| MARKET ROUNDUP | |
| Dow | +22.02 to 16,982.59 |
| S&P 500 | +0.57 to 1,978.91 |
| Nasdaq | -4.65 to 4,444.91 |
| 10-YR Yield | +0.022 to 2.491% |
| Gold | +$1.80 to $1,305.10 |
| Crude Oil | -$0.51 to $101.58 |
Did you see the two huge deals announced this morning?
First, discount retailer Dollar Tree (DLTR, Weiss Ratings: B+) said it would buy up competitor Family Dollar Stores (FDO, Weiss Ratings: C+) for $9.2 billion including debt. The $74.50-a-share price was a 23 percent premium to where FDO traded before the news came out.
Second, the online real estate firm Zillow (Z, Weiss Ratings: C) said it will pay $3.5 billion to buy up Trulia (TRLA, Weiss Ratings: C-). The price of $70.53 a share equates to about 25 percent more than Trulia shares were trading for at the end of last week.
What’s going on here? What do these two transactions have in common? Both are examples of companies killing off the competition by absorbing them whole hog.
Take these dollar stores. Family Dollar is clearly the worse operator between the two chains. It’s been in the process of closing almost 400 underperforming stores, and slashing prices. That increased pressure on competitor Dollar Tree.
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| Consolidation in the discount-store sector: Family Dollar Stores is being bought by competitor Dollar Tree. |
So what did Dollar Tree do? It bought the company to eliminate the competition. The firm plans to cut $300 million in costs, in part by combining procurement and logistics functions, leaving it in a stronger position over time.
As for Zillow and Trulia — both companies compete in the real estate market. They both help customers shop for and price out homes, and help real estate agents market their properties.
By buying out Trulia, Zillow eliminates its primary competitor in one fell swoop. It adds the smaller firm’s 54 million unique online and mobile users to its own 83 million, allowing it to dominate the market.
In short, companies launch mergers and acquisitions for a lot of reasons. Many of the recent ones, for instance, are designed to slash tax bills through the “tax inversion” process.
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“We’re clearly in ‘buy up the competition to kill it off’ territory here.” |
But we’re clearly in “buy up the competition to kill it off” territory here. I have every reason to believe we’ll see more such deals as long as financing remains cheap and government antitrust investigators give them the green light.
So have you made money off deals like these? What other companies are in a similar situation as these, in any industry? Do you believe we’ll see more mergers in the back half of 2014? Or has the trend jumped the proverbial shark? Let me know at the Money and Markets comments section here.
| OUR READERS SPEAK |
I love reading through point-counterpoint style debates on important stock market bellwethers. Friday’s piece on Amazon.com certainly helped inspire a great back-and-forth on the website, so I wanted to share some of the best posts I came across.
Reader M.C. said: “I’m kinda partial to Amazon because of everything they offer but yes, they do need to start showing a profit. I was lucky and bought shares when they were $18, so I’m not complaining that much with all of the splits in the past.
“I think they need to limit their growth a little and show some profit, or less loss anyway. I’ll keep my stock until the whole market starts taking a nosedive with all of the financial turmoil.”
Reader Ian added: “I love Amazon for its prices and fast service BUT to invest, different story. You know it’s all about profit, and there ain’t none, period.”
But Reader Mike was emphatic about avoiding the online retailer’s shares. His comments: “Amazon is a joke! All this talk about expenses due to ‘building out’ the infrastructure, etc. is complete rubbish.
“Look at any of its competitors, either e-commerce or brick and mortar and they’re profitable. Wal-Mart had to spend money on building stores, supply chains, etc. and it makes money. eBay makes money, lots of it. This is simply a company where the model is broken. Amazon doesn’t make money because its model is not working. Plain and simple.”
Keep those comments coming, on Amazon or other retailers, in the comment section.
Finally, Reader Anthony did a great job by sharing some more background material on the Eurodollar market. His comments follow:
“Just a word of explanation to the reader who questioned the term ‘Eurodollar.’ Way back in 1973 the price of oil suddenly spiked, ginormously. The winners were, of course, the oil-producing companies (OPEC), who suddenly found themselves awash with U.S. dollars, the currency in which oil sales have always been invoiced.
“Many oil-producing countries preferred, for political reasons, not to leave their dollars in U.S. banks. The City of London obliged by accepting large amounts of dollars in accounts in London, and Frankfurt, Paris and Zurich soon followed suit. Thus was born the Eurodollars which, originally, merely meant USD held outside the US.
“The volume of Eurodollars held in London eventually became so large that it was the London banks which fixed international dollar lending rates (the so-called LIBOR (London Interbank Offered Rate). This development in the 1970s was the root cause of the 2008 world financial crisis, but that is another story.”
