Thursday, November 23, 2006

The Qantas merger: What are the crackpots thinking?

What are TPG and Macquarie thinking? Do an LBO on a freaking airline, a volatile little beast perpetually affected by the oil prices and the capricious nature of travellers?

Well , it really can be quit simple.

Qantas, unlike many other airlines, operates a full service group. It's operates an airline, as well as a ground handling, logistics, cargo, meal preparation kitchen and the like.

It has a duopoly on domestic routes. and a monopoly on the ultra long hauls out of Australia.

The classic PE play is restructuring. Qantas operates using its less volatile and counter cyclical units (domestic, cargo, meal prep, logistics, services) to balance out the volatility of passenger air travel.

Take Qantas Group, peel off all the stable cash flow units and dump them into Macquarie funds as yield plays. Sell and leaseback all assets, planes, buildings etc and reduce the working capital of the business dramatically, then sell off the airline once all is done or relist on the ASX.

Of course the one problem with this whole exercise is that the airline will never get sold. There is nary a chance in hell that this merger will get approved what with the natural suspicion that the working class union man has for any suit with more money in his bank account than his pocket.

Saturday, November 11, 2006

York Capital: Special Situations/Merger Arbitrage

The York Capital office in Singapore, as far as I can tell, will be headed by Dan Dauber, who previously worked in the London operations of York, and is now is his late thirties.

York runs merger arbitrage and special situations investing. The following were gleaned from various websites:

Merger arbitrage is about capitalizing on announced transactions. It starts when a news release appears on a trading screen such Bloomberg or Reuters announcing that a bidder wishes to buy the stock in a company. The release, or a same-day conference call, will typically state whether the bid is
1) friendly or hostile;
2) a definitive cash agreement (having board approval), a letter of intent, or proposal;
3) for cash or stock, or a combination of both, and whether this is subject to adjustment;
4) a tender offer (lasting 30 days) or requiring a shareholder vote (lasting 4-6 month); and
5) subject to certain conditions -- i.e., due diligence, financing, anti-trust, or regulators.

Merger arbitragers are experts in assessing deal risk. They hire lawyers to dissect deals and anticipate things that might go wrong. They look at the economic and geopolitical environment. They assess the mood of shareholders. They look at the spread between the offered price and current market price for the target firm's stock. They assess how much of it is due to deal risk and how much of it is a liquidity spread reflecting pent up demand of shareholders wanting to sell. If they feel the liquidity spread is high enough, the arbitragers will step in and buy the stock. They capture the spread in exchange for bearing the deal risk.

Merger arbitragers hedge their position by simultaneously shorting the acquiring firm's stock. This provides them with a crude market neutral hedge, but it increases their exposure to deal risk. Usually, an acquiring firm's stock price declines slightly prior to a merger. This is especially true if investors perceive the acquiring firm as overpaying for the acquisition. If the merger goes through, an arbitrager will profit from further decline in the acquirer's stock price. If the merger fails, he will lose as the acquirer's stock price rebounds.


To calculate the value of a potential arbitrage commitment, Benjamin Graham, the father of value investing created the following formula, which he discussed in length in the 1951 edition of Security Analysis; its creation was heavily influenced by Meyer H. Weinstein’s classic 1931 book, Arbitrage in Securities (Harper Brothers).

Indicated annual return = [GC – L (100% - C)] ÷ YP

Let G be the expected gain in points in the event of success;
L be the expected loss in points in the event of failure;
C be the expected chance of success, expressed as a percentage;
Y be the expected time of holding, in years;
P be the current price of the security

Wednesday, November 08, 2006

The Mirant Philippines deal

I've been following this deal for a while now, and it looks as though final bids will be in on Nov 17. However I came across this hopelessly confused editorial by one Bong (with a name like that why would he not be confused??) Austero.

The opinion deals with the fact that Mirant Philippines employees are maneuvering for a payoff in the course of the transaction or in case they get fired. Of all things, they've already been promised 2.5 months pay per year of service, which would give anyone with a mere 5 years of service a full year's pay. And one of the things they point out as unfair is that US$34 million from the sale proceeds has been earmarked for 125 US employees, crying racism. To boot, they imply that they are the ones doing the work to make Mirant profitable, so they should be the ones rewarded.

