Hit #148 (Smith & Wollensky)

Smith & Wollensky (SWRG) accepted a $80 million offer from Patina Restaurant Group. The cash offer, of $9.25/share, makes for a gain of 75.5% over my average cost of $5.27. This position was a relatively recent one, compared to others where I had to wait for a long time for a buyout with such a large gain.

Smith & Wollensky earlier last month got an offer of $7.5/share from Landry's, but rejected it. I mentioned just last week that the stock continued moving up for some reason - well, it seems like somebody knew!

I will be looking at sectors other than restaurants to reinvest the proceeds. Most of the remaining public competitors are expensive. In fact, given the consumer downturn ahead, they may even make for good short candidates. But watch out for buyouts to upset short-selling strategies - Applebee's short sellers must have learnt a bitter lesson recently when it announced that it is looking for a buyer.

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Previous hit - Wild Oats (#147)

Buffett the flipper ?

Buffett's stake in PetroChina is coming under scrutiny from activists over the latter's Sudan connection. But anyone else notice that the recent update to Buffett's portfolio involves what looks like dumping of some holdings after only a short period. Whatever happened to buy and hold forever ? Or does that hold only for a selective few core holdings ?

Updates to Fidelity and Gates Foundation holdings also seemed to involve some short term flipping.

I am wondering if the continued market rise over the last few months has forced some into a different mindset than before. Either that, or long term must have been redefined!

What will Bill Miller's portfolio update look like ?

Starbucks memo - a response

By now, the Schultz memo has been confirmed and received widespread attention. If you haven't seen it yet, you can read it here.

As a former Starbucks regular, I liked the contents of this mostly honest review of past actions, while taking collective responsibility for it. While mostly on track, the memo misses a few items :

• Responding to customer suggestions : as I have posted before, my mails to customer service were not even acknowledged, let alone acted on. Where do these go ?
  
• Cleanliness : There are Starbucks outlets that are unlikely to pass health department checks. Whether it is restrooms that are worse looking than public restrooms, or employees not washing their hands (I was a witness) when they should have, some of these outlets are plain health risks. I wrote about it here.
  
• Store size : In its search for growth, Starbucks has built outlets in some locations that are so small that you need to stand on your toes while waiting for your drink!
  
• Rude service : Service with a smile is non-existent at most Starbucks today.

Anybody listening ?

More deal news

A few updates to earlier deals and notes on deals where one or more of my holdings were involved but not as the target.

• Converium (CHR) rebuffed an advance from Scor. Converium shares have almost doubled since I bought them hoping for a buyout. I will be holding onto them since I believe that Scor is not done wooing. Scor shares may themselves have a decent upside from here.
  
• Keane (KEA) (Hit #143) is being hit with lawsuits challenging the takeover. I suspect that a higher offer may be coming. If I had a penny for every such sellout where owners pocketed the proceeds without worrying much for ordinary shareholders ... well, I wouldn't be blogging at this time!
  
• Meanwhile, Warner Music Group (WMG) is still trying to buy EMI. The two were earlier involved in an interesting bid deadlock. I own Warner shares, and I believe they are a good value right now. The combine should also be a stronger force.
  
• Aegon raised its cash offer for Clark (CLK) shares to $17.21/share. I marked it as a hit earlier. This new higher offer now makes for a total gain of 18.3% over my average cost of $14.55.
  
• Winston Hotels (WXH) was acquired for around $400 million in a cash deal this week. I did not own any shares, but I had mentioned it twice in the past - here and here. The cash I received from Jameson Inns (Hit #67) went into Lodgian (LGN) and ILX Resorts (ILX). Lodgian has already announced that it is looking at strategic alternatives, which is usually just another phrase for we are seeking a buyer. ILX still looks attractively valued.
  
