The Next Small-Cap Buyout

By | July 21, 2007

The Next Small-Cap Buyout

Private equity buyouts and mergers are an integral part of small-cap investing, and let’s face it, the next small-cap buyout is coming soon — big money is finding a ton of value in small companies. But that doesn’t mean you should go out and try to pick the next buyout.

As a small-cap investor, all you can do is continue to look for financially stable, well-run companies. If you can find value in promising small caps, a buyout would just prove your thesis right. As for where to look, follow Chuck Royce’s three precepts:

  1. Focus on small companies.
  2. Employ a fundamentally driven, business-buyer’s approach to small-cap investing.
  3. Plan on holding for five to 10 years, if not longer.

And mix those with three learnings from Motley Fool Hidden Gems

, where Tom Gardner and Bill Mann have had seven companies from their scorecard acquired (and two more in the process of being acquired):

  1. Hunt for cash-rich balance sheets.
  2. Look for top-flight managers (who preferably have an ownership stake in the company).
  3. Buy businesses with a wide market opportunity or a valuable product roster.

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