Merger bet as art
Long target and short buyer
Hedging goes both ways
Showing posts with label merger. Show all posts
Showing posts with label merger. Show all posts
Friday, June 30, 2023
Tuesday, December 08, 2015
Monday, April 13, 2015
Financial Sarcasm Roundup for 04/13/15
It is time once again to refresh the pile of sarcasm that I have built up since my last missive. I just can't quit. No one else in the financial sector is capable of picking up the sarcasm slack if I'm not around.
The Trans-Pacific Partnership trade talks are back in play. It was never really dead because Anglo-Western elites and their friends in places like Japan never give up on something they truly want. Congress needs to get its act together and put the TPP on the fast track. Capitol Hill staffers who were around when NAFTA was ready in 1993 should remember how to get a deal done. Versailles on the Potomac must tap its best operatives. Institutional memory lies within the Deep State.
Companies are salivating over more hot M+A action. Corporate development officers must be getting dumber by the day if they think they can acquire their way to success in this environment. Global macro indicators are heading down and consumer demand is imploding in the largest regional economies. Executives addicted to cheap borrowing see M+A as a substitute for real growth. Paying premiums for high-earning targets in low-growth markets will hurt in the coming downturn.
Ukraine is headed onto S+P's default list. A basket case economy run by kleptocratic cronies for decades should surprise no one when it turns into a black hole for capital. Whoever was dumb enough to buy Ukrainian government bonds last year expecting a bailout should not run a hedge fund, yet these idiots always start another "emerging market debt" fund after they fail. Oh yeah, the US government dumped billions into Ukraine in the 1990s and will never see a return on that foreign aid. The amnesiac, inbred trust fund babies running large investment funds and US government bureaucracies need some kind of public flogging and a lifetime ban from any and all occupations that involve handling money.
Stupidity never ends when stupid people hand down leadership positions to their offspring. The failures noted above rest on the stooped shoulders of enfeebled aristocrats who are finally in water over their heads. They know where to reach me if they need real solutions, provided they step out of the way.
The Trans-Pacific Partnership trade talks are back in play. It was never really dead because Anglo-Western elites and their friends in places like Japan never give up on something they truly want. Congress needs to get its act together and put the TPP on the fast track. Capitol Hill staffers who were around when NAFTA was ready in 1993 should remember how to get a deal done. Versailles on the Potomac must tap its best operatives. Institutional memory lies within the Deep State.
Companies are salivating over more hot M+A action. Corporate development officers must be getting dumber by the day if they think they can acquire their way to success in this environment. Global macro indicators are heading down and consumer demand is imploding in the largest regional economies. Executives addicted to cheap borrowing see M+A as a substitute for real growth. Paying premiums for high-earning targets in low-growth markets will hurt in the coming downturn.
Ukraine is headed onto S+P's default list. A basket case economy run by kleptocratic cronies for decades should surprise no one when it turns into a black hole for capital. Whoever was dumb enough to buy Ukrainian government bonds last year expecting a bailout should not run a hedge fund, yet these idiots always start another "emerging market debt" fund after they fail. Oh yeah, the US government dumped billions into Ukraine in the 1990s and will never see a return on that foreign aid. The amnesiac, inbred trust fund babies running large investment funds and US government bureaucracies need some kind of public flogging and a lifetime ban from any and all occupations that involve handling money.
Stupidity never ends when stupid people hand down leadership positions to their offspring. The failures noted above rest on the stooped shoulders of enfeebled aristocrats who are finally in water over their heads. They know where to reach me if they need real solutions, provided they step out of the way.
Monday, April 15, 2013
Tax Day 2013 and Portfolio Limitations
Filing one's income tax returns can be like getting your teeth cleaned. It's inconvenient but necessary. Like it or not, taxes are the price free enterprise pays for the "commons" of defense, justice, public health, and other stuff used by all players.
