Saturday, April 30, 2005

The other rumor ,,,

.... making the rounds on Friday was on Siebel being in talks to sell to Oracle.

While Siebel definitely will make a great fit for Oracle's suite, it is too early for Oracle to buy such a large company after making 3 sizable acquisitions recently. It will take a while, a year or more, to integrate PeopleSoft, Retek and Oblix with Oracle's offerings. Buying Siebel at this point will put those at risk too.

Siebel's denial has not been strong enough. So, the talks probably are for real. Whether they will result in a transaction is the question. I don't see it happening this year. In fact, Siebel has hinted that it is looking for acquisitions itself, with some $2 billion in cash sitting idle! Siebel should look seriously at Rightnow (RNOW) and SupportSoft (SPRT) as a way to enhance its current set of products.

There is also a possibility that Microsoft or IBM may decide to go after Siebel. Again, I think the chances are slim, especially with IBM as the buyer.

The dot in dot gone

By now the rumor about Sun supposedly being in discussions to go private must have been picked up by every mag and site. The denial from Sun has been strong.

That such a rumor would even be taken seriously shows how weak the tech sector has become. Yesterday's Wall Street darling, Sun, finds itself having to deny that it is going private!

Unlike Seagate and Sungard Data Systems, Sun's business doesn't fit into a form that can be fixed by a stingy private equity firm. Sun is better off merging with one of the Japanese majors like Fujitsu, Hitachi or even NEC.

Sun may have to tear itself into a few pieces to get things right. And, find some way to make money from its java platform!

Tuesday, April 26, 2005

Hit #43

Nortel is buying PEC Solutions (PECS) in a cash deal, valuing PEC shares at $15.5/share. This is a 35% premium over the most recent closing price, but just a 4% premium over my cost of $14.9/share.

The stock had moved down considerably after my purchase and I did not bother to average down - a mistake!

PEC is a federal IT contractor and as such was a target for the likes of Computer sciences, EDS etc. Nortel's entry into this field is a bit surprising. This is 3rd in a series of confounding tech deals (Symantec/Veritas and Adobe/Macromedia were the earlier ones).

Other federal/state IT solutions providers of interest include Tier Technologies (TIER), Tyler Technologies (TYL), Manatron (MANA), Mantech (MANT) and SI International (SINT). I own a few shares of Tier and Mantech.

Michael Dell owns a big part of Tyler.

Sunday, April 24, 2005

Hit #42

Eidos (EIDSY) announced that is going with the offer from SCi. This offer translates to a cash offer of around $1.3/share, since SCi is listed on LSE but not any US exchanges.

Elevation Partners, which made the earlier/lower offer won't be making another one.

This offer represents a discount of 17% over my cost of $1.55/share. With a brand like Lara Croft Tomb Raider, I thought $1.55/share was a steal! The shares slid all the way to around 70 cents before recovering after the takeover offers.

The deal still doesn't make sense. Why didn't management fight for a better offer ?

While on games, watch out for more buyouts. Potential targets include Atari (ATAR), Activision (ATVI), THQ (THQI), Jamdat Mobile (JMDT), Midway (MWY), Radica Games (RADA) and Tom Online (TOMO). I don't see any of them as independent entities 3 years from now.

I own Atari, Midway stock.

Hit #41

DoubleClick (DCLK) is to be acquired by private equity firm Hellman & Friedman, at $8.5/share. This sale has been rumored for a while and I had made an entry earlier. This is where I mark it as a hit.

The offer represents a tiny premium, 2%, over my average cost of $8.3/share.

This is an example of a stock that required continuous averaging down, but even then did not end up with a decent return. Ordinary shareholders are losers in deals like this.

Saturday, April 23, 2005

M & A advisors - update

In an earlier post I detailed how to play an M & A boom by investing in investment banks that are also large M & A advisors.

There will be another one to play with soon - Lazard announced its intention to go public. While not as large as others I listed, they are likely to be priced attractively. Barring a pop, I suggest buying a few shares during the early weeks before they start getting attention from analysts.

So far, Goldman Sachs (GS) seems to be the one benefiting the most from the M & A surge. Just look at the number of ways they profited from the NYSE - Archipelago deal. At last count that was 3! They advised both NYSE and Archipelago and they also owned a nice chunk of Archipelago having taken them public just a few months ago!

Thursday, April 21, 2005

MBNA hurt

MBNA (KRB) today blamed people using their homes as ATMs and paying their credit card debts early, for its lower earnings. This option to prepay early without penalty is a tough one to put a value on.

I made a mention of MBNA in an earlier post on leverage. MBNA has been the most generous one, when it comes to offering low APR balance transfers and cash advances. I made use of those offers to borrow and invest in takeover targets. Among the targets, MBNA itself!

At today's price MBNA is extremely attractive and I would be a buyer and so would be a few banks!

