Got lots of cash? How about clubbing your competition with the green stuff? That’s what HP seems determined to do to Dell

On the surface, bidding $2 billion for a company that hasn’t made an operating profit in the last five years looks nuts.

Dig deeper, though, and the battle between Dell (DELL) and Hewlett Packard (HPQ) to buy data storage company 3Par (PAR) doesn’t look nuts. It’s looks insane. Sales are projected to hit all of $235 million for the year that ends in March 2011. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected at just $21 million.

On August 28 Hewlett Packard bid $2 billion for 3Par, topping Dell’s previous bid, which topped Hewlett Packard’s previous bid, which topped Dell’s bid. Dell proposed paying $1.5 billion for 3Par. The latest bids come to roughly 95 times EBITDA for 3Par.

Aren’t these companies certifiable?

Well, if you’re even asking that question you don’t understand where we are in the economic cycle and how that’s driving company strategy in the technology sector.

This isn’t an age for valuation when companies carefully figure out how to get the best value for the cash they’re about to spend.

This is the era of Cash as Bludgeon. Cash rich companies are looking to club their poorer competitors over the head with dollars. At worst, the result of this spending will be a competitor unable to climb off the canvas for years. At best, this spending might be able to crush a competitor forever.

Put the Dell/Hewlett Packard contest over 3Par into competitive context and it starts to make sense, in spite of the insane valuation awarded to 3Par. Read more

Acquisition fever burns hot–here are three stocks to profit from the frenzy

Acquisition frenzy is upon us. August is on a path to be the second best August ever for acquisitions. Making a profit from one of these deals ought to be as easy as shooting fish in a barrel.

Except it’s not.

Many of the barrels as completely void of deals: fire away as you like you’re not going to hit anything. Others are full of nothing but minnows: Nothing you hit is going to be worth the ammo.

There is a way to improve the odds, though.

If you understand the reasons behind the surge in acquisitions, you can figure out where the big fish might be hiding. (For more on the acquisitions boom see my post http://jubakpicks.com/2010/08/24/thinking-long-term-right-now-is-hard-which-is-why-its-worth-doing/ )

That can help you eliminate some barrels and prioritize others.

Using that process, I’ve come up with three acquisition candidates that I think are worth putting in your gun sights. Read more

Update Teva Pharmaceutical (TEVA)

Today (March 18) Teva Pharmaceutical Industries (TEVA) announced an agreement to buy Germany’s Ratiopharm for $5 billion in cash. Privately-owned Ratiopharm is Germany’s second largest maker of generic medicines—and the sixth largest generic drug company in the world. The deal, in which Israel-based Teva beat out Pfizer (PFE) and Actavis Group, will advance Teva from No. 5 to No. 2 in the German market for generic drugs. The German market is the second-largest market for generics in the world next to the United States.

Teva has a good record with acquisitions with actual cost-savings usually exceeding those projected at the time of the deal. Read more

Do the new Coke and the new PepsiCo both fail the taste test?

Gee, I really hate this deal.

It’s not just that I question the price that Coca-Cola (KO) is paying to acquire the North American operations of its biggest bottler Coca-Cola Enterprises (CCE). The $12.7 billion price works out to about the same multiple that PepsiCo (PEP) paid to acquire its two biggest bottlers. After the deals both close Coke will have control of about 90% of its North American bottling and distribution system; Pepsi will control about 80%. But while the companies are paying about the same price PepsiCo looks like it has a much bigger opportunity to cut costs in its deal than Coke does.

Or that the deal takes away a major reason to own shares of Coca-Cola. Wall Street preferred Coke to Pepsi because it saw Coke as the better emerging markets play. But this deal will take Coke’s revenue from 74% overseas to 54% overseas, according to Barclays Capital.

Or even what the deal says about the declining market for soft-drinks in North America. And the shift in power toward big box stores such as Wal-Mart (WMT.) First, U.S. sales volume of carbonated drinks is down across the industry according to Beverage Digest. Sales volume fell in 2009 following a 3% decline in 2008, a 2.3% drop in 2007, and a 0.6% falling 2006. At the same time, the increasing market power of big box retailers has put pressure on soft drink margins and cut into the shelf-space that Coke and Pepsi get for their bottled waters and the other non-carbonated drinks that they’re counting on to make up for the drop in carbonated soft-drink sales volumes.

No, what really troubles me is that this deal has history, you see. And the history is one of asset-shuffling and accounting razzle-dazzle. If these companies’s are willing to forgo the financial magic that the deals brought them in 1986 and 1999, respectively, then the long-term challenges facing these companies are more serious than I thought. (For more about the implications of the current wave of deals see my post http://jubakpicks.com/2010/02/26/can-ceos-destroy-shareholder-value-in-an-acquisition-just-watch-them/ ) Read more