M & A Execution - How not to do it? E.g. Fedex/Kinkos

Fedex recently acquired Kinko's, a private company. The original investors in Kinko's and its owners made a huge pile (and i don't envy them), so did the investment bankers who acted as consultants for the merger. While these people got away with millions, the merger seems to have been executed shabbily on the ground. A true-life account follows.
The INS (or BCIS, as it is called now. The name change doesn't seem to do much for its efficiency!) recently amended some immigration rules forcing me (and thousands of others in the same situation) to collect/send documents on a few day's notice! I decided to check out the local Kinko's, which is now Fedex/Kinko's (atleast that is what the board says). The experience that followed was traumatic! Wear your life jacket before you proceed ...

The store indicated that it handled shipping. The first hints that things were not going to be great came when i had checked the Fedex website and it had said that this particular location did NOT handle Saturday shipments. When i went in and asked they said that they do Sat shipments too. A billion dollar Wall-St darling can't seem to keep its website uptodate!
The store was manned by 3 teenagers! Again a very bad sign when i was abt to send all my immigration documents (originals). I did not feel like handing these over to a group who on a Saturday noon are probably thinking of ways to get laid that night. But i pushed ahead.
When i told them i wished to ship these docs with prepaid return envelope, they all blinked - none of them had done it before. The store manager who was trained to do this was not going to be in office that day! These 3 Kinko's kids were still undergoing Fedex training (and thankfully, they admitted it).
I was prepared for a joy ride now! I decided not to ship from that store, but i wanted to see what else could go wrong. Plenty, as explained below.
I asked them to call their manager! They did NOT have her number! There was one phone that was programmed to call her using a single button, but her phone number on it was dated. One guy had her new number on his cell phone, but he had forgotten his cell phone at home. Fun fun!
So i asked him to check online or call nearby Fedex centers to check. They were not equipped with a special Fedex directory! They did NOT have any resource except the net to get these numbers. So on we went to the Wide Wild World. Surprise surprise - the Fedex site listed all the nearby offices, but had only their addresses. Get this! - no phone numbers, no email addresses. Reminds me of the KFOG line that goes "We are going to take you back in time"!
By this time, the kids were apologising profusely and told me that they were still being trained and that the manager would come back Sunday. But no shipping is done on Sunday!
One guy finally tried to login to his Fedex work account to get more info - it failed to log him in even after multiple attempts. They were probably taking the site down for weekend maintenance!
Then he directed me to another place close by - The Container Store - a competitor, owned by UPS! I did not bother to check it out since they also were a nasty offspring of a recent takeover of Mail Boxes Etc. by UPS. Same problems were likely to show up there.
Fedex lost one customer for life, and a few more defections are bound to follow.
I finally decided to try out the Post Office, the one place i wished to avoid. After an hour of trying to explain what i wanted to get done, i got the docs shipped.
Shouldn't M&A be done more carefully ? All these honchos speak of synergy and efficiencies of scale. I have a new phrase to add to this meaningless lexicon - "inefficiencies of a botched M&A". Why cannot a store have a fully trained person, especially in a busy center, while the others are still getting trained ? While clueless teenagers are good enough for making a latte, i sure don't want to entrust my life to these guys.
I strongly believe that Greenspan is wrong when he says we have all the efficiency that can be had from this economy. Most of the productivity increase in the last few years have come solely from use of IT in more places. But the biggest increase in productivity can come when these hapless teenagers are replaced with 10-year old Germans or Japanese. For once i believe that the world will be a much better place with less humans and more machines!
Finally i admit that i really had foreseen this - a few mins before i went to Fedex i was talking to a friend abt M&A and my impending trip to Fedex. I told that person that i expect to see some problems due to the recent merger. Man, "some problems", turned out to be a gross understatement.

Business Objects - who else is in the crosshairs ?

Business Objects acquired Crystal Decisions a few months ago, just before the latter was about to go public.
While Business Objects itself remains a takeover target for the likes of Oracle/Microsoft, it is likely to gobble a few more smaller players before it gets swallowed.

Two candidates i can think of -

• Ilog : this business rules/optimization leader should make for a good fit, especially to expand the customer base and cross-sell.
  
• Insightful: this data and text analysis software maker has probably the best IP in its sector. The recent past saw some interesting events that resulted in reduced interest in the company.
  

I do not own any shares of either, and at this point both fall in the speculative bin, Insightful specifically with all its management/accounting problems. I do plan to add when things clear up a bit.
Another item of interest is that all the 3 are French companies - so hopefully the French Govt won't see any reason to interfere!

Oracle on the prowl ... <contd 2>

As part of the proceedings today, Oracle disclosed that Siebel, BEA, Lawson and JD Edwards were (are) targets.
JD Edwards did come as a surprise.
Lawson probably is the one Oracle will go after if the PeopleSoft takeover doesn't go through.

