NEW YORK (
) -- Who says the short week before Thanksgiving has to be boring? On Tuesday
, a Magic Formula Investing stock for the majority of the year, announced a deal to be taken private for $43.50 a share, a premium of about 16% to the closing price on Monday. Many analysts, me included, expect another 10% or so to be tacked on to that price before a deal is finalized.
This once again brings to light another advantage of investing in value stocks: the heightened possibility that these stocks will be acquired.
As Joel Greenblatt, the founder of Magic Formula Investing, points out in
, there are plenty of factors that can drive up the stock of a cheaply valued company.
First, once a stock gets low enough, it reaches the radar screen of value-based investors.
Second, the company itself may find its stock an attractive investment and put capital to work by buying back shares and lowering the share count. This leads to price appreciation because each share earns a larger portion of profits.
Third, a competitor or private equity group could find the entire company attractive at the market price and decide to purchase it outright.
The best part about buyouts is that they are nearly always at a premium to the current market price of the company. This makes sense: Investors would be unwilling to sell their shares unless they could realize an acceptable return. Often, the market value premium is significant. In some years it has been as high as 50%, although recently most takeouts have had premiums of 30% to 40%.
Cheap stocks are prime candidates for acquisition, and good companies at cheap prices are even better buyout bait. These are exactly the companies for which the Magic Formula screen was designed. 2010 was a very active year for Magic Formula stock buyouts (dates are when the deals were announced). The average premium was more than 40%.
- Bare Escentuals (ticker was BARE), acquired in January by Shiseido for $1.7 billion ($18.20/share). 43% premium.
- K-Tron (ticker was KTII), acquired in January by Hillenbrand (HI) - Get Report for $390 million ($150/share). 32% premium.
- COMSYS IT Partners (ticker was CITP), acquired in February by Manpower (MAN) - Get Report for $431 million ($17.65/share). 33% premium.
- DynCorp (ticker was DCP), acquired in April by Cerberus Capital for $1 billion ($17.55/share). 49% premium.
- Interactive Data (ticker was IDC), acquired in May by Silver Lake/Warburg Pincus for $3.4 billion ($33.86/share). 33% premium.
- Odyssey Healthcare (ticker was ODSY), acquired in May by Gentiva (GTIV) for $1 billion ($27/share). 40% premium.
- Sybase (ticker was SY), acquired in May by SAP (SAP) - Get Report for $5.8 billion ($65/share). 44% premium.
- DivX (ticker was DIVX), acquired in June by Sonic Solutions (SNIC) for $323 million ($9.25/share). 33% premium.
- Hewitt Associates (ticker was HEW), acquired in July by Aon (AON) - Get Report for $4.9 billion ($50/share). 41% premium.
- Gymboree (ticker was GYMB) acquired in October by Bain Capital for $1.8 billion ($65.40/share). 57% premium to predeal chatter.
For the end of 2010 and into 2011, there is no shortage of current Magic Formula stocks with plenty of buyout rumors swirling around them. Here are a few of the more prominent ones:
- Seagate (STX) - Get Report has a new rumor every week. Here's the latest one. Competitor Western Digital (WDC) - Get Report is often mentioned as well.
- Aeropostale (ARO) is just one of several retail targets mentioned here.
- Citigroup says that both Veeco Instruments (VECO) - Get Report and Teradyne (TER) - Get Report are attractive leveraged buyouts in chip equipment.
Buyouts are a quick way to make a big profit, and they are most common among quality value stocks. They're just another reason to consider making the Magic Formula Investing strategy your investing strategy.
At the time of publication, Alexander owned shares of Western Digital, Veeco Instruments and J. Crew.
--Written by Steve Alexander of
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