Merrill Lynch analysts say the $11.3 billion private equity buyout of SunGard indicates that Wall Street is seriously undervaluing cash generative IT and business process outsourcing vendors.
The seven private equity firms buying SunGard are paying a 14% premium on the vendor's pre-deal closing price.
Merrill Lynch analyst Gregory Smith says the size of the premium and expectations of improved returns by the buyout group should encourage investors to look again at IT and BPO firms with similar balance sheets to SunGard's. He singles out Affiliated Computer Services (ACS), Fiserv, and First Data as stocks trading at attractive multiples with high earnings stability and strong cash flow.
With ACS currently priced at $51.94, Fiserv at $38.9 and First Data at $39.56, Smith says the stocks "should offer good downside protection in any tough environment for technology investing".
For Finextra's take on the SunGard acquisition, see Big game hunters