MBNA has been extremely picky in selecting cardholders (I know!) and that should help them when rates move up faster.

A desperate quest

Qwest again upped its offer for MCI (MCIP), now valuing it at around $30.4/share. The revised offer has a larger cash portion, and has the same downside protection as before on the stock exchange portion.

As a MCI shareholder, I would like this offer to go through. But this would be a pyrrhic victory for Qwest. It will be over-leveraged. And when interest rates go up ...

Who will be next ? I am looking at Global Crossing (GLBC) and Level 3 (LVLT) as potential targets. I have not done enough research on them and hence will reserve my comments for now. I will provide an update later.

Building a bridge

NYSE's announcement to buy Archipelago (AX) was a shocker!
Coming in the same week when Nasdaq (NDAQ) announced its buyout of Instinet (INGP), this leaves no doubt as to where the future lies.
A third deal this week, that went largely unnoticed, was a private equity groups led investment in NYMEX, the New York Mercantile Exchange, the world's largest energy futures exchange.

I had written in detail on electronic exchanges in an earlier post. I had then commented that I owned Archipelago - I did not. I had placed a buy order for a few shares, but then decided against it, since I saw Archipelago as an acquirer rather than a target. Indeed, around that time, Archipelago was tipped to be the most likely buyer of Instinet!

I ended up buying shares of OptionsXpress (OXPS), Espeed (ESPD) and International Securities Exchange (ISE). I will be buying all 3 at current prices. The consolidation in this sector is just beginning.

Companies that provide additional services like Investment Technology Group (ITG), MarketAxess (MKTX), Arbinet (ARBX), Bisys Group (BSG) and MCF Corp (MEM) are worth exploring.
I own ITG and BSG stock.

The losers in all this ? Traditional floor traders, the specialists, represented by firms like Labranche (LAB) and Van der Moolean (VDM). They have suffered enough now to actually make for value picks, since their business won't disappear overnight. Labranche is definitely a takeover target. I own a few shares of Labranche.

Hit #40

Shire Pharma(SHPGY) today announced that it is buying Transkaryotic Therapies (TKTX) in an all cash deal valuing Transkaryotic stock at $37/share, a 20% premium to its most recent price.

This offer represents a premium of 176% over my average cost of $13.4/share.

Shire itself is a takeover target and that may happen within a couple of years. It is worth buying now - I don't own any yet.

Tuesday, April 19, 2005

Is CA done ?

Computer Associates last week bought out Concord Communications (CCRD) at a 70% premium. CA now has a full suite of management tools, that will force HP and IBM to respond.

I did not own Concord, seeing it as overvalued and not likely a target. Instead, I placed my bets on Visual Networks (VNWK) and Opnet (OPNT). Both these remain attractive and are still targets.

Micromuse (MUSE) is also worth watching. I may add a few at a later point.

With this purchase, I think CA is done with management. There is more to come on the security front. These 2 were mentioned as focus areas for CA going forward.

Monday, April 18, 2005

Hit #39

Gamestop announced today that it is buying rival Electronics Boutique (ELBO) in a cash/stock deal valuing ELBO at $55/share, a 35% premium over its recent price.

This offer price is a 124% premium over my cost/share of $24.51.

Both Gamestop and Elecronics Boutique were takeover candidates for the likes of Blockbuster or Best Buy. I did not expect them to merge, especially with such a huge premium involved. The market has definitely voted for this deal - with even the acquirer's stock moving up considerably.

I do not own Gamestop stock, since it always seemed expensive. But I will be keeping the shares I get as part of this deal, since the game retailing industry has a few more years of growth ahead.

Hit #38

Adobe announced that it is buying Macromedia (MACR) in a tax-free all stock deal valuing Macromedia at around $42/share (based on Friday's close).

I own a small number of Macromedia shares, bought after their last warning. At my average cost of $19.4/share, this takeover represents a 117% premium.

Not exactly a match made in heaven, but Adobe and Macromedia can make it work. While still not universally liked, Flash has made a strong comeback as a browser-based thick-client substitute.

I will be holding onto my Adobe shares that I get in exchange.

In an earlier post, I had mentioned Macromedia as a possible target for Microsoft. Macromedia's leaning towards java technology most likely made it hard for Microsoft to go after it. Or maybe, Microsoft will make a competing bid ?

This acquisition falls in the same class as the recent Symantec/Veritas deal - one that does not immediately make sense. It would have been better for Adobe to go deeper into the document acquisition/retrieval/management area.

Sunday, April 17, 2005

Computer Horizons finds a partner

Computer Horizons (CHRZ) this week announced that it is merging with Analysts International (ANLY), in a merger of equals deal with no premiums involved. I have owned Computer Horizons for sometime now, seeing it as a target for biggies like EDS or Keane. This merger should allow Computer Horizons to compete more effectively with some of the bigger players, but I still think that the company cannot stand alone for long.

