Aug. 30, 2009, is a day my portfolio will not soon forget. That was the day I lost my largest holding. The day that the company I believed in more than any other was taken from me. The company that had the largest potential for growth was absorbed into another. It was the day that The Walt Disney Company (NYSE:DIS) announced they were buying my beloved Marvell Technology Group Ltd. (NASDAQ:MRVL).
I’m not exactly a comic book junky, but I was elated with the then-brand new Marvel Studios. Apparently, so was Disney. They bought Marvel out for around 30% more than it’s market cap at the time. Although I was offered Disney shares, I was so upset I was losing Marvel, that I wanted nothing to do with The Walt Disney Company (NYSE:DIS). I sold all my shares of Marvel. Now, some will point out the good part of that deal: overnight my investment jumped 26% because of the buyout.
I frequently get comments from investors saying that they are buying into a company in hopes of this scenario. They buy a company hoping that it is soon bought out. But this may not be the best way to boost your portfolio.
Current Buy-Out Candidates
Research In Motion Ltd (NASDAQ:BBRY) (now known as BlackBerry) has been subject to many takeover rumors. Rumored suitors include Microsoft Corporation (NASDAQ:MSFT), Hewlett-Packard Company (NYSE:HPQ), and Lenovo. Here’s why.
BBRY Revenue TTM data by YCharts
Since the start of 2011, things haven’t been going well for Research In Motion Ltd (NASDAQ:BBRY). In large part, the once cool Research in Motion Ltd (NASDAQ:BBRY) has been replaced by a lot of other phones on the market. Both revenue and net income have been falling at an alarming rate, and the stock price has followed the downward herd. As an investor, I have serious doubts about the future of the company.
WebMD Health Corp. (NASDAQ:WBMD) is an investment that doesn’t make a lot of sense either. Basically the company has a fairly large market cap, but they don’t make that much money. Rumored buyers have been Yahoo! Inc. (NASDAQ:YHOO) and Alibaba. While these rumors have been largely downplayed, some investors still want to get in for the potential big jump the stock will have when it is bought out.
Part of WebMD’s problem has been a failure to capitalize on the growing amount of users accessing their information on mobile devices. They are going to have to figure out how to make the mobile applications as lucrative as the traditionally accessed website, and I have yet to hear how they plan to do this. In fact, the most concrete plan I’ve heard from WebMD Health Corp. (NASDAQ:WBMD) is that they plan on losing between $0.13-$0.45 per share next year. Doesn’t sound like a good plan to me.
The Avon Products, Inc. (NYSE:AVP) buyout isn’t so much a rumor as something that almost happened. Coty Inc tried to buy the company out, but Avon wasn’t really interested. After that Coty withdrew its offer.
AVP Revenue TTM data by YCharts
As you can see, Avon is facing some pretty serious headwinds. Revenue is essentially flat over the last five years. Net income is plummeting. Long term debt is growing. What is going on at Avon leaves me with some serious doubts.
The ZipCar Situation
I read several articles talking about how great it was for shareholders that Zipcar Inc (NASDAQ:ZIP) was bought out by Avis Budget Group Inc. (NASDAQ:CAR). There were more than a few traders dancing in the streets because they had bought in when the stock bottomed out around $6. When the company was bought out by Avis for about $12, they made a really quick double.
But that didn’t represent the majority of investors. The majority had been in at least a year. People who bought a year before the buyout lost around 15% because of the buyout. Those who bought at the IPO lost over 50% of their investment.
Why Settle For Buyouts?
There’s a better way to invest than investing in companies in the hopes of a buyout. Instead of investing in weak companies hoping they are bought, why not buy the strong companies that are doing the buying? When my Marvel got bought, I wanted nothing to do with Disney. I was still a little bitter. But how wrong I was. If I had accepted the shares of Disney, I would be sitting on a near double, with an ever increasing dividend for the icing on the cake.
And truth is, The Walt Disney Company (NYSE:DIS) is a great company to be a part of.
DIS Revenue TTM data by YCharts
Despite being the colossal company that they are, this company is still building its empire. And speaking of empire, the recent Star Wars purchase is yet another example that this company will continue to make investments to ensure that they stay a money-making machine for years to come.
The same can be said of some of the companies among the rumors. Instead of buying a Research in Motion Ltd (NASDAQ:BBRY) that has a lot of problems, why not buy the stronger and healthier Microsoft? Yahoo! has been growing their business lately, while WebMD Health Corp. (NASDAQ:WBMD) has become stagnant.
Final Thoughts
Let’s imagine you are in a rowboat at sea. To one side of you is a sinking ship. At the other side is the Coast Guard there to rescue the sinking ship. Which ship would you rather board? Would you rather board the sinking ship, or the ship who rushes in to save the sinking ship?
Invest in companies that are healthy. Don’t invest in companies that are sinking. Buyout rumors are just that: rumors. If you invest in a healthy company that is appreciating in value, then you are winning. Eventually if they are bought out, you’ve experienced a nice climb with your investment. But if you invest in a sick company in the hopes that they are bought out, you have no idea if or when that will happen. You may loose a large part of your investment waiting for the share price to pop. It’s just too much speculation to be even considered an investment.
The article Banking on a Buyout originally appeared on Fool.com and is written by Jon Quast.
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