On April 1, 2013, well-known market research firm Forrester Research, Inc. (NASDAQ:FORR) announced that it would commence a $130 million Dutch auction-style stock repurchase program. According to the release, the program will remain open for at least a month. Given the company’s relatively low market capitalization of approximately $780 million, this move has the potential to provide Forrester Research, Inc. (NASDAQ:FORR)shareholders with a significant money-making opportunity in the medium-term.
It also has the potential to reorder Forrester Research, Inc. (NASDAQ:FORR) investors’ financial positions in dramatic fashion. This article will examine the structure of the Dutch auction and offer some insight into its potential effects on the company’s stock price, financial statements, and competitive position relative to its peers.
Competitors
One of Forrester’s major competitors is the Stamford, Connecticut-based research and information services firm Gartner Inc (NYSE:IT) . With nearly five times as many employees as Forrester, Gartner is a more recognizable company and counts many prominent firms as clients. Like Forrester Research, Inc. (NASDAQ:FORR), it offers a variety of research services, but their products are generally tailored more closely to the needs of the information technology industry. Most of its research services focus on the impact and applicability of various programs, technologies and applications. Although Gartner has a profit margin of just over 10 percent and thus is not much more profitable than Forrester, it has a much better return on equity figure of over 67 percent. It also earned about $166 million on $1.6 billion in gross revenue. Forrester’s only notable financial advantage over Gartner relates to cash; Gartner has $215 million in debt and about $300 million in cash on hand.
In a more indirect way, Forrester also competes with Nielsen Hldg NV (NYSE:NLSN). The two companies’ operations intersect primarily in the market research and consumer-habits segments. While Nielsen Hldg NV (NYSE:NLSN) is the undisputed leader in researching and quantifying consumers’ media consumption habits, Forrester does maintain a significant “old fashioned” research arm that competes with Nielsen’s operations. Financially, Nielsen is narrowly profitable with return on equity and profit margin readings of around 5 percent. However, the company is far larger than either Forrester or Gartner: At $5.6 billion, its revenue is roughly 20 times greater than that of Forrester; however, it has significantly more debt than either of its peers. With $6.6 billion in debt and just $288 million in cash, Nielsen is not a good pick for value investors.
Deal Structure
Under the terms of the deal, Forrester has agreed to repurchase up to $130 million of its own stock for a period of not less than 30 days. Shareholders are free to tender their shares in 25 cent increments between $32 and $36 per share. On the trading day prior to the deal’s announcement, Forrester’s stock closed at $31.65 per share. The company’s shares now sit at about $35 per share. Accordingly, the deal continues to offer a theoretical premium of up to 3 percent.
However, it is important to note that shareholders will retain their shares until the offer’s completion. Once the repurchase plan expires, Forrester will use the raw number of shares tendered to determine the minimum price at which it can repurchase $130 million of its shares. All shareholders who tendered their shares during the tender period will receive per-share payments at this price.
It is too early to determine the number of shares that will ultimately be repurchased under this program. If Forrester uses its entire $130 million budget to buy shares at an average price of $34, it would retire about 3.8 million shares. This represents about 30 percent of the company’s total float, which could have tremendous implications for its future share price.
How to Play It
Investors who wish to play this deal may be best served by accumulating a position in Forrester on share-price dips and tendering all of their holdings near the top of the Dutch auction range. This strategy is not a guarantee, as an investor doesn’t want to tender too high or they may not have their shares tendered. Given the company’s negative earnings momentum, it is not inconceivable that its shares could suffer a temporary fall after the cessation of the repurchase plan. In this scenario, short-term investors who used leverage to accumulate a position could be caught flat-footed. Opportunistic investors who buy in after a potential post-repurchase fall could be rewarded in the medium term. At the very least, Forrester’s stock is likely to correct to the level of the “final” tender offer if it is below the current price.
Post-Repurchase Financials: EPS, P/E, Market Valuation Relative to Peers
Assuming that Forrester successfully repurchases about 30 percent of its total float, its earnings-per-share figure will jump from 1.12 to 1.46. Depending upon the movements that the stock makes in the days that follow the deal, the P/E ratio could remain largely unchanged or spike by as much as 30 percent. This would place it in a range between 30 and 39. Meanwhile, Forrester’s market capitalization could remain quite low relative to its peers at just 6 percent of Nielsen’s total market cap and about 15 percent of Gartner’s market cap.
In sum, this deal offers an interesting opportunity for enterprising investors; however, Dutch auctions come with few guarantees. Based on Forrester’s ultimate price determination, it is possible for shareholders who subscribe to this offer to receive compensation at the lower end of the auction’s range. As such, investors should conduct their own due diligence before proceeding. For other ideas and investment opportunities, click here.
The article This Dutch Auction Is Creating An Opportunity For Investors originally appeared on Fool.com and is written by Mike Thiessen.
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