Dealmakers must be forgoing Christmas parties, because the private-equity game just doesn't want to stop. Last week, for example, we saw yet another major deal: the $1.6 billion purchase of Tommy Hilfiger (NYSE:TOM) by private equity firm Apax Partners.
Also last week, The New York Times reported that there's another big deal in the offing, this one concerning Affiliated Computer Services (NYSE:ACS) going private. The chatter is that the deal will be worth as much as $8 billion and will involve the private-equity firms of Bain Capital, Blackstone Group, and Texas Pacific Group.
According to Dealogic, 2005 has seen about $493.8 billion worth of private-equity deals. What's happening? Well, private-equity firms have huge amounts of money to work with, and companies are becoming more willing to sell out for a number of reasons -- including lack of coverage from Wall Street analysts, soft stock prices, and, of course, compliance costs associated with Sarbanes-Oxley.
Founded in 1971, Affiliated Computer Services is now a major information-technology outsourcing firm for businesses and governments. Essentially, the company manages such things as HR, finance, accounting, and payment services.
Traditionally, tech companies have been off-limits for private-equity firms. But that situation is starting to change. For example, this year, we saw the leveraged buyout of SunGuard for $11.4 billion -- by many of the same companies rumored to be involved in the ACS purchase.
Then again, a company like ACS has certain attractions for private equity-players. "Affiliated Computer Services has long-term contracts with recurring, predictable cash flows," says Murray Rudin, a partner with the private-equity firm Riordan, Lewis, & Haden. "This is something banks can certainly lend against."
Affiliated Computer Services has a strong business. In the third quarter, it posted a 25% increase in revenues to $1.3 billion. Cash flow from operations was $108 million. Its customers include big players such as Hallmark, United Technology (NYSE:UTX), and Sprint Nextel (NYSE:S).
On the rumors of the deal, Affiliate Computer Services' stock increased 5% to $61. However, buying the stock now is really a speculation. Private-equity deals can fall apart, as we saw recently with the aborted deal for Albertsons (NYSE:ABS). And don't forget that there was another rumored deal that never materialized -- for Computer Associates (NYSE:CA), one of Affiliated Computer Services' main competitors.
So it seems, as of now, that investing in Affiliated Computer Services is for the pros who are willing to take a gamble.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
