Sunday, July 31, 2005

2 more deals on their way

Late last week 2 more deals were rumored to be in the works.

Saks (SKS) could be on the block, though the company had initially wanted to sell only a few stores and wasn't planning to sell the entire company. I have mentioned Saks in this blog before, and have been buying shares in small numbers, mostly in the $12-14 range. Saks may ultimately go for ~$25/share. Apart from the brand name, Saks is also a good way to bet on a Japanese recovery, given their large presence there.

CP Ships (TEU) has confirmed that it is in talks, without disclosing any further details. CP Ships is a spinoff of Canadian Pacific. It has been paying more attention to the Asia/Australasia sea lanes lately. One party rumored to be interested in buying CP Ships is China Shipping, a state-owned enterprise. This seems a natural progression for the Chinese government. It needs to own resources (Unocal) and increasingly the means to transport them. The US Congress has reacted irrationally so far to Chinese attempts to buy US assets. Canada on the other hand is openly courting China and the response is likely to be in the form of more such purchases of Canadian mining/transportation assets. The US is turning out to be the loser, since the dollars for those deals come mostly from US consumers and the US should be doing everything it can to get those dollars back.

I own a few CP Ships shares bought at around $12/share. The shares may ultimately fetch $20/share, or more, if a competing bidder shows up.

For those of you interested it trivia, the ticker, TEU, stands for Total Equivalent Units, the unit for measuring a vessel's capacity.

After a long dry spell, the shipping industry has attracted huge investor attention over the last 3/4 years. A number of them have gone public in these past years, with atleast 3 (that I know of) having their initial offerings this year. This industry will go through a huge consolidation phase in the coming years as even more goods get manufactured away from their eventual area of consumption.

The inside story of Drexel Burnham

I just finished reading through The Predator's Ball : The Inside Story of Drexl Burnham and the Rise of the Junkbond Raiders.

Reading it is like taking a trip back in time to the 80s' takeover blitz. This also gives you an idea of what could happen if all the cash available with companies right now is put to use. I am hoping to see such a period within the next 2-3 years.

The blind pools of those days have been replaced by a private equity cash glut. A few publications, including Business Week, Worth and Bloomberg, have recently run pieces on all the cash in these investors' hands waiting to be deployed.

Another minor milestone

A few weeks ago my hit count reached 50. This numeric milestone can be seen as artificial, but it does give me an excuse to make another post.

I intended to write on the same day the count reached the half-century mark, but a few things kept me occupied. The hits have continued since then, and now when I finally have some time to write about it, the count stands at 56.

The hits have not disappointed at all. Here is how they compare with my initial expectations.
  • The total number of hits - slightly better than the middle point of my most conservative and aggressive estimates.
  • The average premium - close to my most aggressive number
  • Percentage of cash takeovers - way beyond my most aggressive expectations. As I have said before, cash is king when it comes to paying for takeovers.

I plan to continue investing aggressively in takeover targets as long as the usual reaction, from friends, to my investing strategy remains a mixture of (strong) disinterest, (weak) fear, (mild) skepticism and (even milder) scorn. The day I see a shift, with the majority agreeing with my actions, I will start backing out of this strategy. For now, that doesn't seem to be happening anytime soon.

Saturday, July 30, 2005

Update on Hit #34 - Insight

Insight Communications (ICCI) had earlier agreed to be acquired for $10.75/share as detailed in this post.

Management and the Carlyle Group upped the offer to $11.75/share on Friday. This offer now represents a premium of 29% over my average cost per share of $9.12, held in multiple portfolios.

The stock has been trading above the initial offer price indicating that a new offer was likely.

Tuesday, July 26, 2005

It is that season

Earnings season that is. Time when investor overreaction is in full display. A few warnings over the last 2 weeks have created some takeover target buying opportunities. In the past, I have been able to amplify my gains by buying or averaging down after such warnings.

In the last few days companies that have warned and that have been hurt include Molina Healthcare (MOH), AmeriGroup (AGP), Avid (AVID), Investors Financial Services(IFIN), Radware (RDWR), Avon (AVP), Infospace (INSP) and Pharmion (PHRM). Given the market's shortsightedness, this reaction can be considered natural, but for long-term holders willing to wait for the buyout this is a good chance to buy.