Firstly, Mirant Philippines is profitable because of the contracts signed in the Ramos era that set payments for the plants. Secondly, power generation is an asset business, not a human capital business. So for the employees to imply that they uniquely contributed to the profit, instead of being replaceable cogs in the machine, is incorrect.

Next, the employees are requesting severance pay, but the reasons they give for the severance pay (previous profits, and payment to US employees) deal with prior issues, and are not the forward looking reasons (job security, cushion against job loss) that the term severance pay implies.

Basically, they are being plain ass greedy, saying they want a taste of all that money rolling around. And they're willing to cry anything under the sun in order to get it. And 2.5 months aint enough son, that 2.5 months probably comes to US$20m,divided unevenly between 1,200 employees.

Are We There Yet, Bong Austero, Manila Standard

There’s an interesting and potentially groundbreaking development emerging from the current imbroglio involving Mirant Corp. and its employees. On the surface, the case seems to be simply about employees demanding benefits from their employer. Actually, it is far more important than that.

And depending on whose version of the truth you happen to be partial to, either the Filipino employees are the ones who are greedy, insatiable, and selfish or the American owners and their Filipino counterparts are the ungrateful capitalists who have suddenly become blind, deaf and indifferent to the plight of the Mirant employees. You know how it is in our country, it is not enough that the other side is simply wrong, they have to be demonized, too. Otherwise, there’s no fun in the debate.

The dispute has been simmering since Mirant’s parent company, based in Atlanta, announced it was selling off Mirant Philippines. As many know, Mirant’s parent company has been in the red for quite some time now and seems to be in a desperate need for cash. This need is now prompting it to sell off its milking cow which is Mirant Philippines. The joke is that Mirant Philippines has transformed from being milking cow to roasted calf.

Why Mirant Philippines is very profitable is another story altogether. It is a long story actually, one that highlights the absence of strategic thinking among our leaders, in particular those during President Fidel Ramos’ term who entered into disadvantageous contracts with independent power producers. But more than anything else, it is a story that draws heavily on the sweat, blood, toil, and talent of Filipinos making up Mirant’s workforce. As one employee put it, “we made Mirant what it is today, the Americans simply put in their money.” This is a statement with which one cannot argue with. The Tagalog saying kami ang nagbayo at nagsaing, iba ang kumain (we did all the hard work but someone else is enjoying the fruit of our labor) nicely sums up the workers’ predicament.

Mirant Philippines is a successful enterprise. The company is a trailblazer in many efforts particularly in two areas: fulfilling its corporate social responsibility and taking care of its people. As a human resource management consultant, I am privy to the extent to which Mirant has taken care of its people. At least until the current imbroglio reared its ugly head.

The problem stems from the fact that the sale of Mirant Philippines is already due in November and employees are still groping in the dark about the kind of fate that awaits them. Mirant has not issued guarantees that it will honor practices (that unfortunately have not been translated into policy) pertaining to separation or retirement packages—before, during, or immediately after the sale. It also appears that the terms of the sale of Mirant does not include provisions compelling the new owners to assume contractual obligations to employees—either in terms of respecting tenure, or retaining compensation and benefits packages, or even sustaining the company’s hospitalization or retirement plan. In other words, Mirant employees do not know if they could hang on to their jobs after the sale!

Up until this week, Mirant Philippines president Jose Leviste Jr., who represents the American interest (and who is being paid handsomely for it, I am told) has been making promises about when the company will formalize its separation policy. In the meantime, the clock is ticking.

Mirant employees have tried to do things the more peaceful and cordial way —through appeals and representations with management. Strangely, this is when those nasty attacks against the employees started. Mirant employees were suddenly depicted as greedy spoiled brats who want to have their cake and eat it, too. Unfortunately, the criticism does not fly.

