Hostile Takeovers

The markets traded slightly higher today – but not by much.  Homebuilders and retail rose on expectations that there will be more interest rate cuts, as insurers and banks took a nosedive as woes of the mortgage market crisis resurfaced.  Word on the street is that there’ll be another interest rate cut at the Federal Reserve’s next meeting on March 18th.

Looks like we’re in the thick of it. And it’s about time that the rest of the Wall Street “gurus” finally realized this.  I’ll be honest with you, and if you subscribed to my newsletter then you would know that I called this mess in the beginning of the summer of 2007. 

I invested accordingly and as a result, I returned 60% for my subscribers in the latter half of the year.  The writing was on the wall – inflation, mortgage applications, GPD – all of these basic economic statistics pointed to a crunch.  But hey, everyone has his or her own opinions…

As for today’s news:

Yahoo Rejected Microsoft

Yahoo basically told Microsoft to shove their $41.6 billion takeover offer up their you know what – raising suspicions the Microsoft will result to more “hostile” measures. Just incase you didn’t know the difference between a hostile vs. friendly takeover – let me fill you in on the specifics:

1).  Friendly – The biding company goes to the board of directors of the target company before it makes its offer. This is done to allow the board to analyst the offer and determine if the offer is of benefit to the shareholders.  If the offer is suitable, then the board recommends that shareholders accept the offer.  This is optimal for the biding company because if the board of the target company cooperates, then the bidder will be able to conduct extensive research into the target company’s affairs and will be able to look at all of the cracks and crevices before making a firm commitment.

2).  Hostile – The biding company either makes the offer without informing the target company’s board before hand or the board rejects the offer.  When this happens, the target company usually will not allow the biding company the ability to conduct extensive due diligence into its affairs.  The biding company will only have access to publicly available information – thus taking on more of a risk.  Banks are less willing to finance hostile bids.

With that said – Yahoo’s rejection has pushed this takeover into the “hostile” arena.  Microsoft responded by calling its offer fair, but made it clear that it’ll pursue all steps necessary, if need be.

I figured that Yahoo would reject the initial offer – It has to play hardball.  If Microsoft successfully acquires Yahoo, then Microsoft has a good chance of being a close competitor to Google – at least on the search engine side of things. 

Microsoft needs to be careful, but not too careful if you know what I mean…

Delta and Northwest Merger

Representatives stated today that a deal could be reached within the next couple weeks – which will be great news for these two suffering airline giants.  Both Delta and Northwest, as many of the dinosaur airline companies, have never fully recovered from 9/11 and the steady rise in the price of oil ever since. United Airlines and Continental Airlines are also in the embryonic stages of merger talks.

There really isn’t much more to say about this, accept that all of them really don’t have much of a choice. It is either partner up with another struggling brother in the business, or go belly up…

Dow Jones Kicks Out Altria and Honeywell

And add Bank of America and Chevron Corp.  This will provide the stock market’s largest and most well known indicator more exposure to the banking and energy sectors. 

Altria (formerly Phillip Morris) is a giant in the tobacco industry and Honeywell, as we all know, is one of the largest manufacturing companies around.  The Dow Jones Industrial Average consists of 30 stocks and this is the first change in the index since 2004.

Representatives stated that Altria’s makeover and too narrow of a focus were the main factors in its decision, while industrial companies being a less intricate part of the economy was the reason behind the Honeywell cut.

Cheers,

Jack Aubrey
Senior Equity Analyst, Bourbon & Bayonets