The past year has been one for the ages for some of the companies in the real estate business, and it's been an active period for mergers and acquisitions (M&A). When you see M&A activity in a sector, it becomes a parlor game among event-driven hedge funds to find the next target. Today, I'll give you an idea of how they go about it.
CoreLogic is the subject of a bidding war, and Intercontinental Exchange (ICE -4.05%) just purchased service provider Ellie Mae from a private equity fund. Are any other real estate data or tech companies looking right for a buyout? If you wanted to figure that out, how would you go about it?
Catching up on CoreLogic's takeover battle
CoreLogic was the subject of bear hug tactics over the summer, led by Cannae Holdings and Senator, an activist hedge fund. A bear hug happens when a group proposes to buy a company by publicly releasing a press release. This tactic is typically used to prod a company's board of directors to run an auction for the company, or to cooperate with a potential suitor.
CoreLogic eventually received a bid from Stone Point Capital and Insight Partners at $80 per share in cash. Then CoStar Group unveiled a stock-for-stock bid which is worth about $92 at CoStar's recent prices. It's interesting that CoStar felt the need to use bear hug tactics similar to Cannae; if there were an auction process, all interested parties should have been contacted. The details will be filled in when the preliminary proxy statement is released, as there is invariably a "background" section, which lays out all of the details for the process.
CoreLogic's board of directors will review CoStar's bid and probably determine it to be superior. If I were a CoreLogic shareholder -- with the stock trading for a little under $84 at Thursday morning's prices -- I would be keeping my eye nervously on the door here. Bidding wars are fun, but once the auction is over, it is time to leave. As Taubman Centers shareholders found out earlier this year, sticking around for the last nickel in a takeover can be a big mistake.
Your next step when you see M&A activity
When you see M&A activity, it often pays to take a look at other companies in the sector to determine if they are trading at cheaper multiples than someone just paid for similar assets.
Stone Point agreed to buy CoreLogic for $80 per share, which works out to be 19 times CoreLogic's expected 2021 earnings per share and 3.5 times its expected 2021 sales. CoStar's bid is closer to $92 (the actual price is a moving target), which works out to be 4 times sales and 22 times earnings. Last year, ICE agreed to buy Ellie Mae for $11 billion, which works out to be 23 times expected earnings before interest, taxes, and depreciation and amortization (EBITDA). While 23 times EBITDA is not necessarily equal to 23 times earnings, for our purposes it is close enough.
I put together a table of the multiples for some comparable companies, including Black Knight Financial, RealPage, and CoStar. The ratios are calculated using the company's 2021 expected earnings and sales. This is called a comps analysis.
|Company||Market Cap ($MM)||Price-to-Sales Ratio||Price-to-Earnings Ratio*|
|Black Knight Financial (BKI -1.79%)||$13,722||9.7||37|
|CoStar Group (CSGP -4.63%)||$37,045||19.4||82|
As you can see from the table, most of these companies are trading well in excess of where CoreLogic and Ellie Mae were acquired. This doesn't necessarily mean that they aren't targets; it simply means they are "trading richer than the comps."
Money is cheap and plentiful right now, and private equity firms are looking for firms that will easily cover their borrowing costs. That said, these multiples will look high to a private equity firm, especially when you consider they will also have to pay a control premium. Another company in a similar business may be able to justify a higher multiple since it can generate synergies with the target company.
Overall, none of these companies are as cheap as Ellie Mae or CoreLogic, but it is a worthwhile exercise to do sometime with your portfolio. Sometimes you might even find a cool investment idea doing this sort of analysis.