Category Archives: securities markets

Tesla (TSLA) is bidding for SolarCity (SCTY)

June 22, 2016 By in Autos, mergers and acquisitions, Uncategorized Tags: , , , , , , , , Leave a comment

The offer is an all-stock deal, with TSLA willing to exchange 0.122 – 0.131 of its shares for each outstanding share of SCTY.  The exact figure will depend on a closer examination of SCTY’s books.  The proposal was announced after yesterday’s close.

My thoughts:

–in today’s pre-market trading, SCTY shares are up by about 14% and TSLA’s stock is down by around 12%.  This has little to do with the merits of the deal.  It’s all about arbitrage.  To the degree the market regards the acquisition as a done deal, it ceases to look at SCTY as an independent entity.  SCTY becomes instead equivalent to a deferred issue of TSLA stock.  Because the bid is at a premium to the pre-offer price of SCTY, SCTY is a relatively cheap way to own TSLA.  So arbitrageurs sell short the “expensive” form of Tesla, i.e. TSLA, and use the money they receive to buy the “cheap” form of Tesla, i.e., SCTY.  So SCTY goes up and TSLA goes down.

–my guess is that there’s no other bidder.  Elon Musk, who owns 20%- of TSLA also owns 20%+ of SCTY.  As is often the case with family-owned empires, one firm ( TSLA) is the heart of the enterprise.  Other companies are arrayed as satellites around the central hub.  Those tend to be more highly specialized, sometimes riskier–and invariably dependent on the main core for essential goods/services.  In this case, the Gigafactory being built by TSLA is going to the be the source of the batteries that SCTY will be distributing to customers.  Who else needs one of these?

–price is the main motive, I think.  SCTY is less than a tenth of the market cap of TSLA, so acquisition won’t make a radical difference in the latter’s fundamentals.  In most cases I’ve seen, the hub-satellite relation persists for decades, with third-party shareholders content with their stepchild status as an adequate tradeoff for the satellite’s narrower focus and faster earnings growth in specific circumstances.

–arguably, this is a good chance for adventurous to buy TSLA shares toward the lower end of its recent trading range.  I’m going to sit on my hands for a while, though, to try to gauge how severe selling pressure on TSLA may turn out to be.

 

Microsoft (MSFT) and LinkedIn (LNKD)

June 14, 2016 By in mergers and acquisitions, Uncategorized Tags: , , , , , , Leave a comment

Before the open in New York yesterday, MSFT and LNKD announced that the latter has agreed to be acquired by the former in a friendly all-cash deal for $26.2 billion, or $196 per LNKD share.  Satya Nadella, the MSFT chairman, describes the merger as the coming together of the professional cloud with professional networking.  The acquisition price, a 50% premium to where LNKD was trading beofe the announcement, represents a bit less than 7% of MSFT’s market capitalization.

The most interesting aspect of the deal is that MSFT shares only fell by 2.6% in trading yesterday, in a market that declined by 0.8%.  To me this is indicative of the tremendous positive mindset change that has happened by investors about MSFT since the end of the disastrous Steve Ballmer era.

 

 

value investing and mergers/acquisitions

June 13, 2016 By in capital spending and the business cycle, Capital-intensive firms, capitalizing vs. expensing, mergers and acquisitions, return on equity vs. return on capital, Uncategorized Tags: , , , , Leave a comment

buy vs. build

When any company is figuring out how it should grow its existing businesses and potentially expand into other areas, it faces the classic “buy or build” problem.  That is to say, it has to decide whether it’s more profitable to use its money to create the new enterprise from the ground up, or whether it’s better to acquire a complementary firm that already has the intellectual property and market presence that our company covets.

There are pluses and minuses to either approach. Build-your-own takes more time.  The  buy-it route is faster, but invariably involves purchasing a firm that’s only available because it has been consigned to the stock market bargain basement because of perceived operational flaws.  Sometimes, acquirers learn to their sorrow that the target they have just bought is like a movie set, something that looks ok from the outside but is only a veneer.

when the urge is greatest

Companies feel the buy/build expansion urge the most keenly at times like today, when they are flush with cash after years of rising profits.

so why isn’t value doing better?

Many economists are explaining the apparent current lack of capital spending by companies by arguing that firms are opting in very large numbers to buy rather than to build.

The beneficiaries of such a universal impulse should be value investors, who specialize in holding slightly broken companies that are trading at large discounts to (what value investors hope is) their intrinsic value.  Growth investors, on the other hand, typically hold the strong-growing companies with high PE stocks who do the acquiring.

On the announcement of a bid, the target company typically goes up.  The bidder’s stock, on the other hand, usually goes down.  That’s partly because the bid is a surprise, partly because the target is perceived to be priced too high, partly simply because of arbitrage activity.

