Sunday, October 30, 2005

Behind the scenes

Some recent pieces on what goes behind the scenes of a deal.
  • Oracle-Siebel - And you thought shareholders mattered ?
  • Labor negotiations and deals - an interesing article. While I am no supporter of all that gets done under the name of organized labor, I do feel that workers in the retail sector get a raw deal, especially in contrast to what top-management walks away with. At least in the tech/biotech sectors, where the gap is still very wide, even the workers at the lowest rung get to see something for their efforts.
  • The Dolan family's offer to take CableVision private has been dropped. It is still a mystery to me as to what caused it. While interest rates have gone up, Cablevision should not have had problems borrowing to fund the buyout. The price drop following this news has taken Cablevision into bargain territory again.

An alternative capital magnet

The US stock and other (commodities, futures) exchanges have been able to attract most of the investing capital from around the world for a long time now and no one seems even to think of the possibility that this may not remain so much longer.

As with a number of my other ideas leading to posts, I use daily exchanges/conversations to gauge reaction to such possibilities. The more ridicule an idea receives, the more chances of it materializing. On that scale, I think this is a winner. I initially was planning to write that the US exchanges will lose their global leadership in 3 or 4 decades. I am using the nature of the reponses to reduce that timescale to under 2 decades.

Already, the world's biggest IPO in the last 5 years, that of China Construction Bank, was on the Hong Kong Stock Exchange! Among the reasons cited for not having the $8 billion IPO on NYSE - Sarbannes-Oxley and the associated cost of being a public-company. Not expressly stated, but fears of capital controls down the road was definitely a factor as well.

Another, mostly unnoticed, event was the opening of the Dubai International Financial Exchange - more here. This, with all the liberal finance laws, has the potential to turn into something big. Even a small success will lead to opening of similar exchanges in the half-a-dozen or so smaller, relatively-liberal emirates.

What the economic observers in the US derivisely call as the savings glut in Asia and the Middle East, will turn out to be just one factor in making these the pre-eminent exchanges down the road.

You read it here first!

EMC does it again

EMC announced that it is buying Captiva Software to add imaging / input management solutions to its existing suite. This should integrate well with the tools it acquired when it bought Documentum a few months back.

While EMC may have overpaid for Captiva, the all-cash transaction indicates that the intentions were above-board.

EMC should now take a break from its acquisition spree, atleast for a year or so. As I have said repeatedly in the past, EMC should be in your core holdings at current prices.

I had come across Captiva too late for me to open a position. The runup had begun, and the pullback that I was waiting for, never came.

The end is here

I promise that this will be the very last post on real-estate.

The mainstream press has not yet highlighted this, but prices have fallen close to 20%, since March, in some neighborhoods in the hottest real-estate markets of San Diego, Boston and Bay Area. When these numbers are uncomfortable, you usually get to see from beginning of the year and from the same month last year figures!

Stocks of home-builders have fallen an average of around 30% from their recent highs, and some have lost 60% of their value. If you believe that there is no bubble, you should be buying now. I personally think that this bubble is bigger than the dot-com bubble. With the tech bubble, even in the final stages, there was atleast a hint of innovation/new technology. The only innovation in the real-estate bubble has been so called creative financing i.e lending to people who in their right minds should not be borrowing to buy a house.

So, how much do I think home prices will fall ? In the Bay Area and Boston, I see a 60% fall from their highs. I could be wrong - at the height of the tech bubble, I responded to a few (and they were not happy with my response) friends that JDSU could lose 70% of its value. I was wrong - JDSU at today's price has lost around 97% of its value. This is a company with real assets, real technology and patents. If my numbers are wrong again in the same league, brace yourself for a long recovery period.

Buying a house with the intent to stay in it for atleast 7-10 years should still be fine, as long you don't expect it to appreciate in value. But (I have heard this too many times now), seeing it as the only and the most desirable way to build so-called equity is just not smart. Within a couple of years, a lot of people will have negative equity, courtesy their homes.