I have mentioned Molina before, in this post. I did buy a few over the last 2 days, though this buying was done with cash that I may need in a few weeks, allowing me to hold onto just a few shares for the long run. I will be seriously considering buying the others in the above list.

Hit #56

Ivax (IVX) is being bought by Teva for $7.4 billion, valuing Ivax shares at $26/share. Shareholders can opt for cash or equivalent number of Teva shares. I will likely go for cash if that option is available, mostly because I need to pay some bills. Teva shares represent value at current prices and there is more room for growth, since Teva is regaining its leading position in generics with this purchase.

This acquisition was a reaction to the earlier Novartis/Eon Labs transaction, on which I posted here. I guessed that Teva will go hunting soon, but got the target wrong. I believe there is more coming in this sector, with Mylan (MYL), Forest Labs (FRX), Watson Pharma (WPI), Taro (TARO), Barr Labs (BRL) representing the stronger/sound value plays and Alpharma (ALO), Andrx (ADRX) and Par (PRX) representing weaker/speculative buys. I have been looking at all of them and buying on any significant pullback. Most of these are worth accumulating at current prices.

I have been buying Ivax regularly ever since insider buying showed up last year. My average price, spread across 2 portfolios - my own and another one I am managing for a friend - is $16.02/share and this takeover price is a 62% premium over that price.

Ivax is among the few stocks that I continued to buy even as it went up, mostly because insiders were doing the same. While this definitely moved up my average cost and hence reduced the percentage premium, the absolute gains increased. Additionally, I was also reducing the overall risk associated with this holding, since continued insider buying while the stock is going up is a very bullish sign.

An interesting fallout of this buyout could be the fate of Ivax Diagnostics (IVD), a company that is majority owned by Ivax. I expect Teva to cash out by selling its (acquired) stake. IVD is a speculative takeover play now. I do not own any shares, yet.

Previous hit - Priority Healthcare (#55)

Friday, July 22, 2005

Hit #55

Express Scripts announced Friday after market-close that it is buying Priority Healthcare (PHCC) for $1.3 billion in cash. This offer, of $28/share is a small premium over the recent close, but represents a 17% premium over my average cost of $23.89/share over a year ago.

While I am content with the premium, there is something odd about this deal. Most announcements on Friday after close are not good ones. The premium paid was also extremely low when compared with similar deals in this sector.

Previous hit - Guilford Pharma (#54)

Thursday, July 21, 2005

Hit #54

Guilford Pharmaceuticals (GLFD) agreed to by acquired by MGI Pharma (MOGN) for $3.75/share in a part-cash/part-stock offer.

I first bought a small number of Guilford last year at $5.15. And in May, I bought a much larger number at $2.53/share. I also bought some more at the same price for another portfolio I am managing. The average cost comes to around $2.77/share. Thus today's offer represents a premium of 36%.

This hit is made a bit sweeter since that entire second round of buying was from cash that I received from Oracle for my Retek shares (details here). I hope I can recycle takeover cash so effectively in the future!

MGI itself represents a takeover target down the road, and I will be holding onto the shares I get in this deal.

For Guilford this is the best thing, since it was close to running out of cash. MGI hopefully will be able to use its muscle to extract something out of Guilford's assets.

Previous hit - Correctional Services (#53)

Sunday, July 17, 2005

My favorite list

The Fortune Small Business 100, the list of 100 fastest growing small public companies is the most useful list out there for long-term investors. This year's list was published a few days ago.

I had mentioned FSB in an earlier post on investing publications of interest to me.

Make sure that you don't respond immediately to publishing of such a list. As in every list, the FSB 100 will have a few that are extremely overvalued at the time of publication. Just add such companies to your watch list and buy on pullbacks.

If you like passive investing, then this list is a god-send. A few of these companies will go bankrupt over the years, and a few will go nowhere. But the ones that get acquired and the ones that turn into the next Starbucks will give you enough gains to offset all your losses in the others, and then some! I suggest investing in all the entries in the list but spread over 3 or 4 installments in a year, both to ensure an average price on the buys and to ensure that you can afford not to buy them at extremely high prices.

