I hate when that happens!
I hate when one of my favorite companies gets bought out by another. Solid-state lighting leader Color Kinetics (Nasdaq: CLRK ) announced this morning (very early morning, by the way -- the press release was time-stamped 1:40 a.m.) that it was being acquired by traditional-lighting giant Royal Philips Electronics (NYSE: PHG ) .
Not that I mind getting the 14% premium the $791 million deal represents, it's just that I had high hopes for Color Kinetics being a multibagger for my portfolio.
Color Kinetics is in the business of using light-emitting diodes (LEDs) to create energy-efficient lighting. Until a few years ago, LEDs were capable only of emitting red light, making them impractical for most common uses. But researchers have created green and blue LED light, allowing a full spectrum of colors, which has become particularly useful in TVs, movie screens, and mobile phones. LED lighting also lasts 20 times longer than regular incandescent bulbs.
With its LEDs already in use in places like Harrah's (NYSE: HET ) and Wynn (Nasdaq: WYNN ) casinos and Marriott (NYSE: MAR ) hotels, Color Kinetics is positioned to take the next step and make everyday home use a reality. White LED lighting currently accounts for just 5% of Color Kinetics revenues.
I found Color Kinetics after reading about it on the Motley Fool Hidden Gems discussion boards. It was pointed out that the firm virtually dominates the LED industry because of its patents. Although competitors have long griped that Color Kinetics' patents are defined by prior art, they've been consistently upheld by the courts. Its stock has more than doubled over the past year as both revenues and profits have grown. Since its IPO three years ago, sales have grown 20% or more each quarter and were up 28% in the last quarter alone.
With a potential market valued at $100 billion, the opportunity to expand is almost exponential. Color Kinetics typically uses technology manufactured by Cree (Nasdaq: CREE ) to package its white LEDs, and Cree had actually been an investor in the company until recently. With Philips, Osram Sylvania, and General Electric (NYSE: GE ) also getting in on white LEDs to replace their incandescent bulbs, they obviously dwarfed Color Kinetics in size and marketing muscle.
Which is why the deal is good for Color Kinetics, though it may not be so good for me as an investor. Price has been the main concern in wider adoption of LED lighting. Where incandescent and fluorescent bulbs cost about $1 per kilo-lumen, LEDs can cost as much as $50 per kilo-lumen. By being bought out, Color Kinetics should be able to use Philip's manufacturing, marketing, and distribution efficiencies to produce LEDs at lower cost.
The $34 per-share, all-cash deal is expected to close in the third quarter. Although it's possible a higher offer could be made, it looks like the lights will be going out on this investment for me.
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Fool contributor Rich Duprey owns shares of Color Kinetics but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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