond Deal Shows Right Kind of Risk Taking

NEW YORK (TheStreet) -- CEOs are keeping a tight hold on corporate purse strings and that's caused a recent M&A lull. For investors, it's a lull that should have them taking a look at the exceptions to the rule among risk-averse CEOs.

Bed Bath & Beyond (BBBY) and its CEO Steven Temares are a good example. The retailer's biggest acquisition ever, announced earlier this week, is a sign that the company is putting its balance sheet to work in deals that generate earnings growth to offset what could be a coming earnings slowdown.

Markets were absorbed by JPMorgan's (JPM) Thursday loss after a mega-trade soured, overshadowing a different story this week that was the right kind of corporate risk: Bed Bath & Beyond's acquisition of Cost Plus World Market (CPWM) in a deal that may dispel fears of a slowdown at the brick-and-mortar home goods store.

In Friday trading Bed Bath & Beyond shares surged 5% to $71.91, near record highs on an upgrade and increasing optimism on the benefits of the deal, and the surge may have a wider relevance than just the impact to its shareholders.

An April poll of corporate executives by Ernst & Young showed interest in mergers falling significantly in the first quarter, with just 31% of C-suites interested in cutting large deals, the lowest appetite since early 2009 and down from over 50% in previous quarters. Sharply falling M&A volumes and advisory-based earnings reflect that caution. Yet at the same time, CEOs are sitting on piles of cash and pouring it into share buybacks and dividends.

The positive market reaction to Bed Bath & Beyond's acquisition shows the benefit of staying aggressive in a landscape of austerity, share buybacks and corporate split-ups. The deal also comes as some investors put their money behind M&A hungry companies and S&P forecasters say that 2012 stock market gains may need to come outside of falterning earnings -- the lynchpin of a recovery from March 2009 lows.

After successfully competing with the likes of Web-based competitor Amazon (AMZN) and big box retailers, Bed Bath & Beyond's near-$500 million acquisition may give the company new channels of sales growth after it already posted a 30%-plus three year growth rate of earnings, boosting shares.

"[The] acquisition of Cost Plus adds some significant growth potential to what is already a very compelling but slowing growth story," wrote Credit Suisse analyst Gary Balter in a note to clients upgrading Bed Bath & Beyond to a buy and its price target to $91 from $75 a share.

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