Fadi El-Eter

Mergers and acquisitions is probably one of the hottest topics these days. After the Intel – McAfee deal, and the 3 PAR circus (see Par-lay?), investors are trying to dissect companies to see which ones are eligible for an acquisition (The stock can easily go up a 50% in case of an acquisition). Let’s first understand why there is this gold rush for M&A and why people and then examine the criteria that investors use to see if a company is a potential takeover.

The latest M&A gold rush started this month, when Intel bought McAfee, paying over 60% premium the stock price. Investors were skeptical at the deal, as the two companies do not really complement each other. Next came the 3 PAR fight, between DELL and HP, both companies trying to aggressively purchase a storage company to complement their servers business. PAR has so far tripled in value. Friday, there was a rumor that Lincoln National Corporation will be bought by Manulife and the stock soared 10% during the day, and another 3% in the after hours. In my opinion, the main reason for the current M&A gold rush is that a lot of companies are currently way undervalued.

Now how do investors analyze companies that may be taken over by larger companies? Personally I look at the following criteria:

– Is the company in a sector that has experienced an M&A recently? (For example, technology)
– Is the company’s main business similar to the business of another company that was taken over? (For example, QTM is similar to PAR, SYMC is similar to MFE.
– Is the company undervalued?
– Is the company making money? (Although I have to say that this point may be irrelevant, PAR has consistently lost money).
– Is the company business model working?
– Are the company’s products in demand?
– Is the company’s stock price below 2 x its book value? If the stock price is below 1 x the book value and the company is making money then it’s a very strong buy, as the potential for M&A is great.
– Are the company’s products bought by a much larger company? This can be a practical starting point to see which companies are potential buys. You examine the suppliers of a large company, say HP, and you see which ones match the previous criteria, with a market capitalization that is no more than 10% of the acquiring company (Although in the case of the LNC rumor, that percentage is much higher).

A few companies that I can think of that may be targeted for an M&A are:

– MLNX (strong buy below $14.80)
– NVDA (strong buy around $9.20)
– QTM (strong buy below $1.30)

I went yesterday for quick bite, and there’s nothing quicker then McDonald’s, which is conveniently located a few blocks North East from where I work. I ordered a “combo”, and one of their wraps. I started eating, it wasn’t really a feast, but I jut wanted to fill myself.

I then started thinking about McDonald’s as a business, in good times, people will have more money, and they eat there instead of preparing their lunch at home. In bad times (like in these days), people who are used to go to fancier restaurant start going to McDonald’s to save a considerable amount of money per month.

If you look at MCD chart for the last 5 years (courtesy of Yahoo finance), you will notice that the stock was unaffected by the crisis in 2008-2009.

How many stocks do you know of went down only 10% in March of 2009, and fully recovered in a couple of months? And the 10% drop had nothing to do with the fundamentals of Mc Donald’s, it was just investors panicking!

MCD is bullish short term, and very bullish medium and long term, with an RSI of 65. Why shouldn’t it be, the company is multinational, it has operations nearly in every country, and in a lot of countries business went actually up during the crisis of 2008-2009. The fundamentals are great, and the customer expectations are low (they just want a quick meal).

The only thing that can bring MCD down is a big scandal, but until that happens, the stock will continue to go up. This stock is ideal in both good times and bad times. It doesn’t fluctuate a lot, and it always goes up.

A rumor circulated this afternoon this morning that Manulife offered to buy Lincoln National Corporation (LNC) for $32 a share. The stock jumped from a bottom of $21.26 at 10:10 to $23.38 at 14:50 (the stock will probably go UP another buck from in the remaining hour or so). What’s interesting is that MFC also went up on the news, a stock that I bought at C$14.40 a couple of weeks ago. Usually when there is an acquisition rumor the stock of the company to be acquired goes up, and the stock of acquiring company goes down. But since MFC was going down for a couple of weeks now, it seems that the market liked that Manulife is still a strong company that is looking ahead, expanding its business, and is able to purchase other companies if it wants. Expect MFC to outperform the market next week, as the stock is now back over $12, which is a bullish sign.

Lincoln National is an insurance company, with a current market capitalization of $7.41 billion. Manulife’s market capitalization in US is $20 billion.

In all fairness, I personally don’t think that Manulife can afford Lincoln National; at $32 a share this means that Lincoln National is valued at around $10 billion, 50% of Manulife’s market capitalization.

Of course, the market is acting based on a rumor that may or may not be true. We’ll see next week.

Yesterday I have recommended RY and I gave my own reasons why this stock will bounce back, after comparing it to BMO (just 2 bad days after the earning report, and then the stock will move up aggressively).

The stock reached another historical low yesterday, but it bounced back today (as predicted) and is now trading at $47.35, in case you think if it’s not too late to buy the stock, then I can assure you that it’s not. The stock will most probably go up next week as well, and it will break the $49 level for sure. Yes I know that RBC was downgraded, but again, this is the strongest bank in Canada, and the economy is not super anyway.

Canadian economy is one of the strongest and soundest among all G8 economies, and is supported by several commodities, including oil (which has nowhere to go but up).

