Monday, February 28, 2005

On the road again ...

Yellow Roadway (YELL) today announced that it is buying USF Corp (USFC). Though rumored for a while now, the high premium came as a surprise.

This is the second major acquisition for Yellow in as many years. I had bought Yellow as a takeover target more than a year ago. With today's acquisition, Yellow doesn't remain a target anymore, and I will be selling my shares soon.

Though not being bought out is a disappointment, the stock has more than doubled, and a 120% gain is nothing to complain about!

I follow trucking and rail stocks closely.

2 trucking stocks worth considering now are SCS Transportation (SCST) and Sirva (SIR). I own a few of Sirva, which is the safer of the two given its large European operation and also a presence in Asia. It is a good time to start buying SCS, but be prepared to average down.

A related area of interest is regional railroad companies. RailAmerica (RRA) and Providence and Worcester Railroad Company (PWX) are priced fairly now and are surely being eyed by the rail majors. I own a few of RRA and I am planning to add both at current prices.

While the larger trucking and rail companies are very expensive given the large following on Wall Street as well as among newsletter editors, the smaller ones have been mostly ignored. With the Walmart / China effect showing no signs of slowing down, consolidation in this field will continue. The smaller / cheaper players will be taken out sooner or later.

CAFTA (Central American Free Trade Agreement) will provide additional boost to freight companies as land transport restrictions start to ease.

Hit #33

SAP announced today that it is buying Retek (RETK), paying $8.5/share, in an all cash deal. While this represents only a 40% premium over yesterday's closing price, this is a 136% premium over my average cost of $3.6/share.

I had mentioned Retek as a target, when posting on an earlier hit, QRS Inc.

The remaining players, including Manugistics (MANU) and Manhattan Associates (MANH) will be acquired soon.

Manugistics (MANU) is highly speculative, but IBM may come to its rescue before it goes belly up.

Monday, February 21, 2005

Completing the random walk ...

I was done reading most of A Random Walk Down Wall Street by Burton Malkiel a while ago, except for the last 3 chapters. I got to the remaining ones this past week.

Add this to your to-read list.

The most important lesson to take away from this book is that it is very hard to beat the market. It is even harder to do so when you go through high fees / high turnover mutual funds - a good 50% or more of the funds thus just lose money for you! Index Fund investing is the way to go, especially combined with dollar-cost averaging.

That may sound odd coming from a blog that aims to do better by focusing on M & A targets! I realize that M & A targeted investing is unlikely to beat the market in the short-term and definitely won't in the long-term. I am taking a slightly (?) higher risk in the hopes of beating the market over the next 2/3 years as I expect higher than average deal flow. At some point within the next 5 years, the increased deal flow will turn to a mania - I am hoping to be able to sense and stop sinking more funds into such targets when that happens.

Dividend payouts in takeovers

I wrote on closing of a merger deal some months ago.

A new twist now appearing in takeover deals is the inclusion of a one-time payout as part of the merger. The ultra-low tax on dividends makes this very attractive to shareholders. In addition, for deals that likely will take a long time to close, due to regulatory approval procedures, this provides a short-term reward for stockholders while they wait. Both the SBC/AT&T and Verizon/MCI deals have a dividend component - they both are expected to take a year to close.

The dividend tax break wasn't initially meant to be (mis)used in such situations. But then again, may be this is what they had in mind! Just check the millions that got smartly converted from leverage to one-time dividends at companies like Regal Cinemas and MGM! The trickle down economy works - in reverse!

Is Cox Radio next ?

Cox Enterprises took one of its divisions, Cox Cable (COX), private a few months ago at a small premium, scoring a hit for me at that time.

Will it follow up with the same for another of its public divisions, Cox Radio (CXR). I definitely think so. While the premium is likely to be 15% or lower, the strong insider buying coupled with the current attractive stock price, makes this a buy.

I own a few shares of Cox Radio, and am planning to buy more under existing conditions.

Eon Labs acquired

Novartis announced that it is buying (the part that it doesn't already own, of) Eon Labs (ELAB) at $30/share, a small premium over the previous day's close.

I had written earlier about the generics sector after Icahn made a(n) (unsuccessful) bid for Mylan.

Eon Labs was among the expensive players in this field. The others are still cheap and worth buying - many even have strong insider buying.

