Lehman Sells a Limb; AIG Sells Out

Lehman sold part of itself this evening to Barclay's for $1.75 billion.

"Barclays' purchase includes Lehman's North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two New Jersey data centers." Source

Lehman still has other assets, including international units and its famed asset-management firm.

"Barclays said it intends to immediately begin discussions with international authorities to acquire similar operations of Lehman outside of North America. Barclays also has agreed to provide $500 million of debtor-in-possession financing to Lehman.

Meanwhile, Lehman said it's in advanced talks to sell its investment management division, which includes money manager Neuberger Berman, to a third party.

The division was once valued by as much as $10 billion, but now could fetch much less considering Lehman's bankruptcy, the Associated Press reported. Source

Lehman has about 700 million outstanding shares, so the assets sold today represent about $2.5 per share. (I'm not stating that the shares will trade at that level tomorrow - that's just the asset prices divided by shares.)

Considering Lehman still has other valuable assets to sell off, it seems like shares should continue upward from the $.30 closing price today. Barclay's bought Lehman's North American business for just $250 million - roughly the closing price - implying that a lot of the troubled assets were packaged in that deal. The relatively clean parts - buildings, investment management firms - should fetch nice premiums.

I also added to my original AIG position, but that may not turn out so well. AIG agreed to accept $85 billion in government financing in exchange for warrants representing 79.9% of shares. The $85b isn't payment for the shares - rather, it's a loan, which accrues interest at Libor + 850 basis points (currently totaling over 11%).

So the good news is, AIG will definitely survive, and they have plenty of assets to sell to repay the loans. The bad news is that current shareholders - myself included - will be substantially diluted.

However, the credit rating agencies should upgrade AIG's ratings tomorrow morning after this capital infusion, and AIG will have time to sell assets in a orderly fashion. I don't expect a FRE/FNM-like 90% haircut to $.30 tomorrow morning, but the reaction will probably be negative. However, the government did imply that their goal was to maximize shareholder value, in contrast to the explicitly statement that common holders came last with the FRE/FNM situation.

Considering AIG's after-hours closing price under $3 represents a 95% decline from the top, the dilution may be pared with the survival of the company.


All I can do at this point is dream for good opening prices tomorrow. Both of these purchases represent timing and speculation more than Buffett-like investing. I couldn't keep my hand out of the cookie jar. Tomorrow, and continuing onward, we'll see if I enjoy sweet rewards or endure stomachaches.

Grand Theft... Vista?

My previous post addressed the possibility of another company bidding for Take Two (TTWO), a video game maker that currently has been offered to be bought out by Electronic Arts (ERTS).

Take Two's chairman said (in a press release) that multiple other parties were performing due diligence and TTWO was in early discussions with these potential suitors.

In my previous article, I threw out Viacom, as many pundits often cite them as wishing to become a player in the growing video game industry. However, I think that there's a more likely bidder.


I think that Microsoft is a likely bidder for TTWO. Microsoft already makes a video game platform (Xbox and Xbox 360) and also independently publishes video games. Years ago, they made a video game acquisition when they bought tiny Bungie studios, the company that developed the Halo series. Microsoft had already published the Halo games, but they decided to bring the production in-house to reap the benefits of vertical integration. I can't tell you how many dollars Microsoft has made, but Halo has now produced three best-selling games, and its exclusivity on the Xbox (it's also available on the PC, but no other console) has driven console sales too.

Besides Halo, Grand Theft Auto, TTWO's signature game, is the other dynasty of the video game universe. GTA IV, the most recent addition, released earlier this year, broke sales records that were set by Halo 3 last year.

Halo 3 generated sales of $170 million dollars during its first week last fall. (As previously discussed, virtually every component of creation, production, and distribution is internal, so much of this amount must fall straight to MSFT's bottom line). Compare that to a major blockbuster movie's debut weekend (the numbers are very similar), and the growing value of video games becomes clear.

However, that total, while impressive, is dwarfed by GTA IV's first week, as the game reported $500 million in sales.

For the mere cost of $2.5 billion (25% over ERTS's bid, or about $32/share), MSFT could absorb that massive revenue- and profit-generating game along with the rest of TTWO's portfolio. TTWO does make other games; BioShock was a surprise success this year, and its sports franchises, covering basketball, baseball, hockey, and tennis, are ranked highly and sell well.

Microsoft could become a serious player in the video game industry if they made a console and sold the two best selling games on the planet. Making GTA exclusive to the Xbox (like Halo is) would be a terrible decision, but providing some incentive, like an earlier release date, could drive additional Xbox sales too.

Such a takeover would be so insignificant to MSFT as a whole; unlike an overpriced Yahoo takeover, buying TTWO at $2.5b would only use up about 10% of their cash, in a transaction that's only as big as 1% of their market cap. However, their growing video game department would certainly flourish, growing to a point where it could be spun off if MSFT deemed that most profitable.

Microsoft has the cash, the takeover desire, and the rationale for making such a purchase. The Grand Theft Auto franchise alone is worth more than this current takeover price (which is why many people think that ERTS submitted the bid before the game came out, so that they could cap the share price), and TTWO has many other promising games and franchises that MSFT could continue to build and polish.

I'm long ERTS and now own TTWO calls, so admittedly, I have an interest in a higher bid (especially from someone other than ERTS). But it is in no way ridiculous to conclude that TTWO could, and should, be bought for a price much higher than it's current share price (high $24) and offer price (~$25.75).

JPMorgan Plunders Bear Stearns

I was absolutely shocked to see the headline; Bear Stearns bought out at $2 per share.