Yes, Mirant employees are among the most highly paid in the country and yes, they enjoy premium benefits compared to others. But that is not the employees’ fault. In fact, it can be said that they have earned it. Mirant employees are among the best in the country and represent genuine Filipino talent. The issue is that their security of tenure and their separation benefits must be guaranteed. If the new owners deem it fit to fire everyone, then that is their prerogative and if they decide to rehire everyone, then they start on a clean slate. Imputing motives and analyzing character is not relevant to the discussion. This is not the way to treat the people who make sure there is electricity that runs our households and offices.

Anyway, a few months have passed and nothing has happened yet. The sale is happening in a few weeks and Mirant employees are now entertaining the dreaded possibility that they will be left in the lurch, or to be more brazen about it, royally kicked in the posterior. In short, it is panic time.

So they sought government intervention. Representatives of Mirant employees from it’s Sual (Pangasinan) and Pagbilao (Quezon) plants and from the Pasay head office filed a petition for compulsory mediation with the Department of Labor and Employment citing “potential labor dispute that may lead to a possible disruption of power supply in Luzon.”

The request for intervention is one for the books. For one, this is probably one of the very, very few labor complaints signed by everyone in a company from senior executives down to the first level rank and file employee (except Leviste of course, but that is hardly surprising). But more importantly, it will set a potentially landmark jurisprudence.

Can the labor department require a US-based company to comply with its directives? Can the Philippine compel a US company to respect the rights and welfare of local employees? It remains to be seen. As a human resource management practitioner, I am keenly interested in how this soap opera will play out as it will have far-reaching implications on our labor situation. If the owners of the company were Filipinos, it would be easy to run after them and their assets in the event they are found guilty of breaking labor laws. But Mirant is US-based and their divestment in the Philippines is beyond the jurisdiction of local laws.

This is just another one of the effects of globalization that we seem to be unprepared for. Financial capital can now move around the world like baton being passed around an oval in a 4x100 meter relay. It has become that easy to bring in and pull out money from the Philippines as in anywhere in the world.

When this happens, how do we protect our human capital from the fallout? As I have always maintained in this column, human capital is our only lasting source of competitive advantage. In fact, it is our only national resource left. We have always said we take pride in Filipino talent, or that people are our most important asset.

Monday, November 06, 2006

York Capital Opening Singapore Office

This just in, that York is starting a Singapore office. Even driven, merger arbitrage, now that Asia is starting to be both a target and an originator of major transactions.



Opportunity Is Always News
by Michael Peltz-- April 2001, Worth magazine
Want to know a great source for investment tips? Meet two hedge fund managers who can tell you just where to look.

My mother can be adventurous as an investor. She's a regular reader of financial newsletters and every so often calls me to ask about the latest fiber-optic company or biotech outfit she's taken a shine to. Bold as she may be, however, I've never advised her to try anything as tricky as risk arbitrage or "special situations" investing. But that was before I started hanging around with Jamie Dinan and Dan Schwartz, the highly regarded duo that runs York Capital Management. Their $1 billion hedge fund shop in New York City specializes in trading designed to capitalize on the day's business news. Good as they are at what they do, Dinan and Schwartz convinced me that any smart investor can execute similar tactics and earn enviable returns as a result. So okay, Mom (I know you're reading this), get ready for some new ideas.

Dinan and Schwartz pay little attention to the direction of the market or to the momentum stocks of the hour. Warren Buffett-style buy-and-hold investing isn't their game either. Instead, the two York partners focus on corporate developments that are likely to trigger stock gains. They take a position with the expectation of earning a quick, predictable return as the event they are watching plays itself out — whether in a matter of minutes or months. Once it's over, or the moment anything goes against their expectations, they get out and move on.

One of York's biggest winners last year was Litton Industries. York's interest in the defense contractor began with an October 20 news release disclosing that the company might sell its Advanced Electronics group. To Dinan and Schwartz, an eventual transaction looked likely because Litton's stock price had been stuck in the mid-$40 range. This had been the case ever since Wall Street analysts downgraded it back in early September. Clearly, Litton needed to do more than just put out an announcement to rekindle investor interest; the company had to follow through on the sale.

