Top Merger/Acquisition Rumors and Action on Monday

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mergers and acquisitions (M&A) can make or break a company and are a crucial part of any company’s growth strategy. Monday proved itself to be full of M&A rumors and actions that could and will forever change several different companies. In this article I am looking at three of the most significant M&A announcements that took individual stocks and sectors by storm.

Knight Capital is Trying to Sell Something!

Knight Capital (NYSE: KCG) rallied more than 15% on Monday after the company issued a weekend report saying that it might sell its market-making operations. If successful, the company would be selling its most profitable and largest sector, which would change the business structure of the company. However, it would also be eliminating a segment that nearly forced the company into bankruptcy after a “technical glitch” earlier this year.

Here’s where the story surrounding Knight Capital gets really confusing: The stock originally rose 7% following the weekend report, but then doubled its gains on rumors of a complete sell of its company. Reportedly, some of Knight’s competitors are looking to buy the entire company, and why wouldn’t they, Knight could be purchased fairly cheap. The stock is trading with a 75% loss in the last year and could probably be purchased for just 1.25 times sales, or a 100% premium. Therefore, I view this potential acquisition as “likely” and one that investors should monitor.

McGraw-Hill Loses its Identity?

On Monday McGraw-Hill (NYSE: MHFI) announced that it was selling its education business to Apollo Global Management for $2.5 billion. The education business is a low margin business, and there were some reports that the industry itself has become too “cutthroat,” and difficult to navigate. However, this is an odd acquisition, one that completely transforms McGraw-Hill. The company’s identity is “education,” textbooks for schools. Now the company will be renamed “McGraw-Hill Financial”, and although its margins will be drastically higher, the company’s total sales will be significantly lower.

McGraw-Hill already trades with a price/sales of 2.26, and has a profit margin of 13.65%. Therefore, I am not sure how much upside exists with it losing so much of its total sales. At this time it is hard to say how much revenue the company will lose. But with a 13.65% profit margin, it is hard to figure that margins could be too much higher, considering it’s near the top of the industry. Therefore, I am not too optimistic regarding this acquisition, and I believe that McGraw-Hill lost more than just sales, it lost its identity.

Illimina Doesn’t Know What It Wants

One of the stranger M&A rumors in the works is definitely in regards to Illumina (NASDAQ: ILMN), and the inconsistencies drove its stock lower by 3.30% on Monday. It’s no secret that Illumina has been shopping itself, but at the same time, looking to acquire.

Earlier this month the company placed a bid to acquire Complete Genomics (NASDAQ: GNOM) for $114 million, or $3.30 a share. This bid exceeded its $3.15 proposal, but for some reason the life sciences department rejected the bid. However, last week it was announced that BGI-Shenzhen has extended the deadline to acquire Complete Genomics, which then put Illumina back in the picture.

On the other side, Illumina has been at the epicenter of acquisition rumors for the last six months. Roche had attempted to acquire the company earlier this year, but the two sides failed to reach a deal. However, new rumors had developed over the last month, at the same time as Illumina was trying to acquire Complete Genomics.

The loss on Monday occurred after Baird downgraded Illumina, due to the craziness and inconsistencies of the company's M&A situation, and what appears to be a lack of direction. Baird’s downgrade was based on near-term M&A risks, which could falter the stock. As of now, much of its gains have been a result of M&A rumors and speculation. Therefore, with it having gains of 23% over the last three months, and a P/E ratio of 74, I would avoid the stock for now.

Conclusion

You should never base an investment decision on the prospects of an acquisition or the speculation of what an acquisition could bring to a company. There are several factors at play, such as integration, synergy, and growth. Acquisitions are detailed actions that take time, it’s not a game of chess that can be moved across the board, it has to make sense. And of the three moves above, Knight Capital is the only move that seems logical. However, your own due diligence is necessary and should be performed to determine which one, if any, fits into your portfolio as a company that is getting better with an acquisition/merger. 


BrianNichols is long KCG. The Motley Fool owns shares of The McGraw-Hill Companies. Motley Fool newsletter services recommend Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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