If you are still in doubt, study the Japanese real-estate market.

As for renters, unlike in past housing busts, this time, after a initial increase in rental prices, the rents will also come crashing down given that so many of these houses were bought as rental properties. So, if you are among the ones who decided to rent, don't take a long-term lease - go month-to-month.

Sunday, October 16, 2005

More reads

It has been a while since I listed my reads, and the list has been growing.

Here are a few that will directly or indirectly help in investing.
  • Deals of the Century : Wall Street, Mergers, and the Making of Modern America, by Charles R. Geisst: This one ofcourse is directly related to M&A. This book is not original in any sense, but has a well researched history of mergers. From the blatantly corrupt early part of the century, to neutron Jack, and the AOL-Time Warner marriage made in hell, all the stories are in here. For those who weren't there to read about it or who have just forgotten it, there are reminders of how US coporations did (and still do, including the net giants from liberal San Francisco area!) helped repressive regimes around the world.
    The book also goes into accounting clauses that make acquisitions more attractive to buyers.
  • Spice : The History of a Tempation, by Jack Turner: A page-turner! The book overwhelms you with incredible facts, facts that force you to think and rethink and question all you learnt in your history class. If you want to see how one culture/people go from being the most powerful to the most docile, or vice versa, you should read this. This book also confirms that in practically every country, including the "free" ones, text books are extremely biased - no text ever tries to respect the "other side".
  • Counterculture through the ages - from Abraham to Acid House, by Ken Goffman: A buzzword-laden collection of time capsules. Well written. Lifestyle change based investing will depend on one's ability to detect subtle early hints that a new approach to life/work/daily activities is taking place. The most important point to take away is that what starts as a faint counterculture eventually becomes adopted by /adapted to the mainstream culture. You can build a whole investing theme based on that. Take the current, still early, craze for Yoga and everything organic. There is money to be made here.
  • The Cathedral and the Bazaar, by Eric S. Raymond: This is about the success of Open Source and how it came about. Though it may not sound like one, this is an essential read for anyone investing in technology. The author's take is that software is not in the manufacturing sector, but in the service sector and that too much time and energy is spent in closing the deal, but nothing is done later to help customers deal with the day to day problems they have with whatever it is they have bought. As as insider, I definitely agree. Linux has shown the way. Enterprise Software will be the next one, and it is time that happened. Companies that deal with reducing the maintenance headache associated with bugs/missing features during the life of a product, will thrive. Red Hat, Novell and SupportSoft fall into this category. Companies that reduce the headache by offering a service-based solution where only a product existed before, will also be able to win over small and medium businesses. Salesforce and RightNow are examples.
    This book is as much a sociology/anthropology study as it is a software management study.
  • A Shortcut through Time, by George Johnson: A well-researched book on Quantum Computing, which has moved from theory-only to toy machines, but will within a decade be real. It is hard to think about such a drastic change in the current computing model, but we won't be able to hide from it.
  • AA Gill is away : An irreverent travel book by the Sunday Times tv/food critic. An extremely interesting way to look at places differently. Explosive laugh out loud material in here. But the humor shade is pitch black and you may be forced to skip a meal or two once you are exposed to gory details of tragedies in all the places that he visits.

Buying productive assets

The number of US companies being acquired by foreign buyers is definitely getting some attention now. 3 of my most recent hits have been of US/Canadian companies being bought by European/Japanese buyers. I am not complaining, as in most cases these are cash takeovers at significant premiums.

This surge seems to have raised some concerns in that useless body called the congress! Plans are afoot to give more teeth to the committee that reviews such purchases of US assets by foreign buyers. The committee so far has been very easy going, except in cases where national security seemed to be a concern. But the new plans to look at all purchases more thorougly, with the aim of discouraging the buyers, is definitely not welcome. Is this the case of "we love free market economics when it works in our favor" ? If implemented, the US won't be able to preach to or force others to "open up" their economies.

One point mostly overlooked is the fact that these buys actually result in capital moving back to the US. Ofcourse, with the current craze of investing in what is essentially a non-productive asset, real estate!, this capital may not end up in the right place.

