It was announced Thursday that IMS Health (RX) was to be stolen from its shareholders for $4 billion or about $22 share; a private equity firm will buy them out. IMS Health should have free cash flows this year over $340 million (the actual number should be higher than $400 million, but is benefited by a $60 million onetime tax benefit).
So this company, which has virtually no competition, has barriers to entry impossible for a new entrant to overcome, and a cash printing machine will be sold for about 12 times free cash flows. Over the past year we’ve seen much lower quality companies being sold for much higher valuations than this. Most recently, Burlington Northern Santa Fe, which has a significant competitive advantage but has far inferior return on capital and free cash flow generation than IMS, is to be purchased by Mr. Buffett for about 20 times earnings and 30 or more times free cash flows. IMS Health’s management and board have a history of making dumb capital allocation decisions, but this one may go down in history as their dumbest.
We own these shares and will probably hold on to them in the hope that shareholders will refuse this offer.
About the author:
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).