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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
The Good News ... A Hostile Takeover
By Doug Lyon, CFA
As a value contrarian investment management firm we often invest in companies that turn
out to be takeover targets - companies that are generally undervalued by the market, are
cheap and are good buys for our clients (as well as a "predator" company).
Takeovers, while given a bad name in the 80s, are still a marvelous way for investors to
make money in the stock market. Takeovers can occur with the approval of corporate
management, or they can be hostile, i.e. made without the approval of the
company’s board of directors. In this article we’ll discuss a current hostile
takeover situation.
The Target
AMP, Inc. (See our Pick of the Quarter in the spring 1998 Lyon Letter*) is
currently the target in a hostile takeover. AMP is a high-quality company and the global
leader in design, production, and sale of electronic connection devices. The
company’s stock has significantly under performed the major stock market averages,
like the Dow Jones Industrials and the S&P 500, over the last 5 years. The stock was
down 50% in value over the previous 10 months.
The "Predator"
Allied Signal has initiated an offer to buy all outstanding AMP shares for $44.50 each.
Allied is a diversified company, roughly 2.5 to 3 times the size of AMP. Allied sells into
many of the same markets as AMP. Allied’s management has a track record of cutting
costs, improving efficiency of capital deployment, and thus improving returns on capital.
Allied’s management also has a record of enhancing shareholder value. Allied’s
stock has generated a return 3 times that of AMP’s over the past 5 years.
The Response
AMP has dug in its heels by refusing to meet with Allied’s management, rejecting
the bid, and fighting Allied’s attempt in court to overturn AMP’s so called
"poison pill" provisions. And they have appointed a new CEO (chief executive
officer) with less than 1 year of operations experience.
The Case
Allied elected to make the hostile bid since AMP’s management and board was
unwilling to respond to or even discuss any Allied proposals. Allied Signal made the
takeover for many of the same reasons we decided to buy the stock. AMP was the world
leader in a growing market, had very little debt, was an under performer (thus low
priced), had a bloated cost & capital structure (providing an opportunity to
streamline and enhance profits), and there was little insider ownership (making it easier
for outsiders to take over).
We believe that the AMP management is, in the words of Allied Signal’s CEO,
"inept." Their minimal ownership of stock gives them no incentive to perform.
And indeed they have performed abysmally over the last 5 years of a booming stock market
and economy. They have set the company up for painful cost cutting measures. Cost cutting
is usually the result of poor previous management - not incoming heartless new
management!
But, interestingly, by refusing to accept the opportunity to put in place new
management with a better track record, AMP may force Allied to "up the ante"
(the takeover price). While this is in the shareholders' interest we are also willing to
bet AMP management is holding out for bigger and better "golden parachute" deals
for themselves in the takeover...all the more reason for Allied to be successful in the
end.
We will continue to watch with interest and update you either on these pages or at our
web site: www.lyoncapital.com $$
Lead A Balanced Life
by Doug Lyon, CFA
"It’s important to have a balanced portfolio," we constantly say to
potential clients. When the eyes glaze over and then become an annoyed squint we realize
we’ve done it again - used investment jargon! It’s one reason why managers are
often ridiculed by their clients. Let’s speak in plain English.
A "balanced account" is a term that describes an investment portfolio whose
assets are balanced between several different asset classes.
OK - so what are asset classes? Asset classes include stocks, bonds, real estate,
venture capital investments, cash equivalents, and precious metals.
At Lyon Capital Management we strongly recommend that any total investment portfolio
should have a balance of asset classes.
Risk and Return
When making any type of investment, two of the key considerations are risk and return.
By using a balanced approach to structuring an account for management the investor avails
himself or herself of the risk reducing benefits of a diversification among asset classes.
Simply said, "Don’t put all your eggs in one basket." Buying only stocks
or only bonds or only REIT’s can be hazardous to your pocketbook. By placing all
assets in one asset class an investor is exposed to more risk than they would be with an
account that contained a balance of asset classes.
Benefits of Balance
The balanced account investor may have a lower expected return than his focused friend
but the risk the balanced investor is taking to get his return is proportionately less.
(He or she also sleeps better at night.)
Stocks historically have generated superior long term returns when compared to most
major asset classes but have a higher level of risk. The prudent investor, through use of
the balanced account technique, can cut his potential risk by 50% while only sacrificing
20% of the potential return simply by using an asset allocation of 50% stocks and 50%
bonds. Using additional asset classes may lead to even more risk reduction while
sacrificing little return.
Work with a Professional
Portfolio balance is based on an investors goals and objectives as well as their
investment time horizon. What do you want to accomplish and by when do you want to
accomplish it?
Another factor to consider when balancing portfolios is risk tolerance. How comfortable
are you taking risk? How do you define risk? Do you know what you give up (or gain) when
you switch your assets from one class to another?
How often should you adjust the balance of your portfolio? Are there costs involved?
The questions are all important and you should be asking them and getting solid answers
from a qualified investment professional.
If you would like to know more about balanced accounts and how this traditional
investment management technique can be of benefit to you, contact Lyon Capital Management
at 585-248-9821. $$
More On-line Sites for Investors
By Kate Lyon
www.lyoncapital.com
If you are hesitant to contact financial professionals by phone because of how much
personal information you are asked to reveal, we have a solution: access information via
the web. Visit our site for a thorough insight into our investment philosophy and
services. Get more details on our picks and read the monthly View Point article. You will
find the site to be text rich...we believe a well informed client is our best client. It
contains information not included in this newsletter and you can send us e-mail if you
have questions or comments. Hope you’ll visit us on the web soon!
www.ft.com
This is the web site for Financial Times, an internationally oriented daily
newspaper. If you are interested in a variety of financial topics, you can access this
site, search through their archives, and retrieve current, and not so current, articles.
The site is suitable for the professional investor as well as the novice. You must
register (provide some basic information about yourself, e.g. e-mail address) to sign on,
but there is no charge for use of the site. It's an information bargain.
www.rochester.lib.ny.us
In our office we call this "The Library Site." It is the Monroe County
Library System site and it is wonderful. If you haven’t used this resource, you
should. Libraries are treasures and more of their information goes on-line every year. You
can search for and reserve books from anywhere in the system and have them delivered to
the branch closest to you. We especially enjoy the LIBRA /Magazines & Reference /
Infotrac option. This is a great search engine for ANYONE. Just be sure you have your
library card number handy.
Has the Market Got You Down?
***Did your manager under perform the bull market?
***Has the bear market hit you even harder?
***Were you timed into international stocks, at high risk?
Do you want to turn it around?
If you are looking for
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A coherent, consistent investment
strategy |
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Strong long-term performance |
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The highest level of integrity |
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Outstanding customer service |
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Competitive fees |
Lyon Capital Management provides long-term conservative, value investment management
services. We invest in individual, U.S. based, securities (stocks, bonds and REITs) for
our clients. Call us at 585-248-9821 or visit us on the web at: www.lyoncapital.com
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