Sunday, October 31, 2004

Cash is king - always!

I have mentioned before that cash is always preferable in a takeover. This is mostly because, even taking into account a large premium, the buyer is unlikely to do well in the longer run due to integration problems etc. Moreover it does show some desperation on the part of the buyer.

When Kroll got acquired by Marsh & McLennan (MMC) a while ago, I was happy to see that it was an all-cash transaction, but in this case I would not have been bothered by a stock-swap since I believed that MMC was undervalued following the Putnam scandal. How wrong I was!

As Spitzer started his latest look into corporate sleaze (contingent commissions), MMC took a big hit and is now trading more than 40% below its price when it acquired Kroll!

I have learnt my lesson - I can live with an all-cash takeover!

Saturday, October 30, 2004

Investment Fables

I started reading Investment Fables: Exposing the Myths of "Can't Miss" Investment Strategies by A. Damodaran. I have done only the first few pages, but I can tell you that it is a must read for the long-term investor.
It systematically tries to dissect "well-known" beliefs about stocks and the general market.

Name the next pick, and make it fast!

I have never (yes, NEVER) seen a CNBC or CNNfn show before - that is, until yesterday when I accidentally switched to some biz program where Gabelli was being asked to forecast market moves and trends. Watching it was a disgusting experience!

The interviewer/newscaster repeatedly interrupted, with "name the next pick for us" comments. The continuing stress on a name/ticker even after the great bust is shocking. Is this investing ? Have we not learnt anything ?

And pray, why are these guys being paid ?

Closing of a merger.

Just received cash for the AT&T Wireless buyout. Certainly took a long time to close this transaction. The estimated time to close a merger transaction is significant at times since the buyout may need regulatory approvals (like the one needed from FCC for this one) and the process of raising the required cash may involve lengthy offering procedures.

If the buyout premium was very low this may mean that from the time of announcement to the actual closing of the deal you could have gotten a better return putting that money in a bank account. Program trades and hedge funds do see this arbitrage opportunity and that is why you see the stock inching towards the offer price as the closing date nears. If you suspect that the deal may take a long time to close, then selling on the announcement may be a good idea, especially if your trading fees are low and you have a decent volume combined with some other investment idea.

Bank takeovers (except for the really big ones) seem to get done very fast. For e.g., the National Processing (NAP) takeover closed within a couple of months and I have already seen the cash for it.

Sunday, October 24, 2004

Hit #26

Not exactly a victory this one, but nevertheless a hit!

Daleen Technologies (DALN) is being taken private by Quadrangle Capital Partners for around $0.04/share! The announcement was made a few months ago.

On my part, this was mostly a penny-stock speculation, fueled by some understanding of the billing software sector. I lost money here, since I had bought the shares at around $0.15/share and was prepared to see a bankruptcy filing.

The billing software industry cannot continue for too long as an independent sector. It will get folded into the CRM and Enterprise Integration area. Siebel, PeopleSoft, SAP are likely buyers.

The entire sector is hence a target - the question is, how speculative are the players. Here is a list.

  • Amdocs (DOX) : The strongest and most stable player. While it is a target in the long run, for now it may be looking at buying its smaller/cheaper competitors. The stock is fairly valued now.
  • Convergys (CVG) and CSG Systems (CSGS) : Both stock seem cheap right now, and both surely are targets. One may end up with Amdocs. I own both and plan to keep adding.
  • Boston Communications (BCGI) : Recently hit by bad news. This is highly speculative, but recent insider buying is encouraging. Most likely will end up in the arms of a larger player.
  • Portal Software (PRSF): Dangerously speculative. Could end up in the bin. This is among the worst companies as far as shareholder value destruction is concerned. The management has essentially milked it for all it is worth and dilution is just mindboggling. The analyst activity here is suspect too. I am surprised that no one from this company is behind bars yet. Given all this, why am I even mentioning it ? That is because I have used their software, Infranet. While not the easiest to use/configure, it runs without problems once setup. They could have done a better job with their API too. Anyways, the last I used Infranet was in early 2001. Not sure what state it is in now. I would still consider this as a takeover target for the installed customer-base. Hopefully, the takeover will happen before management succeeds in destroying it! I got rid of most of my position after the last reverse-split, for a small profit. I was lucky - the stock has lost more than 90% of its value since then.

