IMS Health Is Being Stolen from Shareholders

It was announced Thursday that IMS Health (RX) was to be stolen from its shareholders for $4 billion or about $22 share; a private equity firm will buy them out. IMS Health should have free cash flows this year of over $340 million (the actual number should be higher than $400 million, but is benefited by a $60 million onetime tax benefit).

So this company, which has virtually no competition, has barriers to entry impossible for a new entrant to overcome, and a cash printing machine will be sold for about 12 times free cash flows. Over the past year we’ve seen much lower quality companies being sold for much higher valuations than this. Most recently, Burlington Northern Santa Fe (BNI), which has a significant competitive advantage but has far inferior return on capital and free cash flow generation than IMS, is to be purchased by Mr. Buffett for about 20 times earnings and 30 or more times free cash flows. IMS Health’s management and board have a history of making dumb capital allocation decisions, but this one may go down in history as their dumbest.

Full Disclosure: We own these shares and will probably hold on to them in the hope that shareholders will refuse this offer.

Comments

[Alan Young:]

Wow, you just can't please some folks. Shares up 23% today, and instead of celebrating your gains you are complaining.

When I have a day like that, I sell 20-30% of my shares and take the "free" money (a gift from the market) to invest elsewhere.

If this company was so precious to the shareholders, why did they allow the stock to trade so cheaply?

Nov 05 05:11 PM

[Graham Jervis:]

A Guy named Dan Ferris said the same thing yesterday about RX

Nov 06 11:54 AM

[E Nuff Sed:]

I agree. I have held this goddamn stock since 1999 with the same logic and have a 4.1% gain for my pains over ten years. At least the private equity guys are a lot smarter than the investors. I am going to vote against this buyout.

Nov 07 05:49 PM

[weiwentg:]

I got lucky and bought IIMS around $13 but I agree that management is selling the stock under what I would consider fair value. Given the fact that other potential bidders have complained about the lack of time to submit bids, it's possible that a higher offer may emerge. I don't think that will happen, though.

Nov 26 08:42 AM