Thanks for sharing, Anthony!
| OTHER DEVELOPMENTS OF THE DAY |
 Our diplomatic efforts are still falling short in the Middle East. Secretary of State John Kerry spent six days shuttling around Arab and Israeli cities trying to get a peace deal, but came home with little to show for it. Fighting resumed in Gaza, as did rocket fire into Israel, after a brief humanitarian truce.
Of course, that’s assuming Washington doesn’t get in the way! Some are calling on President Obama to attempt to sidestep Congress and unilaterally ban inversions before they get completely out of hand. Democrats and Republicans have competing visions on how to halt the inversion wave.
Reminder: You can let me know what you think by putting your comments here.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 15 comments }
This administration doesn’t have the guts or the people to gain any result except status quo on the global stage. Had enough of liberalism blaming the world’s problems on America yet? Only two more years of enforced purgatory……..if our politically correct youngsters can manage to open their eyes and vote Republican in November. If they do not, welcome to Hell.
Why don’t they just fix the problem, and lower the Corp. tax rate, they might just be surprised at what happens, I just don’t understand why this administration just wants to put band aids on things instead of getting the root cause and fix the problem makes no sense, but it’s the Government and I guess we are suppose to except half fixed solutions they figure it job securement.
When mergers start, I figure demand is stalled or declining – not a good sign because if a company is able to grow, they will not sell out to a competitor…
While the Middle East Burns, M & A’S continue…the markets were all over the place today, but it was still an OK day…I was in and out of 5 Trades today, averaged 10.2% Per Trade and I will sleep tonight, very well…I was DONE by 11:30, so I could enjoy my pool, as the heat index, here in Dallas, was 110…but what me worry, I think not!
Here’s to your $ucce$$, too,
Jimmie
Well since Sears took over k-mart you would have thought that k-mart would have done better, but k-mart are closing.
k-mart can’t compete with Wal-Mart. That’s the way I see it. Now they are closing the one in orange park Florida. Companies that were around since I was a child are not making it.
Is Larry Edelson sick? I thought he wrote on Mondays. He made $1,000 for me on my $5,000 Roth IRA in one year.
“Facing a Tough Competitor? Buy It!”
What makes you think the Federal Reserve isn’t taking the same strategy?
How much cash would it take to buy up the entire global equities and bond markets?
Federal Reserve ownership of everything would explain Bunge putting Browner on their BOD.
Housing sales may be slow in some parts of the country but in the Houston, Texas metropolitan area houses are being sold like the proverbial “Hot Cakes”. Some sellers are getting more than their asking price because buyers are bidding up the sales price. And some sales are for CASH. I’m taking about $200,000 homes and up.
The best comment I have ever read that relates to the current comments about tax inversions was by Wright Wriston then head of Citibank, “money has wheels it will go, where it is treated best” . True then, true now
The answer is just so simple–lower the corporate tax rate! The US doesn’t need the highest rate in the world. Lower taxes = attract more business. I’m just a nurse but it’s so obvious.
What companies are asking is pure propaganda. No company pays the tax rate. GE does not pay taxes but employs supposedly 1700 tax lawyers/advisers to get subsidies instead of paying a fair share. The tax system is corrupt, probably as corrupt as the whole government. The laws don’t mean much – it’s all about “deals”.
Plain old disgusting.
Aside from Intel, Dollar Tree has been my favorite stock for years. It is the best kept secret in the country. The value of its products is superior to both Family Dollar and Dollar General, no product is over a dollar (many of their gift bags and greeting cards sell at one third the price of the other two stores – with many cards being two for $1.00, and it sells name brands cleaners and so many items that cost so much more at places like Home Depot.. It is my favorite place to shop and the demographics are different from Family Dollar and Dollar Tree – they span the gamut.
It is funny that US companies want to “inverse” into Europe where wages are higher and unions have a stronger position. Especially France is a basket case where some rich morons expatriate to avoid taxes.
In general, I am dismayed about the pure egotistic behaviour of people and companies. If they would show some more sense of community, like they pledge in the churches, we all would be better off.
Congress can stop “inversion” by a rewrite of the corporate tax code put this country in line with the rest of the developed world. Don’t blame the companies for trying to improve their bottom line. They’re only obeying the laws passed by Congress over the years. While Congress is at it, greatly simplify the individual tax code also. Instead of the current 1,700 + pages, it should be able to fit on just 2. Take the surplus IRS agents and have them audit every government department to reduce waste and fraud. I strongly suspect these policies would pay for themselves many times over! At least until various politicos start proposing “exceptions” for their major donors.
Mike… thanks for some very good market updates, your bright and informed commentary.
I also like your careful approach to investing.. I kick myself often for not hanging in long enough on your suggested trades when they take a (temporary) downturn.
Regards
Peter