STOCKS

Several mid-caps in the materials and industrials sectors are doing even better than Temple Inland was before International Paper pounced with its big bid, writes Senior Editor Igor Greenwald.

Those International Paper (IP) guys must be real saps.

Right after the market was subjected to another pasting Monday, they unwrapped their hostile takeover bid for corrugated-packaging and building-products maker Temple Inland (TIN).

Perhaps they haven’t heard that the economy is on the ropes again, and the housing market beyond repair. How else to explain IP valuing Temple Inland at a 45% premium to Monday’s market close?

Temple Inland has its own theory, of course—it alleges that its rival’s bid “grossly undervalues” its prospects, which reportedly includes:

  • the likelihood of further recovery in corrugated packaging “as the economy continues to improve” (what?!)
  • unrealized cost savings
  • and even the possibility that its building-materials business still has value...

International Paper retorts that the recovery in packaging will be slow, with the building-products business a drag for years—and anyway, its offer fully values any potential improvement.

In other words, the haggling has begun. And no matter how much criticism IP heaps on the object of its ambitions, its opening bid is far more eloquent.

Let’s split the difference and stipulate that, at 9.2 times the current year’s far-from-peaking cash flow, the offer is not crazy-rich, but not insultingly insufficient either.

For bystanders without a dog in this fight, the final outcome will be of modest import. The more interesting—and potentially far more lucrative—question is, who are the other Temple Inlands out there, in terms of potentially undervalued acquisition targets?

This can be a fun game to play, if only as a distraction from the clammy market action. And even if no greater fool shows up to bid over the top for these particular stocks, it’s always useful to poke around for hidden value, especially in sectors already seeing merger action.

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Tickers Mentioned: TIN, IP, MERC, UFS, SHS