Monday, May 31, 2004

A list of recent hits

Here is a (hoping that i can recall all and hence "complete") list of all takeovers in my portfolio ( or in 3 other portfolios that i maintain for friends )
over the last year or so.

I will skip hostile/unsuccessful takeovers. I also won't mention rumored takeovers here - that will be another list sometime later. I also intend to list potential targets in my current holdings in a later post.

Most of the takeovers happened just a few weeks after i acquired the stock and
in some cases it was actually under a week ( just luck here ).

I can group the targets under various themes and that will be a topic for an upcoming post.

  • JD Edwards : acquired by PeopleSoft
  • Legato : EMC
  • Documentum : EMC
  • Good Guys : CompUSA
  • Blue Rhino : Ferrel Gas
  • Kroll : Marsh & McLennan
  • FreeMarkets: Ariba
  • GlobeSpan Virata : Conexant
  • Hollywood Video : Mgmt Buyout
  • Overture : Yahoo
  • Gold Banc : Silver Acquisition Corp.
  • Wheaton River : Couer D'Alene
  • Digital Think : CSG Systems
  • ATT Wireless : Cingular
  • RMH Teleservices : NCO Group
  • T-NETIX : TZ Holdings

Sunday, May 30, 2004

Beating the market ?

Another question i get asked frequently - Do i expect/plan to beat the market ?
Frankly, NO! Having read "A Random Walk down Wall St", i wouldn't even try doing that.

For me, trying to pick takeover targets is a game/challenge i really enjoy playing. I know i won't be able to beat the market in the long run and i am not aiming for it either. But i may just be able to beat a decent number of Wall St. analysts given that they are as clueless abt companies as the chimpanzees in the local zoo.

When you take into consideration all the fund fees etc, you can beat any Wall St. manager as long as you invest for the long-term using a low-commission online brokerage or using one of the new "folio" builders.

I use ShareBuilder ( as well as FolioFn ( They are similar but have different trading windows and have different securities in their lists. Both are constantly improving, though i really wish these guys merged :-)

Recent revelations abt late-trading/market-timing show that you never got the best price anyway for the equities held in your 401K for e.g.
Money that rightly belonged to you was being taken away in industry-sanctioned day-light robbery. Billionaire-backed hedge funds were getting the best treatment from every bank / investment house. If i wished to lose 3% of my hard-earned savings, i would like to do it either via charity or atleast by losing it myself in Vegas.

Picking takeover candidates

How do i go abt finding takeover targets ?
WARNING : repeated before, but worth adding again - my run so far can easily be attributed to luck, so what i think is a
winning strategy may be pure b.s

Here are the various factors contributing towards making a company a target :

  • The sector it is in is seeing consolidation - when this is the case, premiums are going to be low since the world is anticipating more deals
  • A company is trading at historic lows due to lack of short-term catalysts, but overall the business is safe
  • If a target satisfying b) has seen a lot of insider buying ( open-market purchases specifically ) it makes it even more attractive.
    Even though insider buying info is public, trading rules mean that a takeover is a few months away otherwise those insiders could be in trouble. This "long-term" nature makes the stock not react immediately to this info. But if you are a patient investor ....
  • The stock is trading at close to book value
  • The company has a lot of cash (and short-term investments) in hand
  • The company has been a target of (a hostile?) takeover before
  • A possible acquirer has hinted publicly (in interviews) that it is planning on acquisitions
  • The company has a strong partner with who it has gotten closer and closer over a long-period
  • The bigger player (and potential acquirer) has recently raised cash in a secondary offering or a bond sale, thus indicating an acquisition is being planned.
  • The target has cut costs (selling of seondary businesses, laying off people) making itself more attractive to a prospective buyer.
  • A larger player is facing increasing pressure from big shareholders / Wall St. to diversify and get better returns, forcing it to buy a smart/young company.
  • The economy/market is coming off lows, making it more likely that juicy targets will become more expensive as the recover proceeds. This makes a lot of companies to just buy instead of waiting.
  • A big player's stock has seen dramatic rise, giving it some power to buy smaller players using stock as currency.
  • The top guys in the companies making the potential pair have worked with each other before (or are related!)

There are a few more that i will cite when i take up individual cases, but the above are the most important ones.

Friday, May 28, 2004

Efficient markets and takeover targets.

One question that i am asked very often - if there are obvious takeover targets, won't an efficient market ensure that the valuation gaps are closed in no time ?
Frankly, that is what i thought too, but it turns out that is not exactly the case. I cannot rule out, without a sufficiently long run (over 5-7 years) of hits, that luck may be playing a big part in my success so far.
Ignoring lady luck for now, here is why i think there is room for some good returns following this strategy :
a) Impatience! Thank this human quality for creating so many opportunities. So many investors out there want to double their money overnight; most can't stand the thought of waiting forever ( forever = greater than a month! ) for a buyout to materialize.
b) The major investment houses have a quarterly race, which prevents a lot of them from sitting on a potential target for a long enough duration.
c) Being in tech and having seen all those crappy "analysis" of tech companies from Wall St., i realize i understand tech better than them, especially when i am using the stuff on a daily basis. This should give me a slight edge while evaluating tech takeover targets.

Wednesday, May 26, 2004

Takeover plays - the beginnings

First came the boom, then the bubble and eventually the 2000 crash. A predictable pattern if one were to go by the market's history, but irrationality is a hallmark of the human mind. Mostly due to luck (and to some extent due to the large car payments for my shiny new car) i didn't take part in the action. Phew - that was close.
The pessimism following the crash seemed like the perfect time to enter the market seriously; so i did. I wasn't still satisfied with the short term nature of my investments and the fact that i had to keep a watch on my holdings on a weekly basis lest i miss the latest exec fraud!
I decided it was time to reduce the headache and only go for long-term investments. That wasn't enough though - where is the closure ? One way to get some closure eventually is to target companies that are likely takeover targets. So i started picking such targets from Feb 2003 onwards. So far the hit rate has been much higher than i initially imagined. Hope the trend continues.
Anyways, one year into my strategy, i have begun to forget all my hits. What better way to record the hits and misses than a blog! That is the story behind this.
I plan to use this forum for doing the following :
a. Analyse possible takeover targets.
b. Record the hits in my portfolio.
c. Dig deeper into public info that indicate possible acquisitions.