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April 2007

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My CAPS score/rank has been bouncing around like a pinball

April 30, 2007 – Comments (0)

...needless to say, alot of how my CAPS stock performs is dependent on the overall market sentiments, at least for the short-term. One unintended behavior of CAPS is that we have become quite obsessed with the Rank/Score in CAPS, while we purport to rate stocks, we inevitably trade them in CAPS.   [more]

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Merger Arbitrage: Genentech buys Tanox

April 23, 2007 – Comments (0)

Hi,

this is my write-up on Tanox, which is going to be bought over by Genetech.

The reason I am posting this now is that today I increased my position in

TNOX since the spread widened beyond 7%. This post is long and can be

difficult to read, if you like more of this type of investing, please drop me

a line here or send me an email at raytoei@gmail.com. Thanks !

-----------------------------------------------------
Bare Minimum  [more]

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US Tech slowdown ?

April 23, 2007 – Comments (0)

Last week,  IBM's Q1 results showed that the US hardware business was essentially flat. Today I read an article in SeekingAlpha.com that CISCO's US demand may be decelerating.  [more]

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Magic Formula Investing: +10.29% YTD

April 23, 2007 – Comments (2)

(The following is a posting i wrote to the Magic Formula Yahoo group.  The paper picks were homemade MFI picks with a twist: I chose positive net insider transaction as an additional filter. In other words, the MFI stocks had to have more Insider Buys than Insider sells.)   [more]

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The Fish that got away...

April 21, 2007 – Comments (0)

dang...  [more]

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Merger Arbitrage: Checkfree buys Corillian

April 16, 2007 – Comments (0)

(Disclosure: I do not have a position in CKFR / CORI. It is on my watchlist to buy if the price becomes attractive enough)


hi. I am using my earlier post on the questions to ask in a risk arbitrage deal as an example here to evaluate the deal between Checkfree and Corillian.

I have to first apologise to readers here if you feel that this is somewhat off-topic.


Bare Minimum
* Is this a definitive agreement or Agreement in Principle (Red Flag) ?
Definitive Agreement between Checkfree (Acquirer) and Corillian (Target).

* Is this an all Cash Transaction (preferred), Stock, Cash & Stock, Collar ?
Cash purchase of $245m or $5.15 a share.

* What does the Target Board of Directors recommend ?
Board approved the transaction and recommend it to shareholders.

* Have the shareholders voted and approved the Merger ?
Not yet, likely in May.

* When is the deal likely to be completed ?

On Feb 15 press release,
"The $245 million Corillian deal, announced in February, is expected to close June 1."

On March 30, SEC filing,
"The waiting period for the new filing will expire at 11:59 p.m. on April 30, 2007, unless earlier terminated by federal antitrust authorities, or a request for additional information by such authorities is made. In addition to the antitrust regulatory review, the proposed acquisition is subject to approval by Corillian's shareholders and the satisfaction or waiver of other customary closing conditions.
Corillian continues to anticipate the proposed acquisition will close in the second calendar quarter of 2007 shortly following the requisite approval by Corillian's shareholders, the expiration or termination of the antitrust waiting period and the satisfaction or waiver of all other closing conditions. However, the timing of the closing may be affected by formal or informal requests, if any, for additional information from the FTC or DOJ."

Guesstimate:
Now to End April -> FTC
May to June -> Share Holder meeting
June -> Completion

* Whose price rose or declined after the announcement ?
Corillian Price rose from 3.45 to 4.98.
CKFR fell from 41.62 to current of 36+

* Does it pay a dividend ?
No

* By how much is the price expected to fall if the deal falls through ?
Feb 13th Cori closed at $3.45
Currently at $4.98
Drop is about 30% (gulp)

* Are there any FTC Reviews in progress ? Does it require approvals
from foreign regulator ?
No. But there CORI & CKFR have resubmitted the merger filing to the SEC again, which may mean that they want to preempt any clarification from the regulators, also this will lengthen the deal by about a month.

