Buyers Behaving Badly

• Email
• Share
• Print

Writing for the Fool allows me to share with our readers the odd bit of investing wisdom. To sound the alarm when I see a stock scam. To clamber up onto my soapbox and declaim against management shenanigans. To write the occasional fairy tale. And, on days like today, to just organize my more random thoughts for future reference -- and, perhaps, your Foolish benefit.

Death of the "Blackstone put"
Yesterday evening, news broke that Cerberus Capital Management intends to back out of its $7 billion agreement to purchase equipment rental company United Rentals (NYSE: URI). This followed September's news that Goldman Sachs (NYSE: GS) and KKR were reneging on their deal to purchase Harman for $8 million, and that J.C. Flowers, Friedman Fleischer & Lowe, Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) were similarly backing out of their agreement to purchase Sallie Mae (NYSE: SLM).

In contrast, Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice ultimately followed through on their purchase of Home Depot's (NYSE: HD) commercial construction materials business. And Blackstone's (NYSE: BX) buyout of Hilton Hotels did finally close late last month.

Speaking of Blackstone, I'd like to draw your attention to a column that fellow Fool Emil Lee penned back in May, "The Private Equity Put." The gist of his argument went like this: In an era of cheap capital (which prevailed in recent years, and for much of this year), stocks could only go down so much -- because if they went down too much, private equity would step in and buy the depressed stock. Investors were thus "assured" that private equity would provide a safety net protecting them from significant loss. Logically, they felt their stocks could only go higher. And so they bought with abandon. And so the bid prices rose. And so ... the stocks only went higher.

Until they didn't
Around the same time Emil was putting a name to the phenomenon, yet another of our Foolish colleagues, Rich Duprey this time, began a series of columns describing Wall Street's seemingly irresistible "Urge to Merge" -- lately entering its seventh iteration.

But private equity's now getting antsy, and for good reason: Even the formerly infallible Blackstone proved itself capable of losing money this week. With capital markets drying up and megabanks taking mega-writedowns, I suspect United Rentals won't be the last deal we'll see go sour. Nor will Cerberus be the last private equity hound to retreat from a buyout with its tail 'twixt its legs.

Chinese crises of ...
Allow me to drag out, just one last time, one of the most overused bits of foreign-language lore ever repeated ad nauseam: The Chinese character for "crisis" supposedly merges two elements representing "danger" and "opportunity."

The way I see it, the developing crisis of confidence in high-powered private equity presents mere mortal investors with both danger and opportunity.

... danger
We covered this already. The Blackstone put is history, folks. And as we've all learned over the past few months, private equity's newfound recalcitrance means that, yes, your stocks can go down as well as up.

... and opportunity
But the great thing about prices going down is that, when they do, we get to buy the injured stocks on the cheap. Sure, Cerberus doesn't want United Rentals anymore. But with the stock down 31% on yesterday's news, perhaps we should take a look. Thanks to the post-news sell-off, United Rentals now sports a P/E of 10, and it's projected to grow its profits at 9% per year over the next half-decade. It's not yet a "Dirt Cheap Dream Stock," but it's still a heckuva better deal than what we saw yesterday: the same stock, with the same growth, at 13 times earnings.

Foolish takeaway
The Blackstone put may be no more, but in its place, we just might get something better in the months to come -- a chance to buy really good companies, really cheap, as private equity heads for the hills.