The rush to go public may be about to turn into a rush to go private.
That's not as strange as it sounds, especially when you look at some of the valuations out there. Literally hundreds of companies are trading at levels which, compared to the cash they're generating, make them reasonable LBO candidates.
For those of you who were focused on other things (like high school) in the 1980s, when this tactic was in vogue, LBO stands for leveraged buyout. This is when a company's insiders, an outside buyout group or some combination thereof borrows enough money to buy and retire a public company's stock. Then they run the company to maximize cash flow, pay off the debt, and voila, they own the whole show free and clear.
In this context, cash flow usually means earnings before interest, taxes, depreciation and amortization, or EBITDA. Look for this in the stock profile section of your favorite quote service. And the companies themselves give a pretty good approximation on the "Cash Generated by Operations" line of their annual report and 10-K Statement of Cash Flows.
As for picking the winners in this new game, it won't be necessary, at least early on, to buy the actual LBO candidates. As with the dot-coms more recently, when the market gets excited about something, it bids up the whole category and later separates the good from the bad. So, you just have to find companies that fit the general profile.
You might want to start on familiar ground, with the old-line tech stocks that didn't participate in the Internet mania. A lot of them have mature product lines that are throwing off steady cash (or are valuable for other reasons), but aren't growing fast enough to attract hot money. Disk drive maker
, for example, was a dog for years before agreeing to go private in March. The computer peripheral and software industries have plenty more like this one.
Then there are the Old Economy industries that no one seems to like, even though the best companies are asset and/or cash-flow rich. Bricks and mortar retailers like
may as well operate privately, for all the respect they get from their investors. Ditto for chemicals and building materials.
And even after their recent bounce, the airlines are still possibilities.
parent company, for instance, has about $20 billion of assets, $6 billion of debt and a market cap of only $5 billion. So it could, if it wanted, borrow against its planes (and such) to buy back all its stock for a 50% premium -- and still have $6 billion of unencumbered assets.
In other words, stripped of all the acronyms and financial engineering, LBOs are just a mechanism for unlocking hidden value. Which means that LBO candidates, by definition, are so attractively priced that even if a buyout never happens, they still usually do just fine.
I ran a few screens for small cap variations on this theme. I came up with plenty of cheap names, some of which follow. Don't expect all (or any) of these companies to be taken private any time soon. But, if buyouts become Wall Street's next fad, they're the kind of thing that the players will be bidding up.
Pomeroy Computer Resources
sets up and manages computer systems for governments and companies in the South and Midwest. Sales and profits were both up over 20% in the past year, and EBITDA was about $52 million, versus a market cap of around $185 million. So if you paid, say, $250 million to take this company private, and assumed its $40 million of existing debt, your cost would be only about six times a growing cash stream.
makes CB radios, radar detectors and other related car electronics products. (Hey, it's a wireless play!) Sales and earnings are both growing at double-digit rates, while capital spending, which should generate more cash in the future, is up big lately. Market cap plus debt is about $35 million, or 4.5 times EBITDA.
operates 20 sporting goods superstores in Southern California. The business is facing online competition, but with a market cap of less than three times EBITDA, it's the kind of situation that aggressive cost cutters love.
provides infotech services here and abroad. Both revenues and earnings rose at double-digit rates in 1999, and market cap plus debt is only three times EBITDA.
is an engineering and architectural consultancy with flat sales but rising earnings, implying aggressive cost management. The current market cap plus debt is about $26 million, or 2.5 times last year's EBITDA.
makes cool athletic shoes and other gear. It had a blowout year in 1999 that will not be matched in 2000. Still, market cap (there's no debt) of $139 million is less than three times last year's EBITDA.
Run your own screens for price/cash flow or price/book value measures, and you'll find literally hundreds of other companies with similar profiles. Which means that, barring an economic meltdown, the buyout guys will be busy in the next few years.
John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at