Sunday, July 30, 2006

Warner Music not being bought, for now

After getting tied up in a bidding deadlock recently, EMI and Warner Music (WMG) have decided for now to give up on their takeover plans. WMG stock fell as expected on Thursday, but the initial overreaction on the downside was shortlived.

It is time to accumulate WMG stock slowly. It is attractive, though not anywhere close to being a bargain. The upside will come from WMG's growth on the digital distribution side. A takeover may still occur months or years from now, and the 2% dividend should provide some comfort while you wait.

Saturday, July 29, 2006

Another good move from HP

HP announced last week that it was buying Mercury Interactive in a cash deal that involved an impressive premium. This is a good move for HP though the price paid, $4.5 billion, is a bit high for a company whose executives deserve life sentences for options' abuse. HP may still have to bear the cost of any fines/strictures resulting from the current probe.

HP likely paid such a rich premium to foil a competing bid from IBM or even Computer Associates. IBM must have considered buying Mercury and had that materialized, HP would have been left without a quality target in this area. Mercury going with HP is a minor setback for IBM.

But for the remaining independent monitoring/management software vendors, it is time to find partners before they become irrelevant. Quest Software (QSFT) and BMC (BMC) will be evaluating their options. BMC has been rumored to be a target for private equity groups, and that may yet happen. Any buyer of BMC will also be looking at buying CA to build a more complete portfolio.

Quest could be bought out by IBM or CA, but it won't be in a position to bargain for a rich premium. Quest's tools aren't really as feature-rich or complete as the offerings from others. The main attraction for a buyer of Quest is its installed customer-base.

The next set of targets will be network/traffic monitoring/management tools vendors. Integrating these with the application numbers will provide for a more complete performance picture of an enterprise. Look for Keynote (KEYN), Netscout (NTCT) and Packeteer (PKTR) to be targets soon. Keynote is trading at close to its cash value, and is a bargain buy right now.

NetIQ was another potential target, but it was taken private recently.

I had posted earlier on Mercury's options probe, as well as guessed possible buyers for Mercury when rumors first surfaced about a buyout.

HP is slowly compensating for its big mistake in not going after Veritas earlier. It should not have allowed Symantec to acquire Veritas. Given the frosty reception, there may still be room for Symantec to sell its Veritas division to HP. That should be a relief for Symantec shareholders who have seen the value of their holdings drop 50% since the Veritas merger.

Return of the barbarians

The RJR Nabisco deal in the 80s was the largest LBO till recently. I have said a few times on this blog that we will see that record fall in this M&A surge. It finally happened.

Last week's $33 billion buyout of HCA beat the $30 billion RJR deal. If inflation is accounted for, we are still not close to that earlier deal, but we will see that tumble too before this buyout/merger wave is over.

In fact, I would wager that we will see this record beaten a few times over this year.

I do not own HCA. The stock looked expensive when I last looked at it, especially given the high debt-load. The tiny premium in this buyout seems to validate that. There were other, more bargain-priced, targets in this sector that the buyers could have gone after. Tenet Healthcare (THC), Health Management Associates (HMA), HealthSouth (HLSH), Medcath (MDTH) would have made for better bets for private equity investors. The HCA deal will likely be a money loser for the buyers - it appears to be a desperate attempt to put cash to work, cash that seems to pile up at an amazing pace with these groups.

There is already talk of a rival, higher bid from another consortium of private equity investors. If this turns into a serious bidding battle, expect a pyrrhic victory for the winner.

Reinvesting Jameson Inns proceeds

It is time to redeploy cash from Jameson Inns' (Hit #98) takeover.

I will be putting the proceeds into these three stocks:
  • Lodgian (LGN): I had mentioned Lodgian as another possible target in the hospitality sector when I wrote about the Jameson Inns buyout. The stock could fall further, but I am taking a chance.
  • ILX Resorts (ILX): A resort operator, mostly owning properties in Arizona. It owns some extremely attractive timeshare resorts that should be tempting to private equity groups.
  • National Lampoon (NLN): A speculative play. The company owns the National Lampoon brand and associated movies, in addition to running a YouTube-like site. It could end up being bought by a major media house.