To Find Out

* Is the company under investigations by the SEC ?
No. as specified in the Merger agreement

* Are there any Management Incentives to close the deal ? Does target
CEO/Officers/Board own substantial stock ?

Only 2.65% held by company insider
61.30% held by institutions
There are no beneficial owner. (ie. >5% ownership)

* Are there any unresolved Shareholder lawsuits ?
No.

* Are there any price reductions clause in the agreement ?
No.

* Who is buyer ? What previous acquisition history does it have ?

Checkfree, a maler of online bill payment technology. Also recently bought Carreker Corp., the Dallas-based provider of ACH services and financial institution consulting.

* Does the Buyer need the Acquired ? What does it need ? (customer,
patents, technology )?

"CheckFree is buying Corillian in part because it is developing technology that would have competed with software and services offered by Corillian, and opted to acquire the Portland, Ore.-based company.

Buying Corillian is "a very significant shortcut to where we'd like to go on our own," Pete Kight, CheckFree's chairman and chief executive

* Is the target operating in a regulated industry (eg. Utilities) ?
No

* Is the acquirer smaller than the targer ? (red flag) ?
No

* What is the breakup fee ?
5.5m

* Are there any potential Bidders ?

The analysts added that they do not expect any rival bids for Corillian because, aside from CheckFree, no other potential acquirers could realize the same revenue synergies needed to make the target attractive at a higher price

* How is the Acquirer paying for the acquisition ?

SEC Merger document,
"Parent has, and as of the Closing will have, sufficient immediately available funds (through existing credit arrangements or otherwise) to pay when due the aggregate Merger Consideration and to pay when due all of its fees and expenses related to the transactions contemplated by this Agreement."

Safety
* Is it cheap to own if the deal does not go through ?

Actually the acquirer Checkfree (CKFR) is cheap. M* rates it a 5-star. While S&P rates it a 3-star, there was a further downgrade recently,

"Shares of Checkfree slumped 7.3% after JMP Securities analyst David Scharf said he was fairly certain that Bank of America is planning to transition the payment warehouse portion of its online bill-pay processing to an in-house solution. Scharf said he believed BofA's business accounted for $170 million, or 20% of fiscal 2006 revenue, with bill-pay services accounting for $150 million. He downgraded the stock to market outperform from strong buy and cut his 12-month stock price target to $42 from $48."

As for CORI, this company has lumpy sales and earnings, with negative FCF for the past 2 years. Add this with the 3.7x price to sales ratio. This is clearly an expensive stock. There is no safety in buying this company. The only saving grace is that Q4 results has been encouraging. And this may cushion the fall to something higher than the $3.45 before the merger. As a product, CORI is quite well positioned, and MSFT touts CORI as its strongest e-banking customer. Also CORI has been on the block for a while. So a sale may be inevitable.

* If you are thinking of doubling down, do you have a plan B if the
deal does not go through ?
See above.


Key points:
* What are top key issues that really matters in this deal ?

* First of all, 30th April must pass without incident (from the FTC)
* Shareholders must vote in favor.

This is a straight forward deal, the most recent deal between Checkfree and Carreker Corp, listed on Nasdaq, closed on april 2nd without incident. It took about 90 days from 2nd Jan for the transaction to go through.

Valuation

* What is the current Total Returns (Spread + Dividend) ?
Spread = (5.15 buy price - 4.98 last price ) / 4.98 last price ) = 3.4%
Annualized = (365 / 90 days to close ) = 13.8%

* What is the Expected Return for the deal ?

Because of the high degree of confidence in the deal closure,
(95% high degree of confidence, 90% Typical, 85% some issues)

EV = 0.95 * 3.4% gain + (0.05 * -30% loss)
EV = 1.73%

Decision:

* To wait for better spread. Watch for the catalyst stated above. Will buy on dips.   [more]

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17 Questions to ask in a Risk Arbitrage Deal

April 13, 2007 – Comments (1)

The Bare Minimum

Is this an all Cash Transactions (preferred) ?
Has the board approved of the transaction ?
Have the shareholders voted and approved of the transaction ?
When is the deal going to close ?
Are there any FTC Review in progress ?
Is the company under investigations by the SEC ?
Whose price rose or declined after the announcement ?
Does it pay a dividend ?
What are the expected returns ?
By how much is the price expected to fall if the deal falls through ?

