In a demonstration of how, in America, you're never too young (or too small of market cap) to start shopping, little baby healer and Motley Fool Hidden Gems Watch List stock Natus Medical (NASDAQ:BABY) has up and bought competitor Bio-logic Systems (NASDAQ:BLSC).

In a press release issued Tuesday, Natus announced the conclusion of a definitive agreement to acquire all shares outstanding of Bio-logic for a total cost of approximately $66 million, cash. While Natus doesn't actually have $66 million lying around to do the deal, the company does have a cash-rich balance sheet containing most of the greenbacks necessary -- nearly $40 million at last report. For the balance, Natus plans to tap a new line of credit from Wells Fargo (NYSE:WFC) for $10 million, draw upon $7.1 million to be paid for a private placement of 600,000 shares being sold to David Nierenberg's D3 Family Funds, and avail itself of the cash hoard currently held by Bio-logic itself ($14.3 million at last report). Put it all together, and Natus can easily assemble the necessary cash and still have $5 million or so to spare.

As for how wisely Natus will be spending that cash, let's run a quick compare and contrast.




Return on equity











(Data provided by Capital IQ)

Natus is offering a 45% premium to Bio-logic's pre-buyout announcement price (roughly $5.90). Even so, in pretty much every valuation category you care to look at, Bio-logic's post-buyout price values the target company at a significant discount to the multiples that Natus's stock currently fetches. In other words: Bio-logic's a bargain. And the fact that Bio-logic sports a better return on equity than Natus currently manages to? That's just icing on the cake.

Once Bio-logic's adoption papers have been formalized, it looks like Natus will be the only remaining standalone, public, pure play on infant health care. According to Yahoo! Finance, there are two other companies working in this sphere, but one, Welch Allyn, is privately held; the other, Grason-Stadler, is a subsidiary of larger medical device maker Viasys Healthcare (NYSE:VAS). So what we have here with Natus, is a tiny company in a profitable market niche, essentially locking up that niche by buying one of the few competitors that's for sale, and doing so at a discount.

Do I even need to say it? "Good BABY."

Since Tom Gardner first put Natus on his Watch List in June 2004, the stock has more than doubled in value. Want to find other tiny treasures before the pros on the Street even start looking? Take a free trial to Motley Fool Hidden Gems , and look at the other bargains we've found. Click here to start.

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Fool contributor Rich Smithowns no shares in any company mentioned in this article.