The effects of a poorly timed acquisition can be devastating. Just take a look at Linn Energy (LINE) and Energy XXI (EXX).
Both companies announced in February that they retained financial and legal advisors to help them explore "strategic alternatives" in an effort to address debt and liquidity issues. The similarities for the Texas-based companies don't end there. They both made costly and poorly timed acquisitions financed with a mix of debt and equity.
In February 2013 Linn Energy acquired Berry Petroleum for $4.3 billion. It was a purchase Jim Cramer characterized as "ill-advised" as Linn Energy lacked the cash flows to justify the acquisition..
The timing of Energy XXI's ill-fated transaction is even more telling. It acquired EPL Oil and Gas for $2.3 billion in June 2014 -- just as energy prices began to plummet. As further evidence of the trouble with this transaction, last month Energy XXI elected to enter into a 30-day grace period after skipping a payment on its 8.25% senior notes due 2018, which were acquired from EPL. That grace period expires on March 17, 2016.
Curiously, shares of both companies have rallied since they announced that they were working to resolve their debt issues. Over the last month, shares of Linn Energy have tripled and shares of Energy XXI are up nearly 60%.
To some, the double-digit upswings -- spurred in part by the rally in crude and increased trading volume -- could be enticing. Investors would be wise, however, to remember the fundamentals and forget what could appear to be a bargain.
"Both companies are dead men drilling," Jim Cramer said. "They can hire advisers, they can bring in bankers. They can do whatever they want. But the common seems like a sucker's bet to me."