Hit #87

Transmontaigne (TMG) today agreed to be acquired by SemGroup in a $9.75/share cash deal. This is a 53% premium over my average cost of $6.37/share.

Transmontaigne had earlier received a $8.5/share cash offer from Morgan Stanley which already owns some 10% of the company. I had mentioned this offer here, while also pointing out that the market was anticipating a higher bid.

The shares are again trading slightly above the newest offer, and I think this is not over yet. Transmontaigne looked undervalued to begin with, and the current offers can still be bettered.

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Previous hit - Andrx (#86)

Wonder if this is why March begins with M and A

A flurry of activity in the last few days. None of these are officially marked as hits yet, since the deals are not closed.

• Imax (IMAX) announced again that it is considering a sale of the company. This is not the first time the company has put itself up for sale. The last time rumors of a sale were heard, I posted in detail. At this point, I think the company is better off remaining standalone. It has finally found a way to generate and grow revenues via a new model, while at the same time expanding in Asia. I am happy with a 300% gain in 3 years in place of a 120% gain in a few months. I am holding onto all my shares. They are up around 80% from my buy price.
  
• Jamba Juice is being acquired by a blank-cheque company, Services Acquisition Corp (SVI), listed on Amex. While such reverse-mergers have involved questionable parties in the past, this one has a huge potential for gains. I have always watched Jamba Juice with awe - they have a great franchise and a devoted following. Until the first filing following this acquisition, financial details will not be forthcoming and hence large funds may not be able to invest, keeping a lid on the price. I expect the company, once it renames itself and the ticker, to switch to Nasdaq or NYSE, in the process bringing in larger investors. If you have patience, this is still a great buy.
  
• Intrawest (IDR) put itself up for sale recently. I had made a mention of it here, though I did not dare to buy given its high price. In the same post I had picked Bluegreen (BXG) and Great Wolf Resorts (WOLF) as good buys. While the stocks still look cheap, heavy insider selling in both is troubling. I own Bluegreen and Great Wolf stock.
  
• Transmontaigne (TMG), an oil distribution and supply management company, today got a cash offer from Morgan Stanley. The offer, which hasn't been accepted yet, of $8.5/share seems low, and the markets, likely expecting a higher bid pushed up the shares to around $9.2/share. I had picked Transmontaigne as a target in this post on gas plays in the Rockies. The offer is around a 40% premium to my average cost, but this is not over yet! I had listed a few other picks here when Patina was acquired. Since then, I have also bought into Edge Petroleum (EPEX) and Warren Resources (WRES). Edge still looks attractive.
  
• Lexar (LEXR) may get a higher bid as I had guessed here. Carl Icahn, and possibly other investors, will get Micron to pay more. That makes sense given that this is more beneficial to Micron than to Lexar - they should pay up. Like in so many such deals where shareholders get a bad price, I wouldn't be surprised if Lexar insiders got a sweet deal for themselves. Such a pattern has been confirmed by atleast one study in the past, and I had noted in a post very early on.
  
• Bally Total Fitness (BFT) shares have jumped up in the last few days after rumors of a possible bid from Branson's Virgin Group. I own a few Bally shares, bought at around a 30% discount to the current price level. A good related investment now is Nautilus (NLS), maker of gym equipment. The stock looks cheap and insiders have been buying up. I will likely buy some for myself soon. Another related investment can be obtained by following Mark Wattles, former chairman of Hollywood Entertainment, who also owns a sizeable part of Bally. His one other investment, ignoring Ultimate Electronics that went bankrupt, is Tweeter (TWTR). I own a few Tweeter shares. Tweeter stock isn't cheap anymore, but if you own it already, it is worth holding onto - I expect some action there too.
  
• Onyx Software (ONXS), a CRM vendor got a revised bid from CDC Corp, now offering $80 million instead of $50 million. I expect this deal to go through.
  
