Monday, March 28, 2005


SunGard> to be taken private in $11.3 billion buyout - Computer Software - Technology, Software - Software - M&A

In the mid-eighties leveraged buyouts were in vogue. T-Boone Pickens was the most famous buyer. Time and again he was able to purchase an entire company by getting an investment bank or group of investment banks to loan 100% of the purchase price. The trick was to find an under-valued company and to pledge the assets of the company as the collateral for the loan! Many times after the company was purchased, the pieces were sold off one at a time with the total sales price greater than the purchase price. I picked up the nick name of T-Bond during this time because I "tried to buy the US government bond market on a leveraged buyout". I borrowed money at 13% interest to buy T-Bonds paying 13.75%.

The current economic cycle is similar to the cycle of the mid 1980's. Today, it was announced that 7 investors have formed a group to buy SunGard. The purchase price is 11.3 Billion Dollars. It is only common sense that leverage buyouts should happen now. The public is afraid of the stock market because many were burned in the 2000 bubble. The result is that stocks are cheap relative to borrowed money. Companies can be purchased on 100% borrowed money! Stocks are yielding more than bonds! Such a situation can only last so long until the market finds a way to correct the discrepancy.

The BIG BULL BOOM BUBBLE BUST is on the way. For the past few months, I have written that the BIG BULL BOOM is under-way. World wide economic growth is BIG. US exports and imports are BOOMING. Boomers have money to spend and they are spending it. US consumers are as wealthy as they have ever been. The opportunity is huge.

Unless the market goes up substantially soon, I expect many more leveraged buy-outs to occur. A regular reader has noted that buy-out premiums have not been very large. He is correct. Companies such as AT&T, ASK, NXTL and others needed to merge. In the face of soaring prices for inputs, businesses have not been able to raise output prices to match; in fact, many businesses are having to lower prices to compete. Businesses have fought hard to improve productivity. Unit labor cost have gone down. Companies such as Vonage and Google are putting the hurt on a lot of other "traditional" businesses. Who wants to run a newspaper advertisement for more money and less coverage than a Google ad. Who wants to pay more money for local only service than they can pay Vonage for local and unlimited long-distance.

There will continue to be mergers and leveraged buyouts. For example, Yellow Freight just announced another deal! A report today suggest that the savings to be realized by the merged companies will be bigger than first thought.

The rumor mill is starting to crank-up; which company will be next? Chasing rumors is a losing game. Buy good companies at fair value and you will hit more than your fair share of mergers. Last year, our family accounts enjoyed several buyouts. In most cases, we bought the stocks because we liked the business prospects. The companies on the buying end are getting great deals. Again, Yellow has more than doubled its size and has fully absorbed previous deals with little or no dilution. Buy stocks before they are bought out by someone else!