My tax burden was rather light in 2012 mostly because I deliberately chose not to execute any merger arbitrage trades in my portfolio. The opportunity cost of not playing some obvious low-risk events (well, obvious and low-risk for me alone) was probably significant. The risk for me of having my capital tied up in strategies I can't unwind is potentially much greater than that cost because I don't want to be caught in the middle of a major market dislocation.
Merger plays are low-risk in a stable macroeconomic environment. Our present environment is totally unstable. Its parts hold together with duct tape, bailing wire, and the prayers of a few dozen central bankers. If the market were to crash after I go long the stocks of announced acquisition targets, collapsing share prices may result in the merger's termination. I'd be stuck with outsized positions in a handful of firms outside my normal sphere of competence, at valuations much lower than whatever premium the acquirer would have paid. A merger-arb strategy in this kind of market is like picking up nickels in front of a steamroller. I'd rather leave the nickels in place than try to run ahead of the steamroller.
I also used to be a fan of using cash proceeds from option writing to add to fixed income holdings. I let the last of my bonds mature last year, and I'm staying away from dollar-denominated bonds. The risk of hyperinflation is more compelling than adding yield with a bond ladder.
I probably missed a great deal of potential gains by sitting on the sidelines this long. I have to live with this outcome. Hedge fund managers chasing yield and pension fund managers beholden to benefit payouts must also live with the extreme risks they are taking now. I believe my patience will be rewarded. I have waited a long time and I have further to wait.
My tax burden was rather light in 2012 mostly because I deliberately chose not to execute any merger arbitrage trades in my portfolio. The opportunity cost of not playing some obvious low-risk events (well, obvious and low-risk for me alone) was probably significant. The risk for me of having my capital tied up in strategies I can't unwind is potentially much greater than that cost because I don't want to be caught in the middle of a major market dislocation.
Merger plays are low-risk in a stable macroeconomic environment. Our present environment is totally unstable. Its parts hold together with duct tape, bailing wire, and the prayers of a few dozen central bankers. If the market were to crash after I go long the stocks of announced acquisition targets, collapsing share prices may result in the merger's termination. I'd be stuck with outsized positions in a handful of firms outside my normal sphere of competence, at valuations much lower than whatever premium the acquirer would have paid. A merger-arb strategy in this kind of market is like picking up nickels in front of a steamroller. I'd rather leave the nickels in place than try to run ahead of the steamroller.
I also used to be a fan of using cash proceeds from option writing to add to fixed income holdings. I let the last of my bonds mature last year, and I'm staying away from dollar-denominated bonds. The risk of hyperinflation is more compelling than adding yield with a bond ladder.
I probably missed a great deal of potential gains by sitting on the sidelines this long. I have to live with this outcome. Hedge fund managers chasing yield and pension fund managers beholden to benefit payouts must also live with the extreme risks they are taking now. I believe my patience will be rewarded. I have waited a long time and I have further to wait.
Wednesday, August 15, 2012
Molycorp Downgrade Shows Trouble From Neo Materials Acquisition
I had a few positive things to say about Molycorp's acquisition of Neo Materials when I was a TREM12 panelist this past March. The company was showing some real strategic thinking by going whole-hog for vertical integration. Now the bloom is coming off the acquisition rose with S&P downgrading Molycorp's credit rating.
The strategic bet for a company like Molycorp is that the long-term added value from tighter integration will generate enough free cash flow to pay down the debt used in that acquisition. The monkey wrench in the formula has been the weakening global demand for high-tech goods that rely heavily on REEs for their capabilities. That hurts demand for Molycorp's ores.
MCP is trading at a P/E of about 10, and is only about a dollar above its 52-week low of about $11 (compared to a high of over $58). It would be a bargain if not for the likelihood of a very serious downturn in Europe and the U.S. That would spell further difficulty for any REE producer, no matter how dominant their position.
Full disclosure: No position in MCP at this time.
The strategic bet for a company like Molycorp is that the long-term added value from tighter integration will generate enough free cash flow to pay down the debt used in that acquisition. The monkey wrench in the formula has been the weakening global demand for high-tech goods that rely heavily on REEs for their capabilities. That hurts demand for Molycorp's ores.