Nice To Find Out

Are there any Management Incentives to close the deal ?
Are there any unresolved Shareholder lawsuits ?
Are there any price reductions clause in the agreement ?
Who is buyer ? What history does it have ?
Does the Buyer need the Acquired ? What does it need

Safety First
Is it cheap to own if the deal does not go through ?
If you are thinking of double-down, do you have a plan B if the deal does not go through ?
  [more]

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Kona Grill, Inc. Debuts in Troy, Michigan

April 11, 2007 – Comments (0)

(Disclosure: I own a position in KONA, bought under $10 )   [more]

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Chapter Excerpt: Magic of the DCF

April 06, 2007 – Comments (0)

Discounted Cash Flow Analysis

Another key weapon for the creative banker is the discounted cash flow (DCF) analysis. The DCF is the granddaddy of all crocks of sh*t. It's the technique that makes Linda Lovelace look like a Catholic schoolgirl and Richard Nixon look like Abe Lincoln. In a DCF analysis, the banker projects the company's cash flow for a bunch of years into the future, then he figures out what all those future cash flows are worth today.

The DCF analysis is especially useful for valuing companies with no real business. A comp analysis, at least, requires that the company being valued have some revenues, cash flows, or earnings today in order to have any value. The DCF analysis does not. It finesses the problem by only attributing value on the basis of how the company is projected to do in the future.

The associate always take the first pass at developing the DCF model. The associate has a quick rule of thumb - reality is irrelevant. The projections should always show revenues going up and expenses going down. That makes the DCF model spit out a big fat value for the business. Big fat values make CEO's happy.

When the associate finishes taking wild stabs in the dark on the DCF model, the more senior bankers will get involved, The senior vice president will decide that the revenue growth should be 11 percent per year instead of 8 percent. The vice president will have the associate take the gross margin up a percentage point. There are standard investment banking reasons why any given margin should improve. They always involve phrases like "operating efficiencies," "synergies," and "economies of scale." Everyone on the deal team will pull a few of these phrases out of the hope chest, and tweak the model a little bit so as to put his own special mark on it. It's like animals marking their territory. At the end of the day, there's only one immutable goal. The team has to reach the valuation target that the company will be happy with.

Over and over again associates tweak the DCF models. Over and over again they have models that show the company growth at a rate that, if continued, would the company being modeled to take over the entire planet within a generation. Over and over again the investors buy securities that are overpriced based on inflated and unrealistic expectations. For some reason, nobody every learns. It's part of the magic of the DCF.


-- Lifted from page 124 of the book, "Monkey Business - Swinging through the Wall Street Jungle by John Rolfe and Peter Troob" Rolfe and Troob worked at the investment bank Donaldson, Lufkin & Jenrette (DLJ) in the mid '90s.   [more]

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OMG: Indonesia plans nuclear reactor near dormant volcano

April 05, 2007 – Comments (0)

"We're completely happy about safety," said Taswando Taryo of Batan. "It's a small volcano and couldn't affect the reactor."

http://www.taipeitimes.com/News/world/archives/2007/04/06/2003355487   [more]

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How I pick stocks

April 03, 2007 – Comments (0)

This is a yahoo bulletin board response I posted earlier today to a fellow investor on how I pick stocks. The original poster is a student of buffett, hence the references.    [more]

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Article: Vietnam: Awash in Money

April 02, 2007 – Comments (0)

This is a well researched article. Vietnam's stock market, with a P/E of 45, is alive and well. Thanks to half the population under 30, and experimenting with capitalism for the first time.   [more]

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