Running money

That is the name of the new book by Andy Kessler. A wonderful read - finished in 2 days (4 subway rides!).

A few things that are very valuable in this book -
- a different look at the Industrial Revolution
- attempts at following the money trail
- an interesting viewpoint on deficits and profit margins.

If you are running money, this is a must-read.

Watching for hints ...

Sometimes you get investing help while doing mundane day-to-day activities. I had one such experience recently.

I bought a few shares of Coinstar (CSTR) a while ago when they were hit by news that Safeway was switching to Coinmaster. Coinstar still looked stable given that Albertsons was a customer.

I now wonder if Safeway's move to Coinmaster was successful. I had been to Safeway to get my coins changed only to be told that the machine was not working that day. I went back there after a couple of days, and this time I was told that the machine was not functional, and I was asked to try the Albertstons on the other side of the road! Ofcourse, Albertstons has Coinstar and I had no problems there!

The Coinstar machines seem to have changed recently with interesting additions like the ability to get prepaid wireless card etc. That is a good move, and I think various card providers will jump on this, given the impulsive buying possibilities here.

Anyways, I am holding on to my Coinstar stock and may buy more on dips.

Friday, October 22, 2004

Greater Bay Bancorp on the block.

Greater Bay Bancorp (GBBK) announced that it is looking for a buyer. This is among the last remaining independent banks in the Bay Area. I own a small number bought around $26/share - stopped soon after, since it moved higher way too fast. I think it will ultimately be acquired for anwyhere between $32 to $35. Now that they have announced their intention to sell, the price may not go much lower from here.

2 other (and possibly the only ones ?) independent banks operating in the Bay Area should also be acquired soon. They are Silicon Valley Bancshares (SIVB) and Union Bank of California (UB). The former was a high-flyer during the boom, and the latter has some attractive branches. Both are currently overvalued, and I will be waiting for drop to add.

As I said in an earlier post, practically every local/state bank is a target. The aim is to buy them at prices that deliver you a decent premium on a takeover.

There are other sub-themes within banking that are worth following :

  • Banks catering to immigrant communities : A number of Chinese, Korean banks operating in California are worth looking at, but not right now given their high valuations.
  • Banks in the south-west : The US south-west (Arizona, New Mexico, Nevada) is growing at an amazing rate. Banks here are sure targets, though again at current prices these are not worth nibbling at.
  • Central Coast banks : California's central coast is filing up and in a matter of years LA and SF will be one contiguous area vis-a-via population density. I own a few of Central Coast Bancorp (CCBN), and plan to add at the current price.
  • Puerto Rico banks : Banco Popular (BPOP) is attractive right now. Others are expensive at this moment.


Harmony Gold (HMY) made an unsolicited bid for Gold Fields (GFI). Thankfully, it looks like this bid won't go through.

I do not own any shares in the two, but Harmony is better off selling itself, rather than trying to buy a (larger than itself!) competitors.

I own a few of Durban Roodeport Deep (DROOY), and making a wild guess that like its South African sibling, Harmony, will sell itself at some point.

The consolidation phase in gold is just beginning I think. Watch out for more small players to be swallowed.

Cox bid sweetened.

Refer to Hit #21 for a post on the original offer. The offer now stands at $34.75/share, compared to the original offer of $32/share. At this price, the offer is above my average buy price of $33/share. Finally, phew :-)

Thursday, October 14, 2004

Hit #25

First Health Group (FHCC) was today acquired by Coventry Health for around $18.7/share in a part-cash/part-stock transaction. That is around a 25% premium over $14.9/share I paid not too long ago.

I started accumulating FHCC only recently, and hence had only a very small number.

It looks like a cheap sellout to me and I am not sure why FHCC owners sold it at such a low price. Either the execs got a very sweet deal or they were just tired and waiting to sell. Anyway, people who bought at or near the recent 52-week highs ended up losing from this deal.

Wednesday, October 13, 2004

(Un)Cover stories ...

I will be occasionally writing on that part of my portfolio that is not made of takeover targets. This is one such post.

I would consider this a special case of contrarian investing, based on the number and frequency of cover stories and (lack of) glowing terms for a chief executive. So far it has worked like a charm - ofcourse, that may just be a coincidence!

Here are the ones that have rewarded me and others that are on my list.