MCP is trading at a P/E of about 10, and is only about a dollar above its 52-week low of about $11 (compared to a high of over $58). It would be a bargain if not for the likelihood of a very serious downturn in Europe and the U.S. That would spell further difficulty for any REE producer, no matter how dominant their position.
Full disclosure: No position in MCP at this time.
Monday, May 28, 2012
Financial Sarcasm Roundup for 05/28/12
It's Monday. That means it's time for my extreme sarcasm about business activity. U.S. markets were closed today due to Memorial Day but that doesn't mean my big fat mouth needs to be closed.
Marubeni is supposedly getting close to buying Gavilon. I've never heard of either one of these firms. Marubeni is some big Japanese grain dealer and Gavilon is a U.S. competitor. There isn't much to this story besides another consolidation play in a commodity dealer. It kind of reminds me of consolidation in the steel industry; now India and China dominate a very limited global field.
Now France wants Eurobonds, while the Economist opines in favor of Continental federalism. I need to burst the Economist's bubble. Only total federalism will establish the Continent-wide taxation system necessary to pay off any Eurobonds. Half-measures won't cut it and German taxpayers won't go for full federalism once they realize how badly it will ruin their credit. Putting some Eurobonds into tranches that partially cover participating states' obligations and are partially funded by strong creditor states (i.e., Germany) reminds me of the U.S.'s experience with Fannie and Freddie's amalgamated obligations. The key difference is that the U.S.'s housing CDO debacle was backed by the full faith and credit of Uncle Sam and his ability to levy taxes. Europe's half-effort won't cover squat. It will of course leave a lot of stupid hedge fund managers holding empty bags they thought were full of Euro-tranched super bonds.
U.S. national income is increasingly benefiting business profits and not worker income. There's plenty of research on how global wage arbitrage is pushing down wages in the U.S. One academic canard in financial thinking would call for workers to invest more of their income in the stocks of their employers to recapture some of this lost income momentum. I wouldn't go for such a canard just yet; U.S. stocks aren't bargains relative to earnings even though they're trading at inflation-adjusted levels last seen in the late 1990s. My point is that U.S. workers don't have many personal growth options through wage enhancing things like education or wealth enhancing things like conventional investments in U.S. equities. Stagnated workers can win by thinking outside the box, using tools created and traded in resilient communities.
Smart investors are starting their stampede out of junk bonds. I should throw in the caveat that maybe these are the people smart enough to let hedge funds buy up junk bonds and junk funds on the downslope to junk bond obliteration. This news makes me nostalgic for the early days of 2007 when I kept reading glowing headlines about the junk bond market's growth. I wondered then when it would all crash and realized I didn't want to be anywhere near junk bonds when they hit the floor. Well, crash they did later in 2007. The credit market seizures that started hitting in August 2007 were memorable. History doesn't repeat but it does rhyme. I'm not in junk bonds now, nor will I enter them until long after the U.S. bond market has crashed and America's likely hyperinflationary episode ends.
Marubeni is supposedly getting close to buying Gavilon. I've never heard of either one of these firms. Marubeni is some big Japanese grain dealer and Gavilon is a U.S. competitor. There isn't much to this story besides another consolidation play in a commodity dealer. It kind of reminds me of consolidation in the steel industry; now India and China dominate a very limited global field.
Now France wants Eurobonds, while the Economist opines in favor of Continental federalism. I need to burst the Economist's bubble. Only total federalism will establish the Continent-wide taxation system necessary to pay off any Eurobonds. Half-measures won't cut it and German taxpayers won't go for full federalism once they realize how badly it will ruin their credit. Putting some Eurobonds into tranches that partially cover participating states' obligations and are partially funded by strong creditor states (i.e., Germany) reminds me of the U.S.'s experience with Fannie and Freddie's amalgamated obligations. The key difference is that the U.S.'s housing CDO debacle was backed by the full faith and credit of Uncle Sam and his ability to levy taxes. Europe's half-effort won't cover squat. It will of course leave a lot of stupid hedge fund managers holding empty bags they thought were full of Euro-tranched super bonds.
