Buyout Signals

By The Average Joe Investor

Buyouts seem to be all the rage right now. First we had HCA breaking records with its $33 billion buyout, only to be now topped by Blackstone Group’s $36 billion buyout of Equity Office Properties Trust (NYSE: EOP). And, of course, these are only the most massive of the deals – it seems like we’re getting multiple new announcements every week, whether it’s Eddie Bauer (Nasdaq: EBHI), OSI Restaurant Partners (NYSE: OSI), or possibly even Qantas (OTC: QUBSF.PK)?

So here’s the question: does this mean that stocks are sorely undervalued? It would seem so, right? With all of the smart money out there buying up companies like there’s no tomorrow it would seem that there must be plenty of upside for a lot of stocks out there. I disagree.

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Let me start out by saying that I don’t think that stocks are necessarily overpriced at this level, but I don’t think the private equity deals necessarily signal massive underpricing anymore. Compared to the past, there is much more money out there in the hands of these investors, and it’s all money that they have to get invested or they don’t paid.

Back a decade or so, with a couple hundred million dollars, they could sit back and wait for a fat pitch that they could knock out of the park. Now, with billions to invest and many more competitors out there bidding up all the really nice deals, it’s tough to wait for the same types of situations. So what I think a lot of the larger firms will end up doing is taking private firms with a target return lower than in the past. They will likely end up looking a lot more like mutual funds that can take much more concentrated positions, and benefit from being the controlling shareholder. Also similar to mutual funds, in order to put their money to work they’ll have to be more consistent buyers through various market conditions.

Don’t get me wrong, returns aren’t going to look like public market returns, they’ll still bring in returns that pass that, but by less than in the past. It just can’t be expected that with all of the money out there and the increased competition that the buyers can be as discriminating as they once were on the deals they choose or the price they pay.

So as these big buyout deals continue, I’m keeping in mind that take-privates might not be as solid a market signal as they once were.

-AvgJoe