Thursday, June 29, 2006

A bid deadlock

How do you defend yourself against a buyout bid ? Make a counterbid of your own!

After getting an offer from EMI that it didn't like, Warner Music (WMG) has made an offer to buy EMI. EMI, as expected, has rejected that offer.

It will be interesting to see how this will end, as these two have been dancing around for a few years now. As long as I get a healthy premium, hopefully in an all-cash deal, for my WMG shares, I won't complain.

Update: Reports now indicate that EMI may make a new bid of $33/share. That would be more than a 100% gain over my average cost.

EMC trips

I have written in the past about EMC, viewing its acquisition spree favorably. But today's buyout of RSA Security, at a steep premium, is the first misstep for EMC. There is little room for another such bad move in the form of a large acquisition.

Despite statements to the effect that EMC customers demanded better/integrated security leading to this acquisition, the reasoning sounds as hollow as the one provided by Symantec when it bought Veritas, a debacle from which it never recovered! In fact, this is a mirror image of that acquisition - Symantec was attempting to enter into storage and now EMC is trying to get into security. Both attempts are bound to fail.

Interestingly, the reason for such a high premium paid by EMC for RSA was due to competition from another bidder - Symantec! Some companies never seem to learn. A Symantec-RSA combine makes a lot of sense, but only after Veritas is divested. Symantec having lost this one, will likely be looking at others like Entrust (ENTU), Safenet (SFNT), Aladdin (ALDN), Websense (WBSN), Blue Coat (BCSI) and Secure Computing (SCUR).

Not only is there no place for RSA in EMC's world, there is also no need to pay such a sizeable premium. A better buy for EMC would have been Opsware (OPSW) or Altiris (ATRS).

I still think EMC is a good long-term bet, but today's move has pushed a turnaround farther into the future.

Tuesday, June 27, 2006

Hit #103

Michigan based Citizens Bank is buying fellow banker Republic Bancorp (RBNC) for $1.05 billion in a 15% cash / 85% stock deal. The buyout values Republic at $13.86/share, a 20.4% premium over my average cost per share of $11.51. The cost basis takes into account dividends and splits.

I will be holding onto Citizens Bank stock that I get, as it is reasonably valued today, yielding more than 4% and will itself become a target.

Previous hit - Univision (#102)

Monday, June 26, 2006

Hit #102

Univision (UVN) finally agreed to a deal, selling itself for $11.1 billion in cash, to a group of private equity investors. The deal values Univision shares at $36.5/share, a gain of 29.3% over my average cost of $28.03/share.

The auction has been ongoing for a while. A higher bid from Grupo Televisa is still possible. A good way to invest the proceeds from Univision ? Buy shares of Grupo Televisa (TV).

I had more to say about Univision in another recent post.

Previous hit - Maverick Tube (#101)

From Colt to Bebe

One of my telecom takeover bets was Colt Telecom, the European telco service provider. Colt is still independent, but it decided a while ago to delist its NY-listed ADRs, paying approximately market value to shareholders. Net, I made a small profit, but as a percentage gain, it is tiny.

I received the cash last week. I will be putting all the proceeds into Bebe (BEBE), which I have mentioned in the past (here and here) as attractive targets. I have been waiting for a good entry point, and the recent pullback, more than 50%, provides just such a point.

As Bebe works on its turnaround, it could either be bought, or the founder, who already owns 75% of the company, may decide to take it private. I expect to see a premium of atleast 25% in either case. Bebe has around $300 million in cash, with practically no debt. It also yields around 1.3%, which should make it a comfortable hold in the event that the only positive exit point is post-comeback, something that can take a year or more.

Commodities boom top ?

In the past, bull market ends have been marked by aggressive M&A activity with buyers getting involved in dogfights and winners losing by paying more than they should.
Today's and this past week's activity points to a top in the oil/metals/minerals sector.
  • Mittal made a sweetened offer for Arecelor which finally was accepted! A deal for sure, but at what price ?
  • Anadarko Petroleum (APC) last week announced buyouts of Kerr-McGee (KMG) and Western Gas Resources (WGR) for a combined $22 billion in cash, taking on debt to finance the purchases. Anadarko has grossly overpaid, with premiums above 40% in both cases. Anadarko was itself seen for long as a takeover target, but now it becomes too big to be swallowed by most.
  • Phelps Dodge (PD), the copper leader, is set to announce that it is buying Falconbridge and Inco for a combined $40 billion, thus getting into nickel. Inco had made an offer for Falconbridge just a few weeks ago, and in fact the final clearance from the U.S justice department for that deal had come in only last Friday! Falconbridge had meanwhile received a hostile bid from Xstrata and Inco had received a hostile bid from Teck Cominco. Is your head reeling yet ?

    Among these, the only one that I ever seriously considered adding to my portfolio was Inco, but I could never place a fair-value on it.
There are still a few smaller players in oil and natural gas, especially the latter, that are ripe for the picking. Similarly, in the mining sector, silver, platinum, palladium miners have so far not been approached, but I think it is just a matter of time. While the deal flow will continue, I would say that this is the top for the foreseeable future. I realize that I am going against expert-opinion here, opinion that says we are in a multi-decade commodities boom. I think we have seen the best of it already.