U.S. national income is increasingly benefiting business profits and not worker income. There's plenty of research on how global wage arbitrage is pushing down wages in the U.S. One academic canard in financial thinking would call for workers to invest more of their income in the stocks of their employers to recapture some of this lost income momentum. I wouldn't go for such a canard just yet; U.S. stocks aren't bargains relative to earnings even though they're trading at inflation-adjusted levels last seen in the late 1990s. My point is that U.S. workers don't have many personal growth options through wage enhancing things like education or wealth enhancing things like conventional investments in U.S. equities. Stagnated workers can win by thinking outside the box, using tools created and traded in resilient communities.
Smart investors are starting their stampede out of junk bonds. I should throw in the caveat that maybe these are the people smart enough to let hedge funds buy up junk bonds and junk funds on the downslope to junk bond obliteration. This news makes me nostalgic for the early days of 2007 when I kept reading glowing headlines about the junk bond market's growth. I wondered then when it would all crash and realized I didn't want to be anywhere near junk bonds when they hit the floor. Well, crash they did later in 2007. The credit market seizures that started hitting in August 2007 were memorable. History doesn't repeat but it does rhyme. I'm not in junk bonds now, nor will I enter them until long after the U.S. bond market has crashed and America's likely hyperinflationary episode ends.
Thursday, March 15, 2012
Tuesday, March 13, 2012
Wednesday, August 31, 2011
Monday, June 27, 2011
Williams Fights Energy Transfer Equity For Southern Union
Energy Transfer Equity's (ETE) bid for Southern Union (SUG) should have been a done deal when it was announced. Some acquisition targets are just too juicy to ignore. Now Williams (WMB) is jumping into the fray with an all-cash $39/share bid for SUG. Merger fights make life interesting. The benefit to SUG investors is the enhanced price discovery from competing bids. The problem is that the boards of both ETE and SUG have already approved their merger, so now a costly proxy fight among SUG shareholders is likely.
This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid. I might have more to say in a few days once I have a chance to compare all three companies' financial statements.
This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid. I might have more to say in a few days once I have a chance to compare all three companies' financial statements.
Friday, March 25, 2011
Schwab Buys optionsXpress In Bid For Discount Investors
Sometimes it pays to pay even when you're used to chasing discounts. Charles Schwab, one of America's leading discount brokerages, is offering $1B in stock for optionsXpress. Thumbnail sketches are in order.
This is an all-stock deal, with 60mm new SCHW shares going to OXPS holders. SCHW shareholders will experience dilution of about 5%, which isn't bad considering they're getting a huge options brokerage's market position. OXPS's ROE of 25% is unbelievably healthy, although its three straight years of declining net income is a cause for concern. OXPS's accounts payable and long-term debt are manageable loads for SCHW's balance sheet to bear.
Writing puts under OXPS would be tempting if this were a cash deal, but the all-stock characteristic would make such a move very vulnerable to market volatility. That is a huge risk to take with OXPS's P/E over 20 and SCHW's over 47.
Schwab is probably making the right long-term move here, but the risk factors above take the joy out of any short-term special situation strategy for investors.
Full disclosure: No position in SCHW or OXPS.
This is an all-stock deal, with 60mm new SCHW shares going to OXPS holders. SCHW shareholders will experience dilution of about 5%, which isn't bad considering they're getting a huge options brokerage's market position. OXPS's ROE of 25% is unbelievably healthy, although its three straight years of declining net income is a cause for concern. OXPS's accounts payable and long-term debt are manageable loads for SCHW's balance sheet to bear.
Writing puts under OXPS would be tempting if this were a cash deal, but the all-stock characteristic would make such a move very vulnerable to market volatility. That is a huge risk to take with OXPS's P/E over 20 and SCHW's over 47.
Schwab is probably making the right long-term move here, but the risk factors above take the joy out of any short-term special situation strategy for investors.
Full disclosure: No position in SCHW or OXPS.
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