Tuesday's discussion focused on companies that we believe have sound investment merits as independent companies and are also attractive and feasible takeover candidates. In each case, we felt that time is working on the side of the company. One way or the other, an investor would stand to benefit from owning them.
Today we focus on two companies, Staples (SPLS) and Monster Worldwide (MWW), in which we have far less conviction. In each case, we believe the companies could be takeover targets, but we have real questions about their business prospects. We also believe that Staples is the much better positioned company, with a better management team and a more modest valuation on the basis of price-to-earnings ratio and dividend yield metrics.
Staples has been recently rumored to have had discussions with private-equity firms, a possibility that is only enhanced by the recent merger of Office Max (OMX) and Office Depot (ODP). This combination of the No. 2 and No. 3 competitors improves Staples' earnings prospects, since the Office Max-Office Depot combined entity will consolidate its store base.
In an improving economy, this merger might embolden a private-equity firm to step up. However, working against a possible deal is the greater impact of online competition and a secular change away from paper, which is a major revenue driver for Staples.
At $13 per share, Staples' stock sells at 9.6x earnings, it offers a 3.3% dividend yield, and it is probably a reasonable speculation. But we have lost some confidence in management over the past few years and have significant concerns about the long-term prospects of the store-based office superstore industry. If a deal does ultimately happen, our best guess is that it would be in the range of $15 to $17 per share.
While over the longer term the company might perform adequately as an independent, we conclude, given the concerns just raised, that there are better places to make money.
Another struggling company is Monster Worldwide, the online job-seekers' platform, which has actually been shopping itself for the past year. We have been puzzled by the length of the sale process, and there has been ongoing speculation about the differential between what potential buyers were willing to pay and the price that management and the board have been seeking. We believe that management is a motivated seller but that it has misplayed its hand during the sale process.
While the improvement in the global economy should be a plus for Monster Worldwide, we fear that it has lost competitive positioning vis-a-vis LinkedIn (LNKD). We believe that the online search industry has become commoditized and is no longer the hot area of job search. We are therefore concerned that time is working against Monster and its franchise value.
Ultimately, we believe that there should be a deal, but we are not optimistic about the take-out price. One possible wild card, however remote, could result in a better premium for Monster Worldwide. This would be if LinkedIn, with its $18.2 billion market capitalization, were to have a change of heart regarding an acquisition. Although LinkedIn seemed to have had little or no interest in Monster, this might change if it decided that for a relatively small amount of dollars (Monster Worldwide currently has a market capitalization of $597.6 million), it could add Monster's $836 million in sales to its own $1.48 billion in sales. More importantly, LinkedIn would be able to acquire some very valuable search technologies.
However, outside of this seemingly low-likelihood outcome, we are concerned about Monster Worldwide, because of a less-than-exciting buyout price and its prospects as a stand-alone independent firm.