Oracle on the prowl ... <contd>

I missed a couple of companies in the content management sector that have been in the past rumored to be targets for Oracle.

• Open Text
  
• FileNet
  

These are the $1 billion companies among the targets.
Open Text, File Net, Veritas, BEA, Tibco, Business Objects, Cognos, Cerner, Siebel

Assuming a generous premium, these will also be close to billion-dollar acquisitions:
Lawson, Opsware, Eclipsys

These are definitely sub-billion deals.
Seebeyond, Mobius, Vignette, Stellent, Ilog

If i really had to narrow it down, i would see these three as the finalists and all are equally likely.
File Net, Veritas, Cognos

Laughing all the way to the bank ?

The hottest M&A sector for the last 2 years has been the banking/S&L area. Based on my observation, i can say that there was easily one merger/buyout every other day (yes!). And i am sure i have missed some mergers. If you consider other mergers (say of private entities ) the number could be much higher. The premiums have ranged from 5% to close to 60%.
This obviously got a lot of press coverage and most banks were priced for takeovers. Now interest rate worries are making some banks a bit more approachable.
Overall the banking sector is among the most mature of various industries due to regulation resulting from past blowups. A loss of capital is highly unlikely. The M&A season has been so busy that even the Fed stepped in to comment on it - saying that this activity is healthy.
Given the precarious state of the economy w.r.t debt/mortgages, a bank failure is something the govt just cannot afford right now.
While city/county/regional/rural banks get the best premiums, most of these also tend to trade very lightly making it hard to get the right price. The state/national level bank stocks make for better trades, but these already have a big Street ownership.
One another factor contributing to activity here is the interest shown by foreign banks to get a piece of US banking. Deutsche Bank, Royal Bank of Scotland, Barclay's and HSBC are among the ones that have publicly announced that they are looking for US buys.
Here is a list of the bank stocks in my portfolio with some additional details for each.

• Gold Banc - acquired by a private equity firm.
  
• Columbia Bank - recently mentioned by Barrons as a takeover candidate.
  
• US Bancorp - another candidate for Citigroup or Bank of America.
  
• Greater Bay Bancorp - a regional candidate.
  
• Huntington Bancshares
  
• Mellon Financial
  
• Washington Mutual : probably the one that will be most hurt by mortgage failures. But still a very attractive target given its size.
  
• Private Bancorp: "private banking" catering to rich clients is a growing subsector. Likely target for medium sized banks.
  
• PNC Financial
  
• Banc Corp
  

If you extend this to credit card companies, there is definitely some more activity pending. Here is the list of credit card stocks i own:

• Providian Financial : has been rumored to be a target more than once in the past! I made a good short term profit from it as it went up from 2 to 12 over the last year or so. Holding onto a few and waiting for the buyout.
  
• MBNA : was reported recently that Bank of America may be interested!
  

Oracle on the prowl!

Here is what Oracle CFO had to say during the earnings conference yesterday ...

Oracle continues to look at other large, multi-billion dollar acquisitions as part of its bid to supplement its internal growth, Henley added.
Henley declined to name specific companies that Oracle has looked at as possible acquisition targets other than PeopleSoft, but said the company has a list of some "half a dozen names" to consider "assuming we can work out a deal or two."

Here is my list:

• Veritas: this is one way for Oracle to get deeper into storage management. After having used (indirectly) Veritas, i can tell you that once a customer sets it up, it is close to impossible to get rid of it :-). Talk abt a captive/helpless customer base.
  The stock has been hit due to earnings restatements and an exec who lied in his resume! The stock is still a great buy; i own a few and am still adding.
  
• BEA : Larry Ellison has publicly indicated that he wants to acquire BEA if the price is right. Given the overlap between BEA's offering and Oracle's JDeveloper/Server products, paying a big premium doesn't make biz sense anyway.
  Meanwhile the BEA products (8.1, most recent) get better with every release. I installed/developed on it recently and it was not a bad experience. I own a few. It is very attractive right now since the stock got wallopped after their disappointing quarter.
  
• Mobius : After EMC acquired Documentum, it became obvious that Oracle would enter the document management space. Mobius is a likely candidate and looks cheap. I own a few; again, decently priced.
  
• Vignette, Stellent: More document mgmt companies. Not cheap. I own a good number of Vignette and a few Stellent.
  
• Lawson Software: This is one company that is getting lot of free publicity during the anti-trust trial. If the Peoplesoft bid does not go through, Oracle may settle for this. I own some small number of shares.
  
• Tibco, Opsware : Somewhat far fetched, but still a possibility. Messaging and data center management will remain money-making sectors for a while. I own a few of both.
  