Some of these small players even pay dividends, showing that they have a predictable positive cash flow (do confirm that the dividends are not being paid from debt).

The FSB site also allows access to previous years' lists. It makes sense to go over them and check if any have become attractive candidates.

Saturday, July 16, 2005

Money managers as targets

In the last month, atleast 3 different companies running funds have been rumored to be targets. The entire group has been depressed for a while, following the bursting of the bubble and the Spitzer market-timing and other investigations. So, it was just a matter of time before some of these, especially the ones that did manage to contain or reverse outflows, became targets.

Janus (JNS) has repeatedly been rumored to be a target, and I believe that it will eventually be bought out. Some of the new fund managers there have been slowly gaining back investor confidence and the oft-mentioned suitor, Franklin Resources (BEN), will definitely go for it once they realize that the recovery is for real. I own a few, bought during the pullback during the earlier investigations and has appreciated substantially since then. It is still worth buying at current prices.

British fund manager, Amvescap (AVZ) was the one with a confirmed bid this month from Canada's CI Financial, but the offer was rejected. Amvescap is most likely holding out for higher / competing bids.
I came close to buying Amvescap a few times, but failed to find a compelling price/signal to buy. Now that a bid is confirmed, the shares are worth buying on a pullback that is likely to occur if no other bids show up soon.

There were also reports about Marsh & McLennan (MMC) going private in a management buyout. I think that is unlikely, given the current market cap of ~$16 billion. MMC may end up selling its Putnam funds business (the original target of Spitzer) and then may go private. I own a few shares, again bought after the investigations were announced. The shares are still worth buying, as a turnaround bet, even if no buyout occurs. The 3% yield is also not something to complain about. MMC also owns Kroll - check this earlier post. Kroll and its other businesses are more predictable income generators and Marsh would be happy to keep just them.

Waddell & Reed (WDR) is also another target. It has mostly resolved the regulatory issues it faced. The insider buying there is a very positive sign and the healthy yield is also a good reason to buy the stock for the long term. I do not own any shares, but am planning to buy soon. The ultimate buyout price is likely to be substantially higher than the current price.

New estimates of cash among S & P 500 entities

I came across more accurate estimates of cash and equivalents among the S & P 500 members. As a whole, the group now carries around $23 trillion, with the tech members holding $220 billion. These are extremely high numbers by historical standards.

My objective has been to ensure that when these get deployed for takeovers, I get my small share!

Dividends and buybacks are other ways for companies to deploy this cash to reward investors directly, though with buybacks a number of companies in the past have used it just to offset dilution resulting from obscene stock options grants to a handful of executives.

Friday, July 15, 2005

Hit #53

Correctional Services (CSCQ) was acquired for $62 million, in cash, yesterday by Geo Group (GGI). This offer, of $6/share is a 105% premium over my average cost of $2.9/share back in January. This was mostly a speculative buy, driven by some insider purchases.

Geo Group itself is a good long-term investment in the current climate. The recent London bombings have shown that even the Europeans are likely to react irrationally to such events. Expect these countries to join the US in snooping on citizens and setting up mini Gitmos and locking up citizens with summary or no trial, which can only be good for Geo Group.

Geo runs prison facilities in US, Australia, UK, South Africa, Canada. Except perhaps for UK (but for how long ?), these countries have in the past (and some still do) abused the prison system to put behind bars sections of their societies that were deemed less worthy. So, yes, this investment does make me squirm and my penance will be in the form of donating part or all of the gains to my favorite charities.

Geo also runs detention centers for US immigration authorities. In fact, Geo may not be able to remain public for long as it will find it hard to respond to public queries on its deals/practices.

The other public entity in this area is Cornell Companies (CRN), where some investors have already made noise on the need to increase shareholder value. A management buyout there is a possibility. I have been watching this stock and may buy a few soon.

