Weekend notes

• Sentiment towards private equity groups is turning negative even though we are still in the early stages of this boom. Check out this Business Week piece titled Gluttons at the gate.
  
• Andy Serwer writes about possible bigger deals to come! Serwer's regular column is an enjoyable read.
  
• Business Week looks at another way that insiders maybe fooling regulators and shareholders.
  
• Bethany McLean exposes another options trick, backdoor options used by insiders.
  
• While the masses have not yet woken up to the M&A boom, a few brave souls are daring to name big targets for private quity or management buyouts. The names include Dell and even Microsoft. The latter, if it ever happens, will signal the end of this boom.
  
• Private equity groups may be a target of federal antitrust investigation. Allegations include possible collusion to keep a lid on buyout prices. As a shareholder of some of the targets, I will definitely welcome more competition and better prices!
  
• The Wall Street Journal reported that United Health CEO may actually have found a way to get the same options twice! Criminal - don't you think ?
  
• A number of Silicon Valley executives are calling the options investigation as a witch-hunt, providing various excuses for the amazingly well-timed, gigantic grants. Hmmm! I hope more civil and criminal charges follow, and some of these visionaries(!) end up in prisons.
  
• A while ago, I had written about a possible bad ending for some of the buyouts, given the high debtloads they are forced to take by their buyers. More and more observers are now predicting a bankruptcy spike, and reduced return to investors in private equity. This is probably still a couple of years away, given the low interest rates, but something to keep an eye on.
  
• A couple of pieces over the last few weeks have highlighted the emergence of London and Hong Kong as alternate choices for IPOs. When I first wrote about it, I got some interesting ("Come on now") responses. Finally, the authorities seem to be waking up to this reality where the US may not be the premier choice for companies to list. Unfortunately though, the press (and ofcourse, the industry) is focusing on Sarbox as the deterrent, instead of blaming post-9/11 restrictions.
  
• Predicting upcoming LBO deals by watching CDS moves ? Check this out! There was a related piece recently (can't recall the source) that argued that CDSs are being undervalued, possibly by a substantial amount, with credit troubles and bankruptcy chances being discounted.
  

Hit #120 (Connetics)

Connetics (CNCT) is being acquired by Stiefel Labs for $640 million in an all-cash deal. The offer price of $17.5/share translates into a gain of 82% over my average cost of $9.62.

I had posted earlier in July mentioning that I was recycling cash from Serologicals takeover into Connetics. This buyout thus makes for a nice, and unexpectedly quick, compounding.

I will be posting soon about a few more buys I made recently with cash from just closed transactions.

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Previous hit - Icos (#119)

Hit #119 (Icos)

Eli Lilly is buying out its partner Icos (ICOS) for $2.1 billion in cash. The offer, of $32/share represents a gain of 17.7% over my average cost per share of $27.19/share. Since my initial purchases there were multiple opportunities to buy the stock at much lower prices, but I balked everytime due to lack of insider buying.

I had bought Icos shares expecting exactly this buyout, though I was hoping for a much higher price. After reading various comparative studies of Viagra, Cialis and Levitra, I concluded, wrongly, that Icos' Cialis would gain a much larger marketshare. That was not to happen.

While on this topic, it seems like male sexual dysfunction has received all the attention from the medical/investing communities. According to studies, female sexual dysfunction could be a much larger problem, and potentially a much larger market. Big firms have essentially ignored this segment, leaving only a few small players to do early stage work. Most companies involved in this research are extremely small and hence make for very speculative investments. Except for Palatin's Bremelanotide , most treatment candidates are nowhere close to making it to the market. But if you are willing to take some risks, you should checkout Palatin (PTN), BioSante (BPA), Vivus (VVUS)) and Novavax (NVAX).

WIRED carried an interesting piece on this topic a while ago, mentioning Palatin's progress. I own a few shares of Palatin and Vivus, and will consider adding more.

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Previous hit - NetRatings (#118)

Another construction peak sign ?

