Published
by: Lyon Capital Management, LLC - A Registered Investment Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
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Hostile Takeovers |
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Balanced Portfolios |
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More Cyber Picks |
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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