I own a few of Ivax (IVX), Mylan (MYL), Alpharma (ALO), Par Pharmaceuticals (PRX), Andrx (ADRX), Watson Pharmaceuticals (WPI), Taro (TARO) and Teva (TEVA).

Eon Labs' takeover will set off a chain reaction in this sector. Except for Teva, which is likely to remain independent, the rest will all be targets.

With this deal, Novartis has pushed Teva to no. 2 in the generics sector. That itself should force Teva to bulk up by acquiring a smaller competitor. The most likely candidate - Alpharma, given that they already have a partnership, and a merger between them offers large cost-savings.

Each time one of the above comes out with disappointing news that sends its stock near its 52-week lows, and especially if it is followed up by insider buying, it is time to add.

Saturday, February 19, 2005

That 80's Show

Most reruns are boring, but this one is going to be anything but!
This is a followup to the post on Circuit City and is also a response to a few articles this last week.

Some are predicting that we will see a revival of 80's style buyouts where the buyers are not other corporate entities. The major departure would be that the current bout will see hedge funds as buyers. They have accumulated huge piles of cash in the last 3 years. With very few opportunities for high returns, most of the cash is still sitting idle. Some of these hedge funds' individual stash amount to billions! The most profitable way to put this money to work right now seems to be to takeover underperforming businesses with great cashflows.

With executive underperformance finally getting the attention it deserves, it would be easy for these funds to keep existing shareholders happy by paying a small premium in a buyout. Once private, aggressive cost cuts should allow these businesses to be extremely profitable, and the funds can get their returns either selling these revived businesses to others or taking them public again 2/3 years down the road.

Retail is going to be an obvious choice for such takeovers, since they offer a huge cushion in terms of valuation for the underlyinig real-estate. Small (< 200 million market cap) software firms and smaller still biotechs will be other prime targets. With the former, hedge funds can just use an initial offer to set off a bidding war with other potential corporate buyers, profiting one way or the other. With small biotechs, the funds have an upper hand in negotations given these business' appetite for research funding - the secondary market is not friendly anymore and remaining public won't be an option for many of them!

So, start looking for boring, close-to-book-value, constant cash-flow businesses.

Another angle to this is the window that earnings restatements (followed by a sizable pullback in the stock) provides for opening positions. Restatements are now a regular affair with the increasing spotlight on accounting. At times, perfectly good businesses get lumped with bad ones, and their stock gets punished. Hedge funds have started using these to make their moves.

It will be an interesting rerun!

Wednesday, February 16, 2005

Circuit City gets an offer

Circuit City (CC) got a cash offer of around $17/share. I have been waiting for this for a while now, buying Circuit City shares a few times last year, at an average of $11.2/share. This bid represents a premium of 52%.

This particular offer, though valuing Circuit City fairly, is from a hedge fund, Highfields Capital Management, and is most likely not a serious one.It will be met with competing offers.

Mexican retail king, Carlos Slim will be forced to bid again; his offer, almost of a year ago, of $8/share, was rejected by Circuit City. The recent windfall from Verizon's offer to buy MCI (Mr. Slim owned millions worth of MCI shares) should make it easier for him to throw money at a sweetened offer.

While not a serious one, this bid indicates that the retail sector has some value to offer now. So, who could be next ? I think Sharper Image (SHRP), Pier 1 Imports PIR) and Tweeter (TWTR) will all be targets soon. I own a few of Sharper Image and Pier 1 Imports; both are still cheap.

Sunday, February 13, 2005

Bad medicine

With the merger uptick leading to front-page pieces, there have been some editors offering advice on right targets for others to go after.

2 suggested takeovers definitely don't sound like what a well-intentioned doctor would prescribe.

- Cisco - EMC: A columnist suggested that Cisco should be buying EMC to recover its lost sheen. That would be a bad move - worse than Symantec's recent decision to buy Veritas. Cisco is better off buying smaller companies in storage switches and security.

- HP - Gateway: The suggestion that HP even consider buying Gateway is downright dumb. HP's buy of Compaq was a tragedy, one that kept the buyer barely breathing and whose fallout is still being felt. IBM's sale of its PC unit has shown that it is a bad business to be in. If anything, HP should sell its Compaq unit to Gateway as part of its restructuring, which can now begin in earnest.

