There's Still a Chance to Cash In on This Recent IPO's Upcoming Buyout

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Ancestry.com (Nasdaq: ACOM  ) has been on the brink of going private for several months now. It's one of the success stories among the recent crop of IPOs, so unsurprisingly its management is attempting to cash out with a sale to a third party. The market still seems a little wary of this sell-off, not least because it's been dragging, but there's a lot of momentum behind it, so a deal will probably close sooner rather than later. And when it does, it's likely to provide some nice upside to the current share price.

Selling family history
In the feast-or-famine world of 21st-century IPOs, Ancestry.com has been a gourmand. Its stock has more than doubled, from an issue price of $13.50 a share to the current level of $31 or so. That puts it in league with double-bagger-and-then-some success stories such as LinkedIn (NYSE: LNKD  ) , which has added more than $70 to its $45 issue price for a 162% gain.

It also gives heart to IPO investors still licking their wounds over such high-profile debacles as Facebook's (Nasdaq: FB  ) notorious 50%-plus slide from its debut, or Zynga's (Nasdaq: ZNGA  ) 70% collapse since issue.

Much of the reason for Ancestry.com's rise has to be the company's fundamentals. The company is a fairly simple, straightforward entity whose core business model -- selling genealogical data to customers on a subscription basis -- is easy to understand.

More crucially, its financials are in good shape and the company is growing. Annual revenue has improved from $225 million in 2009 to $301 million and $400 million, respectively, in the two subsequent years. The company topped estimates in its most recent quarter, posting healthy year-over-year boosts in both top line (18% to $119 million) and net (20% to $20 million). Coincidentally with the latter increase, it also managed to grow its subscriber numbers by 20% to a little over 2 million. These days, the company is expecting full-year 2012 sales to reach as much as $480 million.

Its balance sheet is similarly healthy. At the end of the quarter, it had more than $50 million in cash and no long-term debt at all.

TV casualty
The news hasn't been 100% positive for Ancestry.com since its 2009 IPO. One of the big boosts for its shares was the partnership it inked with the producers of the genealogy-flavored documentary TV show Who Do You Think You Are? Since the program broadcast to a mass audience on GE (NYSE: GE  ) and Comcast's NBC network starting in 2010, it stimulated interest in genealogy and hence the offerings of Ancestry.com, whose name was tightly linked to and marketed with the show. The company saw a wave of new subscribers during the life of the program.

But that life didn't last long; after three seasons, NBC cancelled the show this past spring. Following that, Ancestry.com's stock dropped from its all-time high above $45 to the mid- and eventually the low-$20 range before recovering to hit $30-plus, where it bounds along these days. A strong link to a network TV show is like a sugar rush to a company's share price, but as with any rush it's usually followed by an unpleasant crash.

That post-Who Do You Think You Are? slide seems to have released some value in the shares. According to Yahoo! Finance, six analysts who follow the company collectively anticipate that it will bring in EPS of $1.71 in its next (2013) fiscal year. That's growth of nearly 25% from the trailing-12-month level; meanwhile, the stock trades at a trailing one-year P/E of 20.

Motivated seller
Ancestry.com's Powers That Be are surely pointing out this disparity to the company's potential buyers, which (publicly, anyway) include private-equity players Permira Advisors and TPG Capital. It seems the seller -- advised by Qatalyst Partners, headed by investment-banking rock star Frank Quattrone -- is driving a hard-ish bargain by asking for a price above $35 a share.

That threshold is barely a $4 premium to the current share price, meaning around $180 million or so in extra outlay compared to the company's full market cap of $1.3 billion. In other words, just a drop in the bucket to any well-capitalized would-be owner.

Besides, according to media reports, Ancestry.com and its team are sniffing around for other interested parties. If one or more new possible buyers line up, that should either ramp up the pressure for existing candidates to close a deal or produce higher bids from the new guys.

However this buyout story unfolds, look for it to reach a conclusion soon -- and for the stock to get one final price bump before disappearing into the history of public companies gone private. Price bumps in either direction haven proved especially hard for Ancestry's recent cohort of IPOs. If anything, investors watching this space should know that massive price swings are more the rule than the exception. Of course, the good news here is that such massive swings can create the kinds of opportunities investors dream of. On the opposite side of the spectrum to Ancestry's successes have been Facebook's well-documented travails. However, with the stock halved from its offering price, things could be getting interesting for the social-networking giant. The Fool recently broke down the key elements any prospective investor needs to understand in gritty detail in our new premium research report on Facebook. Get started now.

Fool contributor Eric Volkman owns shares of Facebook. The Motley Fool owns shares of Facebook, Ancestry.com, Apple, and LinkedIn. Motley Fool newsletter services have recommended buying shares of LinkedIn, Apple, Ancestry.com, and Facebook and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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