• Sirius (SIRI) and XM Satellite Radio (XMSR) announced their, by now rumored for long enough to almost be real, merger. It will still be a hard one for regulators to approve. Having traded both shares for short-term gains in the past, I had bought into Sirius again after their recent slump. I think that the combined merger makes sense as the cost reduction potential is very high if executed well. Shares of the combined entity are worth buying and holding for the really long run. Satellite radio on its own is doomed to fail inspite of the quality of content. But when that content is combined with online radio, reception on handheld/undocked devices, Tivo-like recording on those devices, and integrated GPS/traffic/add-on location services, they can survive and thrive. One satellite radio player to watch is Worldspace (WRSP), which is growing its customer base in India quite rapidly. The company's financial backers' connections were under a cloud, and that may explain the low price/volume and apparent lack of interest. But this could be a very good buy right now when no one wants it.
  
• Chrysler, currently part of Daimler Chrysler (DCX) is likely going its own way. GM is a possible buyer, but that could only make things really bad for GM. I have owned DaimlerChrysler shares for a long time. If Chrysler is sold, Daimler likely will not have any reason to remain listed in the US. Latest reports indicate that private equity groups are also eyeing Chrysler. If that means a higher cash offer, I am all for it!
  
• Smith & Wollensky (SWRG) and 21st Century (TW), both of which have received offers that are being considered, are inching up steadily. Investors are expecting the offers to be raised substantially. I am hoping that they (and I) will not be disappointed.
  
• Docucorp is going for the lower bid and rejecting the slightly higher bid from Ebix. That means I will be losing money after all in this deal.
  
• The buyout bid for Lesco from Deere has already received opposition from one party, Hawkshaw Capital. I am all for a higher bid especially since someone like Deere can surely afford it.
  
• Jupitermedia (JUPM) last week confirmed that it is in talks with Getty Images about a buyout. I have mentioned Juiptermedia in the past and had bought a few recently after a sharp pullback. The stock had started to recover, and got a further boost on confirmation of buyout interest. Waiting for the formal bid to mark this as a hit.
  
• Dow Chemical (DOW) is supposedly the target of a private equity buyout bid that will make it the largest buyout, ever after adjusting for inflation, ever! I hold a few shares, bought mainly as a dividend/long-term play during the depths of 2002/2003. The bid rumors are from a British newspaper known for things other than business reporting, so this story needs to be taken with a large grain of salt.
  
• TXU is being bought by private equity groups in a another record-setting buyout. While I am surprised this particular takeover interest, I have mentioned that utilities could see a surge in merger activity due to deregulation and that Buffett may be looking at some as well. KeySpan was acquired not too long ago by National Grid.
  

Hit #147 (Wild Oats)

Finally! Wild Oats (OATS) is being acquired. I have been waiting for this for quite a while now, having started to buy the stock after a disastrous earnings disappointment more than a year ago.

Wild Oats is being bought by Whole Foods, which did come as a surprise to me. The purchase does make sense for Whole Foods to cement its stranglehold on the organic crowd. But given the Yucaipa/Ron Burkle/Democrat connection, I was expecting a Safeway/Wild Oats combine to be more natural. Even Kroger as a buyer made sense.

The buyout has got a great welcome. How many takeovers do you see where the buyer's stock goes up almost as much, in percentage terms, as the target, after the announcement! This, even after considering the fact that Whole Foods is the leader, and Wild Oats as a standalone entity didn't pose any threat.

While Wild Oats got a good price, they were in a position to get a better price with possible competing bidders in an auction.

The buyout is valued at $565 million. The cash offer, of $18.5, represents a gain of 138.4% over my average cost of $7.76. With some confidence I had built a somewhat larger position than usual here, even as the mainstream press was touting overvalued (at that point) Whole Foods stock, which pulled back later, disappointing, I am sure, quite a few readers. I had mentioned Wild Oats a couple of times in the past, here and here.

I would have been equally glad to receive Whole Foods stock which has been languishing after a long runup. While I am not a fan of the crowd that shops there (and the prices! - check out Undercover Economist for some explanation), I admire the honesty and integrity of its CEO. Check out his letter to his employees here. Sample this line -

I am now 53 years old and I have reached a place in my life where I no longer want to work for money, but simply for the joy of the work itself and to better answer the call to service that I feel so clearly in my own heart.

