Corporate Restructuring for Fun (not profit)

I've written before about how irritating I find the great corporate restructuring dance to be -- most recently when I sold my shares of Cendant (CD) last year.

Today, another company I used to own, Friedman, Billings, Ramsey (FBR), is doing something very similar.

Again, they have moved in the course of only a few years from the importance of combining companies to "create synergies" to the importance of splitting a company up to "unlock value." As far as I can tell, in most of these situations the only folks benefitting are the corporate bankers and consultants -- and FBR, being a banker themselves, certainly ought to know that.

FBR is another local company for me, just outside DC in Arlington, VA. It used to be a small brokerage house and a separate mortgage investment REIT, but in 2004 (I think) the REIT bought the broker and we ended up with a high-yielding REIT that had a reliable and growing yield, thanks to the extra cash flow that the brokerage spun off and that was used to reinvest in mortgage backed securities.

That turned out to be a pretty great idea for investors for a short while -- FBR had a great 2004 and early 2005 ... but as soon as the great ride of the mortgage REITs appeared to be in danger (and, shortly after that, one of the founding partners got in some serious trouble), the company began to flounder. Even today, with a nice bounce from the spinoff news, the shares are much more than 50% below their highs.

As a former FBR owner, this looks quite distasteful -- the company essentially restructured, at significant cost, to ride the wave of enthusiasm for high yield mortgage-backed securities (and REITs in general). Now that that wave had certainly crashed, they're spinning off the brokerage house, which is moderately successful in its niche, to, it appears to me, take advantage of the new cresting wave in enthusiasm for brokerage houses as the big guys have released stellar earnings yet again. I'd prefer to own companies that build sustainable businesses and manage them effectively through good and bad times -- not companies that feel they have to reorganize every couple years to make it appear as though they're doing something, or impress their friends on Wall Street.

That may well be unfair, but it's yet another reminder for me about buyouts and spinoffs -- be careful, the synergies and cost savings don't always appear or, at least, don't often last ... and the temptation to do something will often lead to a reversal within a few years and a spinoff to release the stock value that they themselves "locked up" with their quest for synergies.

And what you end up with in the end is a damaged-looking set of companies, an air of desperation, and some high-cost corporate transactions that have permanently destroyed at least some shareholder value.

Wow, I haven't been that curmudgeonly on a Friday for a while -- but I come by it honestly. I really liked FBR when I first bought it, well before I started this site, and I still think the company's plan had great merit and could have led to much more success if its management had been ethical, patient, and loyal to long-term shareholder interests.

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Revisiting the Jettisoned

Every once in a while I like to look back at all the stocks I've sold, and see if there's something I missed or might learn from them even if they're no longer in my portfolio (and beat myself up a little if they've gone up since I sold them.

I sold Design Within Reach (DWRI -- click to register for free RT streaming quote) back in December at $5.95. I completely lost faith in the management, and thankfully recognized that I had bought my small position without adequately understanding their problems with production and shipping costs, competition, and self-cannibalization by their various selling vehicles (showrooms, internet, catalog). Today as I type this, the price is below my sale price at about $5.85, but in all honesty I could have held on and sold over $7 if I had waited until January. I would have had to be quick, though, they've just announced that they're delaying their 10-K and good news about DWRI in the near future seems unlikely. I'm still happy to be out of this one.

Cendant (CD) I wanted to shed as soon as they announced their breakup plan, and did sell a few days later at $17.63. Like DWRI, I lost money on this one but could have lost more had I waited longer -- it has dipped to $15 or so and is now at just about $17. Of course, SpaceDev, the company I added to with my Cendant sale money, has lost money too since then. I still have no interest in owning this broken-up conglomerate that's dominated by mid-tier brands (Ramada, Avis, etc.) -- the hope was that these brands could build synergy together, but clearly all management and the investment bankers were interested in was churning the money. Almost all mergers are sold as being about building synergies, and almost all breakups are about releasing value -- both arguments, in most cases, are hard to believe ... most mergers and breakups are about enriching investment bankers and the egos of CEOs. Even if Cendant does trickle up higher if folks buy in to the "unlocking value" argument before the split goes through, I'm not interested. Still happy that I sold this one.