  • Intel (INTC) and Cisco (CSCO): Bought both these early last year when very negative pieces started appearing in the press - a great indicator of bottoms. Started selling early this year when more than one article called Chambers/Grove/Otellini as heroes. Watch out for that key word - hero!
  • Starbucks (SBUX): Made close to 100% profit and sold after the first cover story in an investing mag. I sold a bit early, but don't regret it. If you are holding it, it is time to get rid of it. The number of articles using hottest brand alongside Starbucks has increased dramatically recently.
    Personaly, I think Starbucks' rapid growth in the US is over. Falling consumer confidence will hurt them before they hurt others first. I should know - I have gone from 3 lattes / day to 1 latte and I regular coffee / day to just 1 regular coffee over the last 3 years. And these days, I avoid Starbucks when I can and go to a smaller cafe that saves me a bit.
    Moreover, the rapid mushrooming of Starbucks has also come with increasingly bad, and at times downright rude, service. I am now betting on Peets (PEET).
    The final SELL signal came recently when, having written to Starbucks customer service about some of the bad stores, I heard not so much as a Thank You from them!
  • Krisky Kreme (KKD): A Forbes piece claiming it to be the hottest brand helped me avoid this stock last year when it was at around $40/share. A SEC investigation and few negative pieces later, the stock is at $12/share and looks like both a value and a takeover play. I bought some recently and will be adding around the current price.
  • Boeing (BA): Bought last year after reading countless articles on how Boeing had lost it. Sold recently after the first hint of change in editors' mood.
  • EBay (EBAY): Never owned any and if you do, get out now. The positive pieces on EBay have reached insane levels.

I can go on but will stop here.
By the way, not-so-glowing pieces have started appearing on Intel again. It is time to start buying Intel, but don't put in large orders yet. For that, wait for it to reach a fever-pitch - it will, eventually.

Sunday, October 10, 2004

Ebookers update.

Interactive Corp (IACI) disclosed that it is not interested in Ebookers (EBKR). As mentioned in an earlier post, Ebookers is planning to sell itself. While this is disappointing news in the short-term, I am still seeing this as a buying opportunity. If not IACI, one of Cendant, The Sabre Group or Priceline may end up buying them.

Cendant (CD) meanwhile just acquired Orbitz (ORBZ) at a juicy premium. While I had added Orbitz to my target list a while back, I could not buy any shares since it was not available via Sharebuilder :-(

Interactive Corp may counter with a similar acquisition - Priceline (PCLN) perhaps ?

Ctrip (CTRP, LastMinute (LMIN) and The Sabre Group (TSG) are other possible targets, but they are all fairly valued currently.

Best bet among the bunch - Priceline (PCLN).

More imminent action in the benefits management sector ?

After 3 multi-billion dollar mergers (involing United Health, Oxford Health, Anthem, WellChoice, Mid-Atlantic Medical Services, WellPoint) and few others valued at hundreds of millions, the sector still seems to be ripe for more.

Aetna (AET) recently seemed to hint at an acquistion.

The truth is this is an acquisitive sector, like banking/S&L . In the long run, every player other than the top 3 or 4 will be acquired. The question is just when! And also, at what price should you be buying them ?

So, who looks attractive right now ?

  • HealthExtras Inc (HLEX): This small benefits manager looks the right size. American Medical Security (AMZ), the one acquired recently by Pacificare (PHS) was of comparable size.
  • Health Net (HNT): This mid-sized services provider is a target if the big players can still swallow a sizeable player.

If I had to pick one, it would be Health Extras. I own a few, and am adding at current price. I own some Health Net too, but have paused buying right now - need to see a better price.

Here are the others that are all sound players. These fall into multiple investment criteria, not just takeover plays.

  • Humana (HUM) : A good turnaround play, and if everything goes well, will be bought out too.
  • UnumProvident (UNM): Another turnaround story.
  • Sierra Heath Services (SIE): Good growth story, as it has a big chunk of the Las Vegas and surrounding areas market, which is among the fastest growing regions in the US. Stock is expensive right now and I am hoping to see a substantial discount from today's price.
  • WellCare Health Plans (WCG): Recent IPO. Wait for pulback.
  • Molina Healthcare (MOH): Initial offering just a couple of years ago. Again, looks overvalued right now.

MSC Software gets an offer!

