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Where are the best acquisition values in today's
merger and acquisition marketplace? They are hiding in plain sight
in the form of severely undervalued microcap public companies. Companies
with excess cash are one good place to start looking.
In a June 11 Barrons article, writer Jack Willoughby lists 70 public
stocks in the Internet sector that trade at less than the value
of the cash on their balance sheet. For example, Promotions.com
(PRMO) had a market cap of $4 million on June 1. As of March 31,
it had $15.3 million cash on the balance sheet. Another example
from the same dates: Scient (SCNT) had a market cap of $80.8 million
and $161.1 million of cash. Sixty-eight other cash-rich companies
are on that abbreviated list. Research into other market sectors
will add hundreds of additional excess cash companies prime for
acquisition.
Another aspect that makes these extremely undervalued microcap companies
of interest is the ability to gain control at multiples substantially
below what the buyer would have to pay for a comparable size and
type of privately held business.
In a recent speech, Merrill Lynch Director Philip Loewen noted that
Heartland Industrial Partners has a pending acquisition of Springs
Industries Inc. The transaction cost $280.1 million, which is a
26 percent premium over the previous month's market value. Here
is the most interesting piece of this deal: Heartland is buying
this company for 1.1 times EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization, which, in essence, equals cash flow).
Is that an exception? Absolutely not. There are hundreds of these
opportunities. In February, Bank Boston/Goldner Hawn bought VICORP
Restaurants Inc. for $174.2 million, or 4.2 times EBITDA. A comparable
private company transaction would have been close to six times EBITDA.
Last year, 77 public companies went private. Through May 31, 2001,
38 have taken a similar route, with scores more in process. Why?
Four important trends help explain this public to private march.
First, there is a large universe of opportunities. By my count,
more than 10,000 public companies probably should not be public.
Further, these have high buyer-attractive valuations.
Second, there is an increased access to capital from financial sponsors.
Private equity groups have more than $200 billion in committed funds
looking for a place to be invested. Because of the public market
values, these financial sponsors are re-allocating to leveraged
buyout strategies, augmented by recovering debt markets, to finance
buyouts of managements and sponsors.
Next, these microcap opportunities are here to stay. Though private-to-public
activity may moderately raise valuations in the short term, the
intrinsic disadvantages of being a microcap company will maintain
reasonable valuations near term.
Finally, these public-to-private transactions allow every involved
party to win. The company achieves a critical mass, management enjoys
greater resources and investors maximize their existing value.
Whether it is to acquire cash or simply take advantage of an unusually
attractive purchase price, the undervalued microcap stocks are often
the best M&A values in today's marketplace.
Fred G. Jager is president and chief executive officer of Hunter
Wise Financial Group, LLC and Hunter Wise Securities, LLC, a NASD
broker dealer. Hunter Wise Financial Group is a specialized investment
banking firm providing institutional funding, as well as merger,
acquisition, divestiture and advisory services for micro-cap public
companies, as well as pre-IPO privately held businesses. Mr. Jager
can be reached at (949) 263-0033 or fjager@hunterwise.com.
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