I have been buying slowly into smaller natural gas players as well as silver/platinum/palladium players, but as usual, only when I see bargains as indicated by book value, insider activity and dividends.

Thursday, June 22, 2006

M&A updates

The bidding battle for Transmontaigne (TMG) finally came to an end this week with SemGroup opting out, and Transmontaigne accepting a $11.35/share offer from Morgan Stanley. I had marked this as a hit earlier, along with follow-on posts, the most recent one here. This final cash offer is 78.2% over my average cost of $6.37/share.

The battle for Univision (UVN) has run into rough weather, with the bidding likely to start all over again. An asset like Univison is not getting much interest mainly because of the foreign-ownership restrictions that still apply to the media sector. This is one of those areas, along with airlines and telco, where U.S regulations are even more primitive than those of some emerging market economies.

Greenhill (GHL), the M & A advisor has entered the Canadian market with its purchase of Beaufort Partners. This is an extremely smart move since resource-rich Canada is currently seeing its own version of an M&A boom in the mining/transportation/banking sectors. I had suggested Greenhill here as a way to play the M&A upsurge. Greenhill shares are expensive now, as I noted in another post on risk, but watch for pullbacks to buy.

West Corp (WSTC), which gave me two hits when it purchased Raindance and Intrado, is itself is going private at a significant premium. I do not own shares of West, but I would not have complained if both those hits involved stock swaps instead of cash offers! The pace is definitely picking up.

Thursday, June 15, 2006

It is here!

No - not talking about a market bottom, a bear market, an end to the rate hikes, deflation, real-estate bust (that was here) or Angelina Jolie's baby!

I am talking about the urge to merge. The current market carnage has meant that the sudden uptick in deals has largely gone unnoticed. It started with a bang right after the Labor day weekend with an offer by management to take Kinder Morgan private, in what would be the largest management buyout in U.S history. Investors have piled on, expecting a higher offer. Even without a revised offer, this isn't too far behind the largest leveraged buyout, management or otherwise.

Since the Kinder Morgan announcement, deals have averaged around 2 a day, with practically all being cash deals. A substantial number have been offers from management .

Among the recent forecasts - that we will see a private equity tech buyout in the $20 billion vicinity. I know of a perfect match - Computer Associates (CA), which looks attractive today. The same buyer will also find BMC appealing. Together they will cross the $20 billion mark!

There have been a few false starts over the last 2 years, even as the folks across the pond have been running a high M&A fever. But since the latest uptick has gone unnoticed, I will say that this is it - the silent start to the boom!

Last year the dollar held strong, going against majority expectations, due to, among other factors, the one-time tax amnesty for foreign profits repatriation. Will a huge M&A boom with the primary buyers of U.S assets being outside the country, lead to a stronger dollar as more greenbacks come back! Won't be the first time that the majority got it wrong.

Monday, June 12, 2006

Hit #101

Maverick Tube (MVK) is being bought by rival Tenaris for $3.19 billion in cash. The offer, of $65/share, is a premium of 42% over the most recent closing price of around $45/share, but represents a gain of 253% over my average cost per share of $18.4.

Tenaris (TS) itself is looking attractive after the recent pullback. While not making a takeover target, this merger should result in a leader with a huge potential for growth over the next few years. I will be looking to open a position down the road.

Previous hit - Onyx (#100)

Tuesday, June 06, 2006

Hit #100

Onyx Software (ONXS) is being acquired by M2M Holdings for $92 million in a cash deal. The offer, of $4.8/share, is a small premium of 13% to my average cost of $4.24/share.

Onyx was among the last few independent CRM players. The only other such company left is RightNow Technologies (RNOW), whose shares do look attractive, but have some way to fall.

Onyx had received an offer earlier from CDC, but the offer was rejected. At the current sale price it looks like Onyx owners have done a disservice to shareholders, especially when they could have easily started a bidding war. I am still hoping to see a substantially higher hostile bid from CDC.

While not exactly in the same sector, two other smaller companies in related fields, LivePerson (LPSN) and Supportsoft (SPRT), are attractively valued, given their takeover potential.

Also, a few more points of pullback, and (CRM) will be a buy again.

Previous hit - Laserscope (#99)

Monday, June 05, 2006

Hit #99

Laserscope (LSCP) is being acquired by American Medical Systems in an all-cash deal valuing the company at $715 million. The offer price, of $31/share, is a premium of 39% over my average cost of $22.23/share.

After watching Laserscope for a while, I had bought some shares not too long ago on a sharp pullback. American Medical Systems (AMMD) itself looks attractive and will be a long-term growth story.

Many other players in this field remain attractively valued. Among them, Intralase (ILSE), Candela (CLZR), Cynosure (CYNO), Syneron (ELOS), Iridex (IRIX) are on my watch list. I own a few Intralase shares, and will likely add a few of Cynosure soon. While Candela and Syneron also look like good buys, I haven't looked into them seriously.

I had also opened a small position in Cutera (CUTR) just 2 weeks ago. The stock saw a huge bump, of 35%, today after a patent suit was settled with Palomar (PMTI). I will be holding onto my Cutera shares, but won't be adding to my position until another pullback.

Previous hit - Jameson Inns (#98)