Sunday, November 27, 2005

Hit #68 (ECST) is being bought by PFS Web (PFSW) in a tax-free merger. The all-stock transaction valued ECST at around $1.6/share, which represented a discount of 57% to my average cost of $3.71/share!

I will be holding onto the PFSW shares that I get in exchange, since I believe that those can trade at a much higher price.

This buyout was announced almost 2 weeks ago, but was a very low-key affair. I missed the press-release altogether.

Previous hit - La Quinta (#67)

Sunday, November 20, 2005

Options have no cost ?

I have opined in the past that buybacks, especially in the tech/biotech sectors, are really a fraud inflicted on hapless investors. Given the constant dilution with unbelievable options grants, the buybacks are just a great way to transfer wealth to those who don't deserve it! Check an earlier post here.

The recent announcements of large/increased buybacks are no different. Some see it as a way to return money to the shareholders. I see it as a way for the insiders to sell on the pop that usually follows the buyback announcement.

The recent revelations at Mercury Interactive should be an eye-opener. It is unfortunate that the top executives are unlikely to see the insides of a prison. I do hope though that the SEC will start looking under more rocks. Options fraud definitely was/is more widespread than acknowledged. In fact, if the SEC starts looking close enough, Enron and Worldcom will start looking like misdemeanors.

Having just read an annual report of a technology company, I cannot but shake my head in disbelief at what goes on in these firms. It is daylight robbery, pure and simple. The one I read yesterday had the top 3 executives (each) taking home around $400K in salary, $300K in bonus and zillions of options, while at the same time claiming a cost savings of a few millions laying off 15% of staff. All along, the report has shareholder value strewn around. That is funny!

Where are the board members ? Given their advanced age and the fact that they seem to appear in dozens of boards, snapping up options for each position, is it any wonder they don't see what is going on in their own companies.

The tech industry's fight against options expensing was supposedly to ensure that the innovation engine keeps humming. I have a simpler excuse for the opposition - greed.

Options/bonuses also seem to be one-way streets. With all the restatements over the last years, one would have expected to see atleast a few boards ask executives to return their options/bonuses. Then again, it is an exclusive club filled with behavior that borders on incest.

Net2Phone update

More on Net2Phone, which earlier got a bid from IDT.

IDT last week made a new, higher bid, offering $2/share, instead of the earlier $1.7/share. Net2Phone likely will accept this, though I think they are more valuable to a strategic buyer.

This new bid still represents a discount to my average cost, but a smaller one - 28% - than before.

Cisco finally makes a move

A few months ago I had posted on the rumored Cisco-Nokia merger that never materliazed. Well, Cisco did act finally - buying Scientific Atlanta for close to $7 billion in cash.

This move wasn't received well on the Street, but this definitely was a good buy. Cisco had to move towards the consumer, sooner or later.

Cisco with this purchase stands to gain from the emerging TV over IP boom.

The current pullback is a good opportunity to open a position in Cisco.

Saturday, November 19, 2005

Africa - an opportunity

I have not had favorable things to say about Red Herring in the past. But the reincarnated version is less hype and more readable material.

The Africa special issue 2 weeks ago is a great read. As always, Africa gets coverage only when things go wrong. You don't hear about Namibia, Botswana, Ghana or Gabon anymore. Why, you stop hearing about Rwanda and Burundi, once the violence stops. It is as if the world wants to hear only bad things about Africa. Ihe original nickname, Dark Continent, reflected then and does so now, the ignorance of outsiders rather than the state of the continent.

A few times people have told me that there will always be problems in Africa. That is a statement that has its roots in deep bias and even deeper ignorance. Unfortunately though, such statements are not limited to the fair-skinned!

I have been fascinated with Botswana and Namibia, ever since I watched the breathtakingly colorful landscape on Discovery Channel some 10 years ago. I hope to make a long tour of those countries someday. When I recently told this to a few friends the immediate reactions included responses like you may get killed, what can you do there and so on. These 2 countries are now probably safer than most large cities in the US and moreover, have had great stock market runs in the last decade. They will continue to thrive.

Africa and related investments should be part of any long-term strategy. It is not just resources anymore. From cell phones to call centers to open-source software companies, Africa will have a lot to offer over the next few decades. The only thing that can prevent progress there is bias and misguided aid, not to forget dirty games of the major powers. Outside ignorance is not a hindrance!

A good way to start seeing Africa in a different light is to read Jim Rogers and Paul Theroux. I covered some books from them in this post.

One small investment I made recently was in Millicom (MICC), which provides cellular service in a few African nations. The Europe-based provider also has operations in Asia and Latin America. Expect to see more pure-plays in future.