York scooped up about $17 million worth of Litton shares. The partners saw little risk in this; the price per share was just 10 times Litton's estimated 2001 earnings — about a third lower than the average price-to-earnings ratio for defense contractors. Based on an expected selling price of $1 billion for the electronics unit, York's in-house analysis showed that Litton's stock price could reach $71 a share if a sale occurred.

In early November, Litton announced that it had decided to proceed with the sale and that it had retained Merrill Lynch as an adviser. The stock was now on its way to $60 a share. Then, in December, York reaped a windfall when Northrop Grumman announced that it was buying Litton — not just the Advanced Electronics unit but the whole company — for $80 a share in cash. "We didn't expect that," Dinan says. "But we obviously weren't the only ones who thought Litton was a good buy." In just a few months, York had made a killing.

Dinan and Schwartz's active, event-driven style has paid off time and again. Since its inception in 1991, York Capital's original limited partnership has earned a compounded annual return of 21.3 percent, and that's after subtracting York's 1 percent management fee and 20 percent share of trading profits. Even as it handily beat the Standard & Poor's 500 Stock Index during those years, the York fund was about a third less volatile, measured by standard deviation.

In 1996, Dinan and Schwartz created York Select, a fund that typically takes 15 to 20 positions at a time (versus about 50 for York Capital). Select has averaged an astounding 30.6 percent compounded annual return net of fees since its inception. In all, York has 11 different investment vehicles, including offshore versions of both York Capital and York Select.

The specific targets of Dinan and Schwartz's attention have evolved over time. In the early 1990s, the two focused on distressed debt — a strategy of investing in companies that are under such duress that their ability to make interest payments has come into question. In the mid-1990s, special situations accounted for as much as 45 percent of York's portfolio bets. This approach seeks to capitalize on companies that are undergoing some sort of onetime corporate change, the reasons for which may come from within (a decision to spin off a business or sell a division) or from without (a proxy fight over control of the company). More recently, as corporate buyout activity has hit record levels, merger arbitrage has come to account for 70 percent of York's trades.

York's performance is all the more remarkable considering that, unlike most other hedge funds, the firm employs little or no leverage. It keeps borrowing to a minimum and shies away from futures and options. York limits its total market exposure to 125 percent of its available capital. The typical range for event-driven hedge funds is anywhere from 150 to 500 percent of capital. John Meriwether's Long-Term Capital Management portfolio was leveraged 30 times its capital before it blew up for good, in 1998. "I hate leverage," says Dinan, who owns four homes and doesn't owe a dime on any of them. He has good reason for his fear of debt: During the 1987 market crash, he lost his entire personal savings of $600,000 because he had leveraged his brokerage account with options. "People think of hedge fund managers as major gunslingers, but Jamie and Dan are exactly the opposite of that," says Elisabeth Brugger, senior vice president in charge of alternative investments for Swiss private bank Pictet, one of the current 350 or so investors in York.

Once York identifies a significant corporate event, the odds are good that many other investors have too, so Dinan and Schwartz must act quickly. "The toughest part is not predicting the event but predicting the market's reaction to it," Dinan says. In the case of a merger or an acquisition, that means determining what the odds are that the deal will go through and how long it will take to complete. For special situations such as a corporate spin-off or a restructuring, valuation is paramount, because York must come up with a reasonable approximation of what the new company will be worth after the transaction.

"We don't have the luxury of researching a company for a month, so we've become specialists at down-and-dirty fundamental analysis," Schwartz says. A York analyst creates a one-page spreadsheet with a detailed breakdown of a company's sales, earnings before interest and taxes (EBIT), capital expenditures, and earnings before interest, taxes, depreciation, and amortization (EBITDA). The page also compares the company's overall market capitalization, earnings, revenue, debt, EBITDA, and price-to-earnings ratio with other companies in its industry. This financial snapshot gives York a quick look at how a company is faring in competition with its rivals. Any new information can then be viewed in the context of whether it will improve the company's tactical position or overall financial health.

It's 8:30 on a tuesday morning, and jamie dinan is already well into his second tall cup of coffee (he goes through five a day). The trading desk at York's Park Avenue office is strewn with copies of the Wall Street Journal, the New York Times, the Washington Post, the Los Angeles Times, the Financial Times, and USA Today. I also spot Barron's, the Daily Deal, American Banker, Crain's, Women's Wear Daily, Advertising Age, and Broadcasting & Cable.

