Madison Dearborn Partners, LLC private equity purchase of CDW Corporation (CDWC) earlier this week caught me by surprise, especially as I was short CDW stock at the time. For those interested, you can read the CDW press release (PDF, 36k).
In an earlier article, I indicated that I believed CDW was overvalued relative to its peers. While that might have been true, the private equity deal takes the discussion of out of the theoretical realm. One of the challenges of shorting on valuation alone is that valuation can go higher yet.
Probably the best and most succinct summary of the CDW transaction was expressed yesterday by Bill Fleckenstein of FleckensteinCapital.com:
Deals these days make no sense, and I think that the CDW one will rank right up there with Freescale Semiconductor, in terms of ideas that should have been passed on. To pay 1 times sales for a company that has no products, and in essence just owns a mailing list and a couple of distribution centers, seems to me to be the height of folly -- a refrain that I often find myself repeating lately.
In situations like this, you simply take your lumps and move on. One of the challenges in shorting, especially in a strong bull market, is to find a catalyst that will drive the stock lower. I had no catalyst, but instead believed that CDW's valuation would in time drift lower and more in line with that of its competitors.
The shareholders of CDW have done well. The company does appear to be well managed, and even though I was short the stock, I was and am a content customer.
Disclosure: I have no positions in CDW.
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