The Limerick of Finance for 11/02/16

Broadcom has a plan for Brocade
Seeking data hardware it has made
The back end of networks
Where a merger adds perks
Have to see if buyer overpaid

Financial Sarcasm Roundup for 12/30/15

Social media users often tempt me to follow them down endless rabbit holes of replies. That is not how I prefer to spend my time. I would rather use my hours wisely in the pursuit of sarcasm.

The SEC's report on last August's volatility spike is out. It should have taken the SEC weeks, not months, to produce this report and it doesn't even draw any conclusions. A bunch of people at the SEC must be very concerned about how any hard evidence of malfunctioning markets would make them look bad or endanger their prospects with future employment on Wall Street. Fund managers are becoming very concerned about how liquidity interruptions in the bond market can trigger illiquidity in equity markets. They worry about being forced to sell stocks just to pay for bond fund redemptions. The SEC doesn't even get that the trading halts triggered in August can cause such illiquidity. We're sleepwalking into another market crisis and the SEC has no idea how to untangle its vine jungle of trading rules.

The wealthiest Americans have created their own private tax system. Affluenza has replaced civic obligation as the defining characteristic of this country's ruling elite. Rich people who claim they are willing to pay more in taxes aren't serious. Their claims are a stalking horse for increasing the burden on "tax donkeys" in the upper middle class of professionals who could displace them. I'll bet Bermuda is really nice this time of year. I wouldn't go there for vacation because these "income defense" people would just shoo me away. They don't even realize that they are the intended targets of their super-rich masters' desire to push the income tax burden downwards.

Bridgestone will allow Carl Icahn to walk away with Pep Boys. I think this deal is a play on the sharing economy for cars. Think about how car-sharing services will eventually hurt sales of new cars to Millennials who can't afford to drive anyway. Car-sharing services will still have cars on the road, driving constantly. Those cars will have to last longer and will need constant maintenance. Auto parts and services will always be in demand, even if corporations own most of the cars. Lots of aspiring Uber drivers can switch to jobs stocking parts at Pep Boys once Uber starts buying self-driving cars.

Let me get back to Bermuda as a tax haven. I don't see why Congress doesn't grant the same preferred status to Puerto Rico. Just think of all the professional income defenders who could then set up shop on that poverty-stricken island and help alleviate its insolvency. I guess the ultra-rich prefer to confine their tax donkeys to the same island where they take vacations, just to push them around in person. No one pushes me around. I'm a CEO, in case anyone forgets.

The Haiku of Finance for 03/20/15

Insider buyout
Borrow against expertise
Take it all private

The Haiku of Finance for 08/05/13

Old-school buyout style
Extract cash, hurt the target
Hobble firm with debt

Financial Sarcasm Roundup for 08/05/13

I don't follow pop music, movies, celebrity gossip, or other nonsense.  Plenty of other snarky sites cover those subjects.  This is financial sector sarcasm, folks, plus whatever else I see about business that makes me shake my head.

Uncle Sam is finally overcoming local NIMBYism in renewable energy development with BOEM's first ever lease sale for an offshore wind farm.  The main obstacle to these types of deals has typically been small groups of well-heeled locals who don't want their ocean views ruined.  Let's play the world's smallest violin for these saps.  I hope they have hissy fits the next time they settle into their breakfast nooks and peer out their bay windows at brand new wind farms.  Smart energy policy eventually bets parochialism but you have to give it a few decades.

Michael Dell almost has his computer company back in hand but Carl Icahn isn't giving up his fight for control.  I respect Mr. Icahn's track record but this is one deal he just needs to walk away from.  He's already hurting the company by forcing Michael Dell's team to pay out an extraordinary dividend just to convince shareholders to approve the buyout.  The company could have used that cash productively but oooohhhh nooooo, the buyout king just had to extract one more pound of flesh.  

The Amazon guy bought the Beltway's main gossip rag.  There has to be a hidden agenda.  No way is an e-commerce visionary going to run a printed newspaper the old-fashioned way.  Warren Buffett praises Jeff Bezos' business acumen even though Amazon's net income turned negative after three years of rising revenue.  I suspect WaPo will soon be an online-only news outlet to compete with the Huffington Post, another overrated digital portal.  

Did you know that you won't be getting much of a pension if you're a municipal government employee?  Well, now you do, and you can thank chronic underfunding.  City workers in Vallejo, Stockton, and Detroit can pioneer new odd jobs after hours that other government employees can copy nationwide.  Of course, you would have known this if you'd been reading my blog for a couple of years.  

Speaking of odd jobs, a few idiots who've been ripping off the San Francisco veterans' community really ought to find more honest lines of work.  They'll need to earn cash to cover their legal fees.  

