Reflections on the week ending July 11, 2010

PE Finding Value in Public Companies

Cerberus Capital Management has acquired DynCorp International (NYSE: DCP) in a deal valued at $1.5 billion. The firm paid DynCorp stockholders $17.55 per share of common stock, a premium of approximately 49%. Cerberus invested $591.6 million of equity in the transaction and obtained additional financing from a group of banks led by BofA Merrill Lynch and Citigroup. DynCorp provides specialized critical services to civilian and military government agencies.
 
Since the beginning of 2009, 46 public companies have been or are being acquired by PE firms, according to the PitchBook Platform. Public-to-private buyouts are gaining more interest from investors this year. With just a little over half of the year passed, the number of completed or announced public-to-private buyouts in 2010 has already matched 2009's final count of 23. Bigger public-to-private deals are more common in 2010 as well with 8 deals over $500 million, as opposed to only 2 in all of 2009. The largest deal so far this year is the February buyout of IMS Health, estimated at $4.2 billion, by TPG Capital, Canada Pension Plan Investment Board and Leonard Green & Partners.

When private investors acquire an entire business, they are typically doing a thorough analysis of the business, detailed due diligence investigations and concluding that the acquisition price provides them the opportunity to earn attractive returns.  So, when a lot of Public to Private transactions are taking place, I see it as indicative that the Public Market is undervaluing businesses.  An alternative view is that access to cheap and easy credit is causing private investors to overvalue businesses; however, after the credit crisis that we just went through, I don’t think that is the case currently.