It should come as little surprise that many stocks that make it into the
Magic Formula Investing (MFI) screen are attractive acquisition targets. Many, if not most, are good businesses selling at cheap prices, exactly what the screen is designed to find. When you have quality selling cheap, not only individual investors but business managers, both public and private, take notice as well. Particularly if the screened business is one that is a current or potential competitor, or a business that nicely compliments current operations, it makes sense to acquire it at a favorable price. When this happens, investors reap big rewards in short periods of time.
Of course, there is the other side of the coin too - declining businesses or heavy cyclicals can find their way onto the screen as well, usually well into the downside. With these firms we need to be very careful - too much debt can land them in bankruptcy court. Unfortunately, MFI has turned up a few of these as well. Let's take a look at some individual "buyouts and bankruptcies" on the MFI screen in 2009.
Buyout: IMS Health (RX) by private capital firms TPG Capital and CPP Investment Board.
IMS Health, a former MagicDiligence Top Buy, is an attractive business with great cash flows, stable revenue streams, high margins, and a dominant competitive position in prescription data. Although the deal has not closed yet, the $22/share cash offer is well above IMS's trading range of $10-15 for most of the past year, and a 31% gain over the price when the deal was announced. Those who got into this stock during its 2009 MFI run could have recognized as much as a 100% gain in less than 9 months.
Buyout: Marvel Entertainment (MVL) bought by Disney (DIS).
This deal, announced at the end of August, featured on-again off-again MFI stock Marvel Entertainment, the well-known comic-book and movie producer, being acquired for $4 billion dollars in cash and Disney stock. The buyout values Marvel at about $52 a share (it varies based on Disney's stock price), a significant premium to its 2009 trading range. Marvel had 2 stints on the MFI screen this year: 2/6 - 3/13 and 7/23 - 8/3. If you would have bought in the latter range, you could have pocketed a nifty 27% gain.
