Investing for Growth Forum

The price of ACS has been taking off....up 5% so far today and I noticed an uptick yesterday as well. It turns out that the NY Times reported the company is in talks to sell itself to a group of investors for about $62 per share. My SSG shows a lot more potential than that. Can someone explain why management would be considering the sale of this business at that price? Does it reflect a lack of confidence? Thanks.

Nancy

The price of ACS has been taking off....up 5% so far today and I noticed an uptick yesterday as well. It turns out that the NY Times reported the company is in talks to sell itself to a group of investors for about $62 per share. My SSG shows a lot more potential than that. Can someone explain why management would be considering the sale of this business at that price? Does it reflect a lack of confidence? Thanks.

Did the Times actually say the company was seeking out buyers? Or were buyers seeking out ACS?

I also consider $62 to be a sub value price. I get suspicious when I see mgmt willing to sell for what seems to be an overly low price. It leads me to wonder what kind of compensation they will receive for making the deal. I have never been overly enthusiastic over the ACS mgmt team and the departure of Jeff Rich the CEO with a seemingly loverly sweet financial package did not help. Could his nickname be Get (Rich). I see the M* Stewardship rating of C as being quite generous.

Dan Hess

I agree Nancy and Dan.

At $62, the PAR for Affiliated Computer (ACS) is 17.8%.

I hope they believe they can do much better than $62 in a private equity transaction.

Best wishes and Better Investing,

Mark Robertson

www.manifestinvesting.com

Dan,

>>Did the Times actually say the company was seeking out buyers? Or were buyers seeking out ACS? <<

Every release I read said the companies were "in talks" but didn't say which party initiated the negotiations.

>>I get suspicious when I see mgmt willing to sell for what seems to be an overly low price.<<

I know. I was wondering if it might be advisable to take the money and run.

>>I have never been overly enthusiastic over the ACS mgmt team<<

Nor I. Here's an item from my notes:

"Chairman Deason owns 7%, controls 36% votes through exclusive ownership Class B shares (10x voting power of A shares). Article painted very unpleasant picture of Deason. 9/03 indictment of former executive (James Donnell) for overbilling and mail fraud while ACS employee."

I also have a concluding note as follows "Not one of my favorite holdings".

This is from one of the releases - it contains about as much information as I could come up with:

"The newspaper said the company is in negotiations with a consortium of private buyout firms -- Texas Pacific Group, Bain Capital and the Blackstone Group. It added that the parties could reach a deal as early as next week. The report cited people who had been briefed on the talks, but the newspaper didn't identify them by name. Those people warned that the negotiations could drag on beyond next week or collapse altogether, according to the report"

Mark,

>>I hope they believe they can do much better than $62 in a private equity transaction.<<

Evidently not. This from the article "The New York Times reported that the computer services company is in talks to sell itself to a group of investors for about $62 a share"

Nancy

Thanks. Your notes never fail to amaze me.

 If the stock is undervalued at $62 I see no need for any hasty decisions since maybe someone will make a better offer. I would be surprised if the deal did not go through at $62 that seems a bargain price.

I would note this is a very competitive business area where high margins like ACS has been able to achieve may be hard to sustain.

Dan

>> If the stock is undervalued at $62 I see no need for any hasty decisions since maybe someone will make a better offer. I would be surprised if the deal did not go through at $62 that seems a bargain price. <<

Dan,

I see. So if it sells for $62 the price will stay at $62. If it sells for more, we stand to benefit. The only reason for rushing to sell would be if the sell price is lower which is unlikely. I guess I was thinking that if the sale does not go thru the price will drop back to where it was. But then we are long term investors and if we trust our SSG's the upside potential remains better than either scenario. Is that about how I should be thinking?

Nancy

So if it sells for $62 the price will stay at $62. If it sells for more, we stand to benefit. The only reason for rushing to sell would be if the sell price is lower which is unlikely. I guess I was thinking that if the sale does not go thru the price will drop back to where it was. But then we are long term investors and if we trust our SSG's the upside potential remains better than either scenario. Is that about how I should be thinking?

I would never suggest I knew how to tell you to think. (bg) However I do think your thinking is right on. As Mark, you and I have suggested ACS would be undervalued at $62. My SSG suggest ACS would be fully priced at about $70. I do note M* indicates a fair value for ACS of $54, but this excludes possible acquisitions and is based on a 7.5% growth rate. I see S&P rates ACS at a fair value of 63.20. Thus I see the exposure for a $62 deal going through is likely small. I am hoping a higher price deal or another acquirer may step forward. But if one thinks the $62 acquisition will occur then it may be better to sell and invest in a better opportunity. Thus I see no rush is required on this one.

