Are you MBO-ready?

• Position: Brief Article

IN SMALL AND micro-cap companies, frustrated directors are questioning whether the stock market will ever value their corporate performance. Despite several years of increasing sales and earnings, their stock has languished while that of larger companies has soared. The S&P 500 currently boasts a gaudy 28 price-to-earnings ratio, with tech stocks in the index sporting a whopping 62 p-e.

Last year the 25 largest S&P stocks were up over 50%. In stark contrast, more than half of the S&P 500 were down. This year the market is somewhat broader, with the mid-cap sector up 15%; nevertheless smaller companies continue to be neglected. Doubting their ability to get in and out of small-cap stocks, investors, in particular financial institutions, have removed them from their radar screens. They consider them just too small to bother with.

Some managers and their boards are seeing an opportunity in the market's neglect of their small and micro-cap companies. With their market cap down, but with their cash flow up, they are weighing the possibility of taking their companies private.

Often trading at only five to seven times cash flow, these companies have the financial wherewithal to support comfortably a leveraged buyout. Although mezzanine financing remains relatively scarce, deals are being crafted with adequate amounts...