Aetna in the bargain bin

In a post around a week ago, I had said that Aetna (AET) was moderately attractive, compared to others in the sector that had recently fallen into the bargain bin.

It didn't take that long for Aetna to join the party. The stock has fallen hard this past week due to disappointing earnings news and forecasts. At around $32/share, Aetna is now extremely attractive and trades just above cash/share.

Aetna has long been seen as an acquirer rather than a target. But with this pullback Aetna may itself become a prey. The company will have to do something to thwart such a possibility by either announcing a massive buyback program or a substantial increase in dividends given that the current payout is measly. It may also adopt a poison pill but I hope that route is not taken.

Bottomline - it is time to buy Aetna shares.

Hit #107

Watchguard (WGRD) is being acquired by Francisco Partners for $151 million in cash. The offer, of $4.25/share is a premium of 12% over my average cost per share of $3.79.

A few other companies in this sector now look very attractive.
Checkpoint (CHKP), with over a billion in cash and no debt, is trading at just twice its book value, and makes for a tempting target.

Internet Security Systems (ISSX) is another target, but it has had a big runup recently due to takeover rumors. I own some shares, but will not be buying more at its current price.

Blue Coat Systems (BCSI), Websense WBSN), McAfee (MFE), Secure Computing (SCUR) are all looking like good buys now.

SonicWall (SNWL) is among the few in this sector that have done well recently. It remains a target for a larger player, though that seems to be the only positive catalyst for this company. I own a few shares, which are now up around 40%.

Previous hit - ATI (#106)

Monday, July 24, 2006

Hit #106

AMD confirmed today that it is buying ATI (ATYT) for around $5.5 billion. This offer, of $20.47 is a premium of 32.1% over my average cost of $15.49/share.

I had posted in detail earlier when news of the deal leaked out. In that post, I had hoped that this would not be a cash deal, as it would be bad for AMD. Surprisingly, the deal is mostly in cash, $4.2 billion to be exact.

As expected, Moody's has announced that it is reviewing AMD's credit rating. AMD shares have been bit, and for long-term believers in AMD, this is a good entry point.

Previous hit - Petco (#105)

Sunday, July 23, 2006

Investing cash from Serologicals

Last week I received cash for my Serologicals (Hit #92) shares. I will be reinvesting the cash this coming week. I have picked a) Centene (CNC) and b) Connetics (CNCT).

Centene has pulled back sharply due to bad earnings news recently. The company's financial position is in good shape, and it will become a takeover target for a larger player down the road. I had mentioned Centene in an earlier post on Pacificare (Hit #52). I have made investments in this sector regularly, as and when someone came out with disappointing news. The performance of those stocks have been anything but disappointing. The other holdings include Molina Healthcare (MOH), HealthNet (HNT), Amerigroup (AGP), Humana (HUM), Wellcare (WCG) and HealthSpring (HS), of which HealthSpring is the only one that still remains an attractive buy.
Aetna (AET), with its recent earning shortfall, also has pulled back and is moderately attractive.

Connetics concentrates on dermatology products. The stock took a beating after the company lowered its guidance 2 weeks ago. This is not a short-term play, as there is no visible catalyst to move the stock in the near future, though a bigger pharma partner may take it out anytime.

AMD buying ATI ?

AMD is reported to be close to buying ATI Technologies (ATYT) for around $5 billion. I own a few ATI shares bought during the thebear-market lows of 2002-2003. I will wait for the deal confirmation to mark this as a hit.

Nvidia and ATI are the number one and two, and the only major players in the graphics chips business. Nvidia, being the high-end leader, would not have sold itself to AMD, still not a premium name.

Does this buy make sense for AMD ? No, atleast not in the short run. AMD would have been better off concentrating on the high-margin enterprise/server market. This buy indicates that it is looking to gain strength in the consumer/media PC sector as well. Given AMD's not-so-sound financial situation, this buy will likely lead to a credit downgrade, making it harder to raise additional funding in the future. As it is, AMD is so low on cash that the ATI buy will likely be a stock-swap, with little or no cash part.

AMD should have gone for a smaller buy, like Transmeta (TMTA), whose power-saving technology could be put to even better use in server farms.

