Alliance Data Systems (NYSE: ADS) shares dropped a staggering 35% yesterday after the Blackstone Group (NYSE: BX) announced that the conditions for their merger agreement would likely not be met. In reality, there is little in the way of a bank acquisition other than a price tag of $81.75 that may now look a little rich in today’s environment. However, this massive drop does open the door for other investors seeking an outstanding company at a very reasonable price. Many investors are hoping that the company will be able to attract a new offer at this point given the price.

ADS is a provider of loyalty and marketing solutions derived from transaction rich data. The company partners with its clients to develop insight into consumer behavior and leverage that insight to cretae and manage customized solutions and enable clients to build stronger mutually-beneficial relationships with their customers. These services include AIR MILES Reward Program and private label credit card programs for retailers. The company has two bank subsidiaries to manage the latter and the lack of approval from bank regulators reportedly killed the merger deal.

ADS now trades at just 9.9x consensus 2008 EPS - extremely cheap for a company that has a historical five-year growth rate of 21% for revenue and 40% for EPS. Moreover, the company has not reported any problems related to the credit markets or slowdown in the economy. In fact, ADS has reported two strong quarters and has preannounced results for the fourth quarter that are right in line with expectations. The point investors have to consider is that the company’s stock is suffering because of Blackstone’s failtures, not because of any internal problems or growth issues.

The drop seen yesterday was no doubt the result of selling by arbitreurs who were attempting to profit from the difference between the current price and buyout price. There are also many short-term hedge funds and program traders that try and take advantage of such situations. Combined, these factors make ADS a stock worth watching!

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