The Haiku of Finance for 07/23/13

Pay more for slow growth
Make it work with synergy
What a stupid plan

Cisco Goes Nuts With Sourcefire Acquisition

Sometimes you just gotta wonder what tech executives are thinking.  Cisco is buying Sourcefire for $2.7B.  That prices the target at a 540 P/E (my calculation, based on their year-end 2012 earnings).  Who the holy heck pays that much for a company?!  It's not like Cisco is incapable of developing enterprise security technology themselves if they really wanted it.  I got a peek inside their headquarters in 2006 and they had plenty of capability even then.  They could have prowled the expo floor at any of the tech trade shows I've attended for startups developing network security.  Startups building firewalls can be owned for much less than several billion.

Cisco is buying a company that earned just a hair over $5M last year and those earnings have declined precipitously in the last three years.  I would understand paying a premium for growth but not for shrinkage.  Sourcefire has begun to dig itself out of its retained earnings deficit but that doesn't necessarily mean Cisco is getting a bargain.

Security sector executives need not get overly excited about seeing their own companies getting snatched up at premia.  Any consolidation in the sector will need to happen right now, like in the next few months, before the US economy tips back into recession and businesses seriously cut back their IT spending.

In normal times I'd be tempted to short Cisco's stock on news like this but I'll stay on the sidelines.  If the deal makes sense it won't be because of the price.

Full disclosure:  No position in CSCO or FIRE at this time.

Berkshire Hathaway Goes Nuts For Oriental Trading

Berkshire Hathaway (BRK-A) normally acquires financially healthy companies that possess a durable economic advantage.  The company has thrown that approach completely out the window by agreeing to acquire Oriental Trading Co. for half a billion bucks.  This transaction does not resonate at all with Berkshire's business model.

Oriental Trading emerged from Chapter 11 bankruptcy only last year.  Warren Buffett's famous aversion to money-losing enterprises should have kept him from even considering this company.  Oriental's business model is low-cost, commodified, and easily duplicated by any number of competitors.  There's no economic moat anywhere in sight.  A company that offers guaranteed lowest prices on 40,000 products had better have the kind of stranglehold on its suppliers that Wal-Mart uses to keep that kind of promise.

KKR no doubt relishes losing its original bid for Oriental and watching the Carlyle Group eat a big loss.  I wonder why Berkshire is handing KKR such a great payoff for taking a catalog retailer through Chapter 11.  Retail will be the first sector destroyed when the next leg of the prolonged U.S. downturn materializes.  Oriental Trading has to compete with every odd-lot trinket seller on eBay.  Berkshire is straying from the business model that has made it one of the best holding companies in American history.

Full disclosure:  No position in BRK-A, BRK-B, or Oriental Trading Co. at this time.  

The Haiku of Finance for 10/30/12

Disney buys Lucas
More "Star Wars" films in the works
Use the Force to deal

WellPoint (WLP) Buys Amerigroup (AGP) For $4.9B Cash

I'll serve up my brief thoughts on WellPoint's decision to buy Amerigroup for $4.9B in cold cash even though I don't have a dog in this fight at present.  The strategic rationale is probably a bet on Medicare's ability to deliver new consumers of managed care plans (courtesy of the federal government's mandate) at a very high cost to those clients.  The cynic in me just can't avoid picturing the captive audience of Americans who will soon find their care rationed at an unavoidably high premium.

The lock on a captive market is probably the only good reason for a company trading at a P/E of 8 (i.e., a discount to the S&P 500's long term average of 14) to buy a target now trading at a P/E of almost 29.  WellPoint only had $2.2B in cash on last quarter's balance sheet, so borrowing another $2.7B will put its long term debt over $11B.  That's more than 4x its present net income, and adding Amerigroup only brings in about another $200M in net income (while assuming responsibility for another $400M in Amerigroup's long term debt).  I consider any long term debt load greater than 2x net income to be dangerously high, something to be avoided in my Alpha-D Portfolio.

WellPoint may be counting on the prospect of added pricing power in a consolidating market for anyone held hostage to Medicare.  This deal does not appeal to me, unless I can sell some puts under AGP before the deal closes.  I may just do that if the AGP options chain remains viable for a few more days.  The prospect of making some quick cash from under a stock price supported by an all-cash transaction is the only good thing I see here.

Full disclosure:  No position in WLP or AGP at this time, although I reserve the right to sell cash-covered puts under AGP in the very near future.

The Haiku of Finance for 05/11/12

Avon lady calls
SEC wants some info
Go get the phone logs

The Haiku of Finance for 03/15/12

Critical metals
Ripe for consolidation
Who will be bought out?

The Haiku of Finance for 03/13/12

Rare earth trade complaint
Rare earth deal pipeline growing
Lots of rare earth news

The Haiku of Finance for 06/18/11

Microsoft buys Skype
Video chat with Windows?
Just launch a new tab

Two Odd Finance Moves In Books And Cars

Its not every day that we get to witness two questionable transactions in firms that lead their respective sectors.

First up is Liberty Media's proposed all-cash buyout of Barnes and Noble (BKS).  Brick-and-mortar booksellers are are a declining business model; just ask Borders (BGP) about its prospects.  Liberty Media must see other advantages here as the WSJ has duly noted.  One desirable asset Barnes and Noble possesses in spades is choice retail space that can be repurposed for uses beyond books.  If John Malone needs Liberty Media to go into debt to close this deal, there's no time like the present before rates inevitably rise. 

Speaking of debt and interest rates, we also have Chrysler LLC's proposed payback of government loans.  The problem here is that they're paying it back with money obtained from other debt issues.  Exchanging debt makes sense if the debtor gets a better term structure of interest rates.  Uncle Sam's ZIRP policy makes him the cheapest lender in the country, so going to the capital markets to raise money at higher interest rates makes little sense unless this somehow improves the firm's enterprise value.

Puzzling moves like this make me glad I don't work in corporate treasury offices that have to justify these kinds of decisions on behalf of top management. 

Full disclosure:  No position in BKS, BGP, or Chrysler LLC. 

The Limerick of Finance for 03/20/11

Having trouble when you make a call?
Coverage limits still hitting a wall?
Don't worry for long
Problem's solved with a song
A big mobile phone deal, that's all

Significance Of The Lubrizol Buyout

Today's big dealmaking news is Berkshire Hathaway's purchase of Lubrizol for $9B in cash.  The appeal of LZ's fundamentals is clear.  The 34% ROE and long term debt less than two times net income are hallmarks of the Warren Buffett criterion.  The less obvious attraction here is Lubrizol's sector.

LZ makes specialty lubricants with wide applications in petroleum drilling and refining.  Like BNSF's position astride desirable rail lines, LZ's position in a specialty sector is tough to dislodge.  Railroads and energy services are bulk carriers of the kinds of commodities that advanced economies use with abandon. 

Niche servicers of the energy production sector are long-term bets on the world economy's demand for energy.  If Mr. Buffett doesn't believe in commodity scarcity, he's certainly doing a darn good imitation of a Peak Oiler.

Full disclosure:  No positions in LZ or BRK-A at this time. 

Tuesday Newsreel for 02/08/11

Headlines are not crystal balls. 

Berkshire Hathway is buying Wesco Financial.  Warren Buffett is taking his partner Charlie Munger's firm completely private.  It seems to be a departure from typical Berkshire acquisitions, as Wesco has no durable competitive advantage and currently clocks an ROE that's less than the 10-year Treasury yield.  Maybe Mr. Buffett likes the float from the reinsurance lines so much he's willing to pay a premium (38 P/E!!) for a lackluster, no-growth business.

AOL buys Huffington Post for $315mm, but founder and namesake Arianna Huffington only gets something like $18mm.  Founding principals typically get way more than 5.7% of the takedown at liquidity.  I think her early backers took her to the cleaners.  She should have asked former gubernatorial rival Arnold Schwarzenegger for advice. 

It finally dawns on The Economist that TIPS are not reliable as a way to discount against inflation.  Individual bonds probably aren't as they don't reset their principal often enough to account for daily price changes in a high-inflation environment.  A TIPS bond fund or ETF on the other hand would be subject to routine daily price discovery.  Hmmm, looks like TIPS turn the traditional bond roles - stabilizing a diverse portfolio and providing cash flow - upside down. 

Chinese manufacturing has a long way to go to catch up with the U.S., says an editorialist.  Here's my editorial response.  The gap will close rapidly as manufacturers realize they'll have to relocate to China to keep rare earth metals in their supply chains.  Our only hope is to develop technologies in the U.S. that aren't rare earth dependent.  Hope is not a method. 

Speaking of China, they just raised interest rates again.  They really are serious about fighting inflation and revaluing the yuan on their own terms.  The after-hours announcement will probably make the SSE and SZSE open lower on Wednesday.  Don't hold your breath; after all, this headline isn't a crystal ball. 

Atheros Communications: A Special Situation

Qualcomm (QCOM) announced that it will acquire Atheros Communications (ATHR) for $45/share in cash, expected to close in the first half of 2011.  This presents one of the most straightforward merger arbitrage opportunities I've seen in a while.  Details immediately below. 

Full disclosure:  Long ATHR with covered calls and cash-covered short puts.  No position in QCOM. 

Friday Roundup, Oct. 29, 2010

Unionized longshore workers in NY/NJ get paid an extra three hours for zero work.  Unions can't help but rip off their employers and customers.  This madness must end. 

If cheap debt is driving private equity action, then any disturbance in the bond market (China *cough* China) will shut down all leveraged buyout action and possibly destroy Blackstone and Carlyle.  Neither firm would hire me.  I hope bond vigilantes wipe them out.

The PIIGS await slaughter.  The G-20's agreement not to engage in mutual currency destruction is already null and void.  Debt defaults will demand devaluation.  Disband, G-20.  Further agreements would be a joke and the ECB acknowledges as much. 

Even Islamic bonds are in the yield basement, but they pay more than comparable Treasuries.  Allah willing, Malaysia might finally be the great growth story I thought it would be when I visited there in 2001. 

The Economist signals to American elites that Anglo opinion is souring on the U.S. as a growth story.  Brits can still take austerity with a stiff upper lip.  Americans will cry and riot.