Is Pre-Paid Legal Ready for a Buyout?

Pre-Paid Legal Services (PPD) received the kind of letter that shareholders love, saying that a "well-known" private equity firm has made an offer to buy the company for $60 per share.

Yes, Pre-Paid Legal is in play and the company has already formed a special committee to evaluate strategic alternatives. Although, it's a good bet that the only "alternative" will be to sell the company. And Wall Street agrees. So far in today's trading, the shares of Pre-Paid Legal are up 14% to $64.24.

It Began with a Car Crash

Back in 1969, Harland Stonecipher was involved in a head-on collision. While his insurance covered the car damage and the hospital stay, the fact was that his legal fees were enormous. Unfortunately, Stonecipher had to pay for them himself.

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But he wondered: Is there a business opportunity here? So Stonecipher did extensive research of European legal expense plans and believed he could setup a similar approach in the U.S.

The business took a lot of time to get traction, but Stonecipher persisted. And it's a good thing he did. Now, Pre-Paid Legal provides legal expense plans for over 1.5 million families across the U.S. and Canada.

One key to success is the company's low-cost strategy. For example, some monthly fees are as low as $26. For this, customers get access to a network of independent provider law firms.

What's more, Pre-Paid Legal leverages a network-marketing system, which can certainly spur growth.

Next Steps?

On Monday Pre-Paid Legal also announced its third-quarter earningsreport. Net income spiked 46% to $15.9 million and diluted earnings per share increased 63% to $1.61. A big part of the improvement was a reduction in overall commissions.

However, Pre-Paid Legal has had its share of controversy. Ironically enough, the company has been the target of various lawsuits, such as for dubious sales and marketing practices. But this is fairly common for a network-marketing company and Pre-Paid Legal has had success fighting the claims.

At the same time, Pre-Paid Legal has had difficulties finding revenue growth. Of course, the sluggish economy has been a factor. What's more, it is getting more difficult to wring growth from the network-marketing platform.

Despite all this, the fact remains that Pre-Paid Legal generates substantial cash flows. For the first nine months of 2010, there was a 10% increase to $53.5 million. No doubt, this will make it much easier for a leveraged buyout and to find willing suitors.