The stock went up 11 cents while I was writing this post, which took me a few minutes.

Are you still hesitating? Just buy it now and sell it Monday morning (stocks usually edge up on Monday if there are no news).

It’s only a matter of time before either HP or Dell will say parlay when it comes to the fight over PAR. HP has just outbid DELL at $27 per share. I don’t believe it’s in any party’s interest to continue this stupid fight, shareholders of both companies are suffering from this fight over a company with an EPS of -5 cents, that was worth less than $600 million just over a week ago, and now its market capitalization is over $1.7 billion. 3 PAR personnel must be exalted, why shouldn’t they be, apparently having a mediocre hardware or software company these days means that you can get bought, pretty fast.

So when will this fight stop? And who will be the first to say parlay?

The fight will stop when the stock reaches an unacceptable level that makes it unattractive for both companies, but what is this level? Storage systems are extremely important when it comes to servers, and they constitute about 10-20% of the server cost. Now let’s analyze the lowest denominator of the two companies, DELL. DELL’s server and storage business (excluding services) constitutes about half of DELL’s business. DELL’s market capitalization is $23 Billion. So this means that DELL can bid up to $23 x 1/2 x 0.2 = $2.3 Billion, which is 10% of its total market capitalization. This is the real value of this business from DELL’s perspective.

HP, on the other hand, is a totally different story. HP’s market capitalization is almost $90 billion, and even if the size of the server and storage business is 1/2 that of DELL, HP can easily pay $4 billion for this company (which won’t happen, of course).

The $2.3 Billion is the absolute maximum that DELL will pay for PAR, but that’s not HP’s maximum.

If both are willing to fight to the end, then PAR will be worth $2.3 Billion / 62.58 Million shares = $36. Again, this is the absolute maximum.

I am almost sure that HP will be the one who will buy this company, and currently DELL is solely bidding to increase the cost of a worthless company just to hurt HP. Both HP and DELL know that DELL can never win this bid.

Expect HP to outbid DELL everytime DELL outbids HP (but don’t expect this to always happen when it’s the other way around). If DELL outbids HP again, it would be wise to buy the stock, as it’s almost a certainty that HP will up the bid.

Also expect HPQ and DELL to suffer greatly during this bid.

I have already expressed my worries about RIMM earlier this month, but at this point where the stock is trading at $46.50 (a 17 months low), I feel that the market is starting to overly punish Research In Motion for their arrogance. The stock is now trading at 10 times their EPS. To put things into perspective, AAPL is now trading at 20 times its EPS, and both companies, in my opinion, have a questionable vision: one thinks that toys are going to replace laptops, the other acts passively when it comes to accommodating government requests in emerging and hot economies (such as some Middle Eastern countries, as well as India).

I would wait for the end of day tomorrow to buy a few hundred RIMMs. The rebound on Monday is almost guaranteed, at least for $2 a share, a nice profit.

I think RIM is learning some good lessons here, don’t underestimate emerging economies, don’t underestimate Apple, think forward, and be humble (the arrogant Steve Jobs attitude is not for everyone, can you hear me Mike Lazaridis?)

I was having a lunch today in a nice, cozy place. The food was not great, but it was “adequate”. I then proceeded to pay, the bill was for $12.95, I gave them my Visa card, but the guy told me, with a heavy accent, that “they don’t accept credit cards”. I didn’t understand what he said, and then he repeated himself, very politely, that they don’t accept Visa, only cash or debit. The owner of the place then came, and he thought that I didn’t have either, and he was willing to process my Visa payment apparently, but I just gave him my debit card, and he processed the payment.

I then told him that I had dinner here a few months ago and I remember clearly that I paid with my Visa, what happened? The owner told me that credit card companies upped the merchant rates a few months ago (even before the new rules came into effect), and now it’s costing him an extra $2,000 – $3,000/month for nothing, so he only processes credit card payment in exceptional situations (when the person doesn’t have cash or debit). Apparently credit card companies are trying to compensate for their potential lost revenue from charging poor clients exorbitant interests by making the merchant pay for the newly imposed regulations just to keep their stocks afloat. This is the second place that I go to in a week where the owner stopped accepting credit cards.

Let us examine why credit cards are popular:

– First and foremost, they are almost accepted everywhere.
– They are a very convenient way of paying online and offline, and you don’t have to carry cash anymore.
– They offer the person full protection against unauthorized transactions (they usually refund the money immediately), and you’re allowed to charge back for unwanted services.

Now imagine that 50% of the places you go to will not accept Visa, would you care about using Visa anymore (or MasterCard, or any other card for that matter).

Punishing merchants to boost revenue may work on the short term, and may even work for medium term, but is a bad strategy for long term.

V and MA closed at $69.91 and $203.17, respectively.

Royal Bank of Canada missed the estimates for the third quarter and revenue fell to 18% to US $1.21 billion from a year earlier. But there is nothing to be worried about, both BMO, and CIBC missed the estimates as well, and they’re all blaming it on the decline in trading activity (Canadian banks charge anything between $7 to $40 for a trade).

