Wednesday, January 17, 2007

Five Business Hookups You Might See

This column was originally published on The’s Street Insight on Jan. 11

All too often, the media and investors merely speculate about potential takeovers and start rumors. I, on the other hand, prefer to contemplate what would make a nice corporate match in a Yenta the Matchmaker-type way.

Here is my list of five mergers and acquisitions that make sense to me -- with the reasons why, and the reasons why they might not happen:

1. Sears Holdings (SHLD) to acquire warehouse retailer BJ's Wholesale Club (BJ).

Why it makes sense: Sears still has underperforming stories -- or Kmart-Sears stores that are cannibalizing one another -- and it's in the process of transforming them into new concepts or selling off their real estate. BJ is dwarfed by Costco (COST) . Sears can buy BJ and expand BJ, utilizing those superfluous Kmart-and-Sears stores to capture more of the fast-growing warehouse business from Costco and Wal-Mart's (WMT) Sam's Club. Currently, BJ's market cap is just under $2 billion. Sears has the cash and stock currency to easily pay a 20% premium to BJ shareholders and still make an accretive acquisition.

Why it might not happen: Sears' Eddie Lampert is focused on improving the merchandising in existing Sears stores and continues to experiment with new concepts such as in the Gwinnett Place Mall.

2. Morgan Stanley (MS) to acquire an investment adviser: Legg Mason or T Rowe Price (TROW).

Why it makes sense: The missing ingredient in MS' mosaic of businesses is asset management, and it's a glaring hole. MS must make inroads into this segment if it truly wants to compete with Merrill Lynch (MER) and Goldman Sachs (GS). John Mack brought in James Gorman from Merrill a few years ago, and he would be the right person to spearhead this effort.

Why it might not happen: Mack is still focused on rebuilding MS from the ruins left behind by Phillip Purcell. Furthermore, MER has already picked off the best of breed when it acquired a 49% stake in BlackRock in an asset-for-stock swap last year. Biting off LM or TROW will come at a heavy short-term price because it won't come cheap. It will be dilutive for many years.

3. Hewlett-Packard (HPQ) to acquire Palm (PALM).

Why it makes sense: Hewlett-Packard failed in its early attempt to deliver a handheld PDA several years ago. Palm has an excellent device with the Treo line of smartphones but is now facing brutal competition from Research in Motion (RIMM) and Apple (AAPL) in the consumer segment. Hewlett and the other Microsoft (MSFT) Windows-based computing companies are also facing stiff competition from Apple as the iPod halo effect continues to attract users away from Windows to Mac. A combination of Hewlett-Packard and Palm would help to energize Palm and give Hewlett another key technology to combat the ever-growing Apple. Palm needs some strong marketing and logistical expertise, which Hewlett can offer. Lastly, Hewlett can swallow up Palm for pocket change.

Why it might not happen: Hewlett-Packard might be twice shy about getting into the PDA/smart-phone business. Furthermore, HPQ is still reeling from a recent management shakeup in the wake of an ethics scandal and threats of criminal indictments.

4. General Electric (GE) to acquire Alcoa (AA).

Why it makes sense: Sure, there are rumors of an AA takeover or leveraged buyout, but those rumor-mongers are looking at the wrong suitors. Don't let one good quarter from AA fool you. This is still one of the worst-run companies in the U.S. GE is one of the best companies at managing industrials in the history of business. That is what AA needs. There is nothing fundamentally wrong with the aluminum business -- it's just that new leadership is necessary.

GE is in the process of selling the plastics business, which is a tough industry. GE can easily use the proceeds of the plastics sale to buy AA, although it has plenty of resources without the plastic sale. The deal would be immediately accretive to earnings.

Why it might not happen: GE is simply too big and may be looking to slim down rather than add on. There are other businesses beyond plastics that the company also needs to make some decisions about, namely NBC Universal.

5. Boeing (BA) to merge with or acquire Ford (F).

Why it makes sense: This sounds like a real wacky match, but the more I think about it, the more it might make sense. So hear me out. Airplane, defense, automotive and truck manufacturing all require similar (but not necessarily the same) raw-material inputs and parts. Thus, a combined manufacturing effort would have economies of scale in terms of component and material purchasing. Make the deal subject to a one-time, take-it-or-leave-it labor agreement, focusing on pensions and benefits. Get rid of the defined benefit programs. Ford Motor Credit and Boeing Capital can create a very powerful financial-services company. Consolidate the overhead and eliminate other wasted costs. A healthy Ford without all of the recent write-offs can probably make $1.50 per share. If you clean up the balance sheet, it might be more. Heck, if done right, this could be accretive to Boeing.

Why it might not happen: It's just too complex. Expecting the United Auto Workers to cave in would be expecting a miracle. Furthermore, I doubt if the Ford family egos would permit losing control of a failing company to having a hefty stake in a healthy one. I believe that they think that they would be better off to rule in hell than serve in heaven.

At the time of this Blog entry and the article, Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were was long AAPL, GS, SHLD and BJ, with small legacy positions in COST and MS; long stock and calls -- MER; short PALM -- although positions can change at any time.