• R. R. Donnelley (RRD) announced that it is buying Indian backoffice outfit OfficeTiger, in the process transforming itself from a printing solutions company to an outsourcing/India play. With its established rolodex, it can give OfficeTiger an easy way to rapidly expand its business. This takeover has largely gone unnoticed. R. R. Donnelley is a good buy now. Apart from the recent insider buying, the dividend yield of around 3% is comforting too.
  
• Capital One (COF) bought North Fork Bank, in the process turning itself from a possible takeout target to a consolidator. Combined with the purchase of Hibernia, it has also transformed itself into a bank, from a pure credit card issuer. Capital One, as the last independent credit card issuer, was long seen as a takeover candidate for a major bank. Not anymore. This latest purchase makes Capital One an attractive long-term investment as a bank consolidator, possibly even challenging the likes of Bank of America and Washington Mutual down the road. The stock is not cheap, but may not get any more cheaper. Ofcourse, my earlier reservations on the huge payout to executives in the deal still stand.
  

We file it hoping you don't read it

What is the best thing that has happened to investors lately ? If you guessed SEC or Spitzer you would be wrong.

Check out footnoted.org, a blog dedicated to ferreting out details from SEC filings that companies desperately hope that you and I don't find out about.

Michelle Leder has done a great service to investors by digging up outrageous stuff. What can you do as an investor ? First, don't forget to send a thank you note to Michelle. Try making a donation to support footnoted.

Read footnoted regularly. When you read something that makes you angry/disgusted, write or call Investor Relations at the target firm, and give them a piece of your mind. Most firms' websites have a IR number/email on the Investors pages.

M&A week and other updates

This past week got M&A on the front-pages a few times. I believe this is when small investors start noticing the profit potentital in premiums paid out. Out there in Europe, which is around 2 years ahead in this cycle, M&A has reached bubble proportions - it will be over soon.

I have been planning to go to 50% cash, from the previous 22% level, in my 401K. Instead I have switched to 100% cash. The euphoria and the recent evidence around re-emergence of retail investors is scary. I will wait on the sidelines for a while. My M&A focused investing is not impacted by this. At this stage in the interest rate cycle, a credit event usually shows up. Given that, and the yield curve inversion, I believe that my risks are reduced by going to cash. Moreover, like UAE announced recently, apparently in retaliation for the aborted ports deal, other countries may start announcing that they will convert part of their dollar holdings to euros. That has the potential to impact rates and yields in the most unexpected ways.

I recently sold most of my Rediff (REDF) shares. The shares of this Indian portal have gained more than 300% since I bought them following the post-election scare. I am holding a token number of shares should Rediff remain a target for Yahoo, but that seems remote now. I will be holding onto my other Indian investments. At this point, a 15-20% correction in the Indian stock market seems very likely. That would be a good point to buy some of the infrastructure/banking stocks. Japanese and Chinese stocks look more attractive today than Indian stocks.

The Middle Eastern stock markets have retreated spectacularly over the last few weeks, with 20-30% falls in major exchanges. Even with these pullbacks, markets like Egypt, Tunisia, Palestine and Dubai, have returned more than US exchanges over the last 3 years. Of course, most investors outside these countries wouldn't dare to invest, given the bias resulting from the way media reports events in these countries. Words and phrases like pot holed roads, caste system and corruption are gratuitously thrown in when reporting on these countries (check out today's Barron's feature on Rediff for an example - what a waste of valuable ink and newsprint!). Wonder if it will make any difference if these countries start formalizing corruption into lobbying practices and codify caste system into a Jim Crow legal framework. Maybe that will qualify more countries for entry into the G8! Think of all the investors who will jump in then. Wonder what a Dubai version of Ebbers will look like!

Hey small investor, $#@! you

That was the message from most of the events over the last 2 weeks. Depressing as they are, I would still like to list some of them here.

• A recent report indicated that top executives will walk away with around $280 million from the Capital One / North Fork merger. Capital One definitely has performed well, but $280 million ? Not unless they have fixed world hunger. Distributed to current Capital One shareholders, that would amount to almost a dollar per share (current shares outstanding - around 300 million). As an investor can you do something about it ? Sure. Write to Capital One Investor Relations at investor.relations@capitalone.com. Don't think you can make a difference ? Try telling a few more people. Ask them to write to IR to let them know that they are unhappy with the handout. Are all the fund managers and directors sleeping at the wheel? Shouldn't someone be questioning the compensation ?
  