Trying not to get in the way, I watch as Dinan, Schwartz, and the five other traders on York's desk dissect 13 different deals before the market's 9:30 opening bell. These include Intel's $25-a-share buyout of Xircom; Penske Truck Leasing's bid for its competitor Rollins; and Forstmann Little's $1 billion offer for Citadel Communications. The most intriguing story of the moment, however, is Nestlé's plan to buy the pet food maker Ralston Purina. The Swiss food giant has offered $10 billion, or $33.50 a share, in cash. It's a hefty 36 percent premium over Ralston Purina's closing price the previous Friday.

Schwartz yells out to ask if Dan Dauber, York's London analyst, has checked in.

"Yeah, and he spoke to Nestlé," replies Dinan, who is still making his way through the mountain of papers, reports, and clippings that completely obscure his slice of the trading desk. "They don't expect to have a lot of trouble getting the transaction approved. The big problem for us is that it's an expensive deal, and the only possible other buyer is Procter & Gamble." (Merger specialists such as York prefer deals in which there's the potential for another bidder to step in and raise the price.)

Dinan wonders about antitrust concerns in the United States. Nestlé is a major player in the canned, or wet, pet food business, with such brands as Alpo and Friskies. Ralston Purina, meanwhile, is best known for its dry foods such as Purina Dog Chow. A combination would control as much as 40 percent of the U.S. pet food market.

"This is really a wet food, dry food issue," says Dinan, who then launches into the refrain from the Baha Men's "Who Let the Dogs Out?"

Still, the more Dinan weighs the odds, the more he likes them. The big question now is at what price Ralston is going to open. "If we can buy shares at $32," he says, punching numbers into his calculator, "that would give us an annualized return of 18 to 19 percent if the deal closes in three months."

As it turns out, Dinan's fondness for Ralston Purina doesn't last. York senior analyst Jeff Lewis uncovers news suggesting that Nestlé's purchase might not close for six or more months. So Dinan cancels an order he placed just 15 minutes before, instructing his trader to get out of that "bozo Ralston trade" and sell the 75,000 shares of stock. "You have to be willing to admit you're wrong and get out of a trade," Dinan says.

Dinan's specialty is mergers and acquisitions. He remembers the details of virtually every deal from the past 15 years. He is also the more garrulous of the two partners, and he loves to talk about deals. In fact, he loves to talk about anything, including the rocks he recently picked out for the bottom of his swimming pool in St. Barts.

Dinan is a self-described late bloomer. He didn't get serious about school until he was a sophomore at the University of Pennsylvania's Wharton School, where he earned an undergraduate degree in economics. He got into Harvard Business School but deferred his acceptance for a couple of years to learn investment banking at Donaldson, Lufkin & Jenrette. After business school, from which he graduated summa cum laude, Dinan opted to join Kellner DiLeo, a Wall Street firm specializing in merger arbitrage, rather than to go into investment banking at a firm such as DLJ. (He didn't like the latter option, which would have mapped out the next 15 years of his life.)

Discipline is a critical component of York's approach, and it may help that Dinan has a healthy perspective on money. He's opposed to a tax cut, for instance, because he thinks the funds would be better off going to people who really need it.

Schwartz is the special situations expert. He is the more analytical of the two York partners. Originally from Toronto, he came to New York City to attend Yeshiva University and has never left. He earned a graduate degree in industrial engineering from Columbia University and then joined a training program at Morgan Stanley, where he ended up in the capital markets group doing equity derivatives because he was drawn to the market side of the business. Schwartz is usually the last person to arrive at the trading desk in the morning because he takes his three kids to school.

Some of what York does is best left to the pros. Still, amateur investors today have access to 90 percent of the tools that York does, Dinan says. You don't need to be a day trader to take advantage of special situations, he adds. Anyone who had been closely following General Motors' Hughes Electronics would have known that Rupert Murdoch wanted to buy its DirecTV business well before the story recently broke.

