Corporate Take-Unders

Take-Unders

When I first started investing I would hear what at first sounds strange. An investor would be mad at the fact that he/she held stock in a company that was getting taken over. You own a company and suddenly it gets taken over at a substantial premium. What’s not to like?

The reason is sometimes a company is taken-under (as opposed to a take-over). This is a somewhat rare occurrence but has actually happened to me 4 times in the past year or so. This happens when a company is bought for a slight premium or less than the current market price. A prime factor for this happening is that the acquisition is heavily forecasted ahead of time. A current possible example is the case of Time Inc.

Another way to look at the take-under problem is when a company is being purchased at a fairly steep discount to a reasonable valuation. This may be the case with Forestar Group (a company I presently own and a great portion of the reasoning behind this article). Forestar Group owns 45% of a joint venture that owns water rights on 1.4m acres of land in Texas. This was valuable to frackers to the tune of $300/acre at one point in time. T-Boone Pickens sold some rights in Texas for about $488/acre. But it is now being thrown away in a sale to Starwood Capital where they are purchasing the stock of Forestar Group largely on the basis of the value of the land development division. The company also has approximately $250m in the bank and very little debt as well as several multi-family properties that could be worth 10s or 100s of millions of dollars.

An interesting fact about Forestar is that management recently enacted a rights preservation plan with the stated purpose of preventing NOLs from losing value (NOLs could potentially be taken away if ownership changes drastically). In hindsight this looks more like a tactic to prevent a white-knight from showing up for this acquisition. The rights preservation plan was strangely timed in the sense that it could have been implemented several years ago.

Appraisal Rights

A strategy for dealing with companies you own being low-balled is to exercise your appraisal rights. The company is appraised by a judicial proceeding or independent appraiser with the value then being conferred to the investor.

I have basically only heard about this process theoretically and have not done this myself but may in the future.

Further Phil Fisher

 

A recent interview link featuring the notoriously reclusive Phil Fisher was posted today by Ian Cassel, a fairly notorious investor in his own right. The link is to an October 1987 Forbes article where Phil Fisher made one of his only public appearances which I will also link below.

It discusses Phil Fisher’s strategy in some detail. One interesting aspect is that he would have a very few core positions, ones that he would load up on, and he would also have positions in companies that he is thinking about making core positions. He invested 65-68% in just four stocks of which he unmasks only two–Raychem and Motorola. He also stated he had about 20-25% cash and the balance was held in the potential investment category. This is a high level of concentration by most people’s standards but is in line with Charlie Munger, Warren Buffett and Joel Greenblatt to name a few.

Cash and investment ideas

The amount of cash in a portfolio is usually inversely related to the amount of investment ideas one has. Fisher had a large portion of his portfolio in cash mainly because of not being able to find good investments but also because of well founded macroeconomic concerns (did I mention that this article was dated October 19th, 1987???).

“I haven’t the faintest idea whether we are in 1927 or 1929. Some awfully bright, able, sound people were scared as hell in 1927. But the thing rolled on for two more years, and that may happen here. I don’t know.”

Date her before you marry her

Another interesting aspect is the tracker positions in several companies that he is thinking about making core positions. This is another somewhat unheard of investment approach. He wants to own and track these positions for a while before piling in.

Moat? What Moat?

When discussing one of his major investments, Motorola, to which he made several times his initial investment, he clarified the stock’s merits. All of his core investments were companies that were low-cost producers. They were also all number 1 in their fields. He later made the specific remark that Motorola’s chairman was an honest man who had significant farsightedness.

Bargain Hunter/Contrarian?

Fisher, interestingly, states he is waiting for some positions to pull back or for some issues to be less favored by the market. This is somewhat of a departure from what most people think of his investment style where he will by at any given price. It is fairly obvious that he is somewhat more price conscious than his book lets on.

An interest quote relating to being contrarian is as follows:

“Part of real success is not being a 100% contrarian. When people saw that the automobile was going to obsolete the old streetcar system in the cities, some decided that since nobody would want streetcar stocks, they’d buy them. That is ridiculous. But being able to tell the fallacy in an accepted way of doing things, that’s one of the elements in the investment business of big success.”

Graham vs. Fisher II

Fisher addresses the differences in the Graham and Fisher. Fisher states that Grahams approach was to find things so cheap that it would be extremely difficult to lose money. Fisher states that his approach is better because one can make substantially more money per dollar invested in his approach. He also hits at the idea of Graham’s style being so formulaic that the returns will likely be competed away.

Safety Advantages of Growth Stocks

During historical times of distress in a nation’s history such as war, hyperinflation or depression some of the best run companies still made decent head ways. Fisher states that many of the great companies of France and Germany during early to mid parts of the last century lost significantly less value than lesser competitors. During the great recession some of the major companies of today’s market continued to perform well (not in stock price but in a fundamental sense) and bounced back appreciable faster than the typical issue.

 

 

 

Link to Article Below:

What we can learn from Phil Fisher