• Bear Stearns settled with the SEC over the market timing allegations. The settlement of $250 million won't make it to the account of small investors who lost out in this process. I would have liked to see a few people sent to the gallows for these crimes. But instead a settlement ? What about holding a few people responsible ? A third-time pizza stealer gets what amounts to life, and stealing from people's retirement accounts gets nothing ? The worst possible punishment so far in such cases seems to be house arrest - home sweet home. I am sure they are working on a yacht arrest too!
  
• A Wall Street Journal report today describes how options backdating is widespread. If all the people involved in backdating are put behind bars, Silicon Valley will turn into a Con Valley. Who knows, that may finally bring down valley real-estate prices and unclog the freeways.
  
• Financial Times reports that insider trading is rife on the London Stock Exchange, with around 30% of takeovers preceded by stock movements that look suspicious.
  
• By now Spitzer's allegations about H&R Block's IRA accounts have been reported a few times. Just another bad day for small investors' retirement plans and not one too different from other days.
  
  At this rate, combined with the other malpractices, small investors are likely to be dead before they can retire. Mainstream media cannot be trusted to take these up more aggressively. After all, they are owned by corporations whose boards intersect with other non-media companies' boards.
  

Hit #86

Generic drugs company Andrx (ADRX) is being acquired by Watson Pharmaceuticals for $1.9 billion in cash. The offer, of $25/share, is a premium of 30% to my average cost per share of $19.23.

I had sold a part of my holdings earlier at around $27/share.
Watson (WPI) itself would be a target in the not so distant future.

I had mentioned Andrx as a speculative target in an earlier post on Ivax's acquisition by TEVA.

The consolidation in the generics sector isn't over yet, though most of the smaller players have now been acquired over the last year. One player that looks attractive after its recent large pullback is Impax Laboratories (IPXL). I own a few shares, and plan to add at current levels. Another small player, Caraco Pharmaceutical Labs (CPD) is already majority owned by Indian drug manufacturer, Sun Pharma. At some point it will make an offer for the part that it doesn't own. Shares have gained almost 100% since I bought them a few months ago.

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Previous hit - Lexar (#85)

Chasing stocks and understanding risk

I have covered this topic in different forms before - I just have more great examples. I read financial newspapers and journals, like a lot of investors do. But I have not watched a single financial show on TV, and will not in the future. Reading, and especially watching shows with hyperactive presenters, tend to make people chase stocks and lose money. Read for the information - wait until you can digest it before you act. A day's gain or loss following a newspaper/show pick does not mean anything, unless you are a rich investor with millions to spare (and lose).

Part of the reason most investors act this way is because we are not able to fathom risk. Also, various biases make us act irrationally. A 10% gain in a day looks lot more appetizing than a 300% gain over a year, but that shouldn't be the case, unless your end result from the previous investing habit does indeed ensure better absolute returns over a longer stretch of a year or more.

One of the Barron's picks this week is Investment Technology Group (ITG), a provider of electronic trading services. This, practically unheard of, company's stock has been doing great over the last 2 years. Barron's talks about a possible 10% upside from here. As with such picks, the stock will see a bump tomorrow, with short term traders trying to make some big gains, but most will end up making a few cents! I will be watching from the sidelines. I bought into ITG slightly more than a year ago, at $12.88/share. I made a mention of it in this post following Archipelago's acquisition. On Friday, ITG closed at $49.5/share. My average price takes into account the buy transaction cost as well. Any gains I realize at this point will be treated as long term capital gains, with the corresponding lower tax rate. Why am I giving you all these numbers ? To give you an idea of how much capital you will have to risk to make the same absolute returns I have made, if you were to buy tomorrow and realize the 10% upside that Barron's sees. You will have to risk 32 times the principal I had invested originally. Moreover, given the spectacular runup, one minor bad news will send the stock reeling. Insiders have NOT been buying recently and infact, they have been selling. Why did I buy at $12.88 ? Because the stock looked cheap by value measures, but the most important reason was that insiders were buying at open market prices. Why did I decide to keep the stock even after the runup so far ? Because there have been hints by management that if the right offer comes along, the company will be sold. Did I take less risk when I bought in earlier ? I think so. My only planned for action tomorrow - inaction. Not exciting, I know, but I like it that way.