As Bakul suggested I also viewed SDS was taken over at a price I considered to be too low as well so only time will tell for sure if $62 will be the final price for ACS.

I do believe there is a lot of dollars on the sidelines looking for places to invest and this inevitable results in prices being bid higher. I hope this will be the case with ACS but it is hard to say what the future holds.

ACS has been somewhat of a laggard for me only appreciating 12.5% per year at the current $61 price since I purchased it about two years ago. Thus I am likely hoping to see a little boost to at least achieve a 15% return.

Dan

Dan,

>>Thus I am likely hoping to see a little boost to at least achieve a 15% return. <<

PRK shows my annualized total return at 12.62%. $65 would raise it to 15%. It will be interesting to see how this all plays out. I have a lot of it too. More cash to deal with? I don't know why, but it's becoming more and more difficult for me to find companies to invest in.

Nancy

I don't know why, but it's becoming more and more difficult for me to find companies to invest in.

Perhaps you are becoming a more sophisicated investor and are able to find problems with most any company. i.e. There is no perfect company I have found. 

Another possibility may be that you are limiting your choices to companies that conform to a narrow set of criteria. There always are so me companies selling at prices that provide a bargain.

It may also depend upon your view of the future direction of the market. If one listens to the media they may get the idea the sky is falling in and the economy is about to collapse. I happen to think the economy is quite strong considering the factors that could have caused the economy to collapse. I think we will see at least another year of this strong economy and that bodes for continued nice growth in earnings that eventually will cause the market to rise. The huge pile of cash (like Warren Buffet's $40B) sitting on the sidelines will eventually have to be invested and stocks seem to be a likely place. Also many companies along with the hedge funds have compiled a huge amount of cash that will have to be deployed. This will likely result in more acquisitions like ACS. The affect of this is that ACS shareholders like you and me will have more cash to invest and will help drive the market higher.

Thus call me a bull who is fully invested and planning to stay that way for a while.

Speaking of ACS I have seen reports the proposed acquirers previously tried to acquire another IT company (CSC) but were unsuccessful. Thus I suspect they went after ACS and not vice versa. Thus I still have hopes for a higher acquisition price.

Dan Hess

Dan,

>>Perhaps you are becoming a more sophisicated investor and are able to find problems with most any company. i.e. There is no perfect company I have found. <<

I don't think it's that. If anything, I'm becoming a bit lazier.

>>Another possibility may be that you are limiting your choices to companies that conform to a narrow set of criteria.<<

That is much more likely the reason. I tend to invest in a Takestock sort of way. It turns out that I usually already own most or all of the Takestock three greens, so that's confirmation. MFI is a bit more aggressive which is why I'm starting to do some automatic investing based on their combined quality and par numbers.

>>It may also depend upon your view of the future direction of the market.<<

Nope. I truly believe there is never a wrong time to invest in companies of high quality at a reasonable price. I just haven't found any for a while.

>>Thus call me a bull who is fully invested and planning to stay that way for a while.<<

Maybe you could suggest a few companies that you consider of high quality that are currently at attractive valuations. That might help me clarify where I'm being too stringent in my criteria.

>>Thus I suspect they went after ACS and not vice versa. Thus I still have hopes for a higher acquisition price.<<

Let's hope.

Nancy

Maybe you could suggest a few companies that you consider of high quality that are currently at attractive valuations. That might help me clarify where I'm being too stringent in my criteria.

Each of us will surely decide differently on what to buy and what to sell and at what price. I admit to making as many mistakes as most but with that said here are a few that have caught my eye.

Stocks I recently purchased: BBBY, SYK, ORCL, PSUN & JKHY

Stocks near the top of my Watch List: MDT, JNJ, APOL, LOW and FITB.

Dan

>>Stocks I recently purchased: BBBY, SYK, ORCL, PSUN & JKHY

Stocks near the top of my Watch List: MDT, JNJ, APOL, LOW and FITB.<<

Thanks, Dan. I already own BBBY and SYK and LOW. FITB is out because I own too many banks. The fact that I own so many banks and and since FactSet is my second biggest holding, I'd probably stay away from JKHY. My EDMC holding would rule out APOL.