I hope I do not hear anything about making ethical investments! Between banks, that in the past have facilitated slavery (and owned slaves) and that, as recently as the early 90's redlined neighborhoods and practiced disriminatory lending, to companies that openly did business with Apartheid-era South Africa, I may not really find anything worthwhile to invest in. In fact, with tobacco, porn and prison-industrial complex companies, you know upfront what you are getting into - they do not wear a mask of righteousness.

Previous hit - Pacificare (#52)

Wednesday, July 06, 2005

Hit #52

Pacificare Health (PHS) is being acquired by United Health in a cash and stock deal valuing Pacificare at around $80/share. This offer represents a 163% premium over my average cost of $30.4/share

This deal comes after a minor lull following last year's 2 multi-billion dollar deals, one of which featured United Health as a buyer!

As a shareholder I like this deal, but as someone who has seen his premium go up (though still covering nothing at times!), this is not exactly welcome. In one of last year's deals, a handful of top executives rewarded themselves a total of half a billion dollars! The only 3 states left with some ability to think, California, Massachusetts and New York, did try to bring some sanity to this daylight robbery, but it had limited success. I am not expecting anything better in this deal either. If you wonder why your premiums keep going up, but is not matched with a corresponding qualitative improvement in coverage, you should watch out for compensation details that are part of this deal.

This deal will force the other 2 large players, Wellpoint and Aetna to look to bulk up now. Infact, except for the top 3, United Health, Wellpoint and Aetna, everyone is an eventual target.

The smaller players include Humana (HUM), Wellcare Health (WCG), HealthNet (HNT), Cigna (CI), Sierra Health (SIE), Molina Healthcare (MOH), Assurant (AIZ), Amerigroup (AGP), Centene (CNC). All of these are fairly valued, but are still worth nibbling at.

Molina and Sierra are attractive because of their niche markets - the former has a large Hispanic customer base, and the latter owns a big part of the Las Vegas market, the fastest growing in the entire US.

I own a few shares of Humana, Wellcare, Cigna and HealthNet, bought at significant discounts to current prices. I failed to take advantage of another buying opportunity last year when all these stocks pulled back following a Spitzer scare.

Previous hit - MBNA (#51)

Tuesday, July 05, 2005

Two interesting transactions today

Aspect Communications (ASPT) is being bought by Concerto in an all-cash transaction valuing the company at $1 billion.

The offer price of $11.5 is an extremely small premium over the recent close.

I do not currently own any shares, though I did buy and sell Aspect shares for a 292% gain back in 2004 as detailed here. I had bought my shares at around $4 and sold it ~$15, a higher price than the offer today. My purchase then was triggered by insider purchases and I was hoping to see a buyout. But when the stock rose way beyond my expected acquisition price, I sold all my shares.

I was hoping to buy Aspect shares again, but the price/insider-buying indicators never turned positive since I sold my earlier holdings.

This takeover comes just weeks after another major player in the call center support /solutions sector, Nuance, got acquired. I made a small post then.

The remaining players are targets too. These are Witness Systems (WITS), Nice (NICE) and Verint (VRNT). All of them are expensive, though Verint could still get a sizable premium given its use by the US Govt to monitor phone calls.

The other takeover of interest is the just-announced buyout of privately-held Stentor Inc., by Philips. Stentor operates in the medical imaging/archiving sector. This sector, providing specialized IT solutions to medical institutions/professionals, is going to remain a growth area for a long time, given the still-low penetration of IT in day-to-day activities. I drive by Stentor very often and have expected it to be acquired by one of the majors.

Every small player with a good solution in this area will be acquired by GE, Siemens or Philips.

Monday, July 04, 2005

The most compelling tech target now

A recent earnings disappointment sent Tibco (TIBX) shares from around $13 to $6.5 now. At this price, Tibco must be extremely attractive to Oracle and Sun, though Sun already made a not-so-smart move in this direction by going after Seebeyond recently.

Tibco's large customer base is worth acquiring even at a large premium. In addition, it doesn't hurt that Tibco's software (I have been an end-user before) is of a higher quality than the typical takeover target.

An immediate offer will likely be in the $10 area. But if a takeover happens later than 6 months or more, thus giving enough time for the stock to recover a bit, it could ultimately fetch a price in the $16-20 range - a range that sounds too aggressive today.

