Build-versus-buy is a familiar debate for most companies, and many ultimately decide to do both. That has been the case with NCR (NYSE:NCR), as this company continues to transition and diversify away from its historical reliance on ATM and point of sale (POS) hardware. The November 28 announced deal for Retalix (Nasdaq:RTLX) is going off at a high price for NCR, but it's a logical deal for the company, and past experience with the Radiant transaction should give investors a little more confidence in the long-term worth of this move.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Paying a Premium for Retail
NCR announced that it had agreed to acquire Israeli software and service provider Retalix for $650 million in cash. That was a 37% premium to Retalix's prior close, and a premium of about 17 times trailing EBITDA. While that's a bigger premium than the one JDA Software (Nasdaq:JDAS) got from RedPrairie, Retalix has been posting better growth, and analysts have been more bullish with respect to their growth prospects. It's also worth noting that the premium that NCR is paying for Retalix is similar (although a little higher) to what it paid for Radiant back in the summer of 2011.

SEE: Analyzing An Acquisition Announcement

We've Seen This Before
When NCR bought Radiant, it bought the leading hardware and software player targeting the hospitality industry. NCR not only wanted Radiant to accelerate its diversification away from financial services (ATMs and such for banks), but also to exploit potential synergies with its existing technology. While it's still early, NCR has pretty much done as well as promised (if not better) in terms of integration and incremental returns from the deal.

The Retalix deal seems to fit a broadly similar pattern. Retalix is a significant provider of software and related services to the retail industry, with over a dozen of the top retailers in the world on board as clients. Retalix covers a broad range of addressable functions, including POS, marketing, logistics/supply chain management, CRM, business intelligence and ERP.

With the deal, NCR not only accelerates its diversification into retail, but also accelerates its software business growth and really delivers on its repeated vision to go beyond its legacy of competing with companies like Diebold (NYSE:DBD), Wincor Nixdorf, Danaher (NYSE:DHR) and Verifone Systems (NYSE:PAY) in ATM and POS hardware. It's also likely that NCR will try to convert existing Retalix customers to its hardware offerings, and vice versa with existing NCR retail hardware and software clients.

Retalix Likely Had Options
It was not really surprising to see the news that Retalix had agreed to be acquired, as there had been on-and-off rumors about the company being in play. At various points the rumors included companies like IBM (NYSE:IBM) and Verifone, so it's not exactly a stretch to think that NCR had to step up with a solid and generous offer to get a deal done.

Moreover, it's just a fact of business life that it generally takes money to produce growth. NCR's hardware business is not in bad shape ((the company got a 10,000-unit order for self-checkout terminals from Walmart (NYSE:WMT) not long ago)), but it's not going to grow at the same rate as the software and service business, nor are the margins as good.

What's more, I wouldn't ignore those potential synergy benefits. Acquiring companies make a habit of promising chocolate sprinkles for everybody when they announce deals (particularly expensive ones), but I can see a lot of potentially lucrative cross-selling opportunities. I also wonder if Retalix can fit in with the company's NCR Silver platform (a small business smartphone-based POS similar to Square) and offer even more opportunities in that large (and in many cases, underserved) market.

The Bottom Line
I'm a fan of NCR, and I like this Retalix bid, but the company will have to execute at a high level for this deal to add value. In the meantime, the company has a pretty hefty debt load and a sizable pension liability, not to mention the risks tied to an ongoing Foreign Corrupt Practices Act investigation. And competition with companies like Diebold, Verifone, MICROS (Nasdaq:MCRS) and IBM is hardly an afterthought.

SEE: 5 Must-Have Metrics For Value Investors

If NCR really has reinvested itself as a diversified hardware, software and services company with a broader and more growth-oriented set of addressable markets, then there is a fair chance it can break with its history of less-than-spectacular free cash flow conversion rates. In any case, even with solid free cash flow growth expectations, these shares are not really a compelling bargain at today's price.

At the time of writing, Stephen D. Simpson did not own shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!