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Why Gordon Gekko Was Wrong, Greed is Not Always Good

Companies / Mergers & Acquisitions Oct 29, 2012 - 08:39 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleAs longtime readers know, I have a real affinity for old investing adages - in large part because of the very real lessons the best ones convey.

And one of my favorites tells us that "Bulls make money, bears make money - and pigs get slaughtered."

With apologies to Gordon Gekko, while greed may be good, excessive greed can be hazardous to your health - and to your portfolio.

And a news item I spotted last week drove that point home.

Last Monday, the trade journal Canadian Business reported that Canada has issued a "thumbs-down" verdict on a deal that calls for Malaysian state-run energy giant Petronas to pay $6 billion for Progress Energy Resources Corp. (PINK: PRQNF), a natural-gas producer that's based in Calgary.

Canadian Industry Minister Christian Paradis said Ottawa nixed the deal because the administration of Prime Minister Stephen Harper was "not satisfied that the proposed settlement is likely to be of net benefit to Canada," Canadian Business said.

Needless to say, the free-market crowd is using the Harper Administration for target practice - alleging the rejection will have a chilling effect on all foreign investment north of the border.

Greed is Not Always Good

Of course, that's a political concern. My focus today is on the investing fallout ... and the lesson we can learn from it.

As a result of the decision, the value of other resource companies - especially ones investors thought might serve as decent takeover candidates (at a nice premium) - have also been hit.

Investors are also worried the decision also puts at risk the proposal by China's CNOOC Ltd. (NYSE ADR: CEO) to buy Canadian oil-sands player Nexen Inc. (NYSE: NXY).

And that brings me back to my "pigs get slaughtered" point.

You see, Permanent Wealth Investor Editor Martin Hutchinson twice recommended Nexen shares to Private Briefing subscribers - first in early September 2011 and then again in early July of this year ... just two weeks before CNOOC offered to buy Nexen for $15.1 billion, or $27.50 a share.

Afterwards, the stock jumped to $26 - 33% and 54% above where he'd recommended it to you, but a full 6% below the "offer" price of $27.50.

When the Nexen deal was announced, a lot of folks asked us whether they should cash out and take their winnings, or hold out for that last 6% - which, admittedly, is a significant amount of money in today's zero-interest-rate world.

Martin didn't hesitate. In fact, he gave readers the same advice he gave his own subscribers (who, by the way, pocketed 68% on the deal).


"There's an old investing adage that says you'll never buy at the very bottom and you'll never sell at the very top," Martin said at the time. "And this is one case where I think that investors would be very wise to take what the market is giving them."

Martin's reasoning was based on two things.

First, any takeover - especially one this large - would take many months to consummate. So you could end up waiting a very long time for that small bit of additional cash. With time comes "exposure" to potential risks - including unforeseen events that could change the deal's financial terms, or scuttle it altogether.

With the Nexen deal, the No. 1 worry was government resistance.

And that risk was well-known, thanks to a law called the "Investment Canada Act," which requires government leaders to "evaluate whether individual transactions are in the net benefit of Canada."

If Ottawa decides there's no benefit to the Nexen buyout - as it did with the Petronas/Progress deal - then the deal gets scuttled. And if the deal is nixed, the share price of the target company probably plunges back down to pre-deal levels.

If that happens, that 30%, 40% or 50% windfall profit you were holding in your hands gets whisked away on the wind.

What You Lose When the Deal Falls Apart

It's happened before.

Various miscues helped kill the $40 billion BHP Billiton Ltd. (NYSE ADR: BHP) bid for Potash Corp. (NYSE: POT) in 2010, as well as the $19 billion CNOOC bid for California's Unocal Corp. in 2005. Ultimately, however, it was resistance from the target companies - as well as from government leaders - that combined to sink both deals.

Thanks to the rejection of the Petronas deal, Nexen shares closed the week near $23.30 a share. That means that any investor who held on for the extra 6% is now actually 10.4 % below where they were when the deal was announced in late July.

And that 10.4% drop in your profit doesn't include the "time value" of the money that was sacrificed.

By "time value," I'm referring to the profits you could've made by investing that money elsewhere in the months that followed the Nexen buyout announcement.

For instance, the Standard & Poor's 500 Index gained 6% during that three-month stretch. If you'd just invested in that, instead of sitting and absorbing the 10% decline, you're talking about a "relative gain" of 16% on your money.

And that relative gain will get even bigger if the CNOOC/Nexen deal is axed, and the stock sinks back to the $17 level.

There are buyouts where it might be worth holding on - such as deals where you'll end up owning stock in the newly merged venture. But even there you have to be careful.

When Private Briefing recommendation Pentair Inc. (NYSE: PNR) linked up with a Tyco International Ltd. unit in a merger designed to create a new water-equipment giant, Pentair's stock spiked to $47.61.

Now, with the merger done and the company facing its best-ever prospects, the stock is trading at $42.16 - or 11% below where it was before the deal was announced.

Subscribers who took our advice and cashed out ended up making about 48% (not including dividends) on the stock recommended by Chief Investment Strategist Keith Fitz-Gerald. Now that profit is down to only 32%.

The bottom line: In a straight buyout like the one involving Nexen, you're probably not going to get every dollar. So don't try for it.

Be happy with what you get, sell out and look for new profit opportunities for your money.

Just remember: Pigs who remain too long at the table end up being part of the meal.

Source :

Money Morning/The Money Map Report

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