If you are patient I recommend making a large bet on this stock. The book value of around $3.5 also provides support on the downside.

I would like to see some insider buying, but (as I have stated before) the option-overdosed tech insiders don't really need to buy in the open market.

An interesting possibility is a buyout of Tibco by BEA (BEAS). Not only will it allow BEA to offer a more complete product suite, it will also help BEA to bulk up and thwart any hostile takeover attempts, say from Oracle!

Sunday, July 03, 2005

Merger hints - revisited

I wrote in one of my very early posts that you can find few hints embedded in publicly available information about possible takeovers.

I did also think of using search engines to ferret out more circumstantial hints - say information that a particular CEO is in city x, which is the headquarters of a possible suitor y.

But this here is something I was not looking for - check out the helicopter crash mystery that would have helped to foresee the MBNA buyout. Here is the later admission by MBNA.

Saturday, July 02, 2005

Hit #51

MBNA (KRB) is being acquired by Bank of America in a cash and stock deal valuing MBNA shares at $27.5/share, a 20% premium over my average of $22.8/share.

I would have liked to title this post as mother of all hits, given the number of times I have mentioned MBNA as a takeover target in my blog, with the most recent one coming just after the earnings warning and the subsequent unwarranted drop.

Bank of America paid a 30% premium over the most recent close. While that premium may look excessive, I think MBNA is being bought cheaply. This is the case because MBNA was trading at around $27 till the most recent warning, when the stock tanked to $19. The warning was completely misunderstood, and if you realize that there is a slowdown/recession ahead, the warning was actually a positive sign and the stock should have moved up then. Quite frankly, a fair price would be in the $32-$35 range.

I have been touting MBNA for quite a while now to anyone willing to listen. I initially bought in the $27-$28 range, and averaged down at $20 when insider buying started showing up following the recent pullback. The MBNA holdings I mentioned earlier are in 3 different portfolios - a personal portfolio and 2 others I am managing for friends.

I will be keeping the Bank of America shares I get in exchange since I expect them to benefit substantially from this acquisition.

I will be missing MBNA when this merger goes through. MBNA has been a big part of my investing strategy as I detailed in this post. In addition, if past experience is any indication, the service can only get worse - check out my own ordeal here.

With Providian acquired just days earlier (Hit #46), there is now speculation that the last big independent credit card firms, Capital One (COF) and American Express (AXP), will be taken out soon. That is a real possibility, but I am not buying them now as they are expensive. If there is a long-enough lull before the next takeover, there will be a sufficient pullback to get me interested.

Previous hit - Seebeyond (#50)

Time to short the housing market

I have tried not to comment on the housing market on this blog. But I can't resist anymore, what with me getting the equivalent of a tip from the cabbie 2 times in a week. I cannot tell you exactly who urged me to invest in real estate since he or she may end up as a reader of this blog at some point, but I can tell you that there were the usual obvious truths mentioned - a house is a home! (so is a shopping cart if you can decorate it well enough!), real estate never goes down over the long term (and I believe in Santa!), land is limited (ever heard of high-rises ?) etc.

Insiders have already sold huge amounts of stock in various home-builders. The volume has crossed the billion dollar (yes, with a b!) mark recently. Recent warnings from Trex and Jacuzzi indicate that a massive slowdown is coming soon.

Now that the Australian real estate market has turned cold, and house prices are actually declining, you won't hear about it from friends. The same is true for UK, where prices are still going up, but the rate of increase has slowed dramatically. In fact, a recession in UK is now certain.

If a slowdown in China (and yes, they have a real-estate bubble of their own) occurs at the same time, we will have a global synchronized recession.

The only fillip for housing in the US may come from the recent validation by the courts of eminent domain clauses. This should allow big-business to go on a rampage and bulldoze houses, especially of those who cannot afford to fight back, and create demand for new homes! Yes, that is the cynic in me speaking!

A good way to short the housing market, especially if you bought a house in the last 2 years in the various bubble territories around the world, is to use hedgelets at Hedge Street.