That leaves ORCL, PSUN, MDT and JNJ. MDT is on my watchlist. Maybe I'm being too conservative. I show it as a buy up to $52.40. As for JNJ, I do have a lot of healthcare and must admit I tend to think twice about investing in gigantic companies (a personal preference). Oracle looks interesting. I would like to add to the technology sector. PSUN isn't the sort of company I'd usually be attracted to, but I'll certainly take a look. Thanks ever so much for the response. I'll get back to you when I have some time to check these out.

PSUN isn't the sort of company I'd usually be attracted to, but I'll certainly take a look.

PSUN isn't the sort of company I'd usually be attracted to, but I'll certainly take a look.

Is that because it sells clothing? Or is the type of clothing? Something else?

I would generally agree with Nancy I on this because retail clothing is such a fickle market. On the otherhand the US economy is booming, US consumers have more wealth than ever and young people tend to be the big spenders on clothing. (I would add this age groups appearance sometimes makes us older folks wonder why they buy what they do) PSUN caters to the age groups of 16 to 24 who want everything now and tend to spend accordingly and who are easily influenced by advertising and trends and tend to want to have the latest style each year that makes for great sales.

Dan

>>Is that because it sells clothing? Or is the type of clothing?<<

Both <g>

<< Blows my mind that people pay for holey, stained jeans! >>

Those pants were not for sale (at least not in the store we visited), they were just an eye-catching display. They did catch our eye as their big window was filled with torn, stained and moldy jeans.

When we went in, each pair had a tag "Not for Sale".

[I loved to window-shop at the original Abercrombie & Fitch in NYC before it went out of business...they had a permanent area on the top floor to sell you everything you might need for an African safari.]

Armin

Hi Nancy,

I seen you were looking for some stock ideas and, while I am not Dan, thought I might throw a few your way to see what you think.

SRX - good quality but not a lot of data (V/L rates them an A for financial strength, MFI 69.8 with a 14.1 par). I show them slightly out of my buy range (below 28.7) but worth watching. Also note that they have 0 debt.

IIVI - not quite as strong (MFI 63.7 and 21% PAR). V/L financial strength of B+. Small amounter of debt (43.5M). slightly out of my buy range of 17.2

AMGN - mfi 78.2 and 12.2 par. V/L financial strength of A++.. Slightly above my buy range of 77.9 but even then I show a 16% total return.

LLL mfi 62 and 16.8 Par. Can't find my v/l for it but i have it a buy up to 89.8. I have been following it for a while now...

Also thanks for the compliment. I am really struggling with BBBY but since I am reading Hagstrom's book on Warren Buffett, I am leaning to keeping it for a while.... Management has proven itself in the past, they have no debt, lots of cash, and a small percentage of the market. Plus Dan's holding.... always a consideration.

Let me know if you need some other stocks to look at...

Larry Dix

<<So if it sells for $62 the price will stay at $62. If it sells for more, we stand to benefit. The only reason for rushing to sell would be if the sell price is lower which is unlikely.>>

If ACS sells to a private investment group, then the price will most likely be in the $62 range, regardless of what the SSG says (remember Clayton Homes). Consider this: the market may not view your SSG results to be as rosey as you may think (perhaps the 1 in 5 bad ones <g>). Personally, I wouldn't hold out hope of negotiations leading to a higher price. My experience indicates that once a generalized price has been published, that price is what the parties have agreed to in principle, and it won't move much from there if the deal is consummated.

If it sells for more, it may be due to a White Knight's effort to acquire a company that it thinks will continue to do well, albeit with some fine tuning in the Management arena. I wouldn't continue to hold the stock with that hope in mind - too risky (remember Clayton Homes).

If you choose to sell, don't look back. Simply, reinvest those dollars in a good quality company selling at a reasonable PE - reasonable to itself and its industry.

<< I guess I was thinking that if the sale does not go thru the price will drop back to where it was.>>

That is a distinct possibility!

<< But then we are long term investors and if we trust our SSG's the upside potential remains better than either scenario. Is that about how I should be thinking?>>

I think I would unlock the potential of my invested dollars in ACS by investing those dollars elsewhere.

Full disclosure: I do not own ACS, nor have I ever owned ACS (same applies to Clayton Homes). I'm just presenting my thoughts based upon experiences I've witnessed from one position or another - either as a shareowner or as an onlooker.

>> I wouldn't continue to hold the stock with that hope in mind - too risky (remember Clayton Homes).<<

Armin,

Thanks for the opinion. Yes, I well remember Clayton Homes, as I was a shareholder. I keep finding reasons to sell stocks these days and have a much harder time finding companies to purchase.

