World Dominator Intel announced this morning it'll pay $7.68 billion for McAfee, the computer security software company. It's the largest deal in Intel's 42-year history.
This McAfee acquisition smells bad, like a company flush with cash venturing well outside its core competence. One message board poster said the deal felt like "Borland buying Ashton-Tate and Ford buying Jaguar." Ouch. I hope not.
I've used McAfee, and it slowed my computer way down. I wonder if even one Intel executive ever used the product on his computer. Perhaps even worse, Intel just spent nearly $8 billion of its $18 billion cash/securities hoard on a product Microsoft gives you for free.
The average acquisition is much more likely to destroy shareholder value than increase it. But in this case, Intel is buying a company that has grown revenues 20% a year for an enterprise value of less than 14 times free cash flow. If Intel just bought McAfee and held it at that price, it might work out well over time. Intel would collect more than $500 million in free cash flow in year one and even more in future years. How bad could it be if McAfee took advantage of reduced distribution costs, selling to 80% of the microprocessor market?
Asking how bad it could be tempts the fates... These deals don't usually work out for anyone but the acquired company's shareholders. McAfee's shareholders just made about 60% overnight, so they're in great shape. Intel just spent almost half its cash hoard. I hate to admit it, but it's still in great shape.
There's another possibility between success and failure: total indifference, financially speaking. In other words, maybe Intel is such a cash-gushing World Dominating competitor in microprocessors that the McAfee acquisition won't even matter in the end. I doubt McAfee will reduce Intel's 80% market share in microprocessors. That's the source of its consistently thick margins and ample free cash flow. Few companies can afford McAfee-sized mistakes, but Intel is one of them.
It almost doesn't seem fair. It's like a rich kid driving his car straight into his neighbor's door and suffering no consequences because he can pay for all the damage, legal fees, fines, and higher car insurance costs. Life isn't fair. Everyone gets something other than what they deserve. I suspect Intel will continue to get more than its fair share of the billions of dollars spent in the market for computing devices every year.
Mr. Market hates the deal, pushing Intel down 3%. The market always hates the acquirer. Traders always sell short the acquirer to hedge a long position in the target company. It's called risk arbitrage. Its effects are frequently reversed after the deal closes. Egan-Jones downgraded Intel from triple-A to double-A-plus.
A downgrade sounds bad, but double-A-plus means Intel is still one of the most stellar credits on the planet, better than every S&P 500 member except Microsoft.
This deal would be a great one for some reader feedback. What do you think of Intel buying McAfee? Hate it? Love it? If you're in the industry, we'd especially love to hear from you at feedback@stansberryresearch.com.
General Motors filed for its initial public offering today, hoping to shed its "Government Motors" moniker. GM is expected to raise $10 billion to $15 billion, issuing both preferred and common equity. The common stock will come directly from the GM's current owners. The U.S. government, GM's largest shareholder, owns 60.83% of the company. The United Auto Workers union owns 19.9%.
We generally prefer to avoid IPOs. IPO pricing is inflated beyond all reason. Inflating the price of a company whose existence is purely a political phenomenon sounds like it ought to produce a bad outcome for investors. You'd have to be extra crazy to buy GM at the IPO. Do you really want to share ownership with the government and the union? Even if the government sells its entire stake (which is unlikely), Daniel Akerson, a GM board member appointed by OBAMA!, will become CEO on September 1. And the union had a large hand in running GM into the ground in the first place.
GM was special. It was an American icon. For decades, it enjoyed a sterling reputation. I love the old Corvettes and Camaros from the company's heyday. But now that reputation is destroyed. And because the "new" GM pays no dividend, there's no incentive to hold the stock at all.
GM shouldn't even exist. It should have been broken into pieces and liquidated in bankruptcy, not seized by the government and unions. GM shares will never be worth owning again. Whether the stock goes up or down, I can't predict. But I know which direction it should to go: down, down, down.
GM is a perfect example of government perpetuating a failed idea. Government and academia do this sort of thing every day. Academics cling to bad ideas for their entire careers because nobody cares if those ideas work in the real world, least of all the tenured academic himself! It's not hard to believe Komrade Obama was a university professor. He reminds us of the old joke about the French bureaucrat, who was often heard to say, "Sure, that's a great idea in the real world, but it'll never work on paper."
The timing of this IPO is suspiciously political. Coming into the November elections, the OBAMA! administration wants to show America its financial policies (bailouts) over the last three years are working. A profitable (though only for one year), restructured, and publicly owned GM is a good symbol of that.
But the government can't possibly expect to get its money back with an IPO in such a topsy-turvy and increasingly weak market. For the government to recoup its entire "investment" in GM, the company would need a market value of $70 billion. That's 10 times GM's market cap before it entered bankruptcy protection in June 2009. And it's $30 billion more than Ford's current market cap (which has already increased 700% since early 2009).
Today's unemployment numbers confirm OBAMA! supporters' worst fears... The president can't magically give them jobs, homes, and cars. Jobless claims rose to 500,000 last week – the highest in nine months. Government cannot "create" anything. At least, it can't create anything it doesn't steal from someone else first.
Despite the general chaos in the market, or perhaps because of it, gold has entered a stealth bull market. The government's latest round of quantitative easing and the discouraging unemployment numbers are awakening the market to gold's allure. It's closing in on $1,300 an ounce...
New highs: Eldorado Gold (EGO), MFA Financial (MFA-PA), McDonald's (MCD), Altria (MO), Entergy (EDT).
We've always said the nice notes we get must come from relatives or drunks... Judging by today's mailbag, there must be a party somewhere. Send your comments to feedback@stansberryresearch.com.
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Ferris comment: Shorting is simply borrowing shares you don't own to sell them. Your broker will handle the mechanics of it. Basically, all you have to do is tell him the number of shares of a certain company you want to sell short. Then, he'll borrow the shares and sell them. To close the trade, you tell him to "cover." He'll buy the shares and return them to whoever lent them to him. If the shares cost less to buy than you sold them for, you profit on the trade.
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Ferris comment: It's well-established that public drunkenness becomes more widespread as society deteriorates...
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
August 19, 2010