Last Thursday, shareholders at Sabre (NYSE: TSG), the parent company of online travel provider Travelocity, approved a roughly $5 billion bid for the company from two private equity firms, Silver Lake Partners and Texas Pacific Group.

And while it's a little too late to take advantage of the buyout by accumulating shares of Sabre and profiting from the transaction, there is something that investors can learn from this deal.

Like what? Namely, what it is that private equity firms are attracted to.

So let's run though what made Sabre so attractive, and what I think many private equity firms are looking for, shall we?

Big Name, Lots of Promise
For starters, perhaps Greg Mondre at Silver Lake Partners said it best when he characterized Sabre as a company that has a "track record of pioneering and delivering best in class technology solutions for the global travel industry."

What Mondre means here is that the company is a leader (although he said it using some fancy language).

You see, while private equity firms love to pick up a company on the cheap (and then sell it for a princely sum down the line) they want to buy companies that have brand name recognition, and which have a reputation for being on the cutting edge in their field.

And if you think about it -- that make sense. I mean why pony up big bucks for a second or third tier company when you can have the industry leader for just a little more money.

The Number of People that Use the Company's Services
The next attractive feature is Sabre's footprint, and its distribution network. Sabre employs roughly 9,000 employees in some 45 (give or take) countries. It does about $2.8 billion a year in annual revenue. It also provides content for roughly 400 airlines and more than 200 hotels and markets its services to more than 50,000 travel agencies in 113 countries.

Why is this so important?

Because Silver Lake and Texas Pacific aren't just buying a company, they're buying what amounts to a giant billboard. Think about it folks, if you are in the travel industry, and you are looking for booking information, odds are you use or refer to Sabre.

This means that there are literally tons of eyeballs looking at or using the company's wares everyday. And again, the private equity guys know this. The point is that this user base can be marketed to big time -- and not just for travel services.

For example, hypothetically speaking, the company could start selling complimentary items such as an extensive line of travel gear or luggage, or even suntan lotion.

Makes sense, right? I mean, folks that go on vacation need that stuff.

Anyway, the point is that even though I doubt that in reality Sabre will be marketing sun tan lotion anytime soon, their user base can be leveraged big time!

Take a Bite Out of Executive Compensation?
Another potential source of savings is executive compensation. To be clear, I perused Sabre's proxy statement and didn't see anything too outrageous in terms of executive compensation -- so there's probably not too much to cut. (Plus news reports that Sabre's top management team will stay onboard even when the transaction is consummated).

Nevertheless, there are some benefits to be had if the axe were to be whipped out. For example, in 2005 the management team collectively received almost $2 million in bonuses (on top of healthy base salaries I might add). They've also receive a host of stock options, and a number of other perks from country club memberships to auto and air travel perks over the years as well. And a lot of this could potentially be cut.

The point here folks is that private equity firms will look to trim fat anywhere they can, and often the issue of executive pay is among their top targets come cost cutting time.

The Financials
Then there's the financials. Glancing at Sabre's numbers toward the end of 2006 (The September quarter to be exact) the company's selling, general and administrative expenses as a percentage of sales stood at roughly 31.2%. That was up from 30.3% in the prior year. And while this amount probably isn't anything to worry about given the company's roughly 6% revenue growth over the prior year, there's no doubt that these private equity guys think that there are some efficiencies to be had there.

Then there's the company's balance sheet. Again as of September the company had a little over $11 a share in what I would call pretty hard assets (meaning cash, equivalents, marketable securities, physical equipment and real estate). And that's not too shabby given that the company's stock was selling in the low $20s at the time.

The lesson here is that private equity firms look for companies with a host of valuable assets so that even if all else fails their downside would be limited.

So What's the Next Target?
Here are some companies that I think look attractive given the above parameters:

Specifically, I'd take a gander at Target (NYSE: TGT), General Motors (NYSE: GM) (although union related issues could stymie a takeout bid), Circuit City (NYSE: CC), Best Buy (NYSE: BBY), Martha Stewart Omnimedia (NYSE: MSO), and Lowe's (NYSE: LOW). And I mention these companies because each has a terrific brand name and lots of costs that can at least thoeretically be taken out of the equation by a smart private equity firm.

The Bottom Line
The Sabre deal is valuable in that it provides the investor insight into what private equity firms are looking for in an investment.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  2. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Security

    A financial instrument that represents an ownership position ...
  4. Series 6

    A securities license entitling the holder to register as a limited ...
  5. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  6. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!