Water Cooler Finance: Mergers, Hostile Bids And SEC Probes

By Andrew Beattie | September 14, 2010 AAA
Water Cooler Finance: Mergers, Hostile Bids And SEC Probes

It has been a busy week in finance. Mergers and acquisitions (M&A) activity has once again emerged with offers being made in tech, biotech and even fertilizer. And it is not only companies that are being hunted. Former Hewlett-Packard (NYSE:HPQ) CEO Mark Hurd was out on the streets – albeit with $12 million in severance cash – for less than a week before he was snapped up by Oracle. And, in the midst of this frenzied action, the SEC began prodding the corpse of Lehman along with many other inquiries dating back to the financial meltdown. Read on for more details on what made financial news during the past week. (For background reading on mergers, see The Wonderful World Of Mergers.)

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Lehman Cooking the Books?
Former executives at the company that was Lehman Brothers are lawyering up to defend themselves against an SEC probe into the "repo 105" transactions that made its balance sheet seem less heavily leveraged than it really was.

In case you aren't familiar with the term, a repo trade is a short-term deal in which assets are moved off a company's balance sheet to another party in exchange for cash, but with the understanding that the company will buy the assets back. However, Lehman is accused of recording repo trades as permanent sales, using the strategy to temporarily purge an alleged $50 billion in mortgage-backed securities from its balance sheet. (To read about Lehman's demise, check out Case Study: The Collapse Of Lehman Brothers.)

While Lehman Brothers is, for all purposes, dead and gone, the former executives could face regulatory charges and related civil lawsuits if the SEC can make allegations of deliberate fraud stick. This isn't a cut-and-dried case by any means, as Lehman's books where audited by accounting firm Ernst & Young – and the firm apparently found the repo 105 transactions in accordance with Generally Accepted Accounting Principles (GAAP).

H-P vs. Dell
In its first big move without Mark Hurd at the helm, H-P outbid Dell (Nasdaq:DELL) for data storage company 3PAR (NYSE:PAR). Dell had the ability to match bids, but decided to walk away when the price edged over $2.1 billion. The bidding started with Dell's offer of $18 per share and soon climbed to $30 once H-P entered the picture.

H-P certainly seems to be on a shopping spree while the CEO position hangs dormant, as it also purchased ArcSight (Nasdaq:ARST) for $1.5 billion shortly after its 3PAR coup.

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H-P vs. Oracle
One battle that H-P appears to have lost was the attempt to keep Mark Hurd from going to work for rival Oracle (Nasdaq:ORCL). The announcement that Hurd would be joining Larry Ellison gave Oracle a $6 billion jump in market cap. While H-P is still trying to force concessions as per non-compete clauses and other contractual clauses, it will likely end with a slight cut to his exit package worth a potential $35 million in cash and shares rather than preventing him from working.

BHP Billiton vs. Potash Corp
BHP Billiton's (NYSE:BHP) unsolicited $40 billion bid for Potash Corp (NYSE:POT) in August has dragged on as Potash has tried to ward off the takeover. The company has tried to implement a poison pill, taken its message to the internet and even begun soliciting other offers. Whether BHP will close the deal or not, some people have already made money on it. In August, two Spanish traders were charged with insider trading for options plays on Potash stock that allegedly netted $1 million, although the SEC's investigation into the matter is ongoing. (Learn more about the poison pill strategy in Corporate Takeover Defense: A Shareholder's Perspective.)

Genzyme vs. Sanofi-Aventis
In another rocky courtship, Genzyme (Nasdaq:GENZ) is still struggling to escape an $18.5 billion offer from Sanofi-Aventis (NYSE:SNY). The biotech firm sold off a genetics unit to LabCorp in order to raise capital to repurchase its shares. Genzyme has hovered around $14 billion in market cap after getting hammered down in the financial meltdown. The company believes Sanofi-Aventis is trying to snap it up for a fraction of its true worth. The merger buzz has brought the market cap to within $500 million of Sanofi's offer, carrying shares from the low $50s to $70.

Bottom Line
The rise in merger and acquisitions is a good sign for the economy in the sense that it means more corporations are deploying their large reserves of cash to snap up companies. As a shareholder of the acquirers, some investors may be displeased with the premiums being paid for deals of uncertain quality. It remains to be seen whether the cash piles of corporate America will be the fuel needed to stoke the global economy, but you certainly can't accuse them of failing to try.

If you missed last week's news, check out Water Cooler Finance: The New iPod And The Roller Coaster Market.

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