Tuesday, June 28, 2005

Hit #50

Sun is buying Seebeyond (SBYN) for $387 million in an all-cash deal valuing Seebeyond shares at $4.25/share. This is a 62% premium over my average price per share of $2.63.

While Sun is not overpaying, this buy is intriguing coming just after the recent StorageTek buy. Someone like Oracle may have better use for Seebeyond! In fact, there seems to be an expectation of a counter offer - the stock closed at $4.29, above the offer-price.

Will Oracle outbid Sun ? Tomorrow, during the earnings call ?

I had traded Seebeyond shares earlier in much larger quantities for a good gain. I decided to retain a few for the eventual buyout, which by the way happened at a price that is much lower than the peak of the last 3 years.
Previous hit - Net2Phone (#49)

Hit #49

IDT offered to buy the 60% of Net2Phone (NTOP) shares that it doesn't already own at $1.7/share in an all-cash deal. This is a 20% premium over the most recent close, but represents a 38% discount over my average cost of $2.76/share.

The stock is trading after hours at 1.74, above the offer price, indicating that the market expects a better offer. IDT already owns a majority voting stake, so it need not oblige, but this current offer definitely undervalues Net2Phone.

IDT itself represents a value buy, and will be a takeover target down the road.

Previous hit - Cablevision (#48)

Sunday, June 26, 2005

Recent reads

A list of recent reads that are (even remotely) related to finance/investing.
  • Freakonomics - A rogue economist explores the hidden side of everything: The topics covered range from the sudden/drastic reduction in US violent crime rates in the 90's (and the authors' conclusion as to the cause behind the drop) to cheating in unexpected places and the motivation for the same. The last chapter on names could easily have been omitted without making any difference.

    The most important lesson is to not take expert opinion or conventional wisdom at face value, but rather try to recognize and interpret patterns.
  • Collapse - How societies choose to fail or succeed: A largish book that explores in-depth the reasons behind the decline and fall of past societies. The content is often repetitive, especially when it comes to pointing to the environmental causes. Apart from climate-related causes, the significance of friendly trading relations in deciding the fate of cultures is illustrated well and is worth studying in this age of a massive shift of production and wealth creation to the east.
  • Ugly Americans - The true story of the Ivy League cowboys who raided the Asian markets for millions: A true story that is a real thriller. A must read if you want some introduction into bad loans and how they could go worse. The book also sheds some light on hedge funds, though, being set in the 90s, it is a bit dated. The 8 rules listed at the end are worth following.

None of the above are worth buying. Borrow and read - put your cash to better use.

Onto the next bubble ...

The stock bubble came to an end in late 2000. But speculators moved on, to real estate, helped by the low interest rates. Real estate prices, which moved nowhere or down for a few years in the early 90's (try getting people to admit that now!), started taking off. As interest rates go up, atleast in the short term, the question is when will the real estate cooling start ? And more importantly what happens next ?

With long term rates falling, and the continued narrowing of the gap between short and long term rates, the markets are already predicting a slowdown ahead, which will likely bring with it interest rate cuts soon. These rate cuts may actually give a new lease of life to the real estate bubble, but will take it to even more dangerous territory (think Japan, where the real estate market crash of the late 80's led to price drops of upto 80%, where they still stay today!).

A few will move on to the next bubble. With the stock market crash still fresh in memory, it is unlikely that a good amount of money will return to the market to cause a substantial boom. More likely that most will turn towards the bond market, or even (this borders on sacrilege!) plain old savings. The return to market in full strength is probably another 5 years away. If your time frame is atleast that long, you should not wait, but keep adding to your basket.

Saturday, June 25, 2005

On Ameritrade / TD merger

Ameritrade announced it is buying TD Waterhouse, after ETrade rejected its offer. The Ameritrade/TD combine is surely better than a Ameritrade/ETrade union.

The Ameritrade deal involves a one-time dividend payout to Ameritrade shareholders. This may be good for short term shareholders, but the debt-funded dividend is a bad idea in the long run.

After this merger, ETrade definitely will be looking at other partners. A Schwab/ETrade merger may be in the offing. Such a merger will be good for both shareholders, with Schwab's trust business and ETrade's banking/mortgage providing sufficient diversification.