AMD may still come out ahead after a few years, if it is able to push in both the server and consumer markets without losing grip on either. But it is a big risk to take right now.

This buy will also put some pressure on Intel to go after Nvidia, but it won't do so until it first fixes its internal turmoil. Having just offloaded some of its business to Marvell (buying from a desperate seller, that looked like a good deal for Marvell), the last thing Intel should be doing is to get into another sector so soon. I listed more probable targets for Intel in an earlier post.

We may now be entering the long overdue consolidation phase in the semiconductor sector. There are way too many companies that are barely standing, with their stocks trading at close to book/cash value. We should see a few of them getting taken out over the next few months.

Two targets worth watching - Analog Devices (ADI), long rumored to be a target for someone like Texas Instruments, and PortalPlayer (PLAY), a chip maker for iPods that got hit when Apple decided to switch.

I own a large number of AMD shares bought at a price close to 40% below the current price. If the market overreacts on the down side, I would like to add more to my position. This will be a long-term bet - 3-5 years. With Dell now carrying AMD machines, there is a good chance that its market share will see a significant boost.

I also own a few Transmeta shares which have recently seen a bounce due to rumors about deals with Sony and Microsoft for their upcoming products. I would rate it speculative, but for those with an appetite for risk, it is still worth considering.

I do not own shares of Analog Devices, but it is a stable, low-risk buy. It also has a 2% dividend, with room for more hikes. I will be looking to open a position soon. PortalPlayer is speculative because of its over-dependence on the iPod market, but it is working on getting into other areas/devices, and could see substantial gains if it is able to implement a new strategy successfully. I do not own shares, though I have come close to buying a few times.

Sunday, July 16, 2006

Redeploying Engelhard takeover proceeds

Engelhard (EC)'s acquisition by BASF (BF) was completely recently, and I received cash for my shares a week ago. I have redeployed the cash, buying more shares of these 3 companies that I already have small positions in :
  • Atherogenics (AGIX): This drug developer is a speculative bet. The large volume of insider buying and a big-pharma partnership are an added bonus.
  • Audible (ADBL): After momentum traders left this stock it has returned to a more meaningful level. The stock trades at a low multiple of book value, the company has sufficient cash in hand, and insiders are not selling at the current depressed price. It could also be a target for traditional media companies, or even for Yahoo or Apple.
  • MarketAxess (MKTX): This bond trading platform provider is now expanding into other instrument types. The stock is trading at less than twice its book value and there has been some insider buying too recently. I expect this to be ultimately acquired by someone like International Securities Exchange (ISE). I had mentioned MarketAxess earlier here.
I have not marked Engelhard as a hit since I had bought the shares after the takeover announcement by BASF. Englehard initially rejected the hostile offer and had even rejected the revised/increased offer. I read the material sent out by both companies as part of the takeover battle, and believed in the Englehard story that the company was worth lot more down the road. As to why Engelhard management changed its mind suddenly and decided to proceed with the sale - I have no clue whatsoever, as the usual excuses appear lame.

All I can think of is that executives must have received sweetened packages, that we may never know or details about which will be filed by BASF in a late Friday, preferably before a long-weekened, filing with the SEC. It was a break-even investment for me, but I have learnt again that buying at a low price is absolutely essential to come out ahead as shareholder interest is not something that executives or boards can be expected to think about when making deals.

A second look at Millicom

I had covered Millicom (MICC) in a few earlier posts, most recently when Millicom emerged as a buyout candidate.

But Millicom's attempt to sell itself has hit a wall, with one buyer - who was willing to pay a very high price - itself getting bought out, and the other buyer, China Mobile, deciding to not bid after dragging it out for weeks.

Millicom shares have since plunged, to around $34 from a high of $50 reached when the bidding battle was still on.

While the shares are still around 90% over my buy price, I think this is another buying opportunity. Whether Millicom stays independent, which seems to be the only option for now, or becomes a target again down the road, it is time for the patient investor to buy. I will be looking to do exactly that in the next few weeks.

China Mobile has said that it will be looking at other acquisition candidates. I am not able to pick any from the ones I know. Turkcell (TKC), whose shares are also trading at a very attractive level today, is too big for China Mobile to swallow. So who will the new prey be ?