All this leads up to my point.

Over the past couple of years, growth investing has done very well.  Value has lagged badly.  How can this be if merger/acquisition activity continues to be large enough that it is making a significant dent in global capital spending?

 

 

Dell’s buyout underpriced;T Rowe Price’s costly mistake

June 7, 2016 By in takeover rules, Uncategorized Tags: , , , , , 1 Comment

the Dell leveraged buyout

Three years ago, Michael Dell decided to take the company he founded private in a leveraged buyout.  Last week, the Delaware Chancery court ruled that the buyout price was woefully low.  It said that a fair offering to shareholders would have been $17.62 a share (how precise!), not the $13.75/share actually paid.

Dell does not have to compensate many former shareholders, however.

What’s this all about?

Delaware rules

Most US companies are incorporated in Delaware, where the rules are well-tested and generally favorable toward business.  In Delaware, if holders of 90% of the outstanding shares of a takeover target accept the acquirer’s offer, the remaining 10% can be forced to do so, too.  Other US states and other countries may have different thresholds, but they also typically have similar rules to eliminate potentially bothersome small minority holdings.

Minorities aren’t completely without rights in Delaware, however.  They are allowed to refuse the offer and appeal the valuation in court.  This is a long and expensive procedure–three years in the Dell case.  At the end of the day minorities are not allowed to keep their shares.  The issue is solely about the price they get for selling them.  (Shareholders who are in the 10% because they don’t vote, or who don’t participate in the lawsuit, just get a check in the mail for the original takeout price.)

This is what happened with Dell.  It’s also the reason that Dell only has to compensate those who sued.  The vast majority of former Dell shareholders freely accepted a takeover offer that we now know was way too low.

T Rowe Price 

The money management firm’s internal analysis was that the Dell offer was inadequate.  It also appears to have taken part in the suit.  But the firm somehow made an administrative error in 2013 and voted to accept the Dell offer, not to protest the valuation.  The court ruled that T Rowe Price is stuck with that decision, even if it intended to do the opposite.  So it won’t benefit from last week’s ruling.  In fact, it is going to have to figure out how to pay people who owned funds containing Dell shares the $194 million they would have had, were it not for the voting mistake.  This will likely be a real pain in the neck, since it involves clients from three years ago, who may not sill be holding the funds affected.

 

Apple (AAPL) and Time Warner (TWX)

June 3, 2016 By in mergers and acquisitions, Uncategorized Tags: , , , , , , Leave a comment

I read in the Financial Times recently that late last year AAPL approached TWX with the idea of buying it.  This follows on the heels of an announcement that AAPL has invested $1 billion in a local rival to Uber in China.

What ties the two moves together is that both are substantial deviations from the production of tech hardware, which is AAPL’s professed core business.  The Didi Chuxing move is a drop in the bucket, however.  The price tag for TWX would amount to perhaps 20% of AAPL’s market cap of $527 billion.  That would be a transformative acquisition.

What does this activity mean?

APPL generated about $40 billion in cash flow during the first six months of fiscal 2016 (its fiscal year ends in September).  All but $5 billion of that amount went, as usual, into the company’s holdings of cash and marketable securities, which now tops $230 billion. That’s almost a quarter of a trillion dollars, and represents almost half of AAPL’s market capitalization.

Sales of the iPhone are beginning to slow.  The worldwide market for smartphones is saturated, for all but the cheapest models.  So all vendors, including AAPL, are increasingly reliant on replacement demand.  This means smartphones, by far the largest part of AAPL’s business, won’t in the future show anything like the spectacular growth of the past.

This is not exactly news.  AAPL shares are down by 25% over the past year, while the S&P 500 is roughly unchanged.

To remain a growth stock, AAPL has to reinvent itself.  It has already done this twice, with the iPod and the iPhone.  This time, however, management appears to be conceding that there’s no obvious, internally developed way for it to move forward. A related issue: as currently configured, AAPL has no way to reinvest the enormous amount of cash on its balance sheet.

AAPL has apparently concluded that it needs to buy something, or somethings, that will significantly change its character.  The TWX news signals it is prepared to act (who leaked the story, about a half year after the approach?  Why now?).

The possibility of one or more large acquisitions adds a risk element not previously present with AAPL.  On the other hand, the idea that, ex acquisitions, the company will slowly begin to resemble a certificate of deposit isn’t exactly appealing, either to outside investors or to employees holding stock options.  And the sharp drop in the shares over the past 12 months must already discount something, as does a PE of around 10.

What to do?

As for me, I don’t own AAPL shares now and haven’t owned them for a long time.  If I did, I’d probably be intensifying my search for new names, with the intention of using my holding as a source of funds.