Merger Mania
Research for Online Investors

by John Dalt

8/20/10

Mergers and Acquisitions make investors and trader’s hearts beat a little faster.  There have been two big ones that have shook the market in the last two days.  BHP Billiton (BHP) offered $39 billion or $130 per share for Potash Corp (POT) and Intel (INTC) bought McAfee (MFE) for $7.68 billion or $48 per share.

What do the two deals mean?  Let’s look at each one.  INTC was sitting on a pile of cash.  That is one reason we liked the company for our subscribers in Galt’s Long Term Portfolio.  They had $18.3 billion in cold hard, and another $5 billion in current assets.  INTC made $2.9 billion last quarter, so they have plenty to spend.  The company pays a nice dividend and has bought back shares every quarter since 1990!

What is the negative about INTC?  In our recommendation to subscribers we said, “…the cost of staying in front of technology.  They spend a tremendous amount on research and building new facilities to manufacture their newest chips.”

Paul Otellini, CEO of INTC, is a visionary and knows how to keep his company at the cutting edge of technology.  The MFE acquisition was a surprise, but give credit to people that know their business.  There is no shortage of critics of this deal.  Mostly along the lines of “wasting money…it was burning a hole in their pocket…should have paid a bigger dividend.”

The market punished INTC for paying a 60% premium over current price, but the offer price was just above the MFE share price nine months ago.  MFE is a profitable and the security capabilities compliment INTC’s needs for the future.

Many deals like this don’t work very well, but we believe in Otellini and INTC.

BHP is the world’s largest mining company, and looked at POT as the world’s largest potash miner. Potash is an agriculture fertilizer needed to increase yields on crops world-wide. POT is located in Canada. Eight companies control 80% of the world’s supply of potash.  This gives the big players pricing power.

Potash is used around the world, with the U.S., China, Brazil and India the largest users.  China is expected to become the largest user of potash in the future as the country works to increase agriculture production to feed their population.  China has worked to secure supplies of essential raw materials around the world in the last two years.  From oil to iron ore and copper, China knows they need increasing supplies in the future to continue growing the economy.

The unsolicited BHP bid for POT was rejected by POT’s board as it “grossly undervalued” the company.  Today, BHP has decided to take the $130 per share offer directly to shareholders until Oct. 19.  POT’s board has asked shareholders not to tender their shares until the board has time to carefully review the offer.

With an unsolicited offer, POT has now been put in play.  The stock is trading at $149 per share, substantially above the $130 offer.  Traders believe higher offer will be made by BHP or others.

According to the Financial Times.  Sinochem Group, the Chinese state-owned chemicals group, said it would pay "close attention" to BHP Billiton's hostile bid for POT, and it was "interested in overseas potash investment opportunities." Spokesman Li Qiang told the Financial Times that Sinochem and Potash Corp., the world's largest fertilizer company, had a good relationship and the Chinese group was "very attentive" to what happens to it.

The story has more chapters to be written in the next few weeks.  Be careful of playing in the arbitrage area.  We think POT may sell for $150 to $160, that doesn't leave much room if you buy at $149!

We received our Blue Cross annual renewal notice today for our family’s health insurance.  Premiums are up over 10%, but thank goodness my kids can stay on our policy until they are 26 years old, and there are no dollar limits on coverage.  These are changes I can believe in.  Wait a minute…I thought Obamacare was supposed to lower health care costs?

The decision is not whether or not we will ration care, the decision is whether we will ration with our eyes open.—Donald Berwick  Medicare Director –Obama Recess Appointment

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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