|Dow||+22.02 to 16,982.59|
|S&P 500||+0.57 to 1,978.91|
|Nasdaq||-4.65 to 4,444.91|
|10-YR Yield||+0.022 to 2.491%|
|Gold||+$1.80 to $1,305.10|
|Crude Oil||-$0.51 to $101.58|
Did you see the two huge deals announced this morning?
First, discount retailer Dollar Tree (DLTR, Weiss Ratings: B+) said it would buy up competitor Family Dollar Stores (FDO, Weiss Ratings: C+) for $9.2 billion including debt. The $74.50-a-share price was a 23 percent premium to where FDO traded before the news came out.
Second, the online real estate firm Zillow (Z, Weiss Ratings: C) said it will pay $3.5 billion to buy up Trulia (TRLA, Weiss Ratings: C-). The price of $70.53 a share equates to about 25 percent more than Trulia shares were trading for at the end of last week.
What’s going on here? What do these two transactions have in common? Both are examples of companies killing off the competition by absorbing them whole hog.
Take these dollar stores. Family Dollar is clearly the worse operator between the two chains. It’s been in the process of closing almost 400 underperforming stores, and slashing prices. That increased pressure on competitor Dollar Tree.
|Consolidation in the discount-store sector: Family Dollar Stores is being bought by competitor Dollar Tree.|
So what did Dollar Tree do? It bought the company to eliminate the competition. The firm plans to cut $300 million in costs, in part by combining procurement and logistics functions, leaving it in a stronger position over time.
As for Zillow and Trulia — both companies compete in the real estate market. They both help customers shop for and price out homes, and help real estate agents market their properties.
By buying out Trulia, Zillow eliminates its primary competitor in one fell swoop. It adds the smaller firm’s 54 million unique online and mobile users to its own 83 million, allowing it to dominate the market.
In short, companies launch mergers and acquisitions for a lot of reasons. Many of the recent ones, for instance, are designed to slash tax bills through the “tax inversion” process.
“We’re clearly in ‘buy up the competition to kill it off’ territory here.”
But we’re clearly in “buy up the competition to kill it off” territory here. I have every reason to believe we’ll see more such deals as long as financing remains cheap and government antitrust investigators give them the green light.
So have you made money off deals like these? What other companies are in a similar situation as these, in any industry? Do you believe we’ll see more mergers in the back half of 2014? Or has the trend jumped the proverbial shark? Let me know at the Money and Markets comments section here.
|OUR READERS SPEAK|
I love reading through point-counterpoint style debates on important stock market bellwethers. Friday’s piece on Amazon.com certainly helped inspire a great back-and-forth on the website, so I wanted to share some of the best posts I came across.
Reader M.C. said: “I’m kinda partial to Amazon because of everything they offer but yes, they do need to start showing a profit. I was lucky and bought shares when they were $18, so I’m not complaining that much with all of the splits in the past.
“I think they need to limit their growth a little and show some profit, or less loss anyway. I’ll keep my stock until the whole market starts taking a nosedive with all of the financial turmoil.”
Reader Ian added: “I love Amazon for its prices and fast service BUT to invest, different story. You know it’s all about profit, and there ain’t none, period.”
But Reader Mike was emphatic about avoiding the online retailer’s shares. His comments: “Amazon is a joke! All this talk about expenses due to ‘building out’ the infrastructure, etc. is complete rubbish.
“Look at any of its competitors, either e-commerce or brick and mortar and they’re profitable. Wal-Mart had to spend money on building stores, supply chains, etc. and it makes money. eBay makes money, lots of it. This is simply a company where the model is broken. Amazon doesn’t make money because its model is not working. Plain and simple.”
Keep those comments coming, on Amazon or other retailers, in the comment section.
Finally, Reader Anthony did a great job by sharing some more background material on the Eurodollar market. His comments follow:
“Just a word of explanation to the reader who questioned the term ‘Eurodollar.’ Way back in 1973 the price of oil suddenly spiked, ginormously. The winners were, of course, the oil-producing companies (OPEC), who suddenly found themselves awash with U.S. dollars, the currency in which oil sales have always been invoiced.
“Many oil-producing countries preferred, for political reasons, not to leave their dollars in U.S. banks. The City of London obliged by accepting large amounts of dollars in accounts in London, and Frankfurt, Paris and Zurich soon followed suit. Thus was born the Eurodollars which, originally, merely meant USD held outside the US.
“The volume of Eurodollars held in London eventually became so large that it was the London banks which fixed international dollar lending rates (the so-called LIBOR (London Interbank Offered Rate). This development in the 1970s was the root cause of the 2008 world financial crisis, but that is another story.”
Thanks for sharing, Anthony!
|OTHER DEVELOPMENTS OF THE DAY|
Our diplomatic efforts are still falling short in the Middle East. Secretary of State John Kerry spent six days shuttling around Arab and Israeli cities trying to get a peace deal, but came home with little to show for it. Fighting resumed in Gaza, as did rocket fire into Israel, after a brief humanitarian truce.
We got more somewhat disappointing news on the housing front, with pending sales of existing homes falling 1.1 percent between May and June. That compared with forecasts for a 0.5 percent increase. On a year-over-year basis, they’re off more than 7 percent.
Could another inversion deal be in the works? Hospira (HSP, Weiss Ratings: C) is reportedly considering the purchase of a medical nutrition business from France’s Danone. That would allow the Illinois-based company to re-domicile overseas, slashing its U.S. tax bill.
Of course, that’s assuming Washington doesn’t get in the way! Some are calling on President Obama to attempt to sidestep Congress and unilaterally ban inversions before they get completely out of hand. Democrats and Republicans have competing visions on how to halt the inversion wave.
Reminder: You can let me know what you think by putting your comments here.
Until next time,