One Hundred Companies That Can Take Themselves Private

In past years, I have successfully used a screen that identifies companies that can take themselves private by levering up their balance sheet and using their cash flow to pay the interest payments.  The screen assumes companies could get financing at 9% and could cover the tax adjusted interest payments if they stopped expanding and just spent a minimum in capital expenditures to continue operating.  

If you assume that we don't enter a depression and the companies could actually get financing right now, a stunning number of high quality companies - companies with high cash flow and relatively low debt - could take themselves private at today's prices.  Obviously, the assumptions of the screen are unrealistic currently.  If General Electric is paying Warren "Loan Shark" Buffett ten percent interest rates, then most other companies won't be able to find financing.  But that's beside the point.  At these prices, many quality companies are cheaper than they have been in history.  Money is still available - it's just scared and sitting on the sidelines.  If we see any return to stability in the financial system, many of the stocks on the list could see 25% - 50% upside just by a return to median multiple.        

My original screen included over 200 companies that could take themselves private but I have filtered it to only include companies with relatively low debt to equity ratios.  As a caveat, several of the companies on the list are coming off of cyclical peak earnings and won't be able to sustain the levels of cash flow they have generated in the past year.  However, many others are very steady cash generators with strong balance sheets.  Some of the large cap stocks on the list, like Disney (DIS), Applied Materials (AMAT), and Exxon Mobile (XOM) are unbelievable bargains.  Many of the mid cap stocks are solid companies that have almost become small caps such as Federated Investors (FII), MSC Industrial (MSM) and Manpower (MAN).  And many of the small caps are now cheap, undiscovered gems such as Advanced Energy (AEIS), Darling International (DAR) and JDA Software (JDAS).  

Comments

[Doug Poretz]

I saw this article first in Seeking Alpha and posted the following comment there -- by the way, if this interests you, I have more thinking along these lines (from the perspective of someone in the communications business for aboutd 40 years) at www.deathoftime.com, my blog --

Great observation. Furthermore, as someone who works closely with CEOs, often on issues related to being public companies, I often hear that the attraction of not dealing with being a public company is very compelling. But I think the low cost of going private will be only one attraction. I also think that the economic and political environment will create an environment for numerous fundamental changes in many industries. A lot of game-changing rules are likely to be proposed in healthcare, environment, financial services, the list will not stop at the obvious. Issues of valuation and trying to make credible projections will be extremely difficult and maybe irrelevant if you don't know how the industry might change a year from now. The attractiveness of being private while that is happening will become even more compelling. Interesting prospect ....

[mpc]

Interesting list. At what premium to current market prices do you assume the LBO/MBO would bid?

[numbers man]

This is one of the best pieces I have seen on how gov tries to manipulate markets and minds!
I was aware of M.A.'s work since first published and also followed subsequent events from different angles. Thanks. for publishing it, perhaps it will inspire readers to think for themselves rather than submitting themselves the numbing of the masses by TV and the media.

I, for one, have done cycle-studies, partly inspired by Marty's work mixing it with my own observations. It is quite clear to me that we move in astonishingly precise cycles, not for day traders of course, but more along the lines of multi-decade type of sequences. I vary slightly from M.A in detail, but there is a reason why the markets turned in Oct. of 07 and it will be a long road down. GVT efforts will be futile in the end and the may round the edges a bit, but that will be it.
So all we are seeing now is a lot of noise by DC to make us believe they have control, for if the public would find ot they don't, they would run for the exits...

On detail: I found the Buffet/Silver story particularly disturbing and I remember following it at the time it happened. So is it any co-incidence that "Mr. Nice" who looks like your next door neigbor and is the poster-boy of US capitalism driving a Ford truck, so everyone can associate with him and the "American Dream", comes out at a critical juncture of the stock indices and tells the people "I bought American stocks" for his "personal account". Statements like that, made public,
seem to be made very opportunistically and in the overall picture seem to be reminiscent of similar calls being made by JP Morgan in late 1929 early '30 just before the markets went into the abyss.

Taking in all of Mart's musings it appears IMHO that the old slogan "buyers beware" has not lost its validity.

[oblomov]

Thank you for posting this list when you did. It was a good starting point for further research. Many of these stocks have moved 50% to 200% off their November lows, even after the recent pullback.