|Thinking about future valuation.|
Many of the old WebMD shareholders were ticked off when MW managed to bump up the conversion ratio of MMGR shares to WebMD shares in the merger. At that time I suggested that what had happened was a leveraged buy-out using the stock of the company being bought in place of cash. Since that time, in spite of the fact that the intent (and scope in time) was made absolutely clear by management, the paying down of that debt (by way of restructuring, and stock repurchasing) has met with an endless stream of complaints. Now that that debt has largely been paid off or brought to reasonable proportions, the stock reflects only the value of the end-product of that re-valuation. I think this mistakes the show for the magician and represents a real opportunity for value investors.
The sickness: Fear on the part of investors that growth by merger and acquisition will dilute shareholder value (based on past experience) and that therefore it will not be done.
Those with experience with MW know him as the inventor of the use of stock as currency (well, OK, that goes too far, but certainly he is a master of the art). (Fitting in a way that he should find himself needing to repair what some might consider the far extreme into absurdity of that strategy). Now that HLTH is past the restructuring phase, I think it is fitting to look at the way this management grew Medco Containment Services as the asset that is not being factored into the stock price.
However costly it may have been for MMGR, what the merger managed to do was to eliminate even the appearance of competition in this field. In the dominant position I think it is more than probable that what we will see is the use of stock to consolidate the company's position throughout the country and that in such a way as to consistantly add to real per share earnings; in other words: the use of stock as currency the way it should be done. That is what was done with Medco, and that is what I believe we will see here. Those who are taking the current assets and their earning power and projecting stock price out six months, one, two years are looking in the wrong place. That is how we are where we are. Where we will be in six months is going to be determined by the pace and value of future mergers and acquisitions. My prediction is the pace will be as breathtaking as was the pace of the elimination of debt.
I'm not going to hedge this "take". I say we are dealing with a team of work-aholics and they have finished one thing (not the restructuring, that was the last thing, the setting rolling of earning's "traction" from the existing structure...that's done); they are already looking at the next thing.