|From: Glenn Petersen||3/29/2016 4:34:36 PM|
|A cautionary take on roll-ups:|
The roll-up racket
By James Surowiecki
The New Yorker
April 4, 2016 Issue
Credit Illustration by Christoph Niemann
Few falls in business history have been as sudden and as steep as that of Michael Pearson, the C.E.O. of the drugmaker Valeant. Not long ago, he was heading a company whose stock price had risen more than four thousand per cent during his tenure. A former McKinsey consultant, he had developed a strategy based on acquisitions, cost-cutting, and price hikes. The influential hedge-fund manager Bill Ackman, one of Valeant’s largest shareholders, compared Pearson to Warren Buffett, citing his genius at capital allocation. No one’s calling Pearson a genius anymore. In the past six months, Valeant’s stock price has fallen almost ninety per cent, thanks to a toxic combination of sketchy accounting, political blowback, and slowing growth. Two weeks ago, the company announced terrible fourth-quarter earnings, and said that it wouldn’t be able to file its annual report on time, which drove the stock down fifty per cent in a day. Investors who once saw Pearson as a savior now consider him an albatross: when, last week, Valeant announced that he would step down, the stock price rose.
Valeant used to be a small drugmaker, struggling to stay afloat by doing what pharmaceutical companies typically do: invest heavily in R. & D. in order to discover new drugs. But Pearson, who took over in 2008, scrapped that approach. He argued that returns on R. & D. were too low and too uncertain; it made more sense to buy companies that already had products on the market, then slash costs and raise prices. So Valeant became a serial acquirer, doing more than a hundred transactions between 2008 and 2015. It invested almost nothing in its core business; R. & D. spending fell to just three per cent of sales. It was ruthless about bringing down costs, sometimes laying off more than half the workforce of a company it acquired. And though Martin Shkreli may be the public face of drug-price gouging, Valeant was the real pioneer. A 2015 analysis looked at drugs whose price had risen between three hundred per cent and twelve hundred per cent in the previous two years; of the nineteen whose prices had risen fastest, half belonged to Valeant.
The company also pulled every trick in the financial-engineering handbook. In 2010, it merged with a Canadian company, in order to bring down its tax rate, and it sheltered its intellectual property in tax havens like Luxembourg. It used opaque accounting methods that made it hard for investors to judge how well acquired companies were doing. To ward off competition from generic drugs, Valeant entered into a complicated relationship with a mail-order pharmacy called Philidor. Meanwhile, it paid its executives exceedingly well, and tied their compensation to shareholder returns, thus encouraging a single-minded focus on stock price. Valeant embodied practically everything that people hate about business today. So it’s no surprise that much of Wall Street saw it as a profit-making machine.
If Wall Street was happy, what went wrong? There were a couple of contingent problems: the dubious relationship with Philidor made people wary of Valeant’s accounting (the company just announced that it would have to re-state earnings for 2014 and part of 2015), while the political backlash provoked by Shkreli limited Valeant’s ability to raise prices. But the bigger problem was that Pearson’s buy-and-slash approach hit its inevitable limits. Valeant had become what’s known as a roll-up: a company that buys lots of other companies, trusting that they’ll be much more profitable together than they were apart. The challenge for roll-ups is that they have to keep feeding the beast: if you grow by buying, you have to keep buying to thrive. But, the bigger you get, the fewer deals there are that can truly boost your bottom line. And, because your grim reputation precedes you, you end up paying big premiums, which may mean that you have to start borrowing heavily. (Valeant’s debt is almost three times its annual sales.) Not surprisingly, roll-ups have a terrible track record. A Booz Allen study of the performance of eighty-one roll-ups between 1993 and 2000 found that only eleven did better than the market as a whole. Another study found that more than two-thirds of roll-ups created no value for investors at all. The only roll-ups that succeed are those which find, as one study put it, “a fundamentally superior way to make money.” Valeant’s collapse has shown that it had no such ability.
Valeant now says that its roll-up days are over, and that it’s going to focus on expanding its business “organically.” Yet it’s far from clear that this will be possible. For years, Valeant has been less like a drug company than like a super-aggressive hedge fund that just happened to specialize in pharmaceuticals. It made money not by providing economic value to customers but by financial engineering and by gaming the system. It exemplified a corporate era in which financialization too often eclipsed production. And, in the process, it forgot an important truth about markets; namely, that there are few free lunches. Pearson’s promise to investors was, in effect, that other companies would do the work of researching and developing new drugs, after which Valeant could swoop in and reap the enormous rewards without having taken any risk. But this was a fantasy. The attempt to evade risk turned out to be the riskiest strategy of all.
|RecommendKeepReplyMark as Last Read|
|From: richardred||4/4/2016 10:10:24 AM|
|New buy today TWI Titan Int. in a very depressed sector. I like the fact last two insider transactions have been buys. The company recently has stated it has received a bid for a unit at an acceptable level price. >snip |
The Company had previously expressed its receptiveness to entertaining offers for the sale of ITM at this price level.
