Market Overview

Would Starbucks Buy Green Mountain Coffee?

Shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) rallied on Thursday, moving back into positive territory late in the afternoon session.

Starbucks' (NASDAQ: SBUX) CEO Howard Schultz made comments that might have generated bullish momentum in the name. Schultz stated that his company was interested in making acquisitions in the food and beverage sector -- some traders may have seen these comments as evidence that Starbucks could purchase the Keurig-maker.

Starbucks is no stranger to acquisitions. Over the years, the company has made several. The coffee giant purchased Tazo Tea in 1999, Evolution Fresh last year, and La Boulange Bakery earlier this year.

Looking at these purchases, they share a few things in common. First, they all allowed Starbucks to expand its offerings: adding high quality tea, juice and baked goods to its premium coffee offerings. Second, they were all lesser known names -- none of the companies were widely known before Starbucks acquired them.

Thus, the purchase of Green Mountain would be fundamentally different from a strategic point of view, as the company carries a more well-known name and does not bring anything new to Starbucks' lineup.

Starbucks just released its Verismo single-serve brewer, and according to Schultz, sales are going spectacularly. What use would Starbucks have for Green Mountain?

Despite entering the single-serve market, Starbucks has consistently stated that it would continue its relationship with Green Mountain. Starbucks management has argued that the Verismo plays in a different sector from the Keurig, occupying a more luxurious tier and providing a brewer for those who primarily desire espresso drinks.

Acquiring Green Mountain here might allow Starbucks to expand its Verismo lineup, perhaps branding Green Mountain's Keurig brewers under the Verismo nameplate. But if the Verismo is doing so well, does Starbucks really need to act right now?

Shares of Green Mountain have plummeted, and are down roughly 70% over the last year. Further pain could be just over the horizon, as the company's patents on its K-cups have only recently expired.

On Tuesday, at the Value Investing Congress, Greenlight Capital's David Einhorn gave a presentation in which he reiterated his bearish beliefs on Green Mountain. Last year, Einhorn gave a detailed presentation on the company, questioning the company's accounting practices and arguing that its patent expirations would be major blow.

At any rate, Green Mountain is a fairly heavily shorted stock, so it could see rapid, powerful short covering rallies. But looking to own shares in the hopes of a Starbucks takeover might be misguided.

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