Take a look at the BMO stock that missed the estimates on Tuesday, the stock went down almost $5 dollars and started its ascent yesterday at 10:18 from a bottom of $51.14 on very high volume (2.5 X average). The stock is already trading 1% higher in the pre-market.

RY is a huge buy at $45, if the stock goes down to that level, $46 even $47 is not bad at all as an entry to the stock. The 52 week low of RY is $46.53, reached yesterday.

RBC is by far the largest bank in Canada, probably the only economy in the G8 that was only slightly affected by the recession of 2008 – 2009. Buy a few hundred shares, and your investment will definitely go up by a few hundred dollars by end of day tomorrow or Friday. RY is currently trading at $46.35 in the pre-market, what are you waiting for?

2 years ago it was the netbook, which was supposedly going to make the laptop obsolete. Technology experts predicted that maybe netbooks will replace laptops in just a few years, as most people will enjoy the portability and the flexibility of a netbook. Some conservative views suggested that the netbook will be a second PC (now why would anyone need a second PC), or it will bridge the gap between the phone and a laptop (who created that gap anyway?).

I bought a netbook over 2 years ago, and right now it’s sitting somewhere gathering dust. Here’s my problem with it: The screen is very small (it hurts my eyes), it’s slow, the keyboard is minuscule (it’s painful to use it for typing), and most importantly, I never ever needed it. Why would I need this useless machine when I have my laptop.

Now let’s talk about the tablets. In fact, my friend was just showing me his ipad today, it’s sleek, it’s beautiful, but, as I mentioned before, it’s a toy (this thing can’t even run two applications at once, this reminds me of the birth of the Operating Systems). Apple did a great job designing the exterior and the interface of the ipad, but did a very poor job when it comes to its Operating System.

Now some people (that may or may not benefit from the realization of this dream) believe that $1,000 tablets will make laptops obsolete. There are two mistakes in this statement, first, is that it’ll take a much lower price to make laptops obsolete (good laptops can be bought for less than $500), second, laptops are light years ahead in terms of technology. Unless tablets evolve into something more than a toy, then don’t dream of it. I don’t hate tablets, but I just don’t see it happening. Just to prove my point that this is a toy, I asked my friend what does he usually do with his tablet, so he demonstrated several applications, including, but not limited to: Talking Tom, an application to locate Tim Hortons, and last but not least, the Fart Piano. He tried to be cool by pretending that he’s using also this thing for his email, but that’s about it. In short, you’re paying over $600 for a toy that can read your email.

There is huge potential for the ipad (especially when it comes to using ipad as an exclusive source for reading newspapers), but Apple has grown so big, so fast, and it’s raising a lot of eyebrows.

Ipad is very expensive, currently unnecessary, and it will never ever replace laptops, although telecom providers, such as AT&T, want this to happen, and will certainly push for that direction. After all, 3 ipad models have 3G data service that will make extra money for them. Of course, telecom companies have other means to empty their subscribers’ pockets, but one more is always welcome!

Apple pretends that the ipad stock always runs out and there’s a huge demand, which is not the case at all… Apple issued an aggressive guidance with high expectations on the ipad, that may or may not be met. And even if these expectations are met, it is nearly impossible to sustain them (and competition is coming to the ipad).

AAPL is now trading at $242.89. I think the stock is currently a good deal, but I just don’t believe that Apple will be able to sustain the growth, with these overpriced (and useless) ipads. The again, Apple has a lot of tricks under its sleeves, and the newest one is this (Hello, Netflix competitor).

The market has closed up today (OK, slightly up, but better than 100 points down). The DOW closed at 10060 (20 points up), and the S&P closed up by 3.5 points at 1055.

Now the market was down the whole day, but something happened at 2:30 PM (by the way, 2:30 PM is really a magical time in the stock market, remember this when you look at any chart of a heavily traded stock) where the market started changing direction, and going into the green. Even BAC, which was going down for just over a couple of weeks now, got out of the red, and went up 2 cents, not too much, but very symbolic.

Some people claimed that the market went up because all of a sudden, some investors realized that the drop was overdone, and that they suddenly saw a lot of bargains in the market and started buying. But why now?

In all fairness, I find this extremely odd, especially with the job numbers coming tomorrow at 8:30 AM, even before the market opens, which means that whoever bought today by the end of the day will be at the mercy of the job report tomorrow. The high volume after 2:30 PM suggests that major stock brokerage firms actually bought stocks, and started trusting the market, less than 24 hours before the release of a job report that may be very well horrible. These brokerage firms are not stupid and are there to make money, which leads to think:

1. Major investors know something about the job report tomorrow, and they know that it’s not as awful as many think. OR
2. There is a consensus among major investors that the DOW should go up regardless of the job report. OR
3. Major investors have read and believed this article, but not this one. OR
4. Maybe someone just said the magic word.

All the stocks, especially financials, were already corrected back in 2009 (C is trading at less than 20% its 2008 average), this is a known fact. I do find it weird that suddenly the market feels “Hey, these stocks are real bargains! I’m gonna buy me some”.

Anyway, I believe that whatever the job numbers are tomorrow, the market is going up. Hope is a good word!

Let’s see!