With most of Wall Street still abed in a post-New Year's slumber when the news came out, Tuesday's announcement that online bill payer CheckFree (Nasdaq: CKFR ) was buying payment technology firm Carreker (Nasdaq: CANI ) went mostly unnoticed on Wednesday. But as investors rubbed the sleep from their eyes and began to digest the news, the market's verdict finally arrived on Thursday: This is a good deal.
Or at least, that's how I interpret the movements in CheckFree's stock price -- down a bare fraction of a percent Wednesday, but up a healthy 2.6% yesterday. So now that we've got the verdict, the question for Foolish investors would be this: Is the market right? Let's find out.
By the numbers
According to Tuesday's press release, CheckFree is paying a 5% premium to Carreker's stock price at close of trading last week -- $8.05 per share, or $206 million in total. Right off the bat, that doesn't look unreasonable, especially in light of the premiums being paid elsewhere in the bill-paying space recently (e.g., the 18% premium that Intuit (Nasdaq: INTU ) is paying to acquire Digital Insight (Nasdaq: DGIN ) , the 32% premium that Open Solutions (Nasdaq: OPEN ) commanded in October, or the 15% premium that Intuit (yes, them again) is paying to acquire Electronic Clearing House (Nasdaq: ECHO ) ).
What's more, on closer examination, CheckFree's acquisition looks better -- not worse -- than it does on the surface. For one thing, the deal won't really cost CheckFree the $206 million it's billed at. Carreker has $37 million in cash and short-term investments, which reduces CheckFree's out-of-pocket cost to less than $170 million. With its own bank accounts brimming with cash, CheckFree could easily pay for this purchase with cash on hand. Calculating based on Carreker's enterprise value, therefore, CheckFree will be paying a mere 1.5 times Carreker's sales and 2.8 times book value. Not a bad deal, with CheckFree's own stock fetching valuations of 4 times sales and 2.5 times book.
True, Carreker appears to be a lesser-quality business. The firm is just barely profitable, and its sales declined year-over-year last quarter, as compared to CheckFree's profitable status and growing sales. But look a little deeper, and you'll see that, as with CheckFree, GAAP accounting greatly understates Carreker's true cash profitability. Although its accounting profits amounted to just $2.3 million over the last four quarters, Carreker generated a good $9 million in free cash flow.
When all is said and done, I won't say that CheckFree got an absolute steal of a deal here. But the price it's paying looks more than fair -- and in the rapidly consolidating bill-pay sphere, where pickings have become exceedingly slim and competition for the remaining prizes fierce, that's an accomplishment in itself.
For a rundown of the recent consolidations, don't miss:
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