Another pick, this time a short pick going by the negative tone of the piece, from Barron's a couple of weeks ago was Greenhill (GHL), an M&A advisor. I had mentioned in a post about profiting from advisors that I owned Greenhill shares. I had bought the shares at around $22/share. On reading the Barron's piece, I was tempted to reconsider this holding, but decided that the best course of action was inaction, especially since I believe that we have not yet seen all the M&A action possible in this cycle. The stock barely moved in reaction to that piece and still trades at around $65. No complaints there.

So when will I consider selling those shares ? Never, barring any dire need to raise cash.

Update: The stock, in net, hasn't budged since the piece!

More odds and ends

A few comments on this past week's events.

• Dubai Ports World announced that it won't be taking over US ports' operations. This voluntary move should take the sting out of the threatened moves by legislators. It is a sad end to this saga. Mark this as the official rebirth of xenophobia and protectionism in the US. What was surprising was not that politicians raised concerns, but that, according to various polls, ordinary Americans saw this takeover as cause for concern. That is disturbing. Capital wants to be free and trade wants no barriers. No ill-will here, but along with the earlier forced aborting of takeover of Unocal by a Chinese firm, I see this as early signs of the beginning of the end of an empire - an empire that has finally found the shell that it wants to retreat into. US needs more friends in the Middle East. With this act of holding an entire nation accountable for the act of two terrorists, US has lost its sense of reasoning. We are talking about a moderate Middle East nation here - in fact, a country where the people view the US favorably. Should the Federal government blacklist all Oklahoma based companies from bidding for contracts because a few militiamen went berserk ? As for the quality of the firm, Dubai Ports World can teach a thing or two about managing ports efficiently and keeping them clean! Heck, I wish Emirates Air took over the operations of Continental and American Airlines - we may actually see better service, not to mention a few smiles.
  
• We finally got someone with credibility to speak up against executive (over)compensation. Warren Buffett spoke out against fund fees and executive compensation, especially exit compensation packages that have now become mind-numbing. The good news is that this was heard loud and clear by the media. The bad news is that Buffett carefully avoided naming names, and this is a shame, actually made an excuse for the gross overcompensation that was part of the P&G / Gillette deal. This is the exact mindset that probably makes every executive think that he or she is different and deserves it.
  
• I have been harsh on real-estate in the past. I still think real-estate doesn't make sense. But Mojave could be a good speculative buy now. Space tourism has moved from science fiction pages to Business Week and is set to become a mass-market within a decade. Mojave is set to be the center of this industry, unless New Mexico is able to beat it with attractive government grants/tax-breaks. It is Silicon Valley all over again, but this time you get a good deal on the land! My own brush with Mojave was accidental - I ran out of gas in what seemed like the middle of nowhere, but realised that Mojave town's gas stations were just a few miles away. That was my first real entry into the town, having bypassed it during past trips.
  

Hit #85

Lexar Media (LEXR) today got an all-stock takeover offer from Micron (MU). The offer values Lexar shares at around $8.35/share, a discount of 26.3% to my average cost of $11.34/share.

Lexar shares are trading at $8.85/share, indicating an expectation of a higher competing bid.

While the merger makes sense for both the players, I don't see much coming out it, given that prices and margins are falling fast. The only way is for them to move up the chain. Sandisk is a good example of a nimble/innovative player.

A smaller player, SimpleTech (STEC), is likely to be acquired soon. The stock looks attractive right now.

While there is no doubt that the new flash devices are a great step in the progress of personal storage, it is unlikely that the raw device makers will see any benefits. Companies like Sandisk that also build tiny mp3 players and other end-user devices may expect to profit, but even then margins will be slim.

