You know the drill. A well-known brand name like Tommy Hilfiger
Well, it's more than a drill for the clothier. Industry publication Women's Wear Daily has leaked the news that Hilfiger has been purchased by Apax Partners, a British private-equity firm. The stock soared on the news, and investors, reading reports that the company was asking $1.8 billion but might be worth as much as $2.2 billion, were looking for a quick buck.
The winner purchased the company for $1.6 billion. That works out to $16.80 a share, about two greenbacks short of the high Hilfiger hit back in August and a mere 4.3% above the closing price just before the leak.
There is an excellent lesson here. Sometimes, companies that put themselves up for auction are in the process of recovering from a significant business slowdown and seek to make operations a bit more lean or capitalize on other opportunities.
Hilfiger's business started to wane in 2000, and the company was in the process of making a recovery -- albeit a slow one. Its operating margins were below those for competitors such as Ralph Lauren
But in general, potential investors would be wise not to jump in on speculative bits. Remember reading that Wal-Mart
The good news, maybe, is that Hilfiger got an offer at all. The company could have done a stage-left and not completed a deal -- like supermarket chain Albertson's did when it went on the auction block with Goldman Sachs as its advisor. That stock soared 27.4% and a few days later set its 52-week high. Today, the stock has traded for almost one dollar less than it fetched the day before the auction news.
If you're looking to make money in stocks selling for less than intrinsic value, as the folks at the Motley Fool Inside Value newsletter would have you do, you buy the companies before the "we're looking for strategic alternatives" news is in the headlines. Investors sometimes overreact to the immediacy of a deal and forget that, if the deal falls through, the results could be downright painful to their wallets.
The bigger lesson, though, is that chasing a successful deal isn't a guaranteed road to success -- as Tommy Hilfiger shareholders found out today. Value matters, and when you're dealing with companies not in their prime, it pays to remember that the proverbial free lunch is hard to come by.
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