TheStreet's Top 5 Dealmakers Heading into 2014

NEW YORK (TheStreet) - Sometimes investors are too quick to judge and corporate merger and acquisition activity is one area where that mantra is especially fitting. After all, some hedge funds institute arbitrage strategies that seek to profit from investors' misconceptions about M&A.

Stocks often surge or plummet on deal announcements as investors and analysts weigh issues such as price, synergy and the viability of the stock, debt and cash financing of an acquisition. Often, it is the initial reaction that gets the most press, even if deals that investors thought were duds eventually pan out and vice versa. So much so, we've already begun grading deals conducted in 2013, although it will take many more quarters to find out if companies can meet their guidance.

So instead of judging 2013's biggest deals, for instance SoftBank's acquisition of Sprint (S) or the merger of advertising giants Omnicom (OMN) and Publicis, TheStreet thought it would be good to take a slightly longer-term perspective.

Here are a few picks of 2012 deals that appear to be paying off for shareholders and some more recent transactions that look like well-timed bets.

Constellation Brands

Talk to any M&A banker off the record and they will say that the best mergers are either anti-competitive or loaded with cost cutting synergies that usually pique the interest of regulators. What better to do with your cash than knock out a competitor, tighten the screws on suppliers or make burdensome costs redundant?

It should be no surprise then that some of the best performing mergers are the ones that get the closest look by regulators. For instance, pharmacy benefits manager Express Scripts (ESRX) continues to outperform the S&P 500 Index since its highly scrutinized acquisition of competitor Medco Health Solutions, even amid drastic change to the healthcare industry as the Obama administration rolls out the Affordable Healthcare Act, otherwise known as Obamacare.

One of the most scrutinized deals of 2012 was Constellation Brands (STZ) acquisition of a remaining 50% stake in Crown Imports, the importer of Corona beer to the U.S., from Grupo Modelo during the Mexican beer maker's $20 billion sale to Anheuser Busch Inbev (BUD).

Constellation surged on its piece of Grupo Modelo's sale to AB-InBev, only for shares to plummet shortly thereafter when the U.S. Department of Justice challenged its acquisition of control of Crown Imports on antitrust grounds.

In the end, Constellation was forced to agree to some concessions to get the DoJ's clearance, however, few were far beyond the initial terms of its Crown Imports stake buyout. Now the company has full control of the production, supply chain and brand rights to Modelo brands sold by Crown Imports such as Corona, the most popular imported beer to the U.S.

Since remedies to the DoJ's objections became clear to investors in mid-February of 2013, Constellation's shares have more than doubled to $69.75.

The company's shares are also the seventh best performer on the S&P 500 since the start of 2012, according to Bloomberg data, spurred on by gains made after the company closed its Crown Imports acquisition. Put simply, this deal was miles from ordinary and plenty of shareholders have benefitted.

Micron Technologies

Imagine going from a money losing company to a profitable enterprise in one fell swoop. That's exactly what Micron Technologies (MU), a manufacturer of NAND Flash, DRAM and NOR Flash memory chips did when it took out one of its biggest competitors, bankrupt Japanese semiconductor giant Elpida.

As with Constellation Brands acquisition of control of Crown Imports, Micron's $2.5 billion July 2012 acquisition faced significant regulatory review in the U.S. and internationally. The acquisition, which closed in late July, gives Micron control of Elpira's 300mm DRAM fab in Hiroshima, Japan, and approximately 65% ownership interest in Rexchip, which includes 100% of the capacity of their 300mm DRAM fab in Taiwan.

In the first quarter with Elpida consolidated into its earnings, Micron was able to swing from a quarterly net loss to a profit. The company was also able to realize significant synergy on the top line through increased scale and bottom-line expense reductions after laying off 1,500 workers. Average selling prices for Micron's DRAM business rose in the second half of 2012.

Micron shares are up over 230% year-to-date and are a top performer on the S&P 500.

Actavis: Keep Digging Watson

Copycats are another sign you are doing well with your M&A strategy and no company may be as indicative of that as Watson Pharmaceuticals... I mean Actavis (ACT).

Through a series of acquisitions, Watson Pharmaceuticals has positioned itself as among the leading generic drug manufacturers in the world and among the most innovative pharmaceutical giants in taking advantage of U.S. and Irish laws to lower its tax bill. After acquiring generic drug manufacturer Actavis in 2012 and Dublin based Warner Chilcott this year, the company has changed its name and headquarters.

Shares just keep on rising.

TheStreet reported on Watson's corporate shape shifting through complicated merger agreements, name changes and so-called corporate inversions in May. Since then, others have followed suit such as Perrigo and Endo Health Solutions (ENDP).

Actavis shares have gained over 170% since the beginning of 2012 when it embarked on an M&A spree.

The Future

Just so we are not offering back-ward looking analysis, here are two controversial deals that investors should pay attention to heading into 2014.

In mid-2012, Walgreens (WAG) said it would take a 45% stake in European pharmacy giant Alliance Boots for $6.7 billion. The deal was immediately panned by analysts sending shares in Walgreens tumbling. Some analysts said that Walgreens investment in Alliance Boots, owned by private equity giant KKR (KKR), indicated the company wouldn't re-sign a key pharmacy benefits management contract with Express Scripts.

As it turns out, the analysts were wrong. Not only did Walgreens get its deal with Express Scripts, but the company's shares have performed exceptionally well since the June 2012 acquisition, nearly doubling in about 18-months' time.

But the best may be yet to come for Walgreens.

The company has the option to buy a remaining 55% stake in Alliance Boots from KKR for $9.5 billion, making it one of the world's biggest drug store and pharmacy chains. That could also expose Walgreens to recovering European economies and diversify the company's revenue streams from the U.S. healthcare market, which is on the cusp of a generational transformation.

Walgreens shares have gained over 55% in 2013.

Sysco's Acquisition of U.S. Foods

Foods distributor Sysco (SYY) could be the Constellation Brands of 2014. The company appears to have cut an opportunistic acquisition of competitor U.S. Foods, owned by private equity firms Clayton, Dubilier & Rice and KKR after a $7.1 billion leveraged buyout in 2007. Like Crown Imports, U.S. Foods may be an asset that went to the auction block with a hurried seller and few likely buyers. The acquisition also is likely to face significant regulatory review.

In the case of Sysco and U.S. Foods, a merger would combine the top two foods distributors in the U.S. While that might raise the ire of some antitrust regulators, the industry may be under the competitive and cost pressures that allow a deal to squeak through, albeit with some give and take on divestitures.

But if a deal is consummated in 2014, as management expects, it could help Sysco recover from chronic declines to the company's profit margins. That may help to turn around a company that has underperformed broader markets in recent years.

KKR and CDR are also betting on Sysco's turnaround, taking the majority of their U.S. Foods sale in the form of Sysco stock, a rare move for private equity sellers who usually deal in cash.

Sysco shares are up 15% year-to-date, underperforming the S&P 500. Most of the company's 2013 gains are attributable to investors' reaction to the company's December announcement of the deal for U.S. Foods.

-- Written by Antoine Gara in New York

Follow @antoinegara

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