Prior to the news release, the low estimate of merger-price speculation was at $15/share, a discount of 50% from Friday's closing price. Many analysts expected Bear to fetch more than the $30 closing price from a potential suitor.

I do not understand how Bear's board members sold themselves out for $2/share, or $236 million. The value of their headquarters was estimated to be $12/share by Barron's - why would the board sell out to an offer so far below the value of Bear's tangible assets?

I guess there may be some ghosts on the balance sheet, but I am honestly dumbfounded by the $2 price. I wish I could say I did not own BSC (or was short), but unfortunately, I bought a few share on Friday as I thought that the buyout would be for more than peanuts.

Hopefully another bidder comes along, as it appears as though Bear is a steal at this level. Also, the deal is subject to shareholder approval; considering that employees own an estimated 1/3 of the company, I don't see all of those people losing much of their nest eggs without a fight.

In other news, the Fed also cut the discount window.

As the shockwaves from both events hit investors, futures plummeted. All major indexes are now looking to fall at least 1% tomorrow.

Who wins? It's hard to say. It looks as though shareholders of any US stock will lose tomorrow, and certainly, the evaporation of billions of dollars of BSC will not help millions of investors' portfolios.

As my title suggests, it looks like JPMorgan has stolen itself a building, a clearing house, and many other businesses for far less than the market was valuing them at. Though I'll only get one share of JPMorgan from my BSC, I may look to add more as this may provide very lucrative once cooler heads prevail.


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Syntax-Brillian - Finally Something Happening?

Thankfully, I've been out of Syntax-Brillian (BRLC), a maker of LCD TVs, for quite a while now. For the past few months, the share price has continued to slowly decline.



However, things may be looking up for the little company.

I was always baffled with why investors hated BRLC so much; they are a growing, profitable company. However, some sketchy details concerning the company's business practices, suppliers, and inventory scared many people away.

Also, BRLC was being beaten at it's own game by Vizio, another maker of LCD TVs (and a private company).

A few days ago, an article was published in a local newspaper in Arizona detailing buzz about a possible merger between the two companies. Check out the article here.

The stock did not pop on this news; it may have been weighed down by news about the CompUSA sale. Plus, this rumor IS just buzz from one local newspaper - I am in no way certain that it will happen.

But I'm deciding to roll the dice. If any takeover, buyout, or merger is in the works, investors may be in for a multi-bagger. If not, I honestly do not know how much lower this thing can go; it continues to shed a few percent each day without any significant negative news. BRLC has enormous short interest; if any positive news surfaces (merger-related or otherwise), a big pop is possible. There has also been significant insider buying recently, possibly indicating increasingly positive sentiment or something bigger in the works.

But who knows - BRLC may continue to lose a dime a day until it's on the pink sheets. However, I still see a fundimentally-solid company, with a slim possibility of some explosive news soon.

Heelys Revisited - Analysis

I published an analysis of Heelys (HLYS) as my blog was in its infancy... about one month ago now.

Over the past month, Heelys' shares did little of anyting - they teetered around in the low $8's, trading up or down a dime every day.

However, on Friday, Heely's shares jumped after they released their Spring 2008 lineup of shoes.

The stock was up 16%, a huge jump compared to the basically-flat performance over the past two months. I don't expect the stock to hold all of it's gains from Friday simply because it was such a dramatic pop on non-major news.

However, I still find Heely's as attractive as I did a month ago. Heres are some data (provided by Yahoo! finance) that demonstrates some of the reasons why I still love Heelys:

Share Statistics
Average Volume (3 month)3:	606,689
Average Volume (10 day)3:	496,433
Shares Outstanding6:	27.06M
Float:	17.31M
% Held by Insiders4:	33.52%
% Held by Institutions4:	43.70%
Shares Short (as of 25-Sep-07)3:	2.35M
Short Ratio (as of 25-Sep-07)3:	9.6
Short % of Float (as of 25-Sep-07)3:	28.90%
Shares Short (prior month)3:	2.43M

The statistic that really screams "POSSIBLE BIG GAIN" to me is the percentage of short shares - a whopping 29% of the float. It would take 5 full trading days to completely cover the short positions.

That, in a nutshell, is why Heelys could be an explosive pick. It could very well do nothing for a long, long time, but when there is substantial positive news about Heelys, a major short squeeze will occur and the price will skyrocket.

After the terrible earnings in the summer that sent the stock plummeting, I think that virtually all bad news has been priced in. Lower orders and estimates are already incorporated into the share price; I think that the current quarter could turn out well since the estimates were revised lower.

All it will take to sent Heelys to $15 is good news and the subsequent short squeeze - say that they beat earnings, or Journeys doubles their order - a natural rise to $11 or $12 may occur, and at that point, many investors who shorted the stock on the way down may scramble to cover positions, increasing the price even further.

Will this happen tomorrow, next week, or next month? Don't count on it. I bought my Heelys position around $8.7, and I wouldn't be surprised if it stays priced between $8-$10 for a substantial period of time. However, since Heelys has virtually no long-term debt or obligations, I think the company will regain footing after the retailer's current inventory clears out, and then it will be all good things for the company.

Lastly, another thing to always consider is the possibility of a buyout. Heely's current market cap is about $250 million, which is very doable for Nike (market cap - $31 billion), Adidas, or even Crocs ($5+ billion). I'm not necessarily predicting a buyout, but for a big apparel company, acquiring a growing, popular niche brand like Heelys could be a very attractive investment.