Interesting PR Fri.show a neat way of dealing with a big problem ( big tires).
|RecommendKeepReplyMark as Last ReadRead Replies (1)|
|To: richardred who wrote (3665)||4/5/2016 9:16:48 AM|
|My Speculative appeal of CYAN gets upped. TWO hypothetical Hunters -Meridian OHC Partners & TerraBrands|
This Company Went From Making Biofuels to Health Food
Using a surprising ingredient.
TerraVia and VMG Partners are coming together in a new venture they’re calling TerraBrands.
The two entities are working to bring algae to the mainstream market in food, pet, and wellness products. They plan to invest in and acquire already established, lower middle-market companies that they can build on using TerraVia’s suite of algae-based ingredients and VMG’s capital and experience with consumer brands. TerraVia has also brought founder and former CEO of Popchips, Keith Belling, on board to leverage his brand-building expertise.
The partnership between TerraVia and VMG is fitting considering the latter’s company portfolio, which includes other health-focused brands like Justin’s, which is known for its nut butters, and Health Warrior, the creator of the Chia Bar. “We, in our business and our portfolio companies, are spending a tremendous amount of time thinking about how to bring better, more nutritionally available ingredients to food products,” Kara Cissell-Roell, managing director of VMG partners, told Fortune. “Algae is one of those ‘mothers of all nutrition.'”
This can almost be taken in a literal sense as many plants derive from algae, and it has a nutrition profile superior to a lot of other so-called “superfoods” on the market. It supposedly has more omegas than chia, more protein than spinach, more fiber than kale, and less saturated fat than olive oil.
TerraVia recently changed its name from Solazyme SZYM 1.56% , a company that was known for making biofuels using algae oil. With petroleum-based oils priced low these days, the company could no longer compete in that arena. Its stock reached a high of around $27 in 2011, and has since fallen dramatically by about $25. With what Cissell-Roell says is a “massive opportunity” in the plant-based protein market, TerraBrands is likely a shot at turning that around.
Though the company has been focused on biofuels since its inception 13 years ago, Belling says that it began to realize the potential in the food sector in the last 8 or 10 years. In the past nine months, before making the official change from Solazyme to TerraVia, it saw a handful of early adopters incorporate some of its algae products into their foods, including Enjoy Life brownie mix and Califia Farms coffee creamers. The company changed its name to TerraVia to better fit its new focus. “Terra” means earth and “Via” means path or journey. Together, as Belling explains, they refer to “a path to a healthier food system that’s better for people and better for the planet.”
As has been previously reported by Fortune, it will be interesting to see whether or not consumers will be open to the idea of eating algae. When people hear algae they think of pond scum, but at least it isn’t the strangest food product to hit the market. According to Cissell-Roell, TerraVia’s algae products—which include various oils and powders—have a neutral taste profile and a palatable base, making it the perfect ingredient to replicate certain foods. She claims that they “taste and feel and act like incredibly close replicas” so much so that you wouldn’t be able to tell the difference.
TerraVia’s products are made in fermentation tanks, which Belling said is comparable to the way beer is brewed. However, Cissell-Roell stressed that the algae’s molecular composition is never altered and the result isn’t some kind of “frankenfood”—a likely dig at soy, which happens to be genetically modified.
The plant-based trend is “not just a trend, it’s a reality right now, and it’s continuing to accelerate,” according to Belling. There are a growing number of products and brands turning to algae as an alternative ingredient, and TerraVia is coming in at the forefront of that movement.
|RecommendKeepReplyMark as Last ReadRead Replies (2)|
|To: The Ox who wrote (4158)||4/11/2016 12:53:09 PM|
|Hi OX that may be true, but IMO the stock sold at a higher price just last year. I'm merely suggesting the lawyers representing AFOP shareholders will bring this point out in a fairness opinion. Corning is also suggesting the acquisition to be accretive to its earnings per share, during the first year. I think there might be a fair chance to get a buck or more out of GLW. Apparently the company has more value to GLW because of it current fiber optic business that was growing. |
P.S. I'm staying away myself. Insiders own quite a bit and due to your points, chances of a White Knight are much reduced. Hypothetical White Knight cost -16 mil for a buck more bid plus a breakup fee.
|RecommendKeepReplyMark as Last Read|