Hewlett Packard (HPQ) agreed to buy troubled smartphone maker Palm for $1.2 billion in cash. The HP deal couldn’t have come at a better time for Palm. Palms was burning through cash at an alarming rate. HP will pay $5.70 per share for Palm’s shares. It looks like a good deal for HP which was able to buy Palm at a modest price. HP will be entering a new market where the computer retailer will be trying to wrestle market share away from Apple, Google, and Research in Motion. Shares of Palm are currently trading at $5.91 which is above the deal price.
Warren Buffett & His 300% Investment Return
December 19, 2008 By 4 Comments
Warren Buffett appears to have failed in his attempt to buy Constellation Energy Group (CEG) for 4.7 billion dollars. MidAmerican Energy, Buffett’s company, agreed to purchase CEG for $26.50 a share in September. Constellation Energy terminated this agreement yesterday and accepted an offer from Electricite De Franc(EDF) for 4.9 billion dollars. EDF will purchase 50% of Constellation Energy’s nuclear power holdings and allow CEG to remain an independent company.
I took particular interest in this transaction because I owned stock in Constellation Energy and they are my hometown utility company. You would think that Buffett would be upset about being outbid for Constellation Energy. Think again. Buffett will walk away from his attempted acquisition of Constellation Energy with a 300% return on his investment.
Buffett will receive 418 million dollars in cash, 175 million in termination fees, 460 million in CEG stock and he gets his 1 billion dollar investment back. He will also earn an additional 140 million in interest over the next year while awaiting repayment of his investment. Buffett stands to make over 1 billion dollars on his original investment in less than four months. That is a return of 300 percent on an annual basis.
The brilliance of Warren Buffett is his ability to win in just about every investment that he makes. He buys distressed companies that are selling well below their true value. Buffett has a unique ability to see opportunity where others see calamity. This explains Buffett’s investment of 5 billion dollars in preferred stock and 5 billion dollar in warrants exercisable at $115 in Goldman Sachs. And Buffett’s 3 billion dollar preferred stock investment in General Electric with 3 billion in warrants exercisable at $22.25. Buffett invested in GE and Goldman at a time when they were in desperate need of capital.
Buffett was derided in October for his declaration that he was investing in US companies when others were pulling out. He has been putting money to work while others have fled for the safety of U.S. Treasuries. Time will tell if Buffett’s thesis is correct. Warren Buffett’s recent investment purchases may look risky right now but as history shows you shouldn’t bet against him.
What if Citi Had Gotten Wachovia
November 25, 2008 By 2 Comments
I was thinking recently about the failed Citigroup Wachovia deal. As a Wells Fargo stockholder, I was in favor of the Wachovia deal because of the large deposit base that Wells is picking up. The merger will give Wells Fargo a major presence on the East Coast and should increase earnings in the future. But I can’t help thinking, what would have happened if Citigroup had gotten Wachovia?
Citigroup’s merger with Wachovia would have given Citi a deposit base of 600 billion dollars. Citigroup would have only had to assume the first 42 billion dollars in losses with the government backstopping any additional losses. But I still am not sure if this would have been enough for Citi to stand alone without additional capital injections. Citigroup still has over 1 trillion dollars in off balance sheet assets that have not yet been written down. I think that the government would have had to pay substantially more to backstop the losses of a Cit Wachovia deal.
Wells probably has the strongest balance sheet of all of the major banks. Their balance sheet should be strong enough to absorb additional losses from Wachovia’s Golden West mortgage portfolio. I am not sure that Citigroup could have handled any losses related to Wachovia’s shaky mortgage portfolio. I think that this is only the beginning of Citi going to the government for fresh capital. This will only further dilute shareholders. I can only wonder if a merger with Wachovia would have kept Citi from its freefall or accelerated the process.
Forget Yahoo….Buy Time Warner
November 21, 2008 By 2 Comments
In February, Microsoft offered to purchase Yahoo for $31 a share in a deal valued at 44.6 billion dollars. Yahoo declined the deal and has seen its stock pay the price for refusing the deal. I think Microsoft should make a play for Time Warner. Time Warner’s stock is currently trading at $7.28 per share and has a market cap of 26 billion dollars. Microsoft has discussed purchasing Time Warner subsidiary AOL in the past. AOL is the 4th largest player in the online search engine market. I think Microsoft should not only purchase AOL, but all of Time Warner.
Microsoft could offer $10.00 per share for Time Warner which is a 3 dollar premium over the current price. I don’t think that Time Warner shareholders would allow management to turn this deal down. Microsoft would pay roughly 37 billion dollars to acquire the media conglomerate. In purchasing Time Warner, Microsoft would gain valuable media assets such as Warner Brothers, HBO and Turner Broadcasting to name a few. The only negative is that Time Warner does have a significant amount of debt on its balance sheet. I think that Microsoft is a strong enough company to absorb Time Warner’s debt. Microsoft is in an enviable position with over 24 billion in cash and very little debt.
Microsoft could then use the AOL unit to become a larger player in the online search market. This would further weaken Yahoo’s position in the search market allowing Microsoft to purchase them at an even lower price. Microsoft could spin off the entertainment units of Time Warner or wait until financial conditions improve and sell them to other media organizations such as CBS, Fox or Disney at a higher price. I think either way its a great deal for Microsoft.
