6 Mergers That Ought to Happen
If there is one thing that can result from a bull market and from a good economy in which companies have solid balance sheets, it is mergers and acquisitions. In fact, mergers and acquisitions often provide that next wave of growth for established companies. In order to consider a merger, one has to think about who the acquirer would be, then what each company would be worth under a merger scenario, and whether regulators and shareholders on both sides would go for a deal.
With this in mind, 24/7 Wall St. has thought about six potential mergers that investors and activist investors would love to see in the months or years ahead. These are what we would consider to be dream mergers for companies.
The first thing we considered for any would-be or potential merger, after the potential acquirer, was regulatory approval chances. There is no chance that deals between Intel and Qualcomm, or Pfizer and Merck, or Google and Microsoft, could secure regulatory approval. By our view, regulatory approvals would be likely in five of the six mergers proposed here — and the sixth likely would secure approval down the road as more financial pressure arises. It is also our view that shareholders would go along with these potential mergers, but of course that depends on a theoretical merger price.
In an effort to identify these dream mergers, we kept in mind that some management teams just do not want to integrate a merger of large proportions. Bolt-on deals make sense for most management teams, but merging two different companies can create major friction and can distract management. They also can result in major layoffs after the acquirer realizes where costs and overlaps can be cut. Still, some mergers just make almost too much sense not to consider.
24/7 Wall St. has broken out six dream mergers that corporate officers should at least consider in the months or years ahead. Obviously, this is not meant to imply in any way that these proposed dream mergers are imminent — that is not the case, at least not to our knowledge. Still, these are mergers that would make sense financially and that would strengthen the businesses coming together, as opposed to operating as rivals.
Acquirer: Nasdaq or CME
CBOE Holdings Inc. (NASDAQ: CBOE) is worth close to $5 billion now, and it is the remaining independent leader of options trading. Nasdaq OMX Group (NASDAQ: NDAQ) is 70% larger by market cap, and CME Group Inc. (NASDAQ: CME) is worth six times the CBOE in market cap. The New York Stock Exchange was acquired by IntercontinentalExchange Inc. (NYSE: ICE) for billions of dollars in recent years. Financial exchange mergers have slowed drastically in recent years because the industry has almost consolidated entirely. CBOE could make that consolidation complete.
One negative may be declining volumes in recent reports, but that may end up driving the price to a more affordable target and might even make CBOE more open to a buyout down the road. When companies merge, it is often to protect market share or to keep competition from getting too far ahead. Would CME’s base being in Chicago make it easier for it to acquire a Chicago-based exchange than Nasdaq’s base being in New York?
CBOE trades around $59.00, against a 52-week range of $46.52 to $68. It has a consensus analyst price target of $59.50, and it recently was issued price targets of $60, $58 and $53 by Deutsche Bank, Credit Suisse and Barclays, respectively. CBOE has a market cap of $5 billion, compared to CME, which has a market cap of $34 billion, or Nasdaq at almost $9 billion.
Target: eBay (a split eBay and PayPal)
eBay Acquirer: Amazon or Alibaba
PayPal Acquirer: Visa, MasterCard or Google
eBay Inc. (NASDAQ: EBAY) is already in the midst of breaking up, and its market cap is large enough at $72 billion that it would not be an easy merger for the entire company. This means that there are two would-be potential acquisition targets. With a split of PayPal and the eBay auction system, there might be plenty of takers. Amazon.com Inc. (NASDAQ: AMZN) could own the auction market, just like it owns much of the online retail market. Is it fathomable that Visa Inc. (NYSE: V) or MasterCard Inc. (NYSE: MA), or even Google Inc. (NASDAQ: GOOGL), could step in to buy the PayPal operation? Both may feel like a stretch in raw dollar terms, but companies now have to consider ways of protecting their value and dominance for more than a generation ahead.
Both SpinCo companies will be open to growth opportunities. The question is if they will be acquirers or if they get acquired. Chances seem very high that both companies would be very open to being acquirers themselves. As far as Alibaba Group Holding Ltd. (NYSE: BABA) getting to embark on major U.S. acquisitions, regulators may object to Chinese companies being too dominant in the United States, and customers could revolt as well.
A recent eBay price of $59.74 compares to a consensus analyst price target of $59.44 and a 52-week trading range of $46.34 to $60.93. Susquehanna has a price target of $75 for eBay, and Axiom Securities has a price target of $60; both targets were issued in March. eBay has a market cap of $72 billion, compared to Alibaba’s market cap at $210 billion and Amazon’s at $173 billion.
Acquirer: Schwab or TD Ameritrade
If there is one brokerage firm acquisition that has been pondered by the investment community for years, it is E*Trade Financial Corp. (NASDAQ: ETFC). While there was a point before things got too bad in the financial crisis that Morgan Stanley or Goldman Sachs were considered would-be acquirers. The most likely acquirers now are Charles Schwab Corp. (NYSE: SCHW) and TD Ameritrade Holding Corp. (NYSE: AMTD). With E*Trade being more independent from Citadel and with its mortgage mess deemed largely behind it, perhaps the only remaining discussion would be on price.
Schwab is worth nearly five times the firm, and TD Ameritrade is worth about 2.5 times E*Trade. Also, E*Trade has roughly 3.17 million brokerage accounts and 1.27 million stock plan accounts, with total customer assets of $216 billion. Schwab has over 9.1 million active brokerage accounts, with total assets of $2.53 trillion, versus $697.6 billion in total client assets for TD Ameritrade. Reuters ran a report showing that TD Ameritrade was not interested in buying E*Trade, but you know mergers can be price-driven and opportunistic when the chance arises.
E*Trade shares were recently trading at $28.30, against a 52-week range of $18.20 to $28.52. The stock has a consensus analyst price target of $28.29, consisting of a couple $31 price targets from JMP Securities and Deutsche Bank. E*Trade has a market cap of $8 billion, compared to Schwab at $40 billion or TD Ameritrade at $20 billion.