Amid an economic slowdown, beautiful deals are still gleaming in the eyes of cash-rich companies on the prowl for acquisitions. By looking through the eyes of an acquirer in identifying potential targets, value investors can benefit from the “pop” in a to-be-acquired company’s stock when a takeover is announced or from the bargain share prices that result when a company is left at the M&A altar. That’s the conclusion of the latest Taking Stock commentary by members of the Core/Value Investing Team at Turner Investment Partners.
Turner, an investment firm headquartered in Berwyn, Pennsylvania, publishes Taking Stock commentaries quarterly, communicating the views of its Core/Value and Quantitative Investing Teams on various market issues.
Written by security analysts David Brenia, Sam Chang, and Gordon Cromwell, the commentary, entitled How to look at beauty as in the eye of the acquirer, notes that acquirers typically look at three criteria in sizing up a potential purchase: strong free cash flow, a reasonably healthy balance sheet, and a position in lucrative niche markets.
The analysts consider free cash flow to be “the best standard by which to measure a company’s profitability,” noting that companies with strong free cash flow have the flexibility to pay down debt, increase dividends, and take other actions that enhance shareholder value. They contend that a clean balance sheet (defined by high cash levels and low long-term debt) helps a company to “weather tough markets and remain more competitive” than competitors that are highly leveraged. And finally, the authors assert that companies serving niche markets are attractive to acquirers because they “open the door to new customers and new sources of revenue and profits.”
The commentary cites two current M&A ventures, between video-game makers Electronic Arts and Take-Two Interactive and mining companies Cleveland-Cliffs and Alpha Natural Resources, as prime examples of the three criteria in action. It concludes that smaller oil and chemical companies, insurance companies, retailers, and restaurant chains may be likely M&A targets in the coming months.
To read the third-quarter 2008 Taking Stock commentary in its entirety, see the Turner Investment Partners Web site, http://www.turnerinvestments.com/takingstock, or call 484-329-2439 for a free copy of the piece.
The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.
Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $26 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of June 30, 2008.
As of June 30, 2008, Turner held in client accounts 847,880 shares of Alpha Natural Resources and 354,210 shares of Cleveland-Cliffs. Turner held no shares of Electronic Arts or Take-Two Interactive.
Contacts:
Kate Patarcity, 484-329-2439
Fax:
484-329-2739
kpatarcity@turnerinvestments.com