Another example: Last year, York bought the stock of Emerson after seeing the Digital Power Report, a monthly newsletter published by futurist George Gilder. ("We subscribe to it, although we never understand a word it says," Schwartz jokes.) The report described the urgent need to develop a far more reliable power supply for the information age and mentioned Emerson, an old economy stalwart, because it has a division that makes systems for providing reliable power to data centers, telecom facilities, and Internet service providers. York's investment thesis was simple. Gilder was holding a major conference later in the year under his trademarked Powercosm name. "We reasoned that as word got around, people would start to get excited about Emerson," Schwartz says. York bought the stock at around $45 a share in mid-April, and within a few weeks it had already begun its ascent. By the time the first Powercosm story broke in the mainstream press on May 18, Emerson was trading at close to $60 a share and York had taken some profits. Dinan and Schwartz waited to sell the rest of their position until right before the conference, making nearly $8 million on the trade. What they liked most about it was that there was virtually no downside risk. "We were basically getting a world-class option for free, buying a great blue-chip company at 13 times earnings," Schwartz says.

When it comes to mergers and acquisitions, Dinan and Schwartz have a very highly developed sense for how often deals unravel and why. Under normal conditions, most transactions have a 95 percent chance of being completed once they are publicly announced, they say. Deals with special financing conditions, however, have only about a 75 percent chance of closing under their original terms, Dinan estimates. When a transaction flops, watch out. The stock of the company being bought can easily drop well below where it was trading before the deal was announced. Take casino operator Pinnacle Entertainment: Its stock plummeted nearly 30 percent on December 14 when news came out that its $1.3 billion sale to rival Harveys Casino Resorts would be delayed because Harveys was having a hard time raising financing. The stock fell another 30 percent in January when the bid was formally withdrawn.

Regulatory issues only rarely break deals but can often delay them (a big concern when you're doing merger arbitrage). Companies will jump through hoops to win approval from federal or state authorities, explains Dinan. He doesn't expect the Bush administration's antitrust policy to be much different from Clinton's after trustbuster Joel Klein left. "The government should be fairly accommodative," he says. But the likelihood of a deal getting done, especially if it has financing conditions, drops significantly if there is major market stress, as was the case during the Russian debt crisis in 1998.

Even the best investors, Dinan says, are right maybe 60 to 70 percent of the time. That's why it's so important when you are right to average up and increase the size of your positions. Here are some of York's other key investing rules:

Know why you are investing. While this might seem obvious, it's important, because once you own a stock you have to continually monitor the situation to see if the reasons you bought it are still in place. If they aren't, re-evaluate or sell.

Assess the risk-reward profile of your investments: At this price, how much can you make and how much can you lose? The upside should be at least 1.5 to 1, although ideally it should be as much as 4 or 5 to 1. Your 5-to-1 bets should be your biggest positions. Dollar-weight your investments to match your degree of conviction.

Never average down. "No matter why you went into something, get out if it goes against you," Dinan says. "The first mistake people make is to buy more and average down their cost. Then you make it a really bad trade." York's rule of thumb: If a position drops 20 percent absent a market correction, sell.

Let your winners run. Average up by adding to your winners as they're rising. That's what York did with Litton. It bought about two thirds of its position at $50 a share. When the stock got to the mid- to high $50s, it bought the other third.

As a cautionary note, Dinan adds that in special situations it's always important to be comfortable with the business you're buying, because you may end up holding shares for longer than you expected. Most deals do not play out exactly the way they're scripted. And like all event-driven strategies, investing in special situations is a very active style. "If you're looking for an event, you have to be on the phone, snooping out any information you can get," Schwartz says. "You have to be damned sure the reason you are there is still relevant. If it's not on track, you have to get out."

For individual investors willing to spend the extra effort, a rule change last fall makes the job of event-driven investing a little easier. In October, the Securities and Exchange Commission introduced Regulation Fair Disclosure, which prohibits companies from giving preferential treatment to Wall Street by selectively disclosing material information about their businesses. Gone are the days of corporate winks and nods when analysts used to share their earnings models with management. If companies want to give investors guidance, they're required to do so in an official press release or during a conference call that anyone can listen to. "Sometimes companies even put things on their Web sites before they release the news because of Reg FD," Dinan says. "It's a fairer and better system."