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Previous hit - iVillage (#84)

Hit #84

iVillage (IVIL) is being acquired by NBC for $600 million in a cash deal. The offer amounts to $8.5/share, a premium of 102% to my average cost of $4.21/share.

Given iVillage's leadership position, not to mention its ability to generate real revenues, I feel that the company has been sold cheaply. If nothing else, iVillage should have gone for an auction among various bidders and I bet there would have been other interested parties like MSN and Interactive Corp.

I had mentioned iVillage in a few earlier posts, here, here and here.

A few other content owners remain targets, though very few can be considered cheap. The wedding portal, Knot (KNOT), is one such target. A substantial discount to its current price is needed for it to become attractive.

Online niche retailers like Blue Nile (NILE), Odimo (ODMO) and Red Envelope (REDE) are also potential targets. Red Envelope is the most attractively priced among them. Odimo remains speculative.

CNet (CNET) will be acquired - the only question is "at what price" ? I would like to see a 30% discount before considering buying it. PlanetOut (LGBT), the gay/lesbian portal, also is a property that major media outlets would like to own, though they may decide to wait out the current environment before doing so. The stock looks attractive right now.

One property that definitely looks like a bargain today is Jupiter Media (JUPM). The spectular runup in rival Getty Images (GYI)' stock should give you some idea of the potential - Getty Images' stock has risen from $9 in 2002 to around $81 today.

I own Odimo and Red Envelope stock. I would like to add Jupiter Media, Planet Out and Blue Nile soon.

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Previous hit - BellSouth (#83)

Hit #83

AT&T confirmed that it is buying BellSouth (BLS) in a deal valued at $67 billion. The all-stock deal values BellSouth at $37.09/share, a premium of 60.6% over my cost-per-share of $23.1/share.

The deal is completely unexpected at this point. SBC bought the real AT&T not too long ago, subsequently renaming itself as AT&T. At the time of that deal, BellSouth had figured in rumors, on all sides of a possible deal - BellSouth as a buyer of the original AT&T, BellSouth as a merger partner for SBC, BellSouth as a target for Verizon/Sprint etc.

I expected the new AT&T to buy back Cingular, the SBC/BellSouth wireless joint venture, from BellSouth, eventually. This megadeal won't be good for investors in the long run, and definitely won't make things better for customers. It will definitely mean mega-paydays for top executives on all sides, just like in the previous deal. Having been a suffering customer of SBC/AT&T/Cingular I would definitely welcome an improvement in service even more whole-heartedly.

The earlier buy of the original AT&T scored a hit for me. Just like in that deal, the best part is that the premium paid makes the effective dividend yield for the received shares much higher. SBC sports a healthy yield, and I don't expect that be cut.

What next ? Verizon, Sprint, Qwest will all be forced to look for deals of their own to challenge this new giant. Qwest is the weakest, with a staggering debt-load, and Verizon will likely give it another look. It would definitely help, if apart from receiving long prison terms, various Qwest executives now on the dock are forced to forfeit their accounting-fraud aided bonuses/options/perks.

UK major, Vodafone, may also be looking to do a deal of its own, after announcing just last week that it is selling its Japanese assets to appease investors. Vodafone shares had been losing value steadily before that announcement. Just today it announced that the proceeds from that sale would be used to make a one-time dividend payout of 5 billion pounds, one of the largest such payouts ever. It may have second thoughts after the AT&T/BellSouth deal news.

Who else is in play now ? I expect Rural Cellular (RCCC) to be acquired. I own shares, which have gained almost 100% since my purchase. Centennial Communications (CYCL) and Dobson Cellular (DCEL) are also targets, but the latter looks fairly valued now.
Sprint is also likely to acquire its reseller, Ubiquitel (UPCS), having bought out all the other resellers over the last year.

I own a few Qwest shares, bought at a significant discount to the current price. They look expensive now.

Leap Wireless (LEAP) will also get a good look by potential acquirers. The stock isn't cheap more.

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Previous hit - KeySpan (#82)