Friday, October 14, 2005

Vintage is acquired

Vintage Petroleum was today acquired by Occidental Petroleum at a sizable premium. I had mentioned Vintage when I posted here and here on oil & gas in the Rockies. I had not dared to buy any Vintage shares then, since, at around $20, they seemed expensive. What did I know! They are being acquired at around $49/share!

The other independent oil & gas producers based in Oklahoma and Texas are expensive, given the runup in oil & natural gas prices. I will not be touching them, but they could still get a decent premium in buyouts from current prices.

This deal comes just days after Spinnaker was acquired by Norwegian major, Norsk Hydro, for around $2.4 billion in cash!

Occidental (OXY), though overvalued right now, is a good long-term buy. Occidental was a major player in Libya before that country turned a pariah. Now that Libya is back as a friendly nation, Occidental should be able to play a major role in helping Libya exploit its vast reserves. Libya and Western African countries will play a major role as backup sources, if (or rather, when) Middle East supplies get disrupted.

Smaller/independent oil & gas players in the Rockies still look attractive to me. Since my last post on the topic, I have bought a few shares of Edge Petroleum (EPEX) and Warren Resources (WRES). Both are still very attractive. Credo (CRED), Whiting (WLL), Delta (DPTR) and Petroleum Development (PETD) are still fairly valued and worth adding at current prices.

One clear indication of a top in oil & gas prices will be when takeover frenzy in this sector reaches the level seen in 80's. Compared to that level, we are just in a very early phase. The only thing common so far is that Boone Pickens is featuring in this boom too, though mostly in the background unlike his role (Mesa Petroleum) then. Pickens pocketed a nice change with the Spinnaker buyout.

Recommending the acquirers - II

In an earlier post, I had recommended some acquirers as good long-term investments.

I would like to add BEA (BEAS) to that list. They have gone on a somewhat less attention-grabbing spree of buyouts compared to others. But the quality of the buys has been good so far. The targets include Plumtree, M7 and ConnecTerra.

BEA has still work to do on its app-server. Every release seems to improve a few things drastically, but some things get worse! Take, for example, Weblogic 9.0. Reliability and speed seem to have been improved upon, but the administration console for its app-server is still confusing. I still think that Weblogic can survive and indeed thrive, as a small footprint, nimble alternative to IBM's WebSphere. At the same time, BEA needs to make available value-add products/solutions on top of its application server. To that end, it should now go after a content management system vendor, perhaps Stellent (STEL).

BEA shares are not a bargain, unlike say Oracle, EMC or Macrovision. But they are at a price where you can open a position, with plans to add more later.

Hit #65

Salinas, CA based Central Coast Bancorp (CCBN) announced yesterday that it is being acquired by Dutch agri-banking giant Rabobank for $377 million in cash.

The offer, of $25/share is a 29% premium over the previous day's closing of around $19.5. The offer represents a 75% premium over my average, including a recent stock-split, of $14.26/share.

I had mentioned that California's Central Coast banks were targets, and had singled out CCBN in this post, almost exactly a year ago. At that time, I was expecting one of the larger mainstream banks, like Bank of America or Wells Fargo, to make a move. I had started seeing Rabobank as a potential acquirer after its failed attempt last year to buy Farm Credit Services of America, a farm-lending cooperative active mainly in Nebraska/Iowa/Wyoming. That bid, for a GSE, was thwarted by Congress, as FCSA is just a vehicle to keep alive farm subsidies. For an interesting summary of what happened there, check out this report, published by the Federal Reserve Bank of Kansas City.

Rabobank is a winner as a result. By focusing on the much richer and diversified California agri-market, they stand to gain far more and may even be able to encroach on other mainstream bank's lending areas. Expect Rabobank to go after other banks soon. Rabobank is a century-old bank, with a presence in practically every major agri-business lending market in the world. It is also an extremely well-managed bank. I would have happily settled for a stock-swap!

