Michael Baker Corp (BKR)

This is a small-cap, non-dividend paying firm that offers engineering consulting, mostly (80% of revenues) to the U.S. Federal and State governments. Sectors it operates in include energy and transportation.

It has been in business since 1940 and went public in 1971. The CEO has been with the corporation for 55 years and the transition to find a new CEO has been difficult. In the most recent (2006) annual report, the CEO makes the point that the corporate culture and the talent of the employees are the drivers of the corporation's success.

Although it has more or less tracked the S+P since it went public in 1971, it has significantly outperformed in the last couple years, although revenues were pretty flat. In the last 6 weeks it has gone up 40% on M+A rumors.

My feeling, looking at the annual report, is that the company has never made a massive priority of shareholder value, and that a lot of its revenues were passed through to its engineering talent and corporate officers. It has never issued a dividend. I imagine it's pretty good to work there.

And in a company where the employment is cush and the "corporate culture" and "talent" are the drivers of the comapny's success, an acquisition can be very disruptive. M+A's firebomb existing corporate culture and they often cause core talent to depart the company en masse.

So I'm contrarian here. I don't think the company's a good takeover target because I think the process of acquiring it would destroy much of its value. I don't think there's leadership at the helm that's thinking about the kind of aggressive growth that would make this a Hidden-Gem style pick. So I'm guessing that it'll not get acquired and thus underperform for a while, because its share price has been driven up on M+A speculation.

Risks to this pick include the prospect that I'm wrong and someone snaps the company up for a premium. The goodwill, public sector relationships and talent pool at the company do represent a significant value and an energy services firm like Halliburton or Bechtel might find they can leverage these in a way that the current corporate leadership cannot.