Smaller players like OptionsExpress (OXPS), Knight Capital Group (NITE), TradeStation (TRAD), Siebert (SIEB) will also be eyed by both Schwab (SCH) and ETrade (ET).

The great Chinese brand chase

... has just begun. Barron's also had a piece on this topic today.

While dumb legislators may try to prevent takeover of US brands by Chinese firms, they are better off allowing this natural process to continue. After all, the cash for all these offers comes from China's huge foreign exchange reserve, which ofcourse is money that US consumers paid for all those goods stocked in Walmart! This recycling is preferable to other alternatives.

Who next, after Maytag, IBM's laptop business ?

One possible candidate is Radioshack (RSH). With a market cap of $3.7 billion, this is a small target, even if a decent premium is paid. I do not own any shares, but will be a buyer at its current price.

Toymakers, Mattel (MAT) and Hasbro (HAS), are also likely to attract attention from Chinese buyers.

The Koreans are likely to indulge in a similar chase too. Unlike the Japanese, who burnt their fingers buying up every available movie studio and golf course in California, the Koreans never managed to misuse their cash. They have to, at some point! There was speculation recently that Samsung could go after someone like AMD. That seems unlikely, but if the Koreans start buying, it will likely show up in the chip, memory and cell phone and related consumer electronics sectors. Buyouts of smaller game producers is also a real possibility.

Another hit in the making - Callaway Golf

Callaway Golf (ELY) announced that it has gotten unsolicited bids from certain groups, most likely private equity firms. The offers, at around $15.5/share, amount to a 30% premium over my average buy price.

I expect more bids to emerge, given the strong brand and potentially easy turnaround ahead. Nike should go after Callaway, since if they pass this one, they will be forced to pay a much higer price if they were to buy it at a later date from the hands of a private equity group.

Monday, June 20, 2005

It's been an eventful year

When I started this blog I had doubts if it would remain active beyond a few days or weeks. So it is a nice surprise now to see that it has lasted for a year! An eventful one too.

I started my M & A focused investing around 2.5 years ago, but only after more than a year into practicing that strategy did I think about starting a blog to jot down my thoughts and forecasts. The number of hits so far, 48, is right in the middle of my range with conservative and aggressive numbers as the end points.

The mega-boom in M & A has not shown up yet. So far, it has been just a boomlet - a mini boom. There were signs of a lasting boom a couple of times, but both turned out to be false starts, with signs of a soft patch or interest rate hikes dampening any boom.

I still think that we will see an unprecedented takeover / going private boom over the next 2/3 years. And I hope to be blogging away all along!

Sunday, June 19, 2005

Hit #48

The Dolan family, that owns a majority stake in Cablevision (CVC), has offered to take the company private in a transaction valuing the company at $33.5/share, a 25% premium over the most recent close. This offer represents a 54% premium to my average cost of $21.01/share.

The transaction is a bit complicated, involving splitting up of the company into an entity that contains its core cable assets, which would be taken private at $21/share and a spinoff containing other assets, like NY Knicks, NY Rangers, Madison Square Gardens and a few cable channels, with each Cablevision share entitled to $12.5 worth of shares in this new company.

The price is fair, though someone like Time Warner would likely pay more for the cable part of the company. With the family owning majority voting rights, it is unlikely this deal will fail. With enough shareholder noise, this offer may be sweetened, but that is about it.

This is the 3rd cable company that is going private in less than a year - Cox (check out hit #21) and Insight (see hit #34) were bought out earlier. At this rate Mediacom (MCCC) won't remain independent much longer.

Previous hit - Wyndham (#47)

Saturday, June 18, 2005

REIT buildup

The REIT sector is extremely expensive, and has been that way for a while. But takeover activity is showing signs of heating up.

Just over the last week there have been three sizable buyouts. The one that is of particular interest is the acquisition of Catellus (CDX), an REIT with sizable holdings in San Francisco. Catellus never appeared on my watchlist - infact, I did not know of its existence until the previous day when it appeared on a REIT list in Investor's Business Daily.

