Companies are often engaged in turnarounds, so it isn't unusual that iRobot(NASDAQ: IRBT) is currently pursuing such a path. However, the story here is a bit more complex. The big takeaway for me is that iRobot is starting this turnaround from a particularly weak place. And because of that, I wouldn't touch the stock with a 10-foot pole. Here's why.
The iRobot timeline
The big news in August 2022 was that online retail juggernautAmazon(NASDAQ: AMZN) had agreed to buy iRobot. The purchase price for the all-cash deal was $61 per share for a total value of around $1.7 billion. Not a bad development at all, and the news release was filled with comments about the two companies making customers happy together.
Image source: Getty Images.
Then in July 2023, the companies amended the purchase price to $51.75 per share. But, more importantly, what led to the reduced price was that iRobot entered into a new $200 million loan to "fund its ongoing operations." The lower purchase price was meant to reflect the increase in iRobot's debt.
Finally, in January 2024, Amazon and iRobot ended up calling off the merger, with Amazon paying the robotics company the termination fee that was written into the original deal. Although both companies talked glowingly about what could have been if the acquisition had gone through, the big problem was that it looked like the U.S. government would have blocked the transaction.
The same day the merger was scuttled, iRobot announced that it was kicking off a major restructuring effort. In addition, the CEO stepped down, with a temporary CEO taking over. Other restructuring actions that were planned included reworking contracts with design and manufacturing partners, shifting research and development activities to lower-cost regions, selling assets, and laying off staff.
Reading the iRobot tea leaves
When you step back from this series of events, the story they tell is worrisome. It suggests that iRobot was in financial trouble and finding someone to buy the company was the best-case scenario to preserve shareholder value. That Amazon stepped in was akin to a wide receiver catching a Hail Mary pass in the end zone. It was the best possible outcome.
When the deal didn't close quickly enough, however, iRobot needed cash to keep going. Thus it had to take out a loan, which led to the reduction in the purchase price. It is highly unlikely that iRobot wanted to take that extra debt on, but with the company bleeding red ink since late 2021, the cash on its balance sheet was quickly dwindling and it needed to do whatever was necessary to get the Amazon deal closed. Deep-pocketed Amazon, for its part, accepted the issue and just asked for an amended purchase price.
Then the acquisition was called off due to concerns about regulatory headwinds. That's not bad in and of itself, but the fallout of this event was terrible for iRobot. It quickly parted ways with its CEO and announced a major business overhaul. But because of the expectation of being bought by Amazon, the company likely has more to do now than it would have if the restructuring were kicked off earlier. Effectively, management probably tried to kick the can down the road hoping that Amazon would swoop in and invest in iRobot's business after it was part of Amazon.
Now, iRobot is just a troubled company scrambling to save itself amid deep losses. That's not a good look, and most investors will probably want to wait for iRobot to show material progress on its turnaround before jumping aboard.
Just not worth the risk
When a company looks to save itself by selling out to another business, the problems it faces usually run pretty deep. Given the sequence of events with iRobot since the agreement with Amazon in late 2022, those problems most likely ended up festering. I wouldn't touch iRobot today because it is operating from a position of weakness. Until it can show at least some notable positive movement in its business overhaul, which will likely require at least a few quarters of good news, this stock just isn't worth the risk.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.