Hit #32

It is official now - Verizon is offering $6.8 billion for MCI, valuing MCI at around $21.3/share. Qwest reportedly has countered with a sweetened offer of $7.2 billion that values MCI at $22.6/share.

The Verizon offer, though lower, is a better one. Any Verizon stock got in exchange is definitely worth keeping.

If Qwest's bid succeeds, there is a bankruptcy not too far down the road. Any Qwest shares obtained in exchange for MCI's are not worth keeping.

With my MCI holdings average cost of $16.7/share, the current Verizon and the new Qwest offers represent premiums of 26% and 35% respectively.

Thursday, February 10, 2005

Fractals, power law, risk etc.

I just finished reading Mandelbrot's (Mis)behavior of markets. A good book that argues that conventional methods underestimate risk/volatility and that the bell curve is overused/abused and misapplied.

One important conclusion is that so called outliers are much more frequent than most expect them to be. It naturally follows then that the current magic number of 30-40 (different stocks) to provide safe diversification is an underestimation. In reality, the author argues, the number may be 3 times higher! Having just made a post titled How many is too many, I agree completely.

Be warned that the book contains a few equations and Greek symbols! This book will make me go back and read a few more pure-math books soon (love those equations!), but I promise not to blog about them.

Big bad bank + small bank = Bigger bad bank

A simple equation that explains the results of a bank takeover and one that is the reason behind the rise in private banks geared towards keeping high net-worth individuals happy.

While this has been the subject of numerous pieces on bank takeovers, what prompted me to write today was a personal experience with formerly Fleet Bank. I have been a long-time customer of Feet, and have been happy with their customer service.

Until today, that is. I should have seen it coming - last month's bill from Fleet said Bank of America showing that the merger is now in the execution stage. The call to customer service today was worse than an hour at the dentist getting a root canal done. But it was exactly the same quality as Bank of America's! So much so that, when I ended the conversation with a "you are about to lose a long-time Fleet customer", all I got was a "Thank You and bye" from the other side!

If you had any doubts about there being any room for newer/smaller banks, this should dispel it. Each time there is a takeover, you will see some smaller banks benefit from the customer flight away from the resulting monstrous entities.

How do you play this M & A sideshow ? By investing in banks that offer specialized/individual services, or smaller banks that cater to affluent localities.

Examples include PrivateBancorp (PVTB), Bryn Mawr Bank (BMTC), Greater Bay Bancorp (GBBK), Silicon Valley Bancshares (SIVB), Vineyard National Bancorp (VNBC) and Foothill Independent Bank (FOOT).

I own stock in PrivateBancorp and Greater Bay Bancorp and plan to add others slowly.

Sunday, February 06, 2005

How many is too many ?

One question that I get asked often is about the optimal/maximum number of unique stocks to own.

I have seen money managers referring to 20, 400 and everything in between as desirable!

Frankly, I believe that any hard limit is artificial. If you can get a stock at a reasonable price, you should own it (assuming of course you can afford to). i.e any limit should not be based on what you already own, but by the availability of the target companies' shares cheaply.

Ofcourse, when you own hundreds or even thousands of stocks, some will go down under. Who could have predicted Enron or Worldcom, 5 years ago ?

In addition, the exchange where a stock is listed does tell you something about the risk involved given the different disclosure requirements by the exchanges.

Ultra-low fees online brokerages like ShareBuilder and FolioFN help you lower the costs of transactions, thus taking one item off of your cost-basis calculations.

Saturday, February 05, 2005

Acquiring customers through takeovers.

Oracle's buy of Peoplesoft showed how far an acquirer will go to buy another company just for its large/attractive customer list.

Here are 2 tiny companies that fit a similar profile of having thousands of customers, but still remain under-appreciated.

- Actuate (ACTU): This business performance/analytics reporting software maker should now be in the crosshairs of Oracle, Business Objects or Computer Associates. The insider buying is also a supporting factor.

- LivePerson (LPSN): This provide of software to facilitate real-time web-based customer support is in a niche market and should make for an attractive target for the likes of Siebel or other customer service providers.

I own shares of both, and I remain a buyer at current prices.

Spare the rod, please.

