Backscatter X-ray tech -- American Science & Engineering stock's got it. OSI Systems wants more of it. Image source: AS&E.

On May 9, American Science & Engineering (NASDAQ:ASEI) announced fiscal 2016 earnings results -- a big $0.38-per-share loss, where investors had been expecting a $0.04 profit. American Science & Engineering stock leapt 10% regardless, powered by a return to positive free cash flow and promises of a "return to profitability."

Before those profits had a chance to materialize, though, A&SE had a new announcement to make: On June 21, the company revealed that it has signed  "a definitive agreement to be acquired" by rival X-ray machine maker OSI Systems (NASDAQ:OSIS) for $37 per share, cash.

The stock immediately tacked on an additional 14% in gains, bringing its cumulative rise since just before the Q4 report to 31%.

"The first thing we do, let's [call] all the lawyers" 

So, great news for owners of American Science & Engineering stock, right? Well, not everyone appears to think so. Already, in excess of a half dozen shareholder lawsuits have been filed questioning the "fairness" of the sale and accusing management of selling American Science & Engineering stock too cheaply. Although AS&E is too unprofitable to merit a positive P/E ratio, the lawyers argue that management failed to adequately "shop the company," is selling too far below the stock's 52-week high, isn't getting as high a "book value" for the company's assets as in "comparable transactions," and will leave many shareholders with "no real gain or a loss."

But here's the truth of the matter: Promises of future profits aside, American Science & Engineering just reported a big loss when investors were looking for profits. The company was only barely profitable last year and is currently operating at a loss. And even valued on free cash flow, the $6.8 million in cash profits that AS&E generated over the past 12 months, divided into the $261 million purchase price that OSI Systems will pay, values the stock at a whopping 38 times FCF.

A good deal by any measure

In fact, even if you back out AS&E's net cash position, the FCF multiple on this transaction values AS&E stock at 26.5 times FCF. With S&P Global market Intelligence citing analyst expectations that AS&E will grow its profits at only 14% annually over the next five years, this suggests AS&E management is in fact selling the company for a very good price indeed.

In fact, if anyone should be complaining, it's probably OSI stock holders. S&P Global estimates suggest OSI stock will grow earnings nearly four percentage points faster than its new subsidiary. And OSI stock is profitable and selling for a FCF multiple of less than 24. Arguably, OSI would be better off buying back its own stock than overpaying for AS&E's.

If anyone should be calling the lawyers, it's OSI's shareholders, not AS&E's.