Is IMS Health being stolen?
Management agreed to a private takeover at a price that's way too low. As a shareholder, I say no.
By Vitaliy N. Katsenelson
IMS Health (RX) announced Thursday that it would be stolen from its shareholders for $4 billion, or about $22 share.
To be exact, a private equity firm will buy shareholders out. But to my mind, it is a steal.
IMS Health should have free cash flows this year of more than $340 million (the actual number should be higher than $400 million, but that would include a $60 million one-time tax benefit).
So this company, which has virtually no competition, barriers to entry impossible for new entrants 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 Warren 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.
My company owns these shares and will probably hold on to them in the hope that shareholders will refuse this offer.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). For more information click here.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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