I sold CNET Networks (CNET) and Anglo American UK (AAUK) at about the same time last summer. Both would have probably been better held since they've gone up significantly since I sold. I sold AAUK at $23.44 (now at a split-adjusted $36.50) because I didn't want to maintain such a large holding in a mining collussus that I didn't understand very well, and CNET at $11.98 (it's now at $13,78) on buyout rumors that I thought lifted the stock to overvalued status. I still think both are fine companies and if I had unlimited funds I'd regret that I shed these shares ... but I used that money to diversify internationally into Korea (with the EWY index) and India (with the IFN closed end fund), and both of those have appreciated more than the shares I sold, so on the whole I'm reasonably sanguine about these premature sales.

And one more to note (though there are others -- both good and bad -- that I'll get to in another post) -- I sold New York and Company (NWY) when it started to appear to me that their turnaround story wasn't turning around, or at least not quickly enough for me, and bought Chico's instead. NWY may yet turn around, but they've been on a rollercoaster since I sold them -- I sold at $15.80 and they subsequently dipped to $13 and rose to about $22 at the beginning of this year, before again dipping to the current price of ... just about $15.80 again. I still don't feel like I'm at all confident in NWY's ability to compete against Chico's and the other specialty retailers or the resurgent JC Penney's and their ilk ... this may be another opportunity to buy in with the expectation of the turnaround gaining traction, but I'm not interested in returning to New York at this point.

On the whole, I don't like to sell. I'd rather even ignore a company in my portfolio for a while if I'm frustrated with it, with the assumption that they're more likely to improve than I am to pick a good selling price. But sometimes I need money to put into better ideas, and sometimes I just lose faith in a company's management or in my initial investment thesis and decide to stop being a shareholder. In most of these cases, I still think my decision to sell was reasonable ... though it may have cost me some money, or I may have sold too late or too early. And I may just still be too impatient -- it's possible that my original investment theses for these companies will still play out in the years to come while I watch from the sidelines.

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Selling Silly Cendant Someday (CD)

Well, now it looks as though I'll need to sell my shares of Cendant (CD -- get free real time quote from ADVFN) before too long. I wish I had been peeled to the computer when the announcement came across as I might have sold early on today, before the news-related selloff, but since I didn't catch that I'll just hold on for a little while and see if it either a) recovers so I can get a better price; or b) I find a great deal somewhere else that I need to sell to take advantage of.

But Cendant has now definitely moved to the top of my sell list.

Why? This silly breakup of the company. Similar things have happened over and over, and I guess I shouldn't be surprised, but I'm getting sick of watching corporations spend all their time and money building up a conglomerate to create "synergy", only to realize that in order to get the share price up and their stock options vested they need to then break up their carefully constructed collussus to create "value." Lex reported on this today, among many others.

How does anyone benefit from this, aside from the myriad investment bankers who made money with both the buying and the selling?

The problem for me, beyond what I consider the shenanigans of the build/breakup cycle on Wall Street, is that now I'm left holding a stock that is going to break into four. I have what is for me quite a small position in Cendant and I've just been waiting for their businesses to continue turning around and for the market to realize the value of their brands. That means if I hold until this breakup, which thankfully won't be until next Summer, I'll end up with four different tiny odd-lot holdings that don't particularly interest me as individual investments.

I liked the Cendant portfolio, but I don't want personally to invest in Avis as a stand alone company, or in Howard Johnson's -- the reason for me to own Cendant was to have a stake in a diverse array of hospitality and real estate businesses that was, on the whole, undervalued. And the real kicker, and the reason I'll be selling as soon as I find a good opportunity, is that I don't want to have to sell four different stocks next summer to clear this part of my portfolio -- the commission from selling CD is irritating enough, paying four times the commission would be just stupid. I expect we'll see lots of individual investors gnashing their teeth over this, as they did over Interactive Corp's breakup and spinoff of Expedia, or Liberty Media's spinoff of it's international operations, or the Viacom fiasco. Enough, already.

So sometimes, in my opinion, the whole is more than the sum of the parts. I don't want all these tiny little parts cluttering up my portfolio ... so please, Mr. Market, convince someone that this breakup will be good for shareholder value so I can get a better price soon.

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