Saturday, May 28, 2005

A tale of two insider buying patterns

In this post, I had mentioned Eyetech as a potential target, and that the insider selling made me wait for a better buying point. Turned out the insiders likely knew what was coming! Eyetech (EYET) last week lost 40% when a competing drug from Genentech was reported to be much more effective. At this point, the overreaction has made Eyetech cheap enough to start buying but only in small numbers. I will think of buying in large numbers if and when insider buying shows up. QLT Inc (QLTI) was also hurt, but to a lesser extent, and it still remains a target.

Another interesting case turned up last week. Here, insiders were either ignorant or were aware of the risk, but assumed, wrongly, that the odds were in their favor. Boston Communications Group (BCGI) last week lost around 75% of its value when it lost a major patent battle. The award imposed by the jury could send the company to Chapter 11. I had bought a few earlier, around $8/share, when significant insider buying showed up. To me, it feels like the insiders never thought they would lose this one, which also explains the absence of insider selling. The stock today is a highly speculative buy, since it would be a wild-ride from here to the end, which may take as long as 2 years, while the company tries to exhaust all the appeals paths.

Inspite (or because) of the above, insider buying still remains the most important factor when making buying decisions.

Monday, May 16, 2005

What is aiding Oracle's digestion ?

The pixels have hardly settled on my earlier post on Oracle, where I said that it will be a while before Oracle can think of buying more firms. I miscalculated!

Oracle said today that it is done with integrating PeopleSoft and is looking at more/larger acquisitions. That is some record.

Start the guessing game.

Go back home!

The last few years of a slow domestic economy forced many US private equity groups to look abroad and do large deals in Germany, South Korea and Japan. That is about to change and reverse course again.

Shocked by some of the hardball tactics (and the eye-popping profits) of these private equity firms (and hedge funds) to squeeze value out of their targets, South Korea has already announced rules that will result in domestic firms being given preference in bidding wars.

In Germany, politicians have some nasty words for these firms. Though no new restrictions have been placed on their operations, the environment is definitely turning hostile.

China also has made repatriating profits harder with some recent regulations.

Will all this mean that the firms will change plans and do more deals back home ?

Already there are indications, as reported by Wall Street Journal today, that India, Brazil etc are emerging as alternate destinations. But the volumes in these countries won't make up for lost business elsewhere.

All cash deals - another reason to like them.

A few months ago, I listed various reasons I like all-cash takeovers.

There is now another reason to like them, especially if you already own stock in the company doing the buying.

A study reported that such deals have a better chance of succeeding and rewarding shareholders (of the buyer). The most likely reason is that with a cash deal, there is no room to play stupid accounting tricks, and the buyout intentions are purely strategic.

Year of the European M&A ?

The latest issue of Europe Business is a special on takeovers. I cannot go into the list of targets mentioned, but there are some unlikely names. The feature goes onto predict that this year will be "the year of takeovers".

One interesting aspect mentioned in that piece was the upcoming change in Eurozone accounting rules that take effect early next year. That change will pressure a lot of buyers to advance their buyouts into this year.

A truckload of M&A

In a surprising deal, UPS today announced an all-cash deal to buy Overnite (OVNT), at almost a 50% premium. This is most likely a reaction to Fedex's similar moves (a few years earlier).

I had written earlier that the entire trucking sector looks very attractive now, and this premium today is indicative of the value that is being discounted.

I did not own Overnite shares, but do own a few other trucking stocks. A number of trucking stocks have pulled back substantially in the last few months. A pullback of this nature is usually associated, atleast for those who follow the Dow Transportation index, with a slowdown or recession. In fact, given the rate hikes and more importantly the money supply squeeze, there is likely to be a recession (hopefully a mild one) within the next 2 or 3 quarters. But the strong insider buying in these trucking stocks points to a good turn of events 8-10 months down the road.

Trucking stocks worth considering seriously now - Sirva (SIR), SCS Transportation (SCST), Covenant Transport (CVTI), Swift Transportation (SWFT), US Xpress Enterprises (XPRSA), Dynamex (DDX), Quality Distribution (QLTY). The same day delivery and less-than-truckload (LTL) sector players are ripe takeover targets.

