Today’s news: TiVo (TIVO) pre-announces definitive M&A activity within three months hence.
As we head into the weekend, I’d like my more experienced stock investors to contemplate something that seems quite unusual to me. I’d love your input.
I’ve been pounding the table on “takeover stocks” for half a year now. The unusual thing that I’m witnessing is that corporate management, news stories or investment leaders (e.g. Warren Buffett) are making it crystal clear that certain companies are “in play” – about to experience takeovers or spin-offs or some version of M&A activity that will typically cause the share price to shoot up to the value of the transaction.
Except the share prices don’t shoot up.
In February, I wrote about Allianz’ interest in acquiring XL Group (XL) and also wrote about the likelihood of consolidation within the property and casualty insurance industry, which I gleaned from a research report. XL rose 12% on the rumor, and then stopped rising. Less than a month later, Axa (AXAHY) announced that it would be purchasing XL Group, and the share price rose another 30%, from 43 to 56. Investors had lots of warning that XL was in play, but they didn’t drive the share price up to any significant degree until the deal was finalized!
In late December, KLX Inc. (KLXI) announced that in response to inquiries from interested parties, they “initiated a formal process to explore strategic alternatives for the Company focused on maximizing shareholder value.” They essentially announced in advance that they had commenced M&A processes that would lead to part or all of the company being sold for a dollar value that would be inevitably higher than the current share price. Yet the stock only rose about 10% on that news, and proceeded to lose those gains by February, giving investors one more chance to buy at 64 before the rumor mill finally drove the share price up to 80 in late April.
Eventually, the Boeing (BA) purchase of the KLX Aerospace Solutions Group was announced, and the share price fell because the market had no sense of the remaining value of the Energy Services Group! That’s twice in four months that investors were handed a gift on a silver platter with KLXI, and chose instead to walk away!
And there’s more!
In early 2018, Johnson Controls (JCI) announced that they are seeking strategic alternatives for their power solutions unit (the growth-oriented battery segment). Then in the recent quarterly earnings release, the company announced that they’re in the middle of the review process for that M&A activity. Yet the share price has seemingly done nothing at all in relation to the two announcements, and is instead ebbing and flowing with the broader stock market correction.
A few months ago, Berkshire Hathaway’s (BRK/A) CEO Warren Buffett, who currently owns 8.1% of Southwest Airline’s (LUV) outstanding shares, made it very clear that he would like to purchase an airline. Not like, “in a perfect world, if I had the money, it would be fun to own an airline”, but more like, “We’ve got a ton of money sitting idle at Berkshire Hathaway and I’m seeking a good company to buy. I’d like to own an airline.” (My words, not Buffett’s.) And the resulting share price activity? Down!
Then there was USG Corp. (USG), which is featured in my 10 Best Stocks to Buy and Hold for 2018 special report. When a German company, Knauf, offered to buy USG for 42 per share this year, USG said, “No!”. The stock quickly rose to 40, not to 42, then wavered for several weeks, even though Berkshire Hathaway owns 31% of USG’s shares and Buffett approved of the sale, and even though investors should have known that Knauf would return with a higher bid for USG. Unbelievably, despite USG finally relenting and agreeing to talk to Knauf about a potential buyout, the stock is still trading below 42!
Does anybody else see the absurdity in these situations?!
And now there’s TiVo (TIVO). The company announced in December that they’ve received buyout bids. The company believes that its share price is inappropriately low, leading a TiVo representative to publicly discuss their interest in being acquired or going private. According to the linked article, “Multiple buyers have expressed interest in acquiring TiVo.” Yet the share price has barely reacted to this news that emerged in late February of this year. What’s more, in yesterday’s earnings press release, the company reiterated the news that they are exploring strategic alternatives (that’s code for “we’re going to allow our company to be bought out” ), and that they will have definitive news by the time the next earnings release is due. Yet the stock tanked this morning!
So I bought some October TIVO call options today.
Seriously, these situations are ridiculous. I don’t know what’s happened to people’s abilities to think things through. Maybe they’re just too impatient? Or maybe they’ve lost their minds.
I’m reminded of a video clip that I saw recently, where Mark Dice offers random people the choice of receiving a ten-ounce bar of silver valued at $150, or a Hershey candy bar, and every one of the people chose the candy bar. As the old man said in the movie Indiana Jones and the Last Crusade, “He chose … poorly.”
I’m studying, as best as I can, what’s happened to the investment community, trying to figure out why they listen to factual statements that clearly forewarn lucrative M&A activity, and yet they ignore the investment opportunities that are staring them in the face. Maybe I’ll have answers in the future, and maybe some of my subscribers will have insightful input.
Right now, I’m switching gears and driving north, because my eldest daughter is graduating from college this weekend.
Thank you for your time today. And psst … buy TIVO. Strong Buy.