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)


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