How many CEOs can say something like that ? Please read the letter in full - it is inspiring. Jack Welch will never be a role model for me. Whole Foods CEO ? Possibly.

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Previous hit - Lesco (#146)

Hit #146 (Lesco)

Lesco (LSCO), a retailer of landscaping supplies, is being bought by Deere for around $133 million. The cash offer, of $14.5/share, represents a profit of 9.6% over my average cost of $13.23/share.

This was among my earliest speculative purchases, and I still remember being nervous about buying into a company that never really got any press. I mentioned, and recommended, it here on a post about service plays.

There is a link, though a personal one, between this and the previous hit (Smart & Final). I would like to brag, oops, I mean blog about it at some point. But that will have to wait for another hit!

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Previous hit - Smart & Final (#145)

Hit #145 (Smart & Final)

The smaller warehouse store, Smart & Final (SMF), is being taken private by Apollo Investments in a $815 million transaction. The cash offer, of $22/share represents a gain of 70.9% over my average cost of $12.87.

Unlike the big gorilla in this business, Costco, which is membership based, non-membership Smart & Final is mostly unknown. I was attracted to the stock due to the financials, low debt in particular, that made it look like a great target. In addition, an unusually honest endorsement hidden deep within a celebrity interview a long time ago piqued my interest.

Costco (COST) itself remains a great pick for long-term investors. Costco is a true anti-Home Depot. The executives and the board members have not sold their souls to the green stuff! There have been rumors that Costco's pristine balance sheet may make it a juicy target for private equity groups. I sincerely hope not. The precious few gems like Costco should be left alone as public entities so that others can look up to them. We all need role models; these days that is especially true for American executives.

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Previous hit - Corillian (#144)

A bit late to the party

A few recent cover stories, including ones in Smart Money and Kiplinger, talk about tech being back, and why this time it is for real, urging readers to invest in technology now.

To that I say, it is a bit too late. The time to buy tech at bargain prices was close to two years ago. At this point it is hard to find a reasonably priced tech stock. Moreover, these new stories were touting Akamai, Apple, HP and Cisco, which are far from cheap, instead of atleast recommending beaten down stocks like Dell and Symantec.

The land of self-delusion is in another, though mercifully much smaller, bubble. The last remaining see-through/vacant buildings have been taken up - this includes the Excite@Home office complex and the Siebel building off of 101 (the latter has a nice color/curvature and is among the few buildings in the valley that don't drain life and energy from humans).

So-called experts - Jack Grubman, Quattrone, Mary Meeker, Henry Blodget, Abby Cohen - all have gained back atleast some of the trust/respect. The sheep are ready and waiting to be led to the slaughter house again.

Bay Area residents have reached a point where they think that phony clicks on targeted ads, worthless user-generated content and mutual admiration forums called social networking sites can solve world hunger and fix the Iraq problem. Cisco is getting into social networking, while the CEO is probably still milking the options cow like there is no tomorrow.

Some things never change. How come lemmings have not gone extinct ? Does evolution work ?

Who is next for Rabobank ?

Rabobank, the Dutch agri-bank leader, has been acquiring regional/community banks in the US over the last few years, mostly in areas where farming is the primary economic activity.

Two such acquisitions recently, Central Coast Bancorp (Hit #65) and Mid-State Bancshares (Hit #121) were in my portfolio. I think that a few more such buys are on their way, and plan to be prepared to profit from them.

One obvious candidate, as I mentioned in an earlier post, is Heritage Oaks Bancorp (HEOP). While it looks attractive with some insider buying, and a small dividend, its exposure to bubblicious California Central Coast areas represents a downside risk. I do own a small number of shares, and will be buying more at opportune times.

I can now add two more to the potential list of interest for Rabobank.

Pacific Valley Bank (PVBK) operating mostly in Salinas, CA. The stock is thinly traded.

Farmers Capital Bank (FFKT), a Kentucky bank mostly operating in small, rural communities, also looks attractive. There is some insider buying, and the yield is juicy. I have opened a small position recently, and will be looking to add more over time.

Know of any others ?