Acquirers get punished when they overpay for a target or when they make bad buys that don't fit into the parent company's strategy. Occasionally though, you will find overreaction and in some cases, just failing to see the full/brighter picture. Here is one example of each :

- Symantec (SYMC): As I noted in an earlier entry, Symantec's plan to buy Veritas doesn't make much sense and it deserved to take a beating. But at this point, it looks overdone. The brighter side of this takeover is that, Symantec did not overpay (the real mystery: why was Veritas so desperate to sell?) and even if the integration efforts fail, Veritas has a customer base that is unlikely to thin.

Having worked on an internal project to replace a Veritas deployment, I can tell you that it is hard to get rid of Veritas in a corporate setup. It is disruptive. So, Veritas will remain a cash cow for Symantec. Worst case, Veritas will be spun off a few years down the road.

So, if you are willing to wait for 3 or more years, Symantec should be on your buy list now.

Another point that is often made about Symantec is the impending competition from Microsoft. I think that is overblown too - who would want an anti-virus filled with security holes ?

- SBC Communications (SBC): SBC's purchase of AT&T was smart - it did not overpay, and it is planning to preserve the AT&T name where possible. In addition, the massive cost cuts that are planned should be reflected in the bottomline soon. So, why is SBC being punished ?

Once again, if you are willing to hold for a few years, SBC is a buy right now. While you wait for it to recover, you also get a 4% dividend. What more can one ask ?

Going to the movies, again.

This is NOT another post on Hollywood Video!

It is about Imax (IMAX), owner of the theater chain that promises a 3D experience. Imax was rumored to be a takeover target this week and it is now trading at $11.30/share.

I started buying Imax purely as a value play and paid an average of $5.7/share over the last year. I had accelerated the buying after Imax reported that its recent opening of new theaters in India was very well received. If there is one place where movie theaters can make money, it is in India. While this news largely went unreported, I started seeing Imax as an indirect India play - there are a few others that fall into that category, and I will make another entry soon on what makes up that list.

But for now, if Imax gets acquired, I will be making a 100% gain. I won't be complaining!

Thursday, February 03, 2005

MCI gone too ?

I have mentioned it a few times already, but now the takeover talks seem to have turned official. Qwest is reported to be in talks to buy MCI (MCIP). The offer is expected to be at market price or at a very small premium.

Given that the shares are trading today at around $20, this represents close to a 20% premium over my average cost of $16.7/share.

But, this deal is undesirable. Qwest is itself in a bad shape, both financially, with huge debt levels and operationally with no clear winning strategy to compete against the rest. If anything, I was expecting Qwest to sell itself!

Even if this deal goes through, this is no consolation for millions of former Worldcom shareholders whose holdings were destroyed when it applied for bankruptcy protection last year. MCI, if ofcourse, the post-bankruptcy incarnation of Worldcom. Will those shareholders ever get justice ? In their lifetimes ? Will the people behind this multi-billion wealth destruction ever get punished ?

Wednesday, February 02, 2005

This movie is not over yet!

Blockbuster made another higher offer in the ongoing bidding war over Hollywood Video (HLYW). The new offer is at $14.5/share, compared to the earlier offer of $13.25/share from Movie Gallery.

I think Blockbuster has now reached a point where it is better off buying Netflix (NFLX) with that money, instead of buying just some brick and mortar stores.

This new offer is (finally!) above my average cost per share of $13.8.

CNET attractive again.

I do not plan to regularly react to earnings news with posts, since quarterly earnings are only for people whose day job it is to track these numbers.

I just happened to note that CNET had a good pullback today and makes for a nice entry point for an eventual buyout. I did mention CNET in an earlier post on content.

The likely buyer ? Yahoo is my pick.

Waiting for Godot, Guidant and Gillette.

I was planning to put Pulitzer there in place of Godot, but then I wouldn't get a catchy title!

This one is about 3 of my recent "miss"es. Why the quotes ? Because, these are misses by design!

All 3, Guidant, Gillette and Pulitzer were rumored to be targets for a while before the actual takeover happened. But all were richly valued, and the potential for a big pullback on even the slightest bad news was large. That would have been painful, with any follow-on buyout not rewarding the earlier buy sufficiently enough to compensate for the pain. In the end, the wait approach was validated by the relatively small premiums these companies got.

Isn't that excuse enough ? ;-)