Thursday, January 13, 2011

My M&A Article on MarketWatch

The following is an article I co-wrote with Lance Helfert of West Coast Asset Management about M&A. It appeared on MarketWatch starting January 3rd, 2011:

Commentary: Likely candidates are in tech, financials, consumer

By Lance Helfert

SANTA BARBARA, Calif. (MarketWatch) — Economic forces have come into play, making a wave of mergers and acquisitions a very real possibility in the near future.

First, with corporate bond yields near historical lows, companies have the ability to raise cheap debt to help facilitate deals. Second, as reported in a recent Wall Street Journal article, non-financial firms were sitting on $1.93 trillion of cash and other liquid assets as of the end of September. Many large firms have amassed war chests that can be used to supplement organic growth with acquisitions.

Furthermore, many private-equity funds are holding large sums of cash that were raised prior to the Great Recession, and this money is starting to burn a hole in their pockets.

According to another Wall Street Journal article, buyout firms are holding more than $450 billion in capital that has yet to be committed to new deals, and these firms are most certainly feeling pressure from their investors to put the money to work.

Firms that are speculated to be takeout candidates often trade at premium valuations. Consequently, investing solely in anticipation of a company being taken over is risky business. A more prudent approach may be to identify undervalued companies with attractive fundamentals that represent logical acquisition candidates but are not currently the subject of takeover speculation.

This strategy provides a win-win scenario, regardless of whether an attractive buyout offer surfaces. Here are four companies that fit the mold:


Many investors may recall that in early 2008, Microsoft Corp. (NASDAQ:MSFT) offered $33 a share to buy Yahoo Inc. (NASDAQ:YHOO), but the company eventually rejected the price and Microsoft walked away. However, Yahoo still has a number of attractive assets.

Specifically, Yahoo Search could still be an interesting asset for Microsoft as it tries to compete with Google. Additionally, the company’s large investments in Alibaba (THE:HK:1688) of China and Yahoo Japan offer a potential acquirer a way to tap growth of Internet advertising revenues in Asia. These two stakes are carried on the balance sheet at about $3.78 billion, but the market value of the Yahoo Japan investment alone is around $6.6 billion at the current stock price.

Despite these positive factors, Yahoo seems to be trading at a very reasonable valuation. The company has an enterprise value of about $19.4 billion. But if $636 million in long-term marketable securities and a conservative $9 billion estimate for the value of the Asian investments are subtracted out, the enterprise value falls to $9.76 billion. Given that the company has generated about $1.399 billion in EBITDA over the last 12 months, the stock is trading at less than 7 times EBITDA.

As such, Yahoo may begin to attract both strategic and private-equity buyers once again.

Molson Coors

In recent years, there has been a lot of consolidation in the global alcoholic-beverages industry. The largest example was InBev’s purchase of Anheuser-Busch (NYSE:BUD) . Given all of the activity, it is not hard to imagine an acquirer being interested in controlling Molson Coors Brewing Co.’s (NYSE:TAP) portfolio of beers.

The world-class beers under the Molson Coors umbrella include names such as Coors Light, Blue Moon and Carling. Clearly, at the right price these brands would be a great addition to any product line.

Furthermore, the company has been making inroads into growing international markets. In China, Molson Coors entered into a joint venture with the Hebei Si`hai Beer Co. Then in Russia, the company launched Coors Light. But investors should not forget that the company also owns 42% of MillerCoors LLC — a stake that gives TAP a foothold in the U.S. market that could be attractive to a foreign company like SABMiller (LONDON:UK:SAB) that is interested in expanding its U.S. exposure.

Given these factors, it is hard to believe that the company is only trading at about 12 times trailing 12-month earnings. Shares of TAP appear to offer great value and with a 2.2% dividend yield, investors get paid to wait for the market or strategic buyers to recognize the opportunity.

Broadridge Financial

Even though Broadridge Financial Solutions Inc. (THE:BR) is not a household name, the company has a dominant position in the investor-communications niche. In fact, in fiscal 2010 the company processed approximately 66% of the outstanding shares in the United States in the performance of proxy services. In addition, the company has a very stable and sustainable business model that might make it an ideal private-equity takeout candidate.

For instance, BR’s position as the industry leader leads to large barriers to entry and a durable competitive advantage that shows up in its robust operating margins in the mid-teens. Therefore, a larger firm with similar businesses such as Fiserv Inc. (NASDAQ:FISV) or a trust bank that already offers shareholder services such as State Street Corp. (NYSE:STT) may be interested in adding BR to its portfolio.

Even though the company pays a healthy dividend (2.7% yield and growing), the shares only trade at about 14.3 times trailing earnings. BR’s management team clearly believes the stock is undervalued. So far this year it has bought back close to 4.5 million shares and the board recently authorized the purchase of another 10 million shares.

Live Nation

Live Nation Entertainment Inc. (NYSE:LYV) is the largest entertainment company in the world, connecting millions of fans to thousands of events all over the globe. Early this year, the company merged with Ticketmaster, which is the largest live-event ticketing firm in the world. The combined entity now has a dominant position in the North American concert-ticket market.

According to a Pollstar report cited in the company’s filings, in 2009 North American gross concert revenue increased to $4.6 billion, a 9% compounded increase over 2007. As such, the company now has a near-monopoly position in a growing market with very little opportunity for competitors to steal away market share.

Furthermore, the largest shareholder of the company is Liberty Media Corp. (NASDAQ:LINTA), the John Malone-led company that holds more than 18% of the total shares. Malone proposed to double his company’s stake with a $12 tender offer, but was rejected by shareholders who wanted a higher price.

Currently, the stock trades below Malone’s tender offer. Given Malone’s past interest in owning more of the company and his obvious desire to turn Liberty Media into a dominant media conglomerate, it would not be surprising to see him attempt to gain control of the entire business by offering a premium large enough to entice current shareholders to relinquish their shares.

None of these companies is guaranteed to be bought out in the future. However, all of them have attractive features that make them strong candidates to be taken out. In the meantime, shareholders of these companies can take comfort in the fact that all of them appear to be undervalued and may appreciate, even if a buyout never materializes.

Lance Helfert is president of West Coast Asset Management and the co-author of “The Entrepreneurial Investor — The Art, Science and Business of Value Investing.”

Disclosure: The stocks identified above do not represent all of the securities purchased, sold or recommended for advisory clients; West Coast Asset Management maintains a list of all recommendations made in the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities that were discussed in this article. Past performance does not guarantee future results.