REITs owning office space in the San Francisco/Silicon Valley/Bay Area and other former bubble hotspots could be targets, as they are relatively cheap since office vacancy rates are still high and the glory days of the past are not showing any signs of returning. I have added Digital Realty (DLR) and Prentiss Properties (PP) to my watchlist. Digital Realty, with its technology (data centers for eBay, AT&T, NTT etc.) properties in the valley, looks particularly attractive now.

REITs owning medical properties will always be targets, with the economy having little effect on their pricing. When the housing market starts to cool, REIT's owning rental properties will also make a big comeback. One REIT sector to keep away from is the shopping mall area - there has been massive overbuilding of malls and any substantial slowdown in spending will have drastic impact on these REITs.

Thursday, June 16, 2005

This shopper doesn't shy away from throwing money

Pfizer announced its buyout of Vicuron (MICU) today, in an all cash deal valued at $1.9 billion. Why Pfizer would shell out a 80% premium is beyond me, but I should admit that I am in no position to evaluate potential revenues from Vicuron's upcoming drugs. The premium still looks excessive. Was there a threat of a competing bid that forced Pfizer to make this incredible offer ? If so, will the other bidder(s) go after alternate targets ?

As I have said repeatedly, the pharma majors have huge piles of cash and mostly empty pipelines and expiring patents. The best they can do is to buy up-and-coming players.This game is just beginning.

I had not paid much attention to Vicuron, especially since there has been no insider buying recently. I do own a few shares of Intermune (ITMN), which has seen strong insider buying of late and I still rank it as a buy. Another worthy candidate is Cubist (CBST), which also ranks as a buy but less strongly since the insider purchases haven't shown up. Pfizer competitors will surely be looking at these two.

More on Wyndham buyout

My most recent hit (#47) was Blackstone Group's buyout of Wyndham (WBR) chain of hotels and resorts. Blackstone has been buying hotel/resort groups for a while now, including Extended Stay America and Boca Resorts over the last year.

The hotel/resort sector still looks cheap, except for a few players that have recovered from the post-9/11 drop in travel. Expect more buyouts to happen.

One other stock I own in this sector is Jameson Inns (JAMS), and it still ranks as a buy. This should make for a very attractive target.

A few others that I have been watching but have not dared so far to buy are Intrawest (IDR), Vail Resorts (MTN), Great Wolf Resorts (WOLF), Bluegreen BXG). These are not cheap, but may be worth nibbling at. The latter two are very attractive value buys, though Great Wolf is unlikely to be an immediate takeover target since it went public less than 6 months ago.

Tuesday, June 14, 2005

Hit #47

Private equity firm, Blackstone Group, made a $1.15/share bid for Wyndham International (WBR), the operator of luxury hotels and resorts. This is a 14% premium over my average cost of $1.01/share.

I own a larger than usual number of shares of Wyndham, having bought them as a speculative bet.

This offer still undervalues Wyndham and a better offer from another suitor is likely to surface soon.

Previous hit - Providian (#46)

Thursday, June 09, 2005

More on biotech

I wrote a few days ago that biotech was the best sector to invest in now. Just a few days later, Business Week had a cover story saying much the same thing.

Investor interest is still low, and that is good for anyone with the patience and determination to steadily collect a few interesting biotech stocks. The biotech stock bubble, that coincided with the tech/dot-com bubble, went bust a few months after the tech bust. But unlike tech, where a lot of snake-oil was being peddled, a number of biotechs had one thing going for them - basic research that is beginning to payoff in real cures.

If you are willing to build a portfolio with a 7-15 year horizon, biotechs should form a good part of it.

Where is CA going ?

Does CA stand for Computer Associates or inCoherent Acquisitions ?

Computer Associates' buyout of Netegrity made sense. So did the buyout of Concord, though they overpaid. But today's acquisition of Niku didn't make any sense.

CA shareholders have paid a price for all the acquisitions of the past. They will have to do so again when indigestion begins.

If CA wants to reward its shareholders, maybe it should consider taking back some of the performance-related options paid to executives in the past, especially when it was later revealed that a lot of the performance was not real.

Will the SEC ever take more corrective action on restatements, instead of just settling for refiling.