Friday, July 14, 2006

Hit #105

Petco Animal Supplies (PETC) is being taken private by Leonard Green and Partners and Texas Pacific Group for around $1.8 billion. This cash offer of $29/share is a premium of 42.5% over my average cost per share of $20.35. The premium is rich and I think the buyers overpaid, but I won't complain too much. The private equity groups and their sophisiticated investors must know lot more than I do!

I had started buying Petco shares recently after a pullback made it attractive. But I also saw a potential risk associated with the slowing housing market. Like a number of other sectors of the economy, the petcare industry received a big boost over the last couple of years due to high home-equity withdrawals. That party ended a few months ago, and the impact will be felt for the next few years.

Others who are likely being watched by private equity groups -
  • Borders (BGP), which is now worth buying after yesterday's warning and the subsequent share price drop. Borders is definitely a worthy candidate for a management buyout. The current yield is also attractive and I don't see the dividend being slashed.
  • Gap (GPS) : the turnaround isn't even visible yet, but the price and the yield look tempting.
  • Radioshack (RSH) : has rebounded recently. I would wait for another pullback. Like Gap, the brand identity will be attractive to potential buyers.
  • Bed, Bath and Beyond (BBBY) : this may have to fall some more before it becomes a buy. Competitor Linen 'n Things was taken private earlier this year. In a crashing real-estate market this stock can go down a lot more.
Many players in the retail sectors look attractive today at first sight. But, as some of the retail industry earnings related warnings/misses show, the rapidly cooling housing sector is starting to take its toll. Many, like Home Depot, Starbucks, Target, Best Buy, Brunswick, will fall sharply over the next few weeks as the extent of the slowdown becomes obvious. For retail entities like these I will need atleast a 50% discount to current prices before I consider them seriously.
Previous hit - Encore Medical (#104)

Thursday, July 06, 2006

Deploying cash from NetIQ buyout

Early this week I received cash for my NetIQ shares. NetIQ was Hit #94.

I have used the cash to open small positions in five different stocks.
  • Old National Bancorp (ONB): An Indiana bank, paying around 4% dividend, with insider buying. A takeover target for a larger regional/state bank.
  • Smith and Nephew (SNN): A British orthopedic device maker, yielding 1.6%, and at its current price an attractive target. It has been rumored to be a target before.
  • Deutsche Telecom (DT): Will be a target for private-equity groups. Current yield of around 5.5% is attractive.
  • Nabi Biopharmaceuticals (NABI): A speculative buy.
  • SpaceDev: Another extremely speculative buy - a maker of micro-satellites.

Hit #104

Encore Medical (ENMC) last Friday agreed to be acquired by the Blackstone Group for $870 million in cash. At $6.55/share, this offer represents a premium of 26% over my average cost per share of $5.19/share.

Encore wasn't an immediate takeover play when I bought the shares a few weeks ago. It was more of a turnaround and growth pick, and hopefully after substantial gains, a takeover target. As such, this takeover is a disappointment since the price is too low. I did not expect a private equity buyout, much less a Blackstone buyout. Encore would have been much more valuable to larger players in the orthopaedic devices sector like Zimmer.

I first came across Encore when it acquired Compex, a company I was following but had not yet bought into. Encore itself seemed to be undervalued then because of its ill-managed acquisition spree.

Previous hit - Republic Bancorp (#103)

Sunday, July 02, 2006

Indian Summer revisited

In April, I wrote about a bubble in Indian stock valuations, and predicted a 25% fall. In the last 2 months, we have seen a much deeper pullback. While the capitulation I would like to see has not yet shown up, it is time to tiptoe back into the Indian markets.

Similarly, the Japanese market participated in the worldwide correction, though unlike other markets Japan seems to be still in an early phase of its recovery. It is time to increase your exposure to Japan, preferably via an ETF like EWJ.

Onyx update

In my post on Onyx buyout, I had written about a possible higher offer from CDC. That offer materialized last week.

CDC made a hostile $5/share offer, which would be a 18% premium over my average cost. Will M2M, the current friendly buyer, make a higher bid in an effort to thwart any more offers from CDC ? I think that is a possibility.