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Shutterfly: When a company is for sale but not yet sold

By Barry Randall

In a recent column, I laid out a case for why the current cult of Innovative Disruption is a distraction to the day-to-day job of finding high quality companies in which to invest. We never fall for that kind of so-easy-anyone-can-do-it analysis. In that column I highlighted some of our holdings that happened to be disruptive to their particular industries, but which we owned for more prosaic reasons like cash flow and market share gains. One example of this was long-time holding Shutterfly (SFLY).

But no sooner had I submitted that piece for publication than my early morning sleep was disrupted by the news on July 2 that Shutterfly had engaged an investment banker to shop the on-line printing firm to prospective buyers. Shutterfly stock closed up nearly 15% that day.

That's categorically a nice thing. But what to do next?

Typically, when one of our holdings is the subject of an actual takeout offer we sell our position immediately. Our attitude is that we're in the long-only equity investing business not the M&A risk arbitrage business. If there's a credible offer on the table, we take it.

We don't wait for higher offers because the firms we typically own don't attract them. They're mature, cash-generating companies that have been public for a long time. Anyone who wanted to kick the tires has had the opportunity to do so.

And buyers of companies like ours tend to pay cash, not stock, for the cash flow of the target company. It's rare therefore that the potential buyer is using highly valued shares to buy its target in a stock-for-stock transaction, which in turn would invite another suitor offering even-higher-priced shares.

So we usually just take the first deal that's on the table. And we sell right away. If the buyer is somebody with an impeccable pedigree like IBM or some no-fooling-around private equity firm with which we're familiar, then we don't even bother selling and just wait for the cash when the deal closes.

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