A week that was already scheduled to be newsy with a ton of Q2 earnings, a much anticipated Q2 GDP print, and the FOMC’s press release, just got a heck of lot newsier. This morning’s M&A activity, DollarTree (DLTR) bid to buy competitor Family Dollar (FDO) for a 23% premium, and Zillow’s (Z) $3.5 billion bid to buy competitor Trulia (TRLA) in an all stock deal, continues the recent theme of Merger Monday.
These two deals offer two very different takes on the prospects for investment in the public markets. The first deal in low end retail might not have happened if it were not for Carl Icahn’s activist involvement, as consolidation in the dollar store space had been rumored for years. Additionally, at this stage of the economic recovery the acquisition by a larger, better performing retailer of a smaller player with decelerating growth probably makes a lot of sense for financial and competitive reasons. Its hard to draw too many negative conclusions about the market environment as result of this transaction. about the market environment as result of this transaction. All hail the king Carl Icahn. Last quarter he became the largest shareholder with 10.7 million shares, and who knows how he is positioned in the otc options market for leverage.
On the flip-side, the Z/TRLA deal symbolizes the sort of froth that long time internet bubble participants remember from the late 1990s. Back in late December I opined:
it’s not sky high public market valuations of high-flying tech stocks that mark a bubble, or the valuations, or quantities of unprofitable hot tech IPOs that come to market. It is usually some combination of such activity over a period of time that defies logic, but then topped off with the mother of all ridiculous M&A activity! This could be coming to a theater near you in 2014.
Prior to this morning’s 15% pop, TRLA was trading at 11.5x sales and sported a $2 billion market cap. This deal comes as TRLA saw its first ever profitable year in 2013, despite guidance and consensus for an earnings loss in 2014 coupled with the expectation for massively decelerating sales growth, from 111% in 2013 to expectations for 76% this year and 33% next.
Zillow on the other hand KNOWS that their stock price is ridiculous, up nearly 100% so far in 2014 and trading at 26x trailing sales that are expected to grow 57% this year and 36% next. What’s nuts is that Zillow must think that TRLA is cheap as they are expected to have $253 million in sales this year vs Zillow’s $311 million, yet coming into today Zillow’s stock commanded a market cap of 3 times that of TRLA.
Whats also interesting is that both stocks, despite their relatively small floats had unusually large short interest, with Zillow at 28% and Trulia at 36%, I can’t remember the last time where I have see so many shorts be so wrong on the potential for M&A among two close competitors.
Before its all said and done, we are likely to see more arranged marriages (FDO and DLTR), and more acquisitions, well because the management and boards of ridiculously valued companies like Zillow, well they know it is ridiculous and they might as well get while the getting is good.