Sunday, March 27, 2005

Hit #36

SunGard Data Systems (SDS) is to be acquired by a group of seven private equity firms for $11.3 billion in cash. This is much higher than the price rumored last week.

The deal values SDS at $36/share, a 32% premium over my average cost of $27.23/share. I own a very small number of shares, since I didn't get a chance to add more during the recent pullback.

With this deal, we have now reached a point where private equity groups are willing to overpay - just to avoid costly litigation ?

One particular disappointment here is that someone like EMC did not show any interest in SDS's disaster recovery and data availability services.

Coming as it does after Veritas's buyout by Symantec, this is a sure indication of the storage stocks being undervalued.

Two others to watch are Dot Hill Systems (HILL) and Overland Storage (OVRL). Dot Hill is very attractive right now; I have been buying regularly. Overland looks fairly valued after their most recent warning - I am planning to add some.

A couple of quasi-hits

Autonomy voluntarily delisted its ADRs recently, citing the costs to remain public in US exchanges as being too high. Autonomy was exchanging the shares for cash, with the value determined by the underlying shares traded on London Stock Exchange. With the shares appreciating around 15% since I bought them last year, this offer represents an equivalent premium. If this is considered the same(?) as a normal stock repurchase, the transaction also has tax advantages.Autonomy is still a takeover target, but the only way to play it is to buy shares on the LSE. Expect more voluntary delistings as Sarbannes-Oxley takes its toll.

Cardiac Science (DFIB) entered into a merger agreement with Quinton (QUIN). The transaction looks complicated, and the market seems to think that the deal is not positive, going by the sharp decline in Cardiac Science's shares. I believe that the merger is a good one in the long term, with the combine being a target ultimately for GE or Siemens, to compete with Philips. I own Cardiac Science shares, which have now lost around 40% of their value.

Breakfast at Coach's ?

I don't think so. I have mentioned Tiffany (TIF) as a takeover target in a previous post. Barron's latest issue mentions Tiffany as a target, with Coach as the most likely suitor.

I think that will be bad for both Coach and (in the long term) Tiffany.

Given Tiffany's margins and cash flow, the best buyer would be a private equity group, who can squeeze the most value out of it and bring in new product lines and spruce up existing ones.

I own a few Tiffany shares and will remain a buyer at its current price. The dividend and recent insider buying provide additional support.

A similar premium brand takeover target is Saks (SKS). Trading close to book value, this has seen some buying from Carlos Slim, indicating that the stock is a bargain right now. I own a few and will continue buying.

Monday, March 21, 2005

The butler did it ...

and a few others did so too today on what is surely the biggest M & A day in a few months. They all found a buyer.

3 of the deals were multi-billion dollar ones.

Interactive Corp (IACI) today acquired Ask Jeeves (ASKJ) for a small premium. I had bought Ask Jeeves sometime last year at around $18/share and sold at $38/share as I felt it was overvalued. After reaching the mid-40s, the stock pulled back to low-20s. Interactive's offer values Ask Jeeves at around $28/share, well below its recent highs. So, not a hit as such, but not complaining. Who next ? FindWhat (FWHT), Interchange (INCX) now look undervalued.
There are a few other undervalued, but highly speculative search plays like Looksmart, (MAMA).

Medicis (MRX) acquired Inamed (IMDC). Will Mentor (MNT) be next ? Medicis itself looks like a value buy now.

In what is being dubbed the largest private-equity buyout of a tech firm, SunGard Data (SDS) is about to be acquired for around $31/share, a substantial premium over the earlier closing of around $26. I will write more on this when the deal is confirmed, since this will be another hit for me. If this goes through, we are entering a new phase in tech buyouts, considering that the deal will be worth > $10 billion!

There were 5 or so smaller buyouts. One worth noting is an offer for Eidos (EIDSY) from Elevation Partners at $0.96/share, a good premium over its previous close of 0.75. Thankfully, I got out of Eidos with a profit a while ago, having bought at $2.3/share and sold later at $3/share. Game companies are still worth betting on - all the smaller ones will be gobbled soon. Redstone now owns a majority stake in Midway Games (MWY) having consistently bought shares in the open market. Atari (ATAR) is worth looking at too. And after today's disappointing report from Electronic Arts, which by the way is still extremely overvalued, Activision (ATVI), THQ (TQHI) and Jamdat (JMDT) make for juicy targets for a Disney or a Viacom. Watch and buy these on pullbacks, averaging down if needed.

Oracle wins - again!

SAP has given up trying to buy Retek. Retek agreed to be acquired by Oracle at the last offer of $11.25

SAP will definitely go after someone else - JDA Software ?

Saturday, March 19, 2005

Spring cleaning - Part 1

It is that time of the year - a time for me to cleanup and get rid of books that I have finished reading over the last year or books that I have no need for anymore. I plan to write, in a series of posts, on some of those books that deal with investing. Where I have already written on a book before, I will keep it very short.

