) -- Cash is a real problem for companies right now -- and no, that's not a joke.
You know how too much of a good thing isn't so good? Well, cash works like that too. Cash is certainly a good thing for a liquidity-strapped firm that needs to make its next interest payment, but for a company that's got coffers overflowing with cash, it can present a real problem. After all, management teams are supposed to be good stewards of investors' equity -- and with interest rates scraping the bottom of the barrel near zero, it's all but impossible to earn a meaningful return on a big pile of cash.
With corporate cash holdings sitting at a record high right now, that's a real problem indeed. Share buybacks historically only add value when those shares are cheap, and a dividend initiation can set a nasty precedent for management teams that don't want to openly admit that they can't figure out a better use of cash. So what's a flummoxed CEO to do? The big alternative is to go shopping -- for merger and acquisition candidates, that is.
In markets in which fundamentals are being discounted, mergers and acquisitions (better known as M&A) can provide amazing value for purchasing firms' balance sheets -- and they can provide instant gratification for shareholders in the target firm. Too often, investors think that there's no money to be made once a deal has been announced, but that's just plain wrong; between merger arbitrage opportunities and value creation for acquiring firms, it's worth paying attention to Wall Street's deal book.
With that, let's take a look at
You can't bring up M&A activity right now without mentioning
. The $25 billion PC maker is undergoing considerable drama after CEO Michael Dell announced that he'd like to take the firm private for $13.65 per share. Not to be outdone, two new suitors stepped up --
-- offering as much as $15 per share.
Why the battle over shares in this computer stock? For starters, Dell has been making some big changes to its business in recent years. While the firm's PC business is the most well-known part of the company, the firm has been refocused on the enterprise IT hardware and services market, a business that's ballooned to more than a quarter of Dell's total revenues. If Dell can prove to big-spending enterprise customers that it has best-in-breed solutions, the firm should be able to fuel margin growth and carve out a more defensible position.
Financially, Dell is in stellar shape, boasting more than $6 billion in net cash on its balance sheet. That huge cash position adds considerable risk mitigation to an offer on Dell. After all, it accounts for almost $3.50 per share of the firm's price. While there's still a lot of negotiation ahead before a deal gets settled on, the fact that a material discount is priced into shares alongside the potential for current owners retaining equity in two scenarios makes Dell an interesting -- and potentially lucrative -- M&A deal to watch this month.
Shareholders in oil and gas production firm
are having a great year. Since
announced on Feb. 21 that it would be buying the larger E&P for $4.17 billion in stock, shares of BRY have climbed close to 40%. But merger arbitrage aficionados take note: There's still a healthy 6% premium in the deal.
Berry owns oil and natural gas wells spread across six sets of assets spread from Texas to California. That U.S. focus means that Berry's assets don't have the potential upside of overseas production operations, but they also don't carry any geopolitical risk either. The firm's timing proved unfortunate heading into the financial crisis of 2008, as Berry levered up its balance sheet to buy a major acquisition in Texas -- but management's decisions to unwind positions in favor of balance sheet liquidity should be appreciated. Bear in mind that after this merger legacy Berry will still make up the lion's share of the combined firm's assets.
While the 6% of wiggle-room in the acquisition premium presents a potentially attractive profit for betting on this deal being consummated, investors should remember that the premium is there because at least some people think that the combination won't happen.
As if the steady ascent of REIT values wasn't enough of a reward for shareholders in
, owners of the small-cap real estate investment trust got the upside from a hefty buyout offer tacked onto their price performance. That's left CWH owners up more than 43% since the first trading session in January.
CWH's $24.50 cash buyout offer is the work of Corvex Management and property manager Related Cos. There's another Carl Icahn tie-in with this acquisition deal -- Corvex is run by Keith Meister, an alum of Icahn's fund. CommonWealth owns a hefty portfolio of office properties as well as substantial stakes in former government leasing and senior care facilities and the largest industrial landowner in Hawaii.
One potential complication is the fact that CWH intends to unload its 56% stake in
Select Income REIT
, the firm's Hawaiian connection. The potential for a hostile takeover makes the goings-on particularly drama-filled, but that's justified by a 8.26% premium between the offer price and the REIT's current share price. Risky though this deal may be, it's pretty clear that there's considerable value to unlock from the situation.
I'll admit it -- this one still stings me a little bit: I was wrapping up my analysis to build a position in
when the firm announced at the end of January that it was being acquired by
and rocketed by 60% overnight. While WMS shareholders are used to gambling being a central part of this stock, they probably didn't realize that they'd be the big winners here.
WMS makes gaming machines used by casinos across North America. The firm owns a collection of sought-after licenses such as Lord of the Rings, Monopoly and Battleship, and specializes in immersive gaming experiences. I won't bother with this stock's balance sheet or cash flow generation analysis anymore -- it's not very relevant. But while the big upside is over and done with in this stock, there's still a merger arbitrage opportunity in the mid-single digits.
While that's hardly the 60% upside that shareholders took home on the heels of the acquisition bid announcement, the high likelihood of the deal getting closed quickly -- or scrubbed in favor of a potential rival -- makes it a decent risk/reward payoff.
Our final drama-filled deal to watch comes from
, the mid-cap mobile phone carrier that specializes in prepaid plans in major metropolitan areas across the U.S. In October, T-Mobile announced a merger deal that would combine the Deutche Telecom subsidiary and PCS into a single business -- not long after the failed merger attempt between T-Mobile and
MetroPCS spent the last several years in growth mode, buoyed by consumers' resistance to high-cost post-paid plans. For more than a few reasons, PCS offered a very appealing acquisition target to larger carriers (in fact, PCS was a position that I recommended to my firm's clients as a buy last summer for those very reasons -- we sold out in the mid $11 range a month before the merger, though). In the case of T-Mobile, that attractiveness of MetroPCS could be the deal's undoing.
PCS' biggest shareholders have been balking at the deal, specifically the 74% control of the combined firm that Deutsche Telecom gets after the deal closes. The relatively limited arena of potential suitors does pose a problem, but I think that more value could certainly get unlocked from this deal in 2013.
To see these M&A plays in action, check out
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
, and on
Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.