Sometimes opportunities in thestock market are where you least
expect them. When a company sees a spike in share price on news of
abuyout that ultimately fails, that stock is left for dead by most
But you can actually find deep value here.
Let me explain...
After a series of stumbles throughout 2011, theboard of
directors at health care information provider
realized that the company may be better off in the hands of a
larger digital information company.
An announcement at year's end helped to give fresh life toshares
, as they quickly rebounded toward the $40 mark.
But few companies were interested in buying WebMD at that price,
let alone at the 20-40% premium that shareholders typically expect
in a buyoutoffer . The company's board announced that plans to sell
the company were off the table in the near-term, sending shares
quickly to fresh multi-year lows. Eventually, this company dropped
off the front page, and its shares fell below $15 as investors
moved on to other, timelier opportunities.
Yet it's worthwhile to keep tracking these companies after the
crowd has moved on. For example, even in the absence of near-term
buyout prospects, value investors started to move back in to WebMD,
pushing shares up more than 15% in January. That was a wise move as
WebMD recently announced stellar quarterly results, helping shares
to post a heady 50% in the past three months to about $22.
As the WebMD example shows, companies need to seek a buyout when
they have momentum, and they must have a realistic view of the
value of their company. WebMD's board misread the tea leaves on
both counts. But the company still plays a major role in the health
care information sphere, so this stock, which remains more than 60%
lower than where it stood in early 2011, has ample room to move
higher as sales andprofit trends improve.
Here are three otherstocks that have recently pulled back as
buyout talks have faded.
Digital Generation (Nasdaq:
This company, which provides advertising management services to TV
broadcasters and leading websites, has really vexed investors.
After its shares swooned from above $40 in early 2010 to below $10
last spring, investors started to pay closer attention after media
reports suggested industry rival Extreme Reach offered to buy
Digital Generation for $20 a share. That deal might have eventually
been met with anti-trust concerns, so Digital Generation's board
allegedly rebuffed that offer, though it did hire Goldman Sachs to
find other buyers.
That move angered several key shareholders, as concerns grew
that Digital Generation was really holding out for an even higher
offer than the one Extreme Reach had proposed... these investors
would have been happy to see this company sell for even $15 a
Yet just a few weeks ago, Digital Generation's board decided to
pull the plug on any moves to sell the company. Shares plunged to
about $6.50 as a result. Yet, after that drop, shares managed to
rebound slowly for six straight sessions -- for a simple
reason: Those activist investors likely haven't gone away, and
pressure is likely building for a sale of the company, even it
comes in the $10 to $15 range. This saga is definitely worth
Merge Healthcare (Nasdaq:
In a similar vein, this provider of digitized medical-imaging
software also decided to end talks to sell the company after
itsinvestment bankers couldn't secure a sufficiently robust bid.
Shares surged toward the $3.50 mark near the end of 2012 on hopes
that a buyout offer would soon be forthcoming.
Hopes were dashed on a Feb. 19 conferencecall asCEO Jeff Sturges
said the company had received several nonbinding "indications of
interest," but that the board had determined the valuation ranges
"did not appropriately value the company."
Shares have now fallen to about $2.50, which represent solid
value. That's because Merge is still facing a tremendous growth
opportunity as doctors, hospitals and other health care providers
move to create digital medical records for all patients. The
positive industry trends are already underway: Later in that call,
Sturges noted that in the fourth quarter of 2012 "we saw one of the
strongest sellingquarters in Merge's history." The company'sbacklog
grew an impressive 82% last year.
As Merge Healthcare announced 2012 fourth-quarter results in
mid-February, Sturges and anotherinsider bought a collective 40,000
shares (at about $2.30 each).Insiders have been steady buyers of
this stock in recent years, and with shares now trading for less
than one time trailing sales (which is quite low for a
subscription-based software provider), that buying could prove to
be a smart move.
Joy Global (NYSE:
Though this provider of mining and construction equipment didn't
formally explore a sale of the company, it's worth noting that
shares quickly spiked toward $70 in early January as buyout rumors
circulated. We have no way of knowing whether Joy Global is holding
buyout talks outside of the media glare, but in the absence of any
further news, shares have drifted back down toward the $60
At the current price, this is surely a stock worth tracking. My
colleague Amber Heslta-Barnhart recently discussed the
upside for this stock and suggested an intriguing income-generating
strategy for this stock.
Risks to Consider:
Two of these three stocks only recentlyput their companies up
for sale (without a positive outcome), so it may be quite a while
before they heat up again -- at least using the buyout angle.
Action to Take -->
The key is to focus on companies that appear attractive on an
fundamentalbasis , regardless of any buyout angles. All three of
these stocks trade much lower than their two-year highs and are
capable of building solid growth on their own -- before any suitors
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.