• Business Objects, Cognos, ILog: again, a distant possibility. Though Oracle may not be mighty interested, these remain targets. I own some BOBJ and Cognos, and plan to keep adding.
  
• SeeBeyond, Cerner, Eclipsys, Siebel : SeeBeyond has a Oracle connection (Ray Lane). It has also been rumored that Oracle was interested in Cerner in the past, and Oracle acquired a very small startup in that area last year. I own a few of all the 4. I sold most of my SeeBeyond and Cerner shares long time ago making decent short-term gains, but kept a few.
  

System/asset management ... <contd>

A few days ago i wrote abt Altiris etc. There is still more going on in that area.
Macrovision announced yesterday that it is acquiring InstallShield (private) for 76 million. While at first Macrovision looks like an odd buyer, in the long term it makes sense for buyers of products from either companies to have a combined solution (setup and license/copyright management).

So now both the big independent Microsoft Installation tool providers have been assimilated!

The logical extension for Macrovision would be to now provide digital delivery / online updates. The two players in this area are Digital River (DRIV) and Intraware (ITRA).
Digital River is the leader but is well-priced right now. Intraware is a smaller and shall i say, not so stable/mature, operation.
I own a good number of ITRA.

Hit #17

QRS Inc. (QRSI) was acquired by JDA Software today. The buy price was $6.2, a close to 23% premium over my price/share of $4.95
JDA Software (JDAS) itself is likely to be a juicy takeover candidate.

"Searching" for targets

Of late, the "search" sector has received a lot of attention. With the Google IPO looming, search stocks have taken off and there aren't any "cheap" ones left.
But if you are willing to take added risk, there are still some opportunities.
I scored a hit when Overture got bought by Yahoo a few months ago. In this case, Overture had a good following on the Street, and i had to wait for a long time to even get in. I got the chance when Overture came out with disappointing earnings leading to a big slump. Just weeks later Yahoo paid a premium! If i had bought before the crash, i would have lost money even after the premium!
Look/wait for such lows to buy.

Here is a list of my current/past search holdings and what i see going for them.

• Overture : acquired by Yahoo.
  
• FindWhat : a likely takeover candidate, but expensive at its current price.
  
• LookSmart : speculative. Bought after it lost its most important customer - Microsoft. Still a good buy for larger companies, but the downside is unlimited too! I may add a few more soon.
  
• Viewpoint : really a search add-on. Has a thing going with Yahoo. Speculative again, and won't be adding unless i hear something very positive.
  
• Ask Jeeves : bought low and sold after some 90% appreciation. Still a good candidate for a Google buy, but expensive right now. May buy again on a pullback.
  
  
  Given the emerging search/advertising combo, i believe that some ad firms are also targets.
  
  
• Valueclick : I own a few, but expensive at current price.
  
• Doubleclick: Have a good amount, and the price is still attractive. Very safe investment even if it doesn't get acquired.
  

Another interesting aspect here is enterprise search. Both Yahoo and Google are going to look seriously at current players and possibly buy them. Buying one such company probably is the best use for all that cash Google is planning to raise its the public offering.
Here are my picks :

• Verity: a strong entity. Low risk; makes for a good buy at current price. May continue as a standalone search company too.
  
• Autonomy: again a low-risk takeover candidate.
  

I own a few of both Verity and Autonomy, and plan to continue adding to my positions.

Opportunities arising out of the Iraq scandal.

The recent prisoner abuse in Iraq has dragged 2 companies (CACI Inc, and Titan) into the (harsh) limelight. The resulting drop in stock may make for a good buying opportunity since these 2 are likely takeover targets.
I own a few of Titan, bought before the current scandal became public. Keep in mind that Lockheed made an offer for Titan a while ago, but the stock still trades at a discount due to other problems with the company. This is a speculative buy.
CACI (CAI) seems a better bet, but could go down further on more revelations. I am watching ...

For the "ethical" investors who would rather invest in Enron/Worldcom ;-), i should point out that this is not the first time these (or many other companies) have been in such trouble. These names also come up when Pinochet and the Sandinistas are mentioned. i.e given Pinochet's bloody record and the Sandinista's willingness to blow up school buses with innocent kids, one shouldn't be surprised at these "cruelties" - i guess the only difference was that this time it was not done in the name of "liberty"! Anyways, if you are bothered by profits from such investments, you should be giving it away (that is what i have done in the past and what i plan to do in the future with such "blood" money).

As long as such "tainted" companies are publicly traded, they are legal entities and the investment activity is also legit. That is a "pass" for entry into this blog.

Companies seeking "strategic alternatives" ...

