GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

How to Find a Buyout Candidate

January 14, 2009 | About:
On Monday morning, the sun was shining extra bright for one Southern Californian firm. The small specialized health care business of Advanced Medical Optics (EYE) experienced a truly perfect day. At least, its investors did.

You see, Abbott Laboratories (ABT) announced that it intends to acquire AMO for $22 per share in cash. That’s about 149% above it’s $8.85 Friday close. It took 18 years for the S&P 500 to bring those kinds of gains. Seriously, you’d have had to invest in February 1991 to realize a 149% gain today.

Most investment advisors compare their expected returns to benchmark indexes like the S&P 500 or the Dow Jones. Even small-cap specialists compare their gains to the Russell 2000. But, why in the world would you want to wait 18 years to grow your money, when there are investments you can buy on a Friday afternoon and cash out on Monday for the same return.

So the question before us is: how can you double your money like AMO investors?

AMO is a rare case when investors oversold a company’s stock and a large competitor takes advantage. To benefit from cases like these, you need to find similar scenarios. Let’s walk through AMO’s story…

Finding a Mega Value

AMO sells vision-correction technologies and products for a wide variety of patients. For instance, no one sells more LASIK surgical devices – used in more than 90 percent of all U.S. refractive surgical procedures – than AMO. The company also holds the number two spot in the cataract surgical devices market and the number three position in the contact lens products market.

Now, without serious research there’s simply no way for me to tell you any more than that. Frankly, I don’t know much about this industry, and since the jump already occurred, I don’t need to.

But apparently, Abbott Laboratories did do that research and figured that AMO was still a buy at a 148% premium. The point is, Abbott realized how important it was to control the top spots in these fields.

Over 60% of 60+ year olds have cataracts. In the next 11 years, the number of 60+ year olds globally is expected to increase 43%. Simply put… the older you are, the more chances you’ll need AMO’s technologies. And with more older people than ever, the demand is rising. You don’t have to be an eye expert to realize what Abbott was thinking.

On top of a great looking future, AMO was also incredibly cheap just last week. Abbott is basically paying a total $2.8 billion for a company that produces $1.1 billion in revenue per year. In just two and a half years, the company’s revenue will merit the investment.

Sure, it’s not a highly profitable company yet, but it is in the black. AMO is already turning a profit, which is just another stream of income for Abbott even before synergies are realized.

Back to how this affects you…

If you know what to look for, you can be in on the next AMO. Below is a quick list of criteria to look for when searching for a buyout candidate:

Value – are the company’s price-to-earnings, price-to-sales, and price-to-cash flow ratios low?

ROI – has the company made smart investment decisions? Will there be a lot of useless intangible assets lying around that would disinterest a potential owner?

Industry – is the company in a growing or contracting industry? Is it an industry that is conducive to mergers and acquisitions?

Profit – is the company profiting already, or at least have a profitable horizon?

Debt – is the company carrying high debt? Would a potential buyer use the debt situation to lower its buying price?

Synergy – is the company’s business model flexible, and can a potential buyer save costs by synergizing departments?

Of course, each company is different, and each acquisition is different. It takes some serious studying to find great buyout candidates. But done right, and you can save yourself 18 years of waiting around in the stock market. If you find the right candidate, you might just multiply your money in hours, not years.

Sincerely,

Jim Nelson, www.pennysleuth.com

January 14, 2009

About the author:

Jim Nelson
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

Visit Jim Nelson's Website


Rating: 2.6/5 (8 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Why not just buy all the stocks that will be double in a year?

Your article gives nothing of value in finding the next buyout candidate.
buffetteer17
Buffetteer17 premium member - 5 years ago
In this market, I want a triple.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK