On November 29, 2007, IHOP, now DineEquity (NYSE: DIN), announced it had completed the acquisition of Applebee's, with CEO Julia A. Stewart commenting that "We are delighted to complete the acquisition of Applebee's as it represents an opportunity to create significant long-term value for IHOP shareholders over and above what we could have achieved on a standalone basis." On that day the stock closed at $52.29.
Mr. Conforti "resigned from the Company effective immediately to pursue other opportunities." What those opportunities are, we don't know, but apparently they're more exciting than working at a company whose stock has declined by more than 50% in the past year.
Of course, it's always a red flag when a company's CFO resigns, and investors would do well to be skeptical here -- the move was abrupt, and no permanent replacement has been named.
Back when the deal was first announced, I wrote that "IHOP's revenue in 2006 was lower than it was in 2002. So maybe this is a case of two drunken sailors trying to hold each other up. There's nothing much to get excited about for shareholders of either company."
So far that's been an understatement but I won't take too much credit. The fact is that company-changing mergers and acquisitions rarely create value, and in the long run, betting against them is likely to produce a pretty good track record.
TheStreet.com's Jim Cramer says we're destroying huge amounts of capital, and investors are sick of it.
No big mergers and acquisitions (although my fingers are crossed about Altria (NYSE: MO) (Cramer's Take), because MO needs growth and UST's (NYSE: UST) (Cramer's Take) really good). No initial public offerings of any consequence since Visa (NYSE: V) (Cramer's Take) despite a huge queue of private-to-go-public deals. No private-equity deals despite incredibly low valuations, valuations so minuscule that deals would have been done at gigantic premiums from here and still be much less expensive than they were. No threatening stakes by swashbuckling hedge funds. No new huge buybacks or dividend boosts, save CenturyTel (NYSE: CTL) (Cramer's Take), not that anyone cared about that one.
No nothin'.
It is an amazing time. It is the first week of an admittedly almost always bad month, but that's almost always because we are up going into September and funds want to lock in good gains.
In India, the growth of the information technology (IT) industry has been stunning. For the most part, the strategy has been to focus on internal growth. However, this may be changing; that is, expect more M&A.
In a way, the Indian IT service providers are victims of their own success. For example, wages are skyrocketing and it's getting tougher to find quality consultants.
With the Axon deal, Infosys will add about 2,000 consultants who specialize in the complex work of SAP (NYSE: SAP) implementations -- projects that can certainly generate juicy fees. Infosys will also get a stronger platform in Europe. Last year, Axon generated $378.3 million in revenues, with $37.4 million in profits.
According to Murray Beach, managing Managing Director of TM Capital:
"This transaction is an impressive step for Infosys. Many of the leading offshore services firms have talked about climbing up the value chain of services offerings and improving on-site customer presence, but none have completed a deal of such magnitude to back up their rhetoric. We expect the acquisition of Axon to mark the first of many acquisitions by the leading Indian offshore players of traditional on-site strategic and technology consulting companies in the US and Europe."
For financial markets, August is always a slow time as Wall Streeters head for their vacations. But this year, there was more than just seasonality. Simply put, it was a very tough month for M&A operators.
It's been about a year since the credit crunch started, and it looks like things aren't getting better. If anything, it's a good bet we'll continue to see volatility and layoffs in the financial services space.
In August, the M&A volume in the U.S. came to about $28.5 billion, which is 53% off from the same period a year ago.
Ironically, while private equity funds have a huge amount of capital to put to work, there is not much bank financing. As a result, most of the private equity deals have been fairly small (below $2 billion or so).
Also, some of the recent mega deals – such as InBev's $45 billion acquisition for Anheuser-Busch Cos. (NASDAQ: BUD) – are crowding out the financing market.
In other words, investment bankers may need to wait until next year for things to warm up again.
True, the M&A business is known for its "feast-famine" cycles, but this time it looks like things could be particularly bleak – and perhaps long lasting. Just look at the break-down of the $19.5 billion buyout for Clear Channel Communications (NYSE: CCU).
Basically, financial institutions are in the process of repairing their balance sheets, and as a result, don't have the firepower to finance deals -- especially large ones. In fact, these firms need to find ways to deal with more than $200 billion in LBO loans.
There is also likely to be a slowdown in strategic acquisitions. That is, as the US economy slows down – which may impinge the global economy – where buyers are likely to get jittery. Why take big risks in such an environment?
Now, there are offsetting factors such as the emergence of mega sovereign wealth funds. However, they may get some political pushback.
In other words, don't expect a comeback anytime soon.
It looks like we have now entered the when, not if, stage of Microsoft Corp. (NASDAQ: MSFT) acquiring Yahoo Inc. (NASDAQ: YHOO) and we will soon be saying good-bye to the Yahoo we know for something else.
You will find this splattered across the web today: Microsoft presents its vision of a combined company to Yahoo executives in what appears to be the first meeting since Microsoft made its unsolicited offer for Yahoo, reports The Wall Street Journal [subscription required].
On January 31, 2008, a buyout offer of $44.6 billion was made by the software giant to combine forces with Yahoo!, against the supposedly next evil empire, Google Inc. (NASDAQ: GOOG).
Google has stolen Yahoo's thunder, and try as it might, Yahoo has not been able to get it back. Its stock has stagnated. Even as GOOG shareholders have watched their stock plummet some 40% this year, Google is still the current web star when it comes to search and advertising revenue. Microsoft hopes to steal this mantle by combining MSN with Yahoo.
The best defense is a good offense. If Yahoo Inc. (NASDAQ: YHOO) does not like Microsoft (NASDAQ: MSFT)'s buyout offering price of $31 per share and Microsoft insists this is a fair price, then Yahoo should turn the tables on the software giant and buy its internet search and advertising assets at a similar valuation. Since it is smaller, it should cost less. If this is too big for Yahoo to swallow, then they could do it with a partner -- would Mr. Murdoch have an interest in this? Or maybe Mr. Diller or Mr. Malone would?
Another possibility would be to forget about an acquisition strategy and think merger!
The idea I like best is for Microsoft to spin out its internet assets and merge them with Yahoo's. I think this approach would add value to Microsoft, the cash machine, and create a new, larger, independent internet competitor for Google Inc. (NASDAQ: GOOG). If it were independent from Microsoft, it may also facilitate on the deal's acceptance as far as antitrust issues are concerned. If Murdoch's News Corp (NYSE: NWS) took an interest, then MySpace could be added to the mix. It would be a very strong company.
Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. Disclosure: I do not own shares of GOOG, MSFT, NWS or YHOO.
This week, the cofounder of the Carlyle Group, David Rubenstein, paid $21.3 million for a copy of the Magna Carta. In an offbeat way, is this a sign of optimism for the private equity space?
Well, today Rubenstein gave an interview with CNBC. Basically, he thinks there are some compelling investment opportunities – especially in energy, healthcare, and financial services. What's more, he's bullish on emerging markets. He's not only excited about China but even Africa and the Middle East. For example, in Africa, Rubenstein thinks there are opportunities for mining/minerals, financial services, and telecom.
Although, things may be remain somewhat slow in terms of deal activity, at least in the US, Rubenstein thinks sellers may be in denial on valuations. Also, to get deals done, private equity funds will probably need to pony up more equity. But, with the huge amounts of capital in these funds, that shouldn't be hard to do.
With the credit crunch and the cooling of private equity, the M&A space has been fairly meager lately. But today, we got some good news (at least for deal junkies) -- Ingersoll-Rand (NYSE: IR) has agreed to pay $10.1 billion for Trane (NYSE: TT).
Ingersoll-Rand, founded in 1871, is a major diversified industrial company, with brands like Club Car golf cars, Hussmann stationary refrigeration equipment, and Schlage locks. And with the Trane deal, the company will boost its large climate control business, making it the #2 player behind United Technologies.
Funny enough, it seems that Trane was trying to market itself to private equity buyers by selling off divisions and streamlining divisions. But of course, such a company can also be attractive to a strategic buyer – especially as global markets remain highly competitive.
With the Trane deal, Ingersoll-Rand will have $17 billion in revenues and $2 billion in EBIT (earnings before interest and taxes).
Yet, Wall Street is a bit skeptical, with Ingersoll-Rand's stock price down 7%. Trane's stock, on the other hand, is up 23%.
According to research firm Dealogic, the M&A market is in a big-time downward spiral. For November, the U.S. market saw a 71% drop in deal values to $58.1 billion.
If history is any guide, the M&A market is a feast-or-famine business, and the transition can happen fairly quickly.
Of course, a key factor is the credit crunch. It takes gobs of debt to get deals done, especially for private equity. Also, with an uncertain economy, strategic buyers may also be holding off – even if the valuations look compelling.
Interestingly enough, five of the top 10 deals in November were from foreign-based buyers. With sovereign funds bulging with U.S. dollars, the trend should continue. Although, some of the latest deals have been minority investments, such as the $7.5 billion Citigroup (NYSE: C) transaction from Abu Dhabi Investment Authority.
However, without the juice from private equity, it's hard to make a case for a strong 2008 (the average deal size was a measly $127 million in November). So, for M&A dealmakers, they may want to be thinking of getting another career.
CNBC is reporting that Schwab (NASDAQ: SCHW) and TD Ameritrade (NASDAQ: AMTD) may be in talks to buy troubled discount broker E*Trade (NASDAQ: ETFC). The news has pushed up E*Trade shares as much as 23% to $5.25.
The problem is that if the broker's mortgage securities investments are as severe a problem as some analysts think, the company may not be worth more than the $3.46 where the stock traded a few days ago. Those buying into the rally could be burned if an offer is well below the current price.
Any deal would probably be based on selling the customers of the discount brokerage unit and keeping the damaged securities on the balance sheet within the remaining public company. There is no guarantee that the cash paid for the customer base would not be eaten up if the market for these distressed securities drops further.
E*Trade may be worth over $5, but it could also be worth a lot less.
Douglas A. McIntyre is an editor at 247wallst.com.
With nothing better to do the day before Thanksgiving, The Wall Street Journal has decided to revisit the odds of whether a merger between the two satellite radio companies, XM Satellite (NASDAQ: XMSR) and Sirius (NASDAQ: SIRI) have improved. The paper writes "in the past few months, investors have shown increasing confidence of the deal's winning approval from the Federal Communications Commission and the Justice Department."
There may be a few good reasons that the chances of a deal have improved, but they are hardly compelling.
Some of the car companies have come out in favor of the merger. That would only make sense. Marketing two platforms is probably a bit of a mess. A fair number of congressmen who want to look good say the merger is bad for consumers, and will drive up prices. There isn't any hard evidence of that, but it is a nice talking point.
There is probably an economic reason for a merger. Both companies have over a billion dollars in debt. Paying that down would probably be easier with the savings from combining the companies.
But Wall Street may look at the share prices of XM and Sirius and say that they are the best sign that a merger looks good. The stocks are both up 25% in the last three months. Maybe investors are gambling the deal is looking better.
There is another reason for the stocks to be up: Both companies are still growing and adding subscribers. The firms may still be losing money, but they are moving closer to break-even.
That has nothing to do with a merger.
Douglas A. McIntyre is an editor at 247wallst.com.
Insurance holding company James River Group, Inc. (Nasdaq: JRVR) will be acquired by a member of the D.E. Shaw Group, based in Bermuda. The acquisition should be finalized by the end of December 2007. James River Group is not seeking a buyer because it is in financial trouble. Far from it. The company posted good numbers in its recent 3Q 2007 earnings release. Underwriting profit for the quarter increased 10% to $11 million, not including $1 million spent in acquisition costs. Net income increased to just over $10 million, with diluted earnings per share (EPS) up 9% to $0.63. Excluding year-to-date (YTD) acquisition costs of $3 million, YTD EPS of $1.82 represents a 20% increase.
James River's Workers' Compensation unit posted significantly higher profit margins, due both to lower losses and better management of expenses. Net investment income increased $1 million to $6.3 million, a 20% gain. Buried in the earnings release, however, is the fact that the company holds $4.3 million worth of sub-prime mortgages in its investment portfolio. This may be a problem down to road for the new owners. James River Group is currently rated A- by A.M. Best Company.
Given the company's impending acquisition, CEO J. Adam Abram offered no guidance for 4Q 2007, nor held a conference call to discuss 3Q 2007 numbers.
Today's headlines that IBM (NYSE: IBM) is looking at beefing up its security offerings raises the question if management would acquire Israel-based Check Point Software (NASDAQ: CHKP). Val Rahmani, IBM's general manager of infrastructure management for global technology services, sees security as a key to growth. Val said, "We're looking at a lot of different companies right now, as we always do in a number of different spaces within security."
Until now, the thought on the Street was that Check Point was going to continue as a stand-alone company, but with IBM on the prowl, it may be too much for CEO Gil Schwed to resist. Check Point currently trades at a market cap of $5.53 billion, and an acquisition would certainly come with a much higher price tag. Based on valuation, it would take between $7-8 billion to buy the company. For deep-pocketed IBM, that's not too high a price. For Schwed, a takeover at that price would be tough to reject, and it would break all records for M&A of an Israeli company.
Based on IBM's track record, I would doubt that it is going to try to grow its own security business organically; rather, it will most probably purchase a serious player. Stay tuned to see if that player will be Check Point.
Disclosure: Writer holds a position in CHKP. He has no other position in any stock mentioned as of 11/2/07.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com.
BEA Systems (NYSE: BEAS), received a proposal on 10/12/07 from Oracle (NYSE: ORCL) to be acquired for $17 a share in cash. ORCL announced on 10/23, "ORCL has no interest in a long, drawn-out process to acquire BEAS. BEAS said on 10/26, ORCL $17 per share proposal is unacceptable. Carl Icahn, the largest shareholder of BEAS, holding over 58 million BEAS shares and equivalents, said on 10/26 BEAS should allow its shareholders to decide the fate of BEAS by conducting an auction process and BEAS should not agree to dilute voting by issuing stock, entrench management of derail a sale of BEAS. BEAS said today, 10/29, we are not opposed to an acquisition of the company. In fact, we are currently exploring ways to maximize shareholder value, including the possible sale of the company. Smith Barney says, "We continue to think the likelihood of BEAS being acquired remains high, although the process and the timeframe are unclear a point." BEAS call option volume of 33,577 contracts compares to put volume of 8,064 contracts. BEAS December & January option implied volatility of 38 is near its 26-week average of 39 according to Track Data, suggesting non-directional risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
On November 29, 2007, IHOP, now DineEquity (NYSE: DIN), announced it had completed the acquisition of Applebee's, with CEO Julia A. Stewart commenting that "We are delighted to complete the acquisition of Applebee's as it represents an opportunity to create significant long-term value for IHOP shareholders over and above what we could have achieved on a standalone basis." On that day the stock closed at $52.29.
TheStreet.com's Jim Cramer says we're destroying huge amounts of capital, and investors are sick of it. 
In India, the growth of the information technology (IT) industry has been stunning. For the most part, the strategy has been to focus on internal growth. However, this may be changing; that is, expect more M&A. 
and 
. He also operates 
For financial markets, August is always a slow time as Wall Streeters head for their vacations. But this year, there was more than just seasonality. Simply put, it was a very tough month for M&A operators.
It's a scary thing for investment bankers: the "credit crunch." It has essentially depleted the industry, as dealmaking has shrunk significantly.
It looks like we have now entered the when, not if, stage of 
This week, the cofounder of the Carlyle Group, David Rubenstein, 
and 
. He also operates 
With the credit crunch and the cooling of private equity, the M&A space has been fairly meager lately. But today, we got some good news (at least for deal junkies) -- 
CNBC is reporting that 
BEA Systems
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