  • The Biotech Investor: How to profit from the Coming Boom in Biotechnology by Tom Abate: This should be the first book you read if you plan to invest in biotech. Please do not use this to go ahead and buy some stocks the next day, but as a great guide to all the factors that one needs to consider before investing in this volatile, but at the same time richly rewarding, sector.

  • Stocking up on sin by Caroline Waxler: Just an ok book on this seemingly recession-free sector. I suggest borrowing to read, but wouldn't suggest stealing - that would be a sin! All the stocks in this sector have reached an extremely overvalued state in the last couple of years - so watch out for a bust here.

  • Running Money by Andy Kessler : Be warned - you may fall off the chair reading this one. Funny, extremely cynical and a great read.

  • Against the Gods,
    The (Mis)behavior of markets,
    A Random Walk down Wall Street : Refer to earlier posts on all the three.

  • Investment Biker: Around the World with Jim Rogers,
    Adventure Capitalist : The Ultimate Road Trip,
    Dark Star Safari: Overland from Cairo to Capetown : Travel books, whether directly or indirectly related to investing are a must if you are diversifying your holdings and plan to do so with a very long-term view. From these, you can slowly build a list of countries that hold promise down the road. It is very important to read multiple authors, from different continents when possible, to build a more balanced opinion about a country.

    Authors' biases/prejudices do show through. Some of these generalizations are equivalent to a foreign visitor to Neshoba County in the early 60's concluding that apartheid was legal in the United States - insulting to the target country.

    Dark Star Safari by Paul Theroux is an example of a travel book that is not directly related to investing, but is valuable for its frank (and at times dark) viewpoint.

  • The Fed: The inside story of how the world's most powerful financial institution drives the markets by Martin Mayer: Worried about all the talk of interest rate hikes, yield curves, yield gap but don't fully understand it ? Get away from those headlines and read this book.

Friday, March 18, 2005

Hit #35

CTI Molecular (CTMI) today agreed to be acquired by Siemens for $1 billion in cash, valuing CTMI shares at $20.5/share. That is a 19.5% premium over my cost of $17.15/share.

I have only a few shares, since I had opened a position assuming that I will be able to add more on a pullback, a pullback that never came!

Siemens and GE have steadily acquired medical equipment companies over the last few years and this trend will continue. An additional bonus is that this sector is essential not impacted by the normal economic factors like interest rates, inflation etc.

CTI makes PET scanners for cancer detection, apart from providing related products and services. There are a few other smaller players left, but this sector rarely gets to a undervalued state and even when a window opens, it is usually for just a short while.

Thursday, March 17, 2005

2 offer updates

SAP earlier today increased its bid for Retek, to $11/share from its original $8.5/share, to match Oracle's $9/share bid.
Oracle followed up a few hours later with $11.25/share. Retek shares are trading at $11.7 showing that the markets expect more to come. I think that the final offer will be in the $15 vicinity. At $11.7, Retek is now trading at a 220% premium to my average cost.

Qwest made another offer for MCI valuing it at $26/share. MCI will respond in a few days, but Qwest has gone too far with this revised bid. While the increased cash portion and other terms are attractive to MCI shareholders, this is bad for Qwest well-wishers. This revised offer represents a 56% premium over my average buy price of $16.7/share. Including the dividends paid over my holding duration, the total return is a bit higher,

Saturday, March 12, 2005

What would you do if you had 3 billion dollars to spend ?

That should have been, what will EMC do ?.

EMC is considering bringing back some $3 billion in profits parked offshore, to take advantage of the one-time low-tax repatriation rules.

EMC has hinted that it is planning more acquisitions, with network management mentioned as one area. While I think that EMC should stop and digest its recent buys, if it absolutely must use the cash, it should go after Opsware (OPSW). Data center automation goes hand-in-hand with virtualization, where EMC made a smart move earlier.

On a pure system management side, BMC is the only large target available. BMC is too big and does way too many unrelated things for it to be a good buy for EMC, but if it can pick it up at a very small premium and cut costs sharply, it would still be worth going after.

Going for broke.

Qwest is rumored to be ready to make a new offer of $8 billion (or $25/share) for MCI. This is much higher from the original Verizon offer of $6.7 billion, and MCI shareholders should now force it to accept this offer.

But this is bad news for Qwest well-wishers (are there any ?). Unless Qwest cuts costs aggressively and is able to get its debt costs lowered, it will be broke within a couple of years.

I will be selling any Qwest shares that I get in exchange for MCI.

I would still like to see Verizon making a higher (and winning) bid for MCI and someone like BellSouth go after Qwest.

Birdbrained ?

I just finished reading yet another interesting book titled Mean Markets and Lizard Brains by Terry Burnham. While repetitive at times, the book still does a wonderful job of running over your investing ego with a 16-wheeler equivalent. Lizard Brain is the author's term for that part of our thinking organ that repeatedly tricks us into taking irrational/emotional decisions, and the evidence cited is compelling.