Oshkosh Truck just announced that it is acquiring JLG for $3 billion in cash. While not anywhere as bad for shareholders as the recent takeover of Golden West, this seems like another sign of a top in the construction/housing boom.

Over the last 4 years, I have seen the name JLG practically every single day at one construction site or the other. In fact, as I am writing, there is one JLG boomlift just a couple of blocks down the street, working at a near-complete condominium project site. Here is the JLG page that may help you recall the logo.

For the same duration, I have been watching the stock, though I never found a good entry point. I did end up buying stock of another, though not as commonly spotted, construction vehicle maker - Gehl (GEHL). Having bought the stock at $15/share, I ended up selling (I needed the money!) at around $48/share in just over a year. Gehl is still a takeover target, though an expensive one.

Interestingly, there has been some open market purchase of Gehl shares recently by France's Manitou SA, which bills itself as the world's largest supplier of certain categories of lifts. Will Manitou make an outright offer down the road, as it already seems to own around 12% of the company ? Note that Manitou, though it sounds similar, is not related to US-based Manitowoc (MTW), another player in the construction equipment/vehcicles sector.

In the related mining equipment sector, the boom has been much bigger, as it was driven by the global commodities bubble. The bubble ended a few months ago, or atleast is in a deep correction, and mining equipment makers have correspondingly pulled back. For those who believe that the commodities boom is a very long term one, the recent pullback should be an opportunity to buy into a few of these. These include Bucyrus (BUCY), Joy Global (JOYG), Terex (TEX). These may become fodder for giants like Japan's Komatsu or Hitachi or even Caterpillar.

Here is the list (at Yahoo Finance) of all the major players in this sector.

In the farming equipment sector, I do own shares of Agco (AG), and shares have gained substantially over the last few months. I still see it as a takeover target, though I wouldn't recommend buying now.

One that looks extremely attractive, both from valuation and insider activity perspectives, in the above list is A.S.V (ASVI). I would recommend buying the stock now. I may open a position soon.

Boob tube!

The much talked about Google - You Tube deal is here, with Google shelling out an insane $1.65 billion (thankfully, not cash!) for something that deserves much less. With so much idle cash in hand, it was just a matter of time before Google started doing bad deals. Though this wasn't a cash deal, it still shows some desperation on the part of the buyer. Is this the top of Bubble 2.0 or will there be more to come ?

This deal also marks an intersection of two bubbles - will this, and similar video/mobile/blog/wiki deals to come, save San Mateo real estate by minting millionaires overnight ? San Mateo has already seen year over year declines, and unless something dramatic (and positive) happens, is headed much lower.

The two who get left out now are CBS/Viacom and Yahoo. Losers unite! And they well may, as I speculated here.

For those looking to benefit from the hoped for surge in online video, I suggest reading an earlier post on increased bandwidth plays.

To that list I would add device makers like Logitech (LOGI), whose video cameras capture a good portion of those videos on You Tube and elsewhere, and content network providers/accelerators like VitalStream (VSTH). Akamai is another play, but looks extremely expensive right now; VitalStream on the other hand looks cheaper as a takeover target, even though much more riskier.

Update: Just 2 days after the initial post, VitalStream got a takeover offer from Internap! I do not own VitalStream shares as I am (was) still in the process of studying it. For Internap this is a good buy, and at a great price too, since VitalStream shares had just recently taken a hit, after warning about a possible loss of MySpace revenue. I do own Internap (INAP) shares, bought as a speculative play when they came very close to bankruptcy after the tech bust. Shares have since gone up 5 times, but I am still holding onto them, as I expect Internap itself to be ultimately swallowed by a telco/cable major. I had mentioned Internap in the earlier post on bandwidth plays.

Hit #118 (NetRatings)

NetRatings (NTRT), the web analytics firm, got a cash offer from Dutch firm VNU which already owns 60% of the firm. The offer, of $16/share, is a premium of 31% over my average cost of $12.21/share. The shares are trading higher at around $16.9 with shareholders expecting a higher bid.

