When Quintiles Transnational ( QTRN) announced it would go private in April, its shares jumped 14%. But don't worry if you missed out on the rally -- experts say there are ways to identify other companies that could be privatized, resulting in a potentially big payday. In the case of Quintiles, investors realized that management would pay a big premium over the current share price in taking the drug-research firm private. "Usually management
or a private equity firm is going to buy if they feel the stock is undervalued," said Alan Annex, a partner at law firm Greenberg Traurig. "They obviously have to pay a fair price, but typically that is going to be a price that is in excess of the market." Indeed, Varsity Brands and Sports Club announced plans to go private recently that offered investors a substantial premium over the current stock price, and the shares reacted favorably. Shares of Dole Foods also jumped sharply after the company said it would go private. So how can you tell if a firm is likely to exit the public domain? Walter Zweifler, chief executive of Zweifler Financial Research, said he looks for companies whose net liquid assets exceed the value of their market capitalizations by $500,000 or more. When that happens, he said, corporate raiders start to take an interest in the company and management teams, then rush to protect themselves by buying out their own stock. He pointed out that Titan Pharmaceuticals ( TTP), Cortech ( CRTQ) and American Claims Evaluation ( AMCE) -- all of which trade for under $3 a share -- might be good candidates to go private.
Titan's net liquid assets, defined as cash, cash equivalents and marketable securities minus current liabilities, stood at $62.1 million at the end of the first quarter, according to Securities and Exchange Commission filings, while its market cap sits at just under $57 million. Meanwhile, Cortech and American Claims have net liquid assets that easily surpass their market cap. Zweifler said American Claims and Cortech also stand out because they have a high cost of equity capital. In other words, he said it's costing these firms too much money to remain public now that the Sarbanes-Oxley Act has passed. He said compliance costs and expenses related to new disclosure requirements could amount to about $1 million per year, and that for these firms at least it's just not worth staying public anymore. "When your company's stock is devalued to the point where it drops off the radar of most investors, and you still have the expenses associated with being public as well as increased compliance legislation such as Sarbanes-Oxley, the benefits of being public become harder to see," agreed Keith L. Pope, who chairs the securities group at law firm Parr Waddoups Brown Gee & Loveless. Experts say firms with small public floats are therefore much more likely to be bought out in the future. Greenberg's Annex also noted that if management owns half the company to begin with, "it makes it that much cheaper to take the company private." T.L. Stebbins, chairman of investment banking for Adams, Harkness & Hill, said firms with a negative enterprise value are also "prime candidates" to go private. Enterprise value is a company's market cap plus long-term debt minus cash and investments.
He believes ePresence ( EPRE) could afford to get out of the public arena because it has more cash than market cap. Companies like Edgewater Technology ( EDGW), Fairmarket ( FAIM) and Network Engines ( NENG) also have a large amount of cash on their balance sheets relative to their market value, he said. All of these firms trade for less than $5 a share and have market caps of under $100 million. "If you have less than $200 million in market cap, your chances of getting continuous support from Wall Street is extremely small," Stebbins said. Susan Wolford, managing director at Gerard Klauer Mattison, said she screens for potential public-to-private deals by looking at firms with market caps under $100 million and daily trading volume of under 25,000 shares. But she also believes strong cash flow is vital because equity is often replaced with debt in a going-private transaction, so it's important that the company is producing enough cash to finance that debt. "Management teams are beginning to accept the idea that below a certain market cap you can't pick up enough volume no matter how well you perform; your stock price won't reflect it because institutions can't buy you," she said. "If you have market cap of less than $100 million and strong cash flow, there's a good shot the company is undervalued and it's possibly a decent candidate for going private."