MSC Software (MNS) got an offer from a private equity firm, ValueAct Capital Partners. The offer, at $9/share, is around a 15% premium over my buy price of $7.8/share. I started buying MNS Software shares just a month ago. While the offer indicates something positive, I think it undervalues the company and as such it should be rejected. I will be buying more on such an event and the inevitable pullback.

MNS Software falls into a category of very specialized/niche players. All such players, especially when they have a decent customer list, become very attractive for a potential buyer at some point. For an investor, they become attractive after repeated earnings disappointments.

Other similar niche players I like:

  • Opnet Technologies (OPNT): Very attractive after the miss last week. Don't own any yet, but will buy at the first opportunity.
  • Insightful (IFUL): Have mentioned it earlier. Still attractive.
  • Magma Design Software (LAVA): The price became reasonable after the recent earnings miss. The EDA software maker should be in the crosshairs of the majors.
    While on EDA, the top player, Synopsys (SNPS) is now a very good value play after sequential misses. Synopsys earlier tried to acquire Monolithic Systems (MOSY) but the deal fell off. They must still be planning on other acquisitions. MOSY itself remains attractive to other EDA majors.
  • Visual Networks (VNWK): Somewhat speculative, but insider buying and existing customer base make it a good takeover target. Made short term profits a couple of times in the past, but now holding for the final episode.
  • Stratasys (SSYS): Expensive right now, but this 3D printer maker should be a good buy on any significant pullback.

Hit #24

On Wednesday 10/6, Computer Associates (CA) announced that it planned to acquire Netegrity (NETE) for $10.75/share, a 40% premium over the previous day's closing price of 7.5, but around a 51% premium over my average price of $7.1/share.

This has been among my least speculative bets, in the sense that a takeover was surely in the cards. This is also the one I cited most frequently, when people asked me to name one strong takeover candidate over the last year or so.

While I am happy that Netegrity has finally been bought, I am disappointed that the buyer is CA. I was hoping that someone else, like IBM, would buy them. This, I think, is a bad deal for Netegrity. Having used and liked Netegrity's software, I am unhappy to see them become part of CA!

Thankfully, the deal is an all cash deal! I would hate to get CA shares in exchange for my Netegrity shares!

While on security, I think we will see more aggressive consolidateion here as security becomes the topmost priority for IT spending. A few others that are likely candidates:

  • Internet Security Systems (ISSX): Definitely a buy at current price. Close to book value and with huge insider buying. Moreover, lots of cash in hand.
  • Checkpoint Software (CHKP): No support from insiders, but again lots of cash stashed away. Very attractive for a buyer, but as an investor you should wait for a pullback to buy.
  • Blue Coat Systems (BCSI): Relatively cheap compared to its price after the huge runup earlier.
  • SonicWALL (SNWL) : Very attractive after the drop last week. There must be some desperation to sell here, I would think.
  • Secure Computing (SCUR): Had a hostile takeover attempt earlier this year, but walked away from it. Still very attractive I would say.

So, if I had to pick one ? It would be Internet Security Systems (ISSX). Buy all you can!

Among the above, I own ISSX, BCSI, SCUR.
All of them are worth buying at current prices.
I bought BCSI after the major pullback from its spectacular run earlier.
SCUR, I added after the takeover was rejected.
Will add SNWL when I next get some cash to invest - practically broke now!
CHKP - will wait for a further drop.

Saturday, October 02, 2004

Rumors and what to make of them.

Takeover rumors surface every now and then and make it to publications like WSJ. How can you use them ?

Here is a plan of action that I have followed (successfully so far):

  • When the rumor surfaces, add the stock to your watchlist.
    If this is not the first time the target has been rumored to be a candidate, pay more attention.
  • Don't go chasing the stock immediately, since the pop following the rumor can hurt you on subsequent bad news (it happens!).
  • Occasionally, the target gets bought out immediately after the rumor. In such a case, if you do not already own the stock, just let it go. Don't dwell on it.
  • If the stock retraces and comes back to its earlier price range (either because people have lost patience or because of earnings news) buy it. Make sure that the fundamentals still look ok, and the p/e and p/b are reasonable. Any recent (within the last year) and sizable insider buying is a big plus.

In my hit list, MGM, National Processing, Intercept, Legato, Overture and AT&T Wireless belong to this category.

A few more are still waiting to be bought!