I own Sirva, Covenant stock and am actively evaluating the rest in the above list.

Sunday, May 15, 2005

A good week for shareholders

Icahn's winning of seats on Blockbuster's board is definitely a great victory for shareholder democracy. At most public firms, this democracy still resembles a banana republic. Hopefully this will be a turning point.

Now that Blockbuster CEO's compensation will be cut from its indecent levels, there is hope for the 3 Blockbuster outlets in my neighborhood that have potholed / dimly-lit parking lots.

Icahn also announced stakes in HP and Siebel. That should definitely be good news for the respective shareholders.

The second best sector

I mentioned biotech as the best sector to invest now if you are investing for the long term.

The next best bet is tech, specifically small software vendors. Did I hear an ouch ?

The tech sector has definitely matured as an investing area. Icahn's recently publicized interest in tech firms is proof of this.

Unlike in biotech, one cannot depend on insider buying to flash a buy signal. After all, tech is where generous (too generous, if you ask me - almost a scam when they are not being expensed) options are part of the compensation. You have to use book value and possible strategic value for the eventual buyer - very hard to do. In many cases, I try to limit myself to software that I have actually used and where I can see a potential buyer.

Many of these small software companies have suffered valuation blowups alongside their dotcom cousins. Most deserve better. I am hoping that an enterprise buyer or the market itself will eventually see value in most of these.

I have mentioned a few of them in earlier posts. These include companies like Liveperson (LPSN), Actuate (ACTU), SupportSoft (SPRT), Entrust (ENTU), Visual Networks (VNWK) , Stellent (STEL) and SeeBeyond (SBYN). I own shares in all of them. This list is incomplete - the entire list will likely contain around 200 or more. I believe that atleast 70% of them will be bought out over the next couple of years.

Friday, May 13, 2005

Pfizer's $30 billion bonanza

As mentioned in a previous post, Pfizer has (so far) announced its intention to bring back $30 billion of its profits parked abroad under the one-time tax amnesty.

How will this money be deployed ? I think a good portion of this will go towards buying some of its partners.

The one that seems like a good bet right now is Eyetech (EYET). While the stock looks relatively cheap, the massive insider selling over the last few months does not generate much confidence. I will wait for some insider buying to show up before deciding to buy.

I don't own any Eyetech stock currently, but I do own a few of QLT Inc (QLTI), a competitor. QLT stock is still a buy its current price, and the company itself is a buyout target, most likely by Novartis.

Tuesday, May 10, 2005

On the wrong side of deals ... three times ... on the same day!

Note that I said wrong, not necessarily losing!

There were 3 (rumored) buyouts of interest yesterday. None of them were hits in the direct sense, but they all had something I could write about.

- Duke / Cinergy : Duke (DUK) bought Cinergy (CIN) at a small premium. This utility deal has a less than 100% chance of going through, after a recent court ruling against a similar utility merger. I do not own these stocks, but do own a few of AES (AES), Calpine (CPN) and Dynegy (DYN), all 3 of them being turnaround bets.

- Scansoft / Nuance: Scansoft (SSFT) bought Nuance (NUAN) at a hefty premium (> 40%). I have come close to buying Nuance shares a few times, but each time I was discouraged by the absence of insider buying. I do own Scansoft shares and I believe that this merger will make it a stronger player and ultimately a takeover target itself.

- Ameritrade / Etrade : Etrade (ET) is supposedly interested in buying Ameritrade (AMTD). I have seen both as takeover targets for a while, though I thought the chances of a merger were low. I was seeing Toronto Dominion as the likely buyer of Ameritrade, with a possible Etrade / Schwab combine following it. The market though seems to like the idea of a merger , with both stocks rising on the news.

Hit #44

Sun today announced that it is buying Tarantella (TTLA) for $25 million, valuing Tarantella shares at 90 cents.

I had bought Tarantella in my speculative bucket a few months ago at $1.61/share. So this represents a loss of 44%! Yes, a bad hit.

Tarantella is the stripped down version of the former SCO. Why would management sell at this price, when the shares were trading much higher just a few weeks ago ? With a decent list of enterprise customers and a steady revenue base, what was the hurry ? We will never know. Yet another deal where a court appraisal may help. If only the Delaware courts were more shareholder-friendly.