Thanks, Steve

I got "this page cannot be displayed" but I poked around and came up with this url which seems to work:

http://www.nytimes.com/2006/01/03/business/03deal.html?pagewanted=all

For curiosity, I entered $65 as a current price in PRK which leads to a 15% annualized return since date of purchase. So, from that perspective, I guess I should be satisfied with that price. I'm planning to sit tight and see what happens.

Nancy and Steve

For curiosity, I entered $65 as a current price in PRK which leads to a 15% annualized return since date of purchase. So, from that perspective, I guess I should be satisfied with that price. I'm planning to sit tight and see what happens.

Although $65 may provide a nice profit, I still view it as inadequate and now I see some agree with me. Click on here to see the Red Herring article on this. I like the $75 estimate better. (bg)

Dan Hess

A morning news report states ACS will receive a buyout offer on Monday.

Karen OBoyle

The rumors on the ACS takeover continue and I do expect to see a takeover likely at a lower price than many of us would like to see. Sort of similar to the prior situations at SDS and CMH.

However an article I read today got me thinking there may be a way to benefit from this type of buyout by private equity firms such as the Blackstone Group. Click here to read the article. It seems these firms are looking for companies with strong cash flow, little debt and not necessarilly rapid growth. They acquire these companies at reasonable prices and then leverage them by taking on debt and benefit from the cash flow to acquire additional companies. Their focus seems to be in the tech area where growth has slowed but cash flows are great and many having little or no debt. The article mentions ACS as well as the rumors of CSC being acquired. I guess it would be more accurate to say taken private.

So perhaps screening for companies with superb cash flows and little debt may yield companies that would be potential future takeovers thus enabling the investor to benefit from whatever premium is offered while owning a company with superb cash flow. What do others think of this approach?

Dan Hess 

Dan,

Can you speak a bit to the advantage of the takeover from the perspective of the ACS management team? Why would they prefer to be privately owned rather than a public company and why would they be satisfied with say $65 per share at this time? Is it about lack of confidence in the company's future? Is it a matter of "take the money and run" by the larger (insider) shareholders? I was able to understand the CMH takeoever from Mr. Clayton's perspective, but this is a different situation and management's motivation for selling isn't clear to me. Thanks.

Nancy

 Can you speak a bit to the advantage of the takeover from the perspective of the ACS management team? Why would they prefer to be privately owned rather than a public company and why would they be satisfied with say $65 per share at this time? Is it about lack of confidence in the company's future? Is it a matter of "take the money and run" by the larger (insider) shareholders? I was able to understand the CMH takeoever from Mr. Clayton's perspective, but this is a different situation and management's motivation for selling isn't clear to me. Thanks.

The short answer is I do not know. Perhaps the major shareholders desire to cash out. Perhaps the current mgmt will get some sweetheart deal or a big bonus for selling the company. Or perhaps they do see tough times ahead. Or perhaps they really do think 62 or 65 is a fair price for ACS. I suspect we will likely never know since they are not likely to make their reasons public.

I do recognize this is a very competitive business area and thus quite price competitive. i.e. The low bidder quite often gets the contract. ACS seems to have done very well focusing on a narrow niche of specific Business Process Outsourcing (BPO) where they have gained some level of expertise and thus some pricing power but even this area will have increasing competition going forward.

There are some things you can not do anything about and some things you can do something about. I submit it is better to spend your time on the latter. (g) You and I feeling ACS is worth more is not likely to significantly influence the stock price. (bg)

Dan

Dan,

>>The short answer is I do not know. Perhaps the major shareholders desire to cash out. Perhaps the current mgmt will get some sweetheart deal or a big bonus for selling the company. Or perhaps they do see tough times ahead. Or perhaps they really do think 62 or 65 is a fair price for ACS. I suspect we will likely never know since they are not likely to make their reasons public.<<

I can't put my finger on it, but I was never really thrilled with this holding. Now that I think of it the Chairman, Deason, owned (and maybe still does) 7% of the stock and controlled 36% of the votes. At the time of that note, no other executive owned shares. And I do recall a very unsavory article about Deason

I just googled him and found this one but I don't think it's the same one I read originally though I do remember something about the boat and how he treated the chef.

So.........if ACS is removed from my portfolio, so be it. But again, what to do with the cash :-(

Bill,

>>I see this deal as different than Clayton Homes. Mr. Clayton had taken the company about as far as he could on his own. BRK brought new financial strength to allow further expansion.<<

Yes I think ACS is a whole nother story. It seems to me that Mr. Deason is holding the reigns, and taking the company private may serve his interests for any or all of the reasons you suggest.