This hit joins my favorites list. I first came across this bank, while driving through the bucolic locales of Hollister, Watsonville etc. I have gone back for a few more scenic drives.

Worth watching are Placer Siera Bancshares (PLSB) and Central Valley Community Bancorp (CVCY). I don't own either, but will be considering them seriously.

Previous hit - Centra (#64)

Sunday, October 09, 2005

Hit #64

Centra Software (CTRA) was acquired late last week by Saba (SABA), in a cash and stock deal, valuing Centra at around $2/share. This represents a 8% premium over my average cost of around $1.85/share.

The transaction didn't get the right kind of welcome from investors and Saba's stock was hit taking Centra down along with it. While this is definitely a bad deal for Centra investors, since I think a better price was certainly achievable, this should work out well for Saba in the longer run.

Saba itself will be a target down the road for someone like SSA Global. I will be watching for any positive news to buy into Saba.

Previous hit - Siebel (#63)

Monday, October 03, 2005

A brain transplant at HP ?

It definitely looks like HP got a brain transplant, and it is turning out to be a successful operation.

Today's announcement of HP's intention to buy RLX and enter the blade server market is in the right direction.

Coming just after the purchase of Peregrine, as detailed here, things really seem to fall into place now.

Wonder who is next on HP's list! BEA ? Keane ? Network Appliance ?

Prentiss is bought

In a post on REITs here I had mentioned that Prentiss Properties (PP) was on my watchlist. They got acquired today by Brandywine Realty for a small premium. Prentiss has been expensive for a while, and hence I had not bought any stock - the measly premium reflected the already high price.

If I had kept my eyes open, I would have noticed Prentiss much earlier!

Along with the recent buyout of Catellus, the 2 major REITs in San Francisco / Bay Area have now been acquired. Overall, the remaining REITs are extremely expensive, with yields at or below 5%. I will not consider them till the yield reaches 11-12%, assuming a similar inflation/interest-rate environment as now.

There are 2 REIT's that still interest me. Both fall into the speculative category. Mission West Properties (MSW) is a Silicon Valley REIT and Digital Realty (DLR) is a REIT focused on data centers. I will be looking to buy a few shares.

I own shares, bought long ago, of REITs like Crescent Real Estate (CEI), HRPT Properties (HRP), BRE Properties (BRE) and Avalon Bay (AVB). I will not be a buyer at current prices, but will be holding onto my shares till a buyout materialises. BRE is also a San Francisco REIT, and likely to find a buyer soon.

I have added Bedford (BED) to my watchlist recently.

Sunday, October 02, 2005

Another healthcare IT provider gobbled

GE announced an all-cash takeover of IDX Systems (IDXC) at an attractive premium. Healthcare remains among the most under-penetrated IT market, with most not even realizing the cost-savings possible with something as simple as a website for public announcements.

This sector will remain attractive for larger players. Other targets include, as I have mentioned repeatedly in past posts, Eclipsys (ECLP), Mediware (MEDW), Neoforma (NEOF), Cerner (CERN) and Quality Systems (QSII).

I own shares of Eclipsys, bought during the last earnings miss and other accompanying bad news, and will be holding till the eventual buyout. Mediware and Neoforma look attractive, but I have not done enough research on them yet.

Cerner and Quality Systems, while sound companies, look extremely expensive. They both remain targets, but I will need a substantial discount to current prices to buy them. I did own Cerner, bought mostly at $16 after their previous disastrous warning, and sold too soon, at around $25 - the stock today stands at $87! I had a substantial, atleast by my standards, number too.

I expect IBM, Oracle and even Microsoft to look for more targets in this sector.

Turning the spotlight on the acquirer, GE now looks like a great value buy. A number of fund managers and other "experts" have been saying so for a couple of years now, without making any difference to the stock price. But the fact that this deal was an all-cash one tells me that the stock is worth buying now.

I am not a fan of conglomerates, especially industrial/machinery ones, but will make an exception for GE. They seem to have pulled it off!