More opportunity for you, Mom.


Playlist

Six opportunities that York likes right now
AT&T (NYSE: T) Breakups can be good for investors. Cash in by buying AT&T long and selling short half as many shares of tracking stock AT&T Wireless (AWE). The trade costs $11 a share to set up and has an expected value of at least $15 once AT&T Wireless is spun out of AT&T.
CANADIAN PACIFIC (NYSE: CP) It plans to carve itself into five separate companies, including Canadian Pacific Railway, PanCanadian Petroleum, and Canadian Pacific Hotels. The sum of the parts is worth at least $45.
CERIDIAN (NYSE: CEN) The company wants to spin off media research arm Arbitron to shareholders. Arbitron alone should be worth $6 to $7 a share. At the current stock price, therefore, Ceridian's remaining business is trading at just 17 times earnings versus 30 times earnings for comparable information services companies. Price target: $25.
CONSTELLATION ENERGY (NYSE: CEG) It intends to split into two separate companies: an unregulated merchant energy provider and a regulated utility. The unregulated business should be worth $41 to $51, so investors are getting a $10 or $11 utility essentially free.
DIGEX (Nasdaq: DIGX) Last fall, minority shareholders sued Worldcom to block its acquisition of the Web-hosting company's parent, Intermedia Communications. Under the proposed settlement, Digex shareholders at the time the merger closes will get $3 a share in Worldcom stock.
FMC (NYSE: FMC) The company hopes to spin off its machinery business in an IPO by the second quarter of this year. The new company should trade at a much higher multiple than FMC's core chemicals business. Together they should have a combined value of $90 to $110 a share.

Wednesday, November 01, 2006

Kuala Lumpur: Becoming a world city?

The Wall Street Journal recently listed KL as the cheapest world city to have a party weekend in, and I am in KL today to check out (not the party scene) but a small firm I am interviewing for.

The verdict: KL has changed... or has always been changing and I've just never managed to see it.

Everywhere there are cigar bars, Cuba is represented and latino, whether salsa, rum or the Montecristos are widely available. The best cigars are a bargain at US55 bucks a pop, at the Westin no less, no fuss at all.

The patrons were mostly visiting expats, one night people, mostly Chinese, but English/American educated Chinese, working either in KL, Singapore or further afield. The after work drink has become entrenched, but it seems like KL nightlife has even more to offer (Planet Hollywood had a Ladies Night with free margaritas for all women after 9).

There is a strong current of realism. There are some Malays who work the bar counter, one of whom was obviously a pondan, with razor thin shaped brown, slightly pockmarked face, and vest cut to accentuate his slim waist.

I can see why the Kelantanese, and the Islamic Party of Malaysia PAS, think of KL as Sodom reborn.

It is unfortunate that while parts of this country are going gangbusters into the 21st century, others are still solidly stuck in 1980, the time before the loss of innocence, before the flower of Malay youth became perverted by money, media and the so called Western culture.

During my interview, in answer to my question of how they sourced for oil field deals, the Malay director said half-jokingly, "drink a lot of beer".

The sad thing is that in the Arab nations, the same goes on, but behind closed doors, and in private. The elites run on one path and everyone else must adhere to a double life of wanting freedom, but denying themselves for the sake of public opinion,

Why do we seek to restrict the lives of others? Is it because we are unable to control the lives of our children and see them becoming fags, lushes, stoners and crackheads?

Friday, October 06, 2006

The full Andy Xie email

Did PAP govt send Dr Andy Xie packing?

courtesy of Little Speck

I participated in the panels on Commodity (sic) and China-India and in some obligatory dinner parties. On Friday night the Singapore prime minister invited the speakers at the meeting that the Singapore government organised. Trichet, Larry Summers, Paul Volker (sic) Chuck Price, the finance ministers of ASEAN countries were there. No government official from China was there …guess I was there to make it look like China was represented.