Too little, too late

Siebel announced that it will be paying dividends going forward. The measly payout announced is really no response to the majority of investors demanding that Siebel sell itself. Someone doesn't see the writing on the wall here. If Siebel holds out for too long, they will go the dinosaur way. Here lies another example of destruction of wealth, or, more accurately, the movement of wealth to a select few who awarded themselves repeatedly with stock options, all along claiming that it came with no cost! Is half-n-half the same as whole milk ?

Monday, June 06, 2005

Hit #46

Washington Mutual is buying Providian Financial (PVN) for $6.4 billion is a mostly-stock transaction, valuing Providian shares at $18.71/share. This is a small premium over the recent close, but represents a premium of 52% over my average cost of $12.3/share.

While Washington Mutual did good not to overpay, this deal essentially eliminates it as a takeover target in the near future. One party that may still be interested in buying this new combine is Barclays, which at various times in the past was rumored to be interested in buying Providian as well as Washington Mutual. Washington Mutual is also admitting that the mortgage/banking business is not growing as expected anymore, but that the admission is a positive point.

I started buying Providian around $3, some 2 years ago, when they got into trouble with their consumer lending. Most of that position was sold at prices in the $7-$9 range. I bought again, a few months later, in the $10-$12 range when it looked like their recovery was for real and they could soon become a target. Providian has been tightening its credit evaluation (I known by experience!) of late, and someone did take notice. If I remember right, one of the biggest bets on Providian was made by Bill Miller - another winner.

Previous hit - Titan (#45)

Friday, June 03, 2005

Hit #45

L-3 today formally announced that it is buying Titan (TTN), the defence contractor, for around $2 billion. This deal has been in the making for a while now.

An earlier attempt, last year, by Lockheed Martin to buy Titan was aborted after Titan was associated with a bribery scandal. That news had sent Titan stock to a low of around $14/share before it started recovering.

I had bought Titan before the scandal surfaced, at $21.75/share. My plans to average down, once the scandal hit, could not be implemented as this holding was in a portfolio that I was managing for a friend who refused to believe that this was worth buying on a pullback!

While today's offer at $23.1/share does represent a 6% premium over the average cost, it is a huge missed opportunity! I would have liked to buy aggressively, reasoning that a Republican administration would not allow a defence contractor to be indicted/forced to file for bankruptcy, especially with low-intensity wars being waged in Iraq/Afghanistan.

This strategy, to buy more on market mispricing, is hard to implement, but when done carefully, is very rewarding.

Thursday, June 02, 2005

2 sensible deals

There were 2 other interesting tech buyouts today.

Lawson (LWSN) bought Swedish software maker Intentia whose line of products complements its own pretty well. I own some Lawson shares, bought when the Oracle-Peoplesoft deal ran into rough weather. Lawson would have made for a substitute target. Lawson also looked like a good target for SAP and remains so even today. The market did not embrace today's deal, but I think it will do so eventually.

Citrix (CTXS) bought Netscaler to augment its line of remote-enabled computing with network accelerators. This is a natural extension, though Citrix now starts competing with Cisco and Juniper in some areas. I own a few Citrix shares and I believe that today's pullback is a good chance to add more.

The good, the bad and the ugly

Sun announced that it is buying StorageTek in an all-cash deal valued at $4.1 billion! Sun had hinted earlier that a large deal was coming and it again repeated today that more will follow.

Today's deal had all the 3 ingredients with the breakup being -
- good : Sun finally did something useful with its cash!
- bad : Sun overpaid ...
- ugly : ... to buy a second-rate target!

Sun would have been better off taking a smaller bite going after Dot Hill, Advanced Digital Info or Overland. By going after this large a target, Sun has left no room for error. Moreover this deal will force HP to make a deal of its own, most likely Network Appliance that will mean increased competition for Sun to deal with. This could be the swansong!

I own Network Appliance (NTAP), Advanced Digital Info (ADIC) and Dot Hill (HILL) shares. Dot Hill shares took a hit today as it will lose out due to this deal.

Advanced Digital Info and Overland remain attractive. Dot Hill has now turned more speculative.