Normally there is a bit of remorse when a small, growing company is acquired by a much larger one. Even though shareholders might receive a premium of 20% right away, that doesn't generally outweigh the long-term potential for growth that many companies have.
However, when it comes to today's announcement that Motley Fool Hidden Gems selection CNS
That's not meant to be a ding on CNS or its business, because there is much to like about the company's low capital requirements and consistent product sales. Those hugs for GlaxoSmithKline shareholders are owed, because of the premium Glaxo is paying for CNS.
How you measure that premium will determine how many hugs or kisses you may wish to distribute. One way to look at it is that Glaxo is paying more than 35 times the free cash flow CNS generated in the trailing 12 months. That free cash flow grew a little more than 13% in the past year, but is still below the level achieved in fiscal 2003. Another way to look at it would be to perform a discounted cash flow analysis. I happen to have performed one, so I can tell you that Glaxo is going to need double-digit free cash flow growth (or the equivalent) from CNS for the next decade to justify its price. In short, CNS shareholders cannot argue they're being taken out on the cheap.
That's not to say Glaxo shareholders should be up in arms either. With CNS products being folded in with other Glaxo consumer products and Glaxo's research and development, a number of things should improve. The easy items to assume are that product placement and marketing should improve as Glaxo's clout and deep resources take hold. Glaxo's resources should also help with new product development and variations.
There should be no bitterness on either side in this deal. CNS shareholders are getting amply rewarded, and it's not too hard to argue that CNS is worth more as a part of GlaxoSmithKline than it is as a stand-alone entity. Such marriages don't come along often in the investing world, but when they do, there's nothing wrong with just sitting back and enjoying them.
GlaxoSmithKline is a Motley Fool Income Investor selection. Discover more great dividend-paying stocks from Mathew Emmert's market-beating newsletter service with a free 30-day trial.
CNS is a Hidden Gems pick.
At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
