"Today's Best M&A Values"
By Fred G. Jager, President, Hunter Wise Financial Group, LLC

Where are the best acquisition values in today's merger and acquisition marketplace? They are hiding in plain sight in the form of severely undervalued microcap public companies. Companies with excess cash are one good place to start looking.

In a June 11 Barrons article, writer Jack Willoughby lists 70 public stocks in the Internet sector that trade at less than the value of the cash on their balance sheet. For example, Promotions.com (PRMO) had a market cap of $4 million on June 1. As of March 31, it had $15.3 million cash on the balance sheet. Another example from the same dates: Scient (SCNT) had a market cap of $80.8 million and $161.1 million of cash. Sixty-eight other cash-rich companies are on that abbreviated list. Research into other market sectors will add hundreds of additional excess cash companies prime for acquisition.

Another aspect that makes these extremely undervalued microcap companies of interest is the ability to gain control at multiples substantially below what the buyer would have to pay for a comparable size and type of privately held business.

In a recent speech, Merrill Lynch Director Philip Loewen noted that Heartland Industrial Partners has a pending acquisition of Springs Industries Inc. The transaction cost $280.1 million, which is a 26 percent premium over the previous month's market value. Here is the most interesting piece of this deal: Heartland is buying this company for 1.1 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, which, in essence, equals cash flow).

Is that an exception? Absolutely not. There are hundreds of these opportunities. In February, Bank Boston/Goldner Hawn bought VICORP Restaurants Inc. for $174.2 million, or 4.2 times EBITDA. A comparable private company transaction would have been close to six times EBITDA.

Last year, 77 public companies went private. Through May 31, 2001, 38 have taken a similar route, with scores more in process. Why? Four important trends help explain this public to private march.

First, there is a large universe of opportunities. By my count, more than 10,000 public companies probably should not be public. Further, these have high buyer-attractive valuations.

Second, there is an increased access to capital from financial sponsors. Private equity groups have more than $200 billion in committed funds looking for a place to be invested. Because of the public market values, these financial sponsors are re-allocating to leveraged buyout strategies, augmented by recovering debt markets, to finance buyouts of managements and sponsors.

Next, these microcap opportunities are here to stay. Though private-to-public activity may moderately raise valuations in the short term, the intrinsic disadvantages of being a microcap company will maintain reasonable valuations near term.

Finally, these public-to-private transactions allow every involved party to win. The company achieves a critical mass, management enjoys greater resources and investors maximize their existing value.

Whether it is to acquire cash or simply take advantage of an unusually attractive purchase price, the undervalued microcap stocks are often the best M&A values in today's marketplace.

Fred G. Jager is president and chief executive officer of Hunter Wise Financial Group, LLC and Hunter Wise Securities, LLC, a NASD broker dealer. Hunter Wise Financial Group is a specialized investment banking firm providing institutional funding, as well as merger, acquisition, divestiture and advisory services for micro-cap public companies, as well as pre-IPO privately held businesses. Mr. Jager can be reached at (949) 263-0033 or fjager@hunterwise.com.

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