Phew, It is not a cover story!

Businessweek carried a piece this past week speculating that the current M&A mini-boom will turn into a 80's style mayhem, leading to a market surge. Ofcourse, I have said the same thing here.

The biggest relief was that this wasn't a cover story. In the past, Businessweek cover stories have been great contrarian indicators (I have covered this topic before), including the classic late 1979 The death of equities cover story, that was indicative of the best time to get in before the greatest bull market ever!

A cover story would have jinxed this upcoming boom. For now, it can continue on its normal course!

Friday, November 18, 2005

Jill gets a proposal

J Jill (JILL) has been rumored to be a target for a while now, as I mentioned in this post. It was made official today, with a $18/share cash offer from Liz Claiborne. Jill has not yet accepted the offer, and the shares are trading above the offer price, indicating that the market expects a higher or competing bid.

This $18/share offer is a premium of around 44%. I will wait for a confirmation to mark this as a hit.

I mentioned other targets in the same earlier post, as well as in another post. Since then, Gap (GPS), Maidenform (MFB), Deckers Outdoors (DECK), Hot Topic (HOTT) have become attractive.

Also, Charlotte Russe (CHIC), Playtex (PYX), Gymboree (GYMB) have appreciated considerably, with Playtex making a number of right moves in selling assets.

Ashworth (ASHW) has come under pressure from a large holder to pursue alternatives, usually a suggestive hint to sell the company.

Sunday, November 13, 2005


Privately held Koch announced that it is buying Georgia Pacific (GP), offering $13 billion in cash. That is one of the largest cash offers ever.

I do not own GP shares. So why I am blogging about it ? Just to tell you, the readers, that if you were waiting for a clear signal for a M&A boom, this should be it.

Most people fret about missing the early stages of a bubble or not getting out in time.

The tech bubble of the 90's was triggered by a revival following a minor recession, and then some real innovation and finally, by the Fed's aggressive moves to facilitate liquidity to aid Y2K outlays and also as a way to recover from LTCM and other credit dangers.

The current housing boom has its beginnings in the 1997 law that eliminated capital gain on a sizable portion of a profit from selling a house. The legitimate boom was turned into a bubble by the unnaturally low interest rates that the Fed retained for a long time to prevent the tech bust turning into a deep recession. Adding to this was an increasingly emotional need to own a house following 9/11 and feelings of insecurity. That party is just about over.

We are onto the early stages of the next bubble. And this will surpass the M&A boom seen in the early 1900s. This boom is being funded by excess liquidity, extremely low corporate tax rates, one-time amnesty on foreign earnings' repatriation as well as significant increase in profit margins due to cost cuts / technology utilization and enhanced productivity. This boom will turn into a bubble 5 years down the road. But for now, pick undervalued companies and wait. The best thing about this bubble is that you get cash, mostly, in exchange for patience. If you can see far enough, you should realize that this bust, will ultimately lead to a corporate debt crisis, but that is for the Fed to worry about a decade from here!

For now, if I can get a minute percentage of the trillions of dollars that are waiting to be deployed, I will be happy. I expect 10-15% of all current public companies in the US to disappear in 5-7 years.

Headline snatchers

CNN/Money had a piece this week about the increased deal flows from private equity groups. You can read it here.

I made a similar case almost a year ago here, using the exact same headline!

Given the still low readership (and I like it that way) of this blog, I can only fantasize that my post served as inspiration, but it is good to know I was on the right track and early too.

Thursday, November 10, 2005

A week for rumors

This was a week for tech buyout rumors, some sensible, but mostly the ignorable kind.

Here are the ones worth commenting on :

BEA - IBM was cited as the potential buyer. My verdict - unlikely. BEA is better off by itself, and as I have said before, BEA's recent buyout spree has been very smart, and that will naturally lead to a significant increase in shareholder value, which ofcourse will mean Oracle, who I expect to eventually buy BEA, will be paying a lot down the road.

Borland - Tod Nielsen's move to Borland has resulted in speculation that Oracle or BEA may end up buying Borland. I think both are real possibilities, but in either case the buyout will result in Borland's products getting retired down the road. From a buyer's perspective, BEA will have the most to gain, as it inherits a loyal userbase.

Mercury Interactive - Since the con job, i.e stock option grants, at Mercury Interactive has become public knowledge, the stock has taken a dive, making this one-time Wall Street darling extremely attractive. The rumors surrounding Mercury are the most believable. IBM, Computer Associates and HP, all make for serious buyers. The most important questions that no one seems to be asking though are a) How could have the illegalities in grants gone unnoticed for so long ? Were all the board members in deep slumber ? We need to see a few people behind bars here - any other settlement is not just. b) How widespread is this practice in the tech sector ? My guess is really widespread - one huge fraud perpetrated on shareholders, while board members sleep or willingly collude and fund managers play golf or play with other people's money, never bothering to ask real/serious questions. What a shame!

