Could an ordinary investor have predicted these acquisitions?

The post reorganization equity is a field for investments that I have visited before, and consider one of the more attractive fields to search for gems. The attractiveness is outlined in Joel Greenblatt’s book. The reason I am writing this post is because Smurfit-Stone, a company that recently emerged from bankruptcy, just agreed to be bought by RockTenn.
When a company emerges from bankruptcy, it is typically much leaner from a fixed cost perspective. Wages can be lowered, debt can be erased, and agreements with suppliers or customers can be amended. This is why contrary to conventional wisdom, a company becomes more attractive after it declares bankruptcy. As Greenblatt outlines, there are many examples of this occurring, and Smurfit-Stone can now be added to the list.

Another interesting aspect of the acquisition is that Footnoted over at Morningstar released a report on potential acquisitions in 2011. Can you guess one of the companies on that last? Yes, Smurfit-Stone. Footnoted uses a different methodology to arrive at this conclusion, utilizing a close reading of nuances in SEC filings. Footnoted and Morningstar each chose their top 10 potential acquisition targets which can be found here and here respectively. The Footnoted report is more in depth and their thought process is more fleshed out and readers can learn by reverse engineering their process. I recommend this to anyone looking for a jumping point in research. Looking for companies on the lists that are cheap regardless of their buyout potential gives someone a catalyst to point to for unlocking value.

The New York Times ran an article in the Sunday Business section about Citadel Broadcast being sought by another company. This is another example of a company emerging from bankruptcy and being a much more attractive company. This instance is a little more fraught with controversy as the article outlines. What the article doesn’t really delve into is that most of the new shareholders were former debt holders. They are looking to cash out as soon as possible. Their selling normally pushes the price down even greater, as they are less concerned with the value of the stock. In this case, the buyout offer has given former debtholders the opportunity to sell without driving down the price in the process. At the same time, this situation should act as a warning that investors should be looking for companies they would like to own even if it is not acquired.

I hope these few examples demonstrate that there is almost always the catalyst of an acquisition in the post reorg equity space. If you buy a company cheap enough, as these usually are, it become icing on the cake. There are still plenty of bankruptcies getting worked through that are going to start trading soon enough, and I posted a link to a list of potential companies in this post.

To answer the title of the post, I don't think an investor could predict these acquisitions. Footnoted is quite the thorough investigator. I do strongly believe that an investor can put themselves in a situation - post reorg equities - where the chance of an acquisition is higher than other stocks, and plenty of resources exist for investors to find worthy investments in such circumstances.

Talk to Andrew about post reorg equities