Saturday, April 16, 2005

A few more reads

I added a few more books to my done reading list this week.
  • Liar's Poker by Michael Lewis: An entertaining read on the inside working of Salomon Brothers in the 80's. Also, for those who have come to believe that the current housing boom is different, a reminder that housing booms have ended badly in the past, banks have failed miserably, and great one-day market crashes happen. The book is also a great primer on mortgage bonds from its earliest days.

  • The Vital Few vs. the Trivial Many by George Muzea: A thin book on analyzing insider trades. I have always seen open market insider buying, with sufficient dollar volumes, as the best sign for buying a stock. So it was not hard for me to be convinced about what the author has to say. The story on Columbia Pictures is especially important - don't miss it.

  • The Fed: The Inside Story of How the World's Most Powerful Financial Institution Drives the Markets by Martin Mayer : All that you ever wanted to know about how the Fed/Treasury work. It is not a fun read, but the author has tried his best. Can't blame him - the subject is the culprit. There are some good details on the various crises of the last few decades, including the East Asian currency debacle, the Russian default etc. It is also an eye-opener - makes you realize how lightly regulated the derivates/currency markets are. And those very markets have the potential to bring the entire financial system to its knees!

Friday, April 15, 2005

Hit #37

Lion Biosciences was taken private by management paying $1.37/share. Having bought the stock at close to $4/share, I ended up losing 65%! But thankfully I had a very small number of shares, and this loss did not make any difference to the overall portfolio. I am hoping to avoid such routs, but there will always be a few of these nightmares.

While still a hit, this one is more of a hit and run!

Will the RJR record be beaten ?

The largest buyout during the late 80's buyout binge was the $25 billion LBO of RJR Nabisco. Will that record be broken ? I think so. We will see a larger deal over the next 2 years.

The recent $10 billion buyout of Sungard Data Systems was just a start. More similar sized tech deals are in the offing. One ideal candidate is EDS, with a current market cap of around $10 billion.

The steady stream of new announcements of fundraising, including the recent $8.5 billion raised by Goldman Sachs points to another round of takeovers down the road.

Brookstone bought.

Brookstone, a specialty retailer, got acquired today by a group of investors at a healty premium. I never owned Brookstone as I considered it the most expensive in its group. The buyout today came as a real surprise. The others in this group, Sharper Image (SHRP), Pier 1 Imports (PIR) and Cost Plus (CPWM), provide much more value to potential acquirers.

I own Shaper Image and Pier 1 stock. Both are still very attractive. Cost Plus is also a value play now, though with some more downside left.

Another aspect of today's buyout worth noting is that 2 of the 3 members of the buying consortium are Singapore based, including Temasek, the highly regarded investment fund of the government. Temasek has made some smart bets all over Asia. Does this indicate that a few US retailers have reached a state where they actually provide a safe diversification for foreign funds ?

Sunday, April 03, 2005

Bank mergers - what to expect now

A few months ago, I listed a few banks as targets in my post on betting on bank mergers. Things have changed quite a bit since then - and an update is due.

Most important change - interest rates have moved up and definitely going up in the short term (why not long term ? I think that the Fed will be forced to cut rates within the next 2 years to deal with the fallout of a housing slowdown or outright crash - not a conundrum, is it ?).

During the last great interest rate spike in the early 80's, a full 20% of small banks collapsed, and the Fed arranged for a bailout. This time around, it is supposed to be different - because of changes in regulations, reserve requirements and better hedging by banks. But if problems at Citibank and AIG are anything to go by, a few of the rules were being silently ignored. The effect of adjustable rate mortgages and massive carry trades will only be known when rates go up a few percentage points from current levels.

I am removing Washington Mutual (WM) from my takeover list. Since my position is small, I am not selling, but I would have cut my position by 70% if it had formed a larger part of my portfolio. Prospects for a takeover have fallen and risks from interest rates make it even worse. A European suitor now looks less likely given that European banks are more interested in going after other banks on the continent - there were 3 cross-border bank takeovers in the last month. (Another, more serious, question arising out of this - do European banks see more growth prospects in Europe than in the US over the next few years ? Is it time to bet bigger amounts on Europe ?). Another potential buyer, Citigroup, has been asked by the Feds to stop making acquisitions until it cleans up its control processes. This means that Citigroup is not buying anybody for a year or more.

So, are banks still worth betting on, as takeover targets ? Yes, but I now need even more insider buying activity and a good yield (2.5% atleast) to support any buying. I am also interested in much smaller banks or banks that have already tanked due to warnings.

Here is a short, incomplete list :
  • LNB Bancorp (LNBB)
  • KNBT Bancorp (KNBT)
  • Epic Bancorp (EPIC)
  • Doral Financial (DRL)
  • Old National Bancorp (ONB)

I own LNBB, KNBT and DRL shares.