I had bought the shares, on weakness, just a few weeks ago expecting exactly such an offer from VNU. I do expect a higher offer, as this still undervalues NetRatings given its cash position.

The funds for this investment came completely from the recent takeover of SSA Global (Hit #97), and hence represents a nice compounding.

Another player, NetIQ had gone private (Hit #94) not too long ago. I have also started buying shares of Websidestory (WSSI) whose shares were hit when Google made Google Analytics available for free. The large insider buying indicated a bottoming, and I expect the company to be sold eventually, hopefully at a premium to my cost basis.

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Previous hit - CNS (#117)

Hit #117 (CNS)

Nasal strip maker, CNS Inc. (CNXS), is being acquired by GlaxoSmithKline for $566 million in an all-cash deal. The offer, of $37.5/share, represents a gain of 220% over my average cost per share of $11.69.

To give credit where it is due, this company was first brought to my notice by Motley Fool's Hidden Gems newsletter, the only content on TMF worth paying for. I did not invest immediately after that mention, but took my time looking for other factors like insider buying. CNS looked like the perfect takeover candidate, though the one trick pony nature of the business made it risky. Such naturally strong takeover candidates are rare.

Since I mentioned the Hidden Gems newsletter, there is one more item in there that I would recommend to those who have a stomach for volatility and lots of patience - the Tiny Gems section in the newsletter. There are some great long term winners there, if you follow a disciplined approach to add on dips, and never overpay.

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Previous hit - Maritrans (#116)

A few pointers ...

Here are three interesting pieces that I came across in the last few hours that I consider a must read (or must hear)

• Justin Fox says more, in under half a page, about population and prosperity than what most experts can convey in a tome.
  
• Mark Hulbert's research confirms that investing in turnaround plays is more profitable, though volatile (and hence risky for some), than normal investing.
  
• Mish has a post linking to ex-CEO of Goldcorp, Robert McEwen's address at the Denver Gold Forum. Please listen to the address in full. It is an amazingly honest speech, making it unlikely he will be invited to speak anywhere in the future. We need more people like him.

Honoring the dead

Halloween has arrived a bit early to this blog!

Various cultures have found different ways of honoring departed souls with the objective of helping them find peace and not come back to torment those left behind.

Add to these practices the granting of stock options to the dead. We thought we had seen all sorts of bad things that could be done with options. We have seen backdating, and we have seen backdating by executives in hurriedly setup meetings just weeks after 9/11 even as some of their own employees lay dead (according to a Wall Street Journal piece that was mostly ignored by other media outlets!).

Now we get informed that Cablevision made an options grant to a dead executive, and backdated it to a time when he was still depleting earth's oxygen supply, just so that his estate/family could benefit. That should help his soul rest in peace! The ancient Egyptians bundled items needed for daily activities when they buried their dead, assuming these items would be useful in the after-life. In this era when executives love money, their options and their shower curtains, I hope coffin makers find a way to make space for these items to accompany their former owners in their after-lives.

Don't these overpaid executives, the companies and the boards have any decency left!

Another recent case of paying unwarranted respect to the dead was when a few people heaped praise on Kenneth Lay, former Enron head. Lay was looking at a sentence of more than 10 years. But the truth is that white-collar criminals like him often get light sentences. For someone like Lay, nature's punishment was timely - just look at the number of people whose life savings have been destroyed by him. Did he deserve any better than what states like California do to victims of the three-strikes clause ?

Look at the light sentence, if you can call it that, awarded to a Walmart executive recently, for stealing around half-a-million. Citing health concerns, he was handed a 27 months house arrest instead of the expected 10-30 year imprisonment. I for one hope that he meets the same fate as Lay. Interestingly, if you don't look like an executive, you can get 67 years for robbing just $15K.

It is time to treat white-collar crimes seriously. They destroy lives, plain and simple. War on drugs ? What a waste of resources! We need a war on thugs-in-suits-and-ties. Whether by signing themselves sweet packages, after laying off hundreds, in a bankruptcy deal or just walking away with millions in exit packages or asking and getting companies to cover tax payments on gains in the form of gross ups, these people have insulted investors. Enough is enough - show them the door or better still, the noose!