Hit #144 (Corillian)

Corillian (CORI) is being bought by Checkfree for $257 million in a cash deal. The offer, of $5.15/share gives me a gain of 47.1% over my average cost of $3.5/share.

This was a speculative bet, based on insider buying and the cash hoard at Corillian. I have opened a small position recently in a competitor S1 (SONE), for the same reasons.

Checkfree (CKFR) itself is a stable, long-term bet, and is worth buying even at current levels. Like Digital Insight, which was bought out by Intuit not too long ago, I suspect somebody will find Checkfree attractive as a takeout candidate.

I own a few Checkfree shares, bought a long time ago, and plan on adding more.

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Previous hit - Keane (#143)

Hit #143 (Keane)

Keane (KEA) is being bought by privately-held Caritor for $854 million in cash. The offer, of $14.3/share represents a measly gain of 5.4% over my average cost of $13.56.

Caritor is a name I have never heard of before! Apart from the buyer being small and unheard of, the deal is also interesting in that Keane seems to have sold itself short. Keane should have fought for and received a better price.

I did mention Keane in the past, though my list of prospective buyers for Keane was completely different.

While on IT service providers, major federal/defense service providers like SRA International (SRX), SI International (SINT), MTC Technologies (MTCT) and the recent IPO, SAIC (SAI), are looking very attractive. Expect defense biggies like General Dynamics, Raytheon and Northrop Grumman to make moves.

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Previous hit - Longview Fibre (#142)

Everybody panic now

I have occasionally posted on the state of the real estate market. It is about time to panic, looking at the developments of late.

2 out of the top 20 subprime lenders have gone under. A few more are on the brink. Banks/lenders like Coast Financial (CFHI), HomeBanc (HMB) and IndyMac (NDE) have warned, and have seen their stocks crumble.

To top it, HSBC and New Century Financial have come out today with more unexpected (really ? what were they expecting ?) news, that is stunningly bad.

At some point we will see the mainstream media take these events of the last two months much more seriously. That is when panic should set in, possibly affecting the equity markets as well.

Wait and watch. This should be a fun ride. I am hoping that the ride is named 1987 and not 1929.

Hit #142 (Longview Fibre)

Longview Fibre (LFB), a large owner of timberlands in the Pacific Northwest, is being acquired by Brookfield Asset Management for $2.15 billion in a cash deal. The offer, of $24.75/share represents a gain of 18.36% over my average cost of $20.91.

Longview had seen some drama earlier, with a hostile offer, and subsequent plans to transform itself into a REIT. This is definitely a better outcome for shareholders.

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Previous hit - Altiris (#141)

Deal updates

• NetRatings (Hit #118) got a revised offer of $21/share in cash from Nielsen. This now represents a gain of 73% over my average cost of $12.21. This offer is unlikely to be raised again.
  
• Docucorp (Hit #135) got a rival offer valuing it at $11/share from Ebix. If it goes through I will be breaking even on this investment.
  
• 21st Century (TW), the auto-insurer, has received an all-cash bid from AIG. The shares are trading at $21.5, above the offer price of $19.75, indicating that a higher offer is likely. I will mark it as a hit in a much longer post when that happens.
  

Hit #141 (Altiris)

Altiris (ATRS) is being acquired by Symantec for around $830 million in a cash deal. The offer, of $33/share, represents a gain of 77.6% over my average cost of $18.58/share.

I have mentioned Altiris repeatedly in the past as a target - here and here. I did not see Symantec as a buyer, and in fact still think that Macrovision or BMC could have made for a better fit, though there would be a lot of overlap with the former. In fact, there was some interesting price/volume action the day following the acquisition announcement, but whatever rumors may have led to that action must have died down soon.

With Altiris gone, I see Opsware (OPSW) as the last man standing in this sector. Fow how long is anybody's guess. I own Opsware shares, and, even with the current gains (~ 50%), I plan to hold on till the eventual buyout.

For Symantec, someone like Guidance Software (GUID), a recent IPO, would have been a better long-term fit.

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Previous hit - USI Holdings (#140)