The dinner was turned into an Oprah with PM Lee Hsein Long (sic) at the center. The topic was on the future of globalization. People fawned him like a prince. Of course, he is. There are two reigning princes in the world that the Davos crowd kiss up to, Jordan and Singapore. The Davos crowd are Republican on economic issues and democratic on social issues. Somehow they manage to put aside their moral misgivings and kiss up to Lee Hsein Long and Abdullah.

I tried to find out why Singapore was chosen to host the conference (WB/IMF). Nobody knew. Some thought it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would have been a lot more appropriate. ASEAN has been a failure. Its GDP in nominal dollar terms has not changed for 10 years. Singapore’s per capita income has not changed either at $25,000. China’s GDP in dollar terms has tripled during the same period.

I thought the questioners were competing with each other to praise Singapore as the success story of globalisation. Actually, Singapore’s success came mainly from being the money laundering center for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China.

These western people didn’t know what they were talking about. Aside from the nauseating pleasantries some useful information came out of it. Trichet sounded very bullish on euro-zone economy (sic). He noted that euro-zone was catching up with the US in growth rate (sic) and talked about further gain in 2007. His tone was much more bullish than our house view. As Japan is surprising on the downside, I don't see how the rise of euro-yen could be stopped.

Larry Summers and Paul Volker (sic) were very worried about the US economy. As you probably know, Alan Greenspan is talking the same way. At the CLSA conference last week, he talked like one of his critics. There is fear of a US collapse. Many Americans think that an RMB reval (sic) would save the US. This is just a dream, in my view.

Most were worried about the future of globalisation due to income inequality. As average workers in the west are not seeing wage increase (sic), they may vote against globalisation. I thought that they were understating the benefit from cheap consumer goods. However, as inflation comes back, it does diminish the benefits for western consumers.

No-one was worried about the growth outlook for China and India. The Indian Planning Minister was very bullish, talking about 9% forever.

My sense is that policymakers are relexed (sic) about the short-term economic outlook but anticipate a US collapse at some point. Americans think that RMB reval could save the US. So they would keep pressuring China."

Andy Xie
Morgan Stanley

Wednesday, October 04, 2006

The Andy Xie Affair

The Singapore mandarins struck back against Andy Xie, cavalier Morgan Stanley economist who got a little too big for his boots.

Andy's frustration with the oh-so-rehearsed IMF sessions probably got the better of him, a whole week burned and not a single original idea in the pack of cards. Everyone ass-kissing everywhere, investment bankers sucking up to the finance ministers who issue sovereigns and approve the largest mergers, finance ministers sucking up to IMF and World Bank officials, and everyone sucking up to China and USA.

And amidst all this, the smug Singaporean sense of achievement.

So he goes back to his hotel room, and let's loose with his thoughts on the phoniness of it all, presses Send and nine paragraphs of facade stripping invective lands in the mailboxes of the Morgan faithful, some of whom forward it on to their closest friends, and no doubt one of whom forwards it to a friend in the MAS.

And it lands of PM Lee Hsien Loong's desk, a call is made, and something along the lines of "If Morgan ever wants to do business in Singapore again, they had better do something about it"

Morgan's chief in Hong Kong gets Andy on the phone, tells him there's been a leak, and specifically does not suggest that he leave... but leaves the impression that if he were to stay it would be damaging to the firm's prospects...

Andy bites the bullet.


What caused all this furore?



The subject line of Xie’s email was ‘Observations on the IMF/ World Bank conference’. That event was hosted in Singapore, and the email was written just after the conference finished. The email consisted of nine paragraphs but it is the third and fourth that have attracted most attention.

“I tried to find out why Singapore was chosen to host the conference,” wrote Xie. “Nobody knew. Some said that probably no one else wanted it. Some guessed that Singapore did a good selling job. I thought that it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would have been a lot more appropriate. ASEAN has been a failure. Its GDP in nominal dollar terms has not changed for 10 years. Singapore’s per capita income has not changed either at $25,000. China’s GDP in dollar terms has tripled during the same period.”

Xie then continued that he thought some “were competing with each other to praise Singapore as the success story of globalisation. Actually, Singapore’s success came mainly from being the money laundering centre for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China.”