September 2, 2010
Dell Says, "Thanks, but No Thanks."
HP’s $33-a-share offer values 3Par at 325 times the company’s earnings before interest, taxes, depreciation and amortization during the past year. In 21 computer-services deals in the past five years, acquirers paid a median 16 times trailing Ebitda, according to Bloomberg data.
Believe me, there's no way they are popping Champagne corks over at HP's Palo Alto headquarters.
More Advice for Young Lawyers
Yesterday, the SEC settled insider trading charges against James Self and Stephen Goldfield. Self was director of Business Development at Merck and Goldfield, Self's classmate at the Wharton School (UPenn), was a hedge fund manager. According to the complaint, Self disclosed confidential inside information about Merck's pending acquisition of MedImmune to Goldfield. Goldfield traded on that information and according to the complaint made approximately $14 million in profits.
Here's the thing. Self didn't make any money on this deal. In fact, he didn't "profit" at all. Rather, he provided the information for reasons that most facebookers will readily recognize. According to the SEC,
"Self divulged the confidential information to Goldfield in order to boost his reputation in Goldfield's eyes and to show Goldfield that he was working on important matters"
Hey, I get it. Your buddy got out of Wharton and immediately joined a hedge fund. As near as you can tell, he's making a gazillion dollars a year, has houses in three cities, and leads a glamorous life-style. You? Well, you were smart, but you decided to work for Big Pharma. You might not be rolling in cash, but you're doing important work. There's a natural inclination to let others know that you, too, are important, that you, too, are a big deal. Like I said, I get it.
But ... get over it. Before you start first day at that fancy law firm. Here's some advice - it's time to learn to be discreet. You may not brag to hedge fundies you know from law school about deals you are working on. (Who would be that stupid?) But you may do other things. I know everyone always has to have a status update on their facebook page or gchat that lets everyone what exactly they are up to. If you're not careful, these could get you into trouble. How about this possible facebook status update for example:
"On my way to a board meeting at MedImmune. Who wants to buy a cheap biotech company?!"
Definitely a career killer if you posted something like that. Now might be a good time to start weening yourself off of many of the social media sites. Less is more.
September 1, 2010
HP and its Extra $15 Billion
So while we sit and wait for Dell to decide whether it wants to bid a penny more for 3Par, I think it's interesting to note that HP announced a stock buy-back over the weekend. In this case, HP committed an additional $10 billion to its ongoing stock repurchase program. Remember that before going into the 3Par bidding war, HP had something like $15 billion in cash. Now, it's decided to give away most of that in the form of a stock repurchase.
Why companies think a stock repurchase is better than simply announcing a dividend is a tricky question. The stock repurchase does somethings that are attractive for managers. First and foremost, the repurchase allows managers to shrink the number of outstanding shares in its capitalization. Once you have shrunk the denominator, presto the stock price goes up (for a day or so). Or, it should. For managers who might have bonuses and other compensation tied to stock price, getting the stock price to rise is a good thing. On the other hand, a one time special dividend doesn't have the same kick on the stock price. So it depends on what one is trying to accomplish with the buy-back.
A share repurchase can also have a strong signalling function. That's to say, when insiders think the market is undervaluing shares, goes the theory, they authorize a share repurchase. OK, I guess. But that's not what is happening with respect to HP. What's happening here is that shareholders are unhappy with HP's decision to take its excess cash and engage in a bidding war that it will likely lose (even if it wins) with Dell. Committing $10 billion of its $15 billion to a share repurchase credibly signals to investors that HP won't be engaging in more of these kinds of game - mostly because it can't any more.
That's a good thing I suppose.