M&A Mania: Everyone Buys Everyone and the Market Marches Higher

Source: Thinkstock

Source: Thinkstock

M&A activity has been extremely strong over the past few months with Reynolds American (NYSE:RAI) buying Lorillard (NYSE:LO) and Tyson (NYSE:TSN) buying Hillshire Brands (HSH). On Monday, we saw this continue as Zillow (NASDAQ:Z) bought Trulia (NYSE:TRLA) and Dollar Tree (NASDAQ:DLTR) bought Family Dollar (NYSE:FDO).

Zillow Buys Trulia

Zillow and Trulia are the two market leaders in the online real estate market. Real estate agents can list properties for sale and rent while prospective buyers can search for homes to buy and rent. They also provide insight into the market. For instance, you can find out the past prices that a particular home has sold for, the general trends in local real estate markets, the annual tax rate, the quality of the local schools, and more.

According to the announcement, Zillow is buying Trulia in an all-stock deal.   While the two companies are combining forces, both brands will remain in existence.

Trulia shareholders will receive 0.444 shares of Zillow for each share of Trulia that they own. Trulia shares soared to as high as $64/share on the announcement, up from Friday’s $56/share close. However, most of the move higher occurred on Thursday when rumors of a deal first hit Wall Street. The stock is up over 50 percent in the past few days. Zillow shares fell nearly 5 percent on the news, but they rose on the rumor and are up 18 percent since the rumor went public.

Source: Thinkstock

Source: Thinkstock

Dollar Tree Buys Family Dollar

Dollar Tree and Family Dollar are major players in the discount retail space. Both companies have been growing its businesses long-term given that consumers tend to be looking for bargains. Recently, however, Family Dollar has been struggling. The company expanded too quickly and as a result it became inefficient and it had to close some stores earlier in the year. Activist investor Carl Icahn stepped in, bought nearly 10 percent of the company, and tried to broker a deal between Family Dollar and the third major player in the space — Dollar General (DG). But that company is going through a managerial transition and is not well-positioned for a merger.

So surprisingly, Dollar Tree stepped in. The deal is a bit complicated. Owners of Family Dollar shares will receive $59.60 in cash for each share that they own plus some stock in Dollar Tree, although the amount of stock depends on Dollar Tree’s value. If Dollar Tree shares trade at $59.98 or greater then owners of Family Dollar will receive 0.2434 shares of Dollar Tree for every share they own. If Dollar Tree shares trade at $49.08 or lower then owners of Family Dollar will receive 0.3036 shares of Dollar Tree for every share they own. If Dollar Tree’s stock price is between the two valuations then owners of Family Dollar stock will receive $14.90 worth of Dollar Tree stock for every share that they own. Right now Dollar Tree trades at about $57/share and so the third scenario is set to play out.

Both stocks rose on the news. Family Dollar rose over 20 percent and Dollar Tree was up 10 percent at one point although it has since fallen back and is now about 4 percent higher on the news.

The bottom line is that there is a lot of M&A activity in the market. This is due in part to the low interest rate environment. Dollar Tree will be issuing debt in order to finance the cash part of its deal with Family Dollar. Also in past deals Reynolds American and Tyson Foods have or are planning to issue debt in order to finance their deals. However, keep in mind that both Zillow and Dollar Tree are using stock, which might suggest that these companies’ managements believe that their stocks are overvalued, and this could be a sign that we are near a market top.

Disclosure: Ben Kramer-Miller has no positions in any of the stocks mentioned in this article.

More From Business Cheat Sheet: