Updated 3.16.2008  Financial Trader Research

Our last M&A forecast was the Oracle takeover of PeopleSoft 2006.  We were a rare breed when we stated that despite the department of Justice and Treasury misgivings, the mega software deal would eventually take place, and at higher prices.  Indeed it did.

There are not many long profit opportunities for investors today given the gloomy financial status of the world's largest debtor nation.  But United Technologies (UTX), the 6th largest U.S. defense contractor by revenue, and Diebold (DBD), makers of voting machines and, to a lesser extent,  ATMs, tossed a pork chop our way with the potential UTX acquisition of DBD.

Diebold has firmly renounced any friendly dealings with the United Technology offer, yet DBD has still held most of the recent gains from the UTX acquisition announcement, roughly 55% with an irresistible 10% incentive margin likely on the way.  Is there a profit and arbitrage opportunity for investors, or will this deal sour like the rest of the market?   

In a sentence, we believe this deal is all but done except at even better prices for investors.  The business logic here is flawless.  While UTX could have collected Diebold shares at much cheaper market prices, a hostile bid might risk closing the deal by generating unnecessary public scrutiny.  Thus, the initial 60% takeover premium is quite marginal compared to the voting security and system security services that UTX will reap from potential long-standing U.S election contracts funded by the Help America Vote Act (HAVA) and that's just domestic elections. 

Remember, this is the same business model that many software companies engage where they sell their software at a loss in order to obtain higher profit margin services contracts and implementation contracts.  Good examples of this strategy include Oracle, IBM, and even the kingpin of IP sales, Microsoft.  Clearly, the UTX strategy differs little from this battle-tested outsourcing strategy.

If the future services revenue scenario still leaves investors concerned that this deal might still fold, keep in mind that UTX will own the turnkey election system for the U.S. and most likely can turn that key for whichever candidate bids highest.  UTX derives roughly 15% of its revenue from Civilian Security Systems.  If that's too cynical, its worth noting president Eisenhower's sobering sentence: "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist." 

Ike, he's a hard one to argue with.

And The Acquisition Risks Are?

It is possible that liquidity and market conditions could deteriorate overnight, but even that is unlikely to sway the UTX offer.  Another risk, albeit very slim, is congressional leadership stepping up to the plate and performing due diligence as it relates to the U.S. voter.  We think that runs against almost every established track record to date, but miracles do happen.

Conclusion: 

Given UTX's past three acquisitions at lofty valuations, we see the Diebold acquisition play unfolding no differently, thus investors have the opportunity to ring the cash register at even higher prices in an otherwise dreary market  on profit opportunities.  Currently, DBD trades at $36.60 with our acquisition target at an easy $41.50.

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