Rule Makers really do rule. Yesterday, First Data Corp. (NYSE:FDC), a Motley Fool Inside Value selection and one of our "9 Best Rule Maker Stocks," agreed to be acquired by the famous private equity firm Kohlberg Kravis Rogers & Co. (KKR). The deal -- estimated at about $27 billion -- represents a 26% premium over First Data's closing share price on Friday and about a 34% increase over the average price during the previous month.
The transaction is still pending a 50-day "go shop" provision (in which management can seek out higher bids), so it's far from a done deal. In my opinion, though, this is a pretty sweet arrangement for First Data shareholders as it stands.
As I mentioned a few weeks ago, shares of First Data, though not blatantly cheap, were reasonably priced on both relative and absolute valuation measures. Couple that with the de-leveraging of First Data's balance sheet -- conducted through last year's spinoff of Western Union (NYSE:WU) -- and the Colorado-based payment processor had "LBO target" written all over it. Still, it would've been tough to predict (or even imagine) a purchase premium of this magnitude, even amidst the flurry of buyout madness we've been witnessing in the last year.
After the Western Union spinoff, our value investing guru Philip Durrell priced the "new" First Data at about $23 per share. So, the deal is primarily the result of cheap debt, banks like Citigroup (NYSE:C), Credit Suisse (NYSE:CS), and HSBC (NYSE:HBC) falling all over themselves to get in on private equity fever, and KKR's seemingly insatiable appetite for record-breaking takeovers -- rather than any rock-bottom price tag on First Data. Said more simply, First Data shareholders should be really pleased with the fast cash. I know I am.
I've enjoyed my time as a shareholder of First Data and all, but I'm always glad when I get paid a fat premium for one of my stocks. The reason I owned First Data in the first place was because of its kingly free cash flow generation, recurring revenue stream, and dominant position within payment processing. Not to mention First Data's prospects for growth as more and more people rely on electronic transfers.
However, now that Mr. Market, or KKR in this case, recognizes those features and actually wants to pay up for them, First Data Fools should be more than happy to oblige. Warren Buffett once said, "The market is there to serve you, not to instruct you." With Berkshire Hathaway owning 10 million shares of First Data, I'm guessing Mr. Buffett isn't exactly upset with the offer, either.
Of course, it's virtually impossible to predict exactly how you'll be able to earn excess returns in the stock market. But as long as you're thinking like an owner -- that is, looking to buy cash-generating assets, with solid competitive advantages, at reasonable prices -- lots of good things tend to happen over time.
Whether your investment gets returned through steady dividends and capital appreciation, or through a furious LBO craze that's spreading the nation, owning quality companies at good prices puts you in a strong position to stomp the market.
Philip Durell searches for these scenarios during most of his waking hours (and for the first few minutes of his sleep). We don't know exactly who will buy out what, but many of Philip's undervalued cash-cow selections are prime candidates. Want to see for yourself? For a free gander at the entire market-trouncing portfolio (including the original First Data recommendation), take a 30-day test drive on us.
Foolish contributor Brian Pacampara conducted leveraged buyouts of student housing once, but the leverage (and students) scared him into stocks. He owns shares of First Data and Western Union, both Inside Value recommendations. Berkshire Hathaway is also a selection of that newsletter. The Fool's disclosure policy never sells out.
