BALTIMORE (Stockpickr) -- U.S. companies are facing a cash crisis in 2014. It's not because they need cash, though. The problem is that firms currently have too much of it.
As I write, firms in the S&P 500 currently hold more than $1.25 trillion on their balance sheets, the most in history. Add it all up, and those cash holdings are enough to pay for a whopping 20% of the S&P's current price tag. That may seem like a good problem to have -- and it is -- but it's still a problem because its almost impossible to earn meaningful returns in the near-zero rate market were stuck in.
So as management teams come to the realization that they need to either put money to work or hand it back to investors, acquisitions are looking a whole lot more appealing again. 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 theres no money to be made once a deal has been announced, but thats just plain wrong; between merger arbitrage opportunities and value creation for acquiring firms, its worth paying attention to Wall Streets deal book. With the S&P squarely in correction mode this month, we're stating to see bigger premiums up for grabs in the market.
And now, with M&A deals coming off decade-long lows, deal volume is starting to spike again.
With that, lets take a look at four M&A deal stocks worth watching right now.
Jos. A. Bank and Men's Wearhouse
Mass market suit retailers Jos. A. Bank (JOSB) and Men's Wearhouse (MW) have been engaged in a macho battle for months now. Both firms acknowledge that they're better off together, but neither firm wants to be the acquisition target. Men's Wearhouse rejected Bank's $2.3 billion offer in October, and then Jos. A. Bank rejected MW's $1.6 billion offer earlier this week.
While the back and forth is kind of funny right now, it's also creating an opportunity. With both sides agreeing that their businesses are better together, it's just a matter of agreeing on price. At last count, the JOSB offer is a modest 3% premium to its current share price. Even though the current spreads aren't astronomical, the business combination could add up to some material fundamental improvements in the next couple of years when and if the deal is pulled off. That's an even better reason to take a closer look at JOSB and MW now.
Jos. A. Bank's fortress balance sheet makes it the more attractive of the two names right now. It currently carries $340 million in cash and no debt, enough to cover a full 22% of its market cap right now. That big cash balance greatly reduces the risk of buying JOSB if a deal falls through.
The last few months have been dramatic for shareholders of Blyth (BTH) -- the small-cap direct sales company got a buyout offer on Oct. 29 for $16.75 per share, representing a 30% premium to shares' previous-day closing price. The offer came from CVSL (OTC:CVSL), a company that acquired direct sales firms. While Blyth rejected the unsolicited offer, it opens the door to bigger payouts for BTH shareholders.
Blyth sells scented candles, weight management products and energy drinks. While that may seem like an odd smattering of products at first glance, they all have a track record of success with direct sales, and they all sport enormous margins. Blyth's scale and relatively low balance sheet leverage make it a logical acquisition choice for CVSL particularly as valuations for more "mainstream" direct sales companies go through the stratosphere.
CVSL, for its part, is no slouch when it comes to the direct sales model; the firm is headed by John Rochon, the former chairman of Mary Kay. Currently, BTH trades for a huge 74% discount to the previous offer from CVSL. That's before factoring in the potential suitor's claim that it would follow up with a more aggressive offer for BTH. Naturally, the biggest premiums come from unrequited acquisition offers. While this is certainly higher up on the risk spectrum, there's an interesting opportunity in shares right now.
R. G. Barry
There's another unique acquisition play in shoemaker R. G. Barry (DFZ). On Sept. 12, private equity investors Mill Road Capital Management offered $20 per share for the firm, a 22% premium to its then price. Today, there's still 5.5% left in the deal.
R. G. Barry owns a collection of comfort footwear and accessory brands, including Dearfoams slippers, Baggallini handbags and Foot Petals insoles. DFZ has enjoyed an stable growth trajectory in the last few years, with sales and profitability both up considerably since the Great Recession. Likewise, the firm has been able to maintain a debt-neutral balance sheet, with enough cash to totally offset its $20 million in borrowings.
Mill Road previously made a buyout offer in 2009 for $7.75 per share, which R. G. Barry rejected as insufficient. This time, management is thinking over Mill Road's offer more seriously. The spread between shares and the offer price is big enough to warrant thinking about speculating on merger acceptance, especially considering DFZ's track record of profitability and its low-risk balance sheet.
$2.8 billion real estate investment trust CommonWealth REIT (CWH) has left investors in a good spot in the past year. Not only has this mid-cap trust rallied more than 46% in the trailing 12 months, but the firm has also had an ongoing hostile takeover nipping at the bid on shares. That's helped to keep a floor on share prices as Mr. Market corrects in January.
CommonWealth REIT is primarily an office REIT, but it's the firm's majority ownership stake in Select Income REIT (SIR) that's getting its suitors excited. That makes the firm the largest industrial landowner in Hawaii, a market that's known for its hefty real estate valuations. That's what spurred the now long-running $24.50 cash buyout offer from Corvex Management (run by Keith Meister) and property manager Related Cos. At current price levels, there's more than 5% of premium priced into shares assuming Corvex and Related don't up their bid.
Earlier this month, CommonWealth offered Meister a spot on its board, an offer that got rejected. Instead, Corvex and Related submitted a list of five nominees it would like to see take control of CWH's board. So the battle wages on -- but all that drama is leaving money on the table right now. With a few key developments in 2014, I think investors should expect a resolution in this M&A deal sooner rather than later.
To see these M&A plays in action, check out the M&A portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.