IMS Health Is Being Stolen

It was announced Thursday that IMS Health(RX Quote) was to be taken from its shareholders for $4 billion or about $22 share; a private-equity firm will buy the company out.

IMS Health should have free cash flow this year over $340 million (the actual number should be higher than $400 million, but is benefited by a $60 million onetime tax benefit).

So this company, which has virtually no competition, has barriers to entry impossible for a new entrant to overcome and a cash-printing machine will be sold for about 12 times free cash flows.

Over the past year, we've seen much lower-quality companies being sold for much higher valuations than this. Most recently, Burlington Northern Santa Fe(BNI Quote), which has a significant competitive advantage but has far inferior return on capital and free cash flow generation than IMS, is to be purchased by Warren Buffett for about 20 times earnings and 30 or more times free cash flows.

IMS Health's management and board have a history of making dumb capital allocation decisions, but this one may go down in history as their dumbest.

We own these shares and will probably hold on to them in the hope that shareholders will refuse this offer.