Atleast 3 companies (it is pretty hard to keep track of all announcements here) in my list have announced publicly that they are seeking strategic alternatives, usually meaning that they are looking for buyers. Such an announcement is usually followed by a spike. Here is the list :

National Processing (NAP)
Intercept (ICPT)
MGM (MGM)

In the case of ICPT i had to wait for a long time to hear this good news, but in the other 2 cases the news came just a few days after i got them.

Separately, in the last 2 days Goldman Sachs and Credit Suisse Group have separately announced that they are recreating their M&A departments. This to me is a clear indication that someone is taking note of the pent-up demand.
While M&A activity in the banking / natural gas and to some extent health care/benefits sectors has been steady over the last 2 years, the expected tech M&A recovery is yet to occur. This may be the first indication that it is finally about to happen. I surely hope so.

System/asset management - more buyouts soon ?

A few acquisitions in the system/asset management area recently shows the interest by companies to really try to solve this big headache for customers.
- Novadigm (private) - acquired by HP
- Marimba (MRBA) - acquired by BMC
- Wise (private) - bought by Altiris (ATRS).

I can also include EMC's VMWare buy in this group.

I was watching Marimba for a while, especially after Business Week mentioned it as a buyout target, but the stock seemed expensive. A few days later they came out with a earnings warning which led to a big drop in the stock, making it very attractive and i finally added it to my buy list. But before i could act on it, BMC snapped it up. It does make a good fit for BMC given its focus on management.

VMWare (and i am a BIG fan of their products) was the only IPO i was waiting for this year. EMC picked it up before it went public. A very smart buy indeed - and this could be a good revenue stream for EMC for years to come.

Can't say much abt Novadigm, except that it looks like a small operation and it could be just a first in a series of acquisitions for HP (more on it a bit later).

Altiris' takeover of Wise was very interesting and a good one. Having played with Wise i believe it is an elegant product.

I also had a small private investing success in this area, netting me a 150% return in some 3 months! Can't go into details.

So, what other possible targets exist in this sector ?
- I think Altiris itself is a takeover candidate - a prime one. I haven't used it myself but got a review from a close friend who says it is great.
HP recently revealed that they own a good number of shares in Altiris. Also, some Novadigm guy recently joined Altiris. I definitely think HP is the most likely buyer. Other possible buyers include Novell (Utah!; Novell has a similar product but not a "complete" one), IBM, EMC, MSFT.
I own a few shares and plan to keep accumulating since the current price is attractive.
- Opsware is also a good target - with EMC or IBM being the likely buyers. There is some Legato (acquired by EMC) connection here.
I own a few shares, but will not be buying more at the current price since it looks a bit pricey. Will wait for some bad news to add.
- Quest Software - these guys are all over the place - a few dozen tools - with
the most interesting being DeployDirector. The install base doesn't seem to be that large. I did try out this product and i think is a very valuable one if there was a way to integrate it with other deployment tools. Quest also has a few other Windows specific management tools which could be of interest to a buyer.
I don't own any stock and won't be buying until i see some insider buying or some big contract.

Takeover hints embedded in public info!

One of the tracks i follow is acquisition hints in public announcements/interviews etc. Here is a brief list (that i recall) from the last month or so :

• Boeing top execs in interviews have said that they are interested in acquiring some defence-related companies. I assume the idea is to offset the growing competition in the commerical aircraft space from Airbus/Embraer etc.
  Who are the potential targets ? I haven't done much research but Engineered Support Systems (EASI) seems to be a good one.
  I am not interested in EASI since it has received a lot of attention lately, and hence it is fairly or overvalued.
  
• Interactive Corp. has made a series of acquisitions and has indicated that more is to come. Hotels.com, Expedia, Lending Tree, Hotwire.com, Ticketmaster were the earlier buys. Who next ? My guesses - Doubleclick (i own a few), Homestore, .. ?
  
• Cendant CEO said recently that it is looking to buy companies after a break from its earlier acquisition spree. Europe is said to be the sphere of interest. So ? I think Ebookers (EBKR) and LastMinute.com (LMIN) are good bets. I own a few of Ebookers.
  
• Microsoft has repeatedly said that they will disclose what they will do with all that cash by end of June. After settling at an amazing pace over the last few weeks, a big one-time dividend payout or a takeover may be in sight. If it is a takeover, who can it be ? Some fund managers think it will be Symantec. While i think the target area is right (anti-virus), Symantec is too big to swallow, Network Associates (NET)or Trend Micro (TMIC) are better candidates. I own a few of both.
  
• RedHat raised a few hundred million in a bond offering and hinted that the cash will be used for an acquisition. This one i have no idea as to who the candidates are.
  

I will add more as i remember. I am interested in knowing if you know of others who belong to this category. Also feel free to point out other targets for the above likely buyers.