Is the Vulcan Materials Acquisition Likely?
Turbulent markets often prevent financial transactions from taking place. For example, when equity markets are extremely violent, companies are wary of issuing public equity securities. The same principle affects the debt capital markets. Mergers and acquisitions are also affected severely, as they often require large obligations to be undertaken by the acquiring company.
During uncertain times, companies that do end up taking over other entities often do so with fierce conviction. Whether a company is a strategic or financial buyer, it should have several reasons for why a company is a good target. Recently, Martin Marietta Materials (NYSE: MLM) offered Vulcan Materials (NYSE: VMC) $4.7 billion in a hostile bid. While the merger is far from confirmed, investors must consider why the merger should occur in the first place.
For a strategic buyer like Martin Marietta, one of the first things it should consider is how the acquisition will improve existing market share. The first thing to notice is that both companies offer similar, yet different, products. Vulcan Materials is a large producer of asphalt and other cement products, while Martin Marietta manufactures chemical and lime-based products. Vulcan also operates in various states including California, Virgina, Florida, and Texas. Martin Marietta currently operates in Texas, North Carolina, Georgia, Iowa, and Louisiana. While there may be some overlap in Texas' operations, the value added from the other states is likely to outweigh the cons.
Investors should also consider if the acquisition is likely to save costs. Since the companies produce fairly similar products, they may be able to streamline costs by consolidating work forces or factories. Reducing overhead is extremely likely in this particular case. One of the few downsides to this is that certain jobs will probably be made redundant, and workforce downsizing may be imminent.
Martin Marietta Materials also has to consider various financial characteristics underlying Vulcan Materials' business model. For example, the way Vulcan funds its operations is extremely important. Acquirers want to see cash flow positive companies that do not necessarily fund itself via extensive debt and equity issuances. Vulcan has a history of consistent debt and equity issuances, but appears to have calmed down recently as far as capital markets activity goes.
Vulcan Materials' financial situation could be more positive, but it has consistently paid back its debt. It has also been able to boost overall cash flows over the last several years, with no help from financing activities. Balance sheet modifications in working capital along with depreciation add-backs bolstered cash flows. Inventories and stock-based compensation were two key drivers, and both appear to have affected the company positively over the last five years.
Vulcan Materials and Martin Marietta Materials have a long way to go before ironing out all the details behind the possible acquisition, but it may seem to be a good match. The strategy behind the acquisition appears to identify key synergies that may be able to skyrocket both companies in the industrials sector. Moreover, the two would be able to combine existing resources to efficiently mold both companies into one entity.
Martin Marietta Materials is currently trading at about $75.75, down 18.5% for the year. Vulcan Materials Company is currently trading at about $39.05, down 28% for the year .
Traders who believe that the Vulcan Materials/Martin Marietta acquisition will complete might want to consider the following trades:
- Long Vulcan Materials by purchasing shares or call options. Vulcan currently appears to be close to a technical support level, so now may be a good time to buy.
- Short another similar company, like US Concrete (NASDAQ: USCR). You could short this company to hedge a long VMC trade or to accentuate your belief that Vulcan Materials will continue to dominate the asphalt production market.
- Long an ETF like the Industrials SPDR (NYSE: XLI). If a significant industry like construction is doing well, industrials itself will probably do well.
Traders who believe that the acquisition will not take place may consider the following positions:
- Short Vulcan Materials until it reaches $34, which is the level it was at before the unsolicited offer by Martin Marietta Materials; it also appears to be a technical support level. The next support level appears to be at about $31.
- Long a competitor like Texas Industries (NYSE: TXI), as someone bearish on Vulcan may believe that a specialized competitor is more likely to garner market share.
- Buy put options as Vulcan Materials' earnings announcement comes along. The company may not be able to sustain its costs as precious metals rallied significantly in Q3 2011.
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