Looking at the other side of this transaction, Sun got a good deal, buying some valuable technology assets for a song (though it may sound more like a dirge on the other side).

This sector, of remote access / computing, still remains attractive. Other players, including Neoware (NWRE) and Citrix (CTXS), are targets too. Both Neoware and Citrix are still expensive.

I own a few shares of Citrix bought at a much lower price.

Sunday, May 08, 2005

The single most attractive sector now

A number of factors now make the biotech/medical devices sector the most attractive. There is the oft-quoted demography change in developed nations, but I will limit my list to more immediate/financial factors.
  • Big pharma has had a few drug setbacks lately, and at last, the very use of single-objective chemical drugs is now being questioned. They will be forced to partner with or buy outright the smaller/smarter biotechs.
  • Under the one-time tax-amnesty on foreign profits repatriation the top 5 pharmas are eligible to bring back over $80 billion! I expect a large portion of this to go towards acquisitions, given that the pharmas have no debt problems.

    Pfizer just announced that it is planning to bring back over $10 billion under this rule. This is in addition to the $20 billion it has already planned to repatriate under the same rule.
  • The insider buying in many of these small biotechs has increased dramatically over the last few months. Assuming a lead time of around 8 / 10 months, we should see some action by the end of this year.
  • The generics competition/patent expiration/weak pipelines/possible, indirect, price controls threats are not going away anytime soon.

A sample, non-exhaustive, list would include companies like Trimeris (TRMS), Intermune (ITMN), Pharmion (PHRM), Diversa (DVSA) etc.

I own Trimeris and Intermune stock.

Friday, May 06, 2005

Icahn and Siebel ?

Yet another rumor about Siebel surfaced last week - this time Carl Icahn was the supposed suitor.

Icahn's interest in Mylan (MYL) and Blockbuster (BBI) are understandable, but Siebel ?

I think companies like EDS (EDS), Keynote Systems (KEYN), Quantum (DSS), Fiserv (FISV) are more worthy candidates.

Still, if Icahn can repeat his recent performance at the Blockbuster conference call at a few more places, it would be good for investors. Someone had to question executive pay, and who better than Carl Icahn ?

$50 million pay package for Blockbuster CEO, while my local Blockbuster parking lot looks straight out of a third world slum ?

Culture shock in Japan

Hostile takeovers are starting to take off in Japan. This is definitely a change from the calm corporate climate that prevailed there.

After 15 years of an economy that hasn't moved in any direction, companies and equity firms are looking to buy some assets cheaply.

Another sign came today when NEC announced plans to adopt a poison pill to prevent any such takeover. As I have said in the past, poison pills usually are sharedholder-unfriendly and as such don't deserve to be supported.

I have been buying small number of various Japanese ADRs over the last few months - most notably NEC (NIPNY) and Pioneer (PIO). Both are still attractive; they also pay a small dividend.

Sunday, May 01, 2005

Sun buying ? for real ?

McNealy today revealed that Sun is planning acquisitions larger than the ones it has done in the past. Coming soon after the rumors about Sun going private, I believe that this new revelation was meant to divert attention from the earlier rumors - a puffin fish act ?. So the buyout news may have something to it - a hostile tech LBO perhaps?

If Sun were to make a large buy now, who would make the best target - Novell (NOVL) would be my pick. In fact, a Sun, Novell, AMD combine can pose a serious threat to Wintel. Any advance towards Novell will likely be met by a similar move by IBM.

Other reasonable possibilities include Sybase (SY), Openwave (OPWV), Dot Hill Systems (HILL).

It is that time

Time when.
  • a Money magazine survey reports that the stock market comes at the very last in a list of what Americans think is the best way to get rich now! On top of the list - real estate! No prizes for guessing what this list might have looked like back in 1999
  • Barrons has a front-page piece talking about how money managers are moving into cash and have turned bearish
  • Forbes reveals(!) that tech stock prices are still too high. Where were these guys before the decline started ?
  • Monthly fund inflow has dropped dramatically

Translation - time to buy stocks!

I generally do not care about the market or index, but when all the items mentioned above line up so well, a cosmic event must be just around the corner.