Hit #67

La Quinta, the hotel chain, is being acquired by Blackstone Group in an all-cash deal, for $3.4 billion. The offer, of $11.25/share is a 41% premium over my average cost of $7.99/share.

The Blackstone Group had earlier acquired the Wyndham chain - Hit #47. Before that, the same group had bought Boca Resorts and Extended Stay America chains.

Who next ? As I mentioned in this post as a followup to the Wyndham buyout, the remaining independent chains are all targets, since Blackstone is moving towards building an all-encompassing portfolio.

Lodgian (LGN), Boykin Lodge (BOY), Jameson Inns (JAMS), Winston (WXH) and Equity Inns (INN) are all either attractively or atleast fairly priced. I own a few shares of Jameson Inns and will be seriously considering buying Lodgian and Winston at current prices.

Previous hit - Verity (#66)

A hit, revisited

Gold Banc (GLDB)), a small, and somewhat troubled, bank with customers mostly in Kansas and Missouri, is being acquired by Marshall & Ilsley (MI) for $18.5/share. The cash and stock deal will be split up as $2.78 in cash and the rest in stock.

I will be keeping the MI shares I get in exchange. MI itself is fairly valued, but has room to rise and will be a target down the road.

I am not bumping up the hit count because I had already included Gold Banc earlier, when a deal was announced to take it private. That fell through, most likely due to doubts on Gold Banc's loan portfolio. If the doubts turn out to be based on real ground-level facts, this offer from MI may prove to be on the high side.

This new offer represents a 73% premium to my average cost, of $10.7/share. The gains are a bit higher if dividends are included.

The banking sector is still extremely fragmented in the southeast and I expect a lot more activity there, mostly in Georgia, Carolinas and Florida.

Sunday, November 06, 2005

More from the Central Coast

A recent takeover hit, Central Coast Bancorp, had its origins in an early roadtrip to California's Central Coast.

On a return trip recently, I added another couple of local banks to my watch and buy list. Arroyo Grande based Mid-State Bancshares (MDST) and Paso Robles based Heritage Oaks Bancorp (HEOP) are good takeover bets. I don't own either yet, but plan to open small positions soon.

Both are close to their 52-week high levels, and hence buying in volume is not recommended. The dividends are a small, but real, comfort. The downside with both is their exposure to California's unsustainable real-estate bubble. While the Central Coast dances to a different tune than Northern or Southern California, resulting in a less-pronounced bubble, it is still present and the effects of any severe slowdown will be felt.

Still a buy

In August, I had made a case for buying Macrovision.

Since then the stock has taken a beating, mostly the result of dumping by those guys who don't seem to be able to look beyond their own nose-tips. I reaffirm what I said there, and consider it to be an even more of a value bargain today.

It is possible that Macrovision may start seeing some interest from the likes of IBM or Computer Associates, but the fit is less-than-perfect. I expect Macrovision to remain independent, at the same time continuing its acquisition spree at a more modest pace.

With a steady cash flow, Macrovision will definitely be a great target for private equity groups, since there is enormous room for turning it into a more stingy operation.

Buying a few of its direct and indirect competitors like Altiris, Opsware, Motive, Aladdin and SupportSoft will turn it into a powerhouse down the road.

If you have patience, add more at current levels.

Merger activity gets noticed, again

This weekend, Wall Street Journal as well as Barron's have devoted some space to the spurt in merger activity this year, with Barron's making it a cover-story.

Summary - with around $2 trillion in cash, and more ($8 trillion ?) if you consider non-liquid holdings and ability to take on low-cost debt, what we have seen is just the beginning.

I for one, have been saying this for over 2 years! The number of cash transactions has just been astounding. The merger activity in Europe has surprised most observers.

We will be left with far fewer public companies 5 years from now.

Hit #66

Verity (VRTY) is being acquired by Autonomy for around $500 million in cash. This offer, of $13.5/share is a 19% premium over my average cost of $11.32/share.

I first mentioned Verity as a strong takeover candidate here. My best guess at that time was that Yahoo would be a likely buyer. Given its cash position, Verity could have commanded a higher price, but emerging competition from Google and Yahoo meant that it would be bargaining from a weak position.

The combined entity following this merger would still be a long-term target for Yahoo, but since Autonomy is not listed in the US anymore, there isn't a direct way to play it.

Previous hit - Central Coast Bancorp (#65)