Full disclosure: I oppose capital punishment. The apparent support for it here is just an indication of the anger/disgust/frustration at corporate crimes that go unpunished or very mildly punished. From talking to others, I can say that an overwhelming majority of individual investors feel the same way.

HP needs some magic

HP definitely needs some black magic to make its current troubles go away.

This may not help on the snooping front, but HP's just announced acquisition of niche game PC maker Voodoo PC is a good move, atleast over the short term.

Voodoo PC founder and CTO, Rahul Sood, has been blogging for a while. The blog is among the more informative and readable tech/PC-business blogs out there.

HP's buyout seems to be in response to Dell's recent acquisition of Alienware, another high-end game PC maker.

Why did I say "over the short term" above ? In the longer run, I expect HP, like IBM, to exit the PC business. The costs/margins will deteriorate further, and for a company like HP it just doesn't make sense to be there. I would say the same thing about the printer business, which, for now, enjoys higher returns than the PC business.

Are HP shares a buy now ? I will not be buying at their current price, but I am holding onto my shares bought during the bear-market lows. They have more than doubled since then, and the dividends also have been hiked. The contrarian in me recommends DELL instead, especially now that most experts/observers have turned very negative on it. I did open a small position recently, and I intend to add to my position substantially, as part of my long-term buy and hold positions.

HP's acquisition of Mercury Interactive, about which I posted here, was more in line with the long-term focus on software/service.

Hit #116 (Maritrans)

Maritrans (TUG), an oil/pertroleum shipper, is being acquired by Overseas Shipholding Group for $453 million in an all-cash transaction. The offer, of $37.5/share makes for a gain of 73% over my average cost per share of $21.67.

While the takeover and the premium are welcome, I did not see Maritrans as a target, nor did I expect to see a consolidation wave in the shipping sector anytime soon.

The takeover makes sense for OSG which mostly has its operations outside the US. Maritrans is a US-only operator, and with this takeover, OSG now has a significant share of the US market.

I have been buying shares of a few others in the beaten-down shipping sector over the last few months. After what looked like a golden-era of shipping leading to a flood of public offerings, shipping stocks tanked starting late last year. I used the opportunity to buy into such companies as Seaspan (SSW), Diana Shipping (DSX), Genco Shipping (GSTL), Quintana Maritime (QMAR) and Eagle Bulk (EGLE). These also pay large dividends, and unlike the bigger operators, that are expensive due to heavy following on Wall Street, were marked down substantially.

Shipping has always been a notoriously cylical sector, with the past downturns being brutal, taking down a number of companies. Any future downturn will not be much different, as most of the players operate with huge debt loads. For that reason, I may decide to sell some of my holdings as and when opportunities present themselves.

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Previous hit - Serono (#115)

Hit #115 (Serono)

Serono (SRA), the Swiss biotech, is being bought by Merck KGaA (of Germany) in a cash deal valued at $13.3 billion. The offer, of $21.98/share represents a gain of 39.7% over my average cost per share of $15.73.

I had bought a few shares of Serono after its earlier attempt to sell itself fizzled. A buyout was still in the cards if only because the majority holder, the founding/controlling family, wanted to cash out, and they were unlikely to do so without a fight for a significant premium, which they have now received.

As I have said in the past, biotech remains in the M&A sweetspot, with big pharma desperate to do something to replace empty pipelines, dwindling sales and competition from generics. Expect more, aggressive, deals over the next few months. Just within the last 2 weeks, we have seen atleast 3 multi-billion/cross-border deals, and the pace is set to continue, if not accelerate as more dog-fights erupt over fewer/juicier targets.

Cambridge Antibody Technology (CATG) was a recent hit (#96) in this sector. In addition, I have these on my current watchlist - Acambis (ACAM), Skye Pharma (SKYE) and Qiagen (QGEN). I own shares of Acambis and Qiagen, and will be looking to add to my positions.

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Previous hit - Symbol Tech (#114)