The main point made by the book is that the human brain is still oriented towards solving problems that our hunter/gatherer ancestors faced and that it is just not equipped to deal with the complexity of the modern world, especially artifical settings like the financial markets. As someone who has always believed (yes, that is the cynic in me talking) that it will be a few million years before we can call the human race as highly evolved, I found this book easy to digest.

Please read this book, if only because it is guaranteed to kill your over-confidence, and that is good for your investing health.

The book argues against dollar-cost averaging and averaging losers, but those 2 methods when used extremely carefully, can be very beneficial. I have done both with respect to takeover targets that are trading at low multiples of book value, and that has helped me amplify my gains. The techniques work in this case because some of these obvious takeover targets get taken down with the rest of the market to prices that can only be termed mouth-watering.

I have also added an earlier book by the author, called Mean Genes, to my reading list.

Tuesday, March 08, 2005

Look who wants a dogfight with SAP!

Oracle today made a rival bid for Retek (RETK), offering $9/share (SAP offered $8.5/share). Expecting a bidding war, the shares were trading at around $10!

Oracle is doing the right thing here, since allowing SAP to go through with this would have given it an edge in the retail software market. If there were any doubts that Oracle intended to take on SAP with the purchase of PeopleSoft, this dogfight should dispel them.

The interesting point here is that Oracle seems to only react (earlier to Peoplesoft's JD Edwards takeover) instead of taking the lead. I don't understand why.

But, as long as these guys keep hiking the offer price for Retek, I won't be complaining.

Monday, March 07, 2005

Hit #34

Insight Communcations (ICCI) is being taken private by The Carlyle Group for $10.7/share, a 11% premium over Friday's close and a 17% premium over my average cost of $9.12/share.

The offer still undervalues the company, and I expect the bid to be raised.

I had mentioned Insight Communications, the ninth largest cable company, along with Mediacom (MCCC) in an earlier post. Mediacom is still a good buy and would make an ideal combine with Insight.

Friday, March 04, 2005

A big meal for Cisco ?

Cisco hinted this week that it intends to not only continue with its habit of making small acquisitions, but a big one is in the making. Who could that be ?

I can only think of 3 large possible targets :
  • Trend Micro (TMIC): Trend Micro already has a strong partnership with Cisco, and Cisco will have to make an entry into the anti-virus market eventually. What better time to do this than when Symantec is distracted trying to digest Veritas!

    I did buy a few of Trend Micro earlier at around $25/share and they stand today at $47/share. At its current price Trend Micro is expensive, but any pullback that takes it to $35 or lower is a great entry point.

  • Nortel (NT): Rumors have surfaced a few times in the past about Cisco's interest in Notel. Today's appointment of a former Cisco top exec as Nortel's president now makes this a real possibility. Nortel is a good buy right now, especially since the restatements are now done.

  • Brocade (BRCD): Cisco has failed so far in winning a decent marketshare in storage area networking. It is time to buy instead of build!

Among the above, Nortel doesn't make a quality target. Brocade is still a good buy.

As mentioned in a previous post, investing mags have picked EMC and Network Applicance as possible targets for Cisco. I hope, for Cisco's sake, that they are wrong!

Network Appliance (NTAP) is a target, but for someone like HP.
EMC cannot be a takeover target! It would be bad for both the acquirer and the target.

Wednesday, March 02, 2005

Another retail software buyout

Blue Martini (BLUE) software was acquired by a private equity group today. Coming just a day after SAP's Retek buyout, this is pointing to a much faster disappearance of the other standalone players.

I haven't owned Blue Martini shares after playing it for short-term gains a couple of years ago (when I was also working in the same block as Blue Martini!).

The remaining tiny entities like Epiphany (EPNY), Broadvision (BVSN), Kana (KANA), Onyx Software (ONXS) will get bought out soon. They are still highly speculative, especially given the lack of insider support.

I own Epiphany and Onyx stock.

Elan takes a hit

Elan (ELN) took a 70% (from $28 to $8) nosedive yesterday after announcing a voluntary withdrawal of Tysabri from the market.

That was a close call! I had bought Elan at an average of $6.5/share, when it started recovering from its accounting problems last year. Then it started taking off on hopes for Antegren (now Tysabri). My original expectation was for partner, Biogen, to make a move and buy Elan before it got too expensive - I had a takeover price of around $18/share in mind. That did not happen, and when the stock reached $21 I sold 70% of my shares. The stock did go all the way upto $28 before crashing back yesterday.

With biotech takeover targets, this practice of converting paper profits to real profits is even more important than it is for other sectors.

At this point, Elan is looking cheap, especially if you believe ( I do ) that Tysabri will make a comeback, maybe with a different recommended dosage or as part of a combination treatment with another drug. It remains a target for Biogen, and I am planning on adding at this price.

If you are looking for a less-speculative bet, Biogen (BIIB) itself is a great pick right now. While the withdrawal will have an impact, the company is much stronger financially than Elan and is in no way threatened by this setback. Along with Elan, Biogen dropped yesterday from around $70 to $40. A nice 2-year/40% profit value play from current levels.

I do not own Biogen stock currently, but will seriously consider adding if it continues to be available at today's price.