The final countdown

                  
                       We're heading for Venus and still we stand tall
                       'Cause maybe they've seen us and welcome us all
                       With so many light years to go and things to be found
                       I'm sure that we'll all miss her so
                       It's the final countdown, The final countdown.
                           
                               Quoted from song lyrics - The final countdown
                               Songwriters: Tempest, Joey;    Performed by Europe

Just occasionally, the market's creaky trading machines in tech counters can whir into rapid action.

Bears sidestep Acer pit

Pep talks from Acer's chairman and interim CEO, JT Want, delivered much-need optimism for the flagging Acer stock which defied gravity to edge up NTD1 to NTD58.1 WoW last week. Not only refuting speculation about a rerun of lowering estimate in 2Q11 for the 3rd time in a row, Wang also signaled favorable odds for the NB maker to revise upward expectations for the quarter.

At its Apr. 07 analysts meeting, Acer released a slackening growth tip for 1Q11 sales, down 3% QoQ to NTD145 bn, which will be held the same in 2Q11. By product lineup in 2011, sales of its NB stripes, including netbooks, will gain at a single-digit pace. Netbooks will be sold off at a flat clip of 30 mn units with emerging markets eyed as main channels. Acer disambiguated it that netbooks operation won't slip into a rear-view mirror, and even put in pretty picture for 2011 total sales expected to be capable of an upward revision, on assumptions of better-than-expected delivery of its first tablet soon to hit shelves globally.

Pre-orders for Iconia Tab A500, its first tablet and to be sold exclusively on Best Buy stores at USD449.99 kicked off Apr. 08, with Android-based device available April 24. The Iconia Tab A500 has 16 gigabytes of storage, and front and rear cameras. It features only Wifi wireless internet without connection via a phone operator. The tablet has a 10.1" screen similar in size to iPad2 and is USD50 cheaper than the similarly equipped device from Apple. Upbeat news indicates that the new gadget is well-received on the island, to be closely-watched as a barometer for Acer's future resilience.

Acer dismissed uncertainty about its profit margins. R&D expense to be accelerated this year will erode gross margin less than 0.2%-0.3%, a ratio far lower than sales growth. It ruled out a big impact from shortfall of key material supply caused by Japan quake, and will face threat no more than Apple. One niggling concern among foreign analysts, however, is that cost for contracting services for Acer NB had been assessed to be in for appreciations. There are grounds for them to state so, given a global inflationary specter, but a tight alliance for Acer with its Taiwanese ODM makers could serve as silver bullets in the face-off of global NB seats, despite cost hike strains will linger over 2-3 years.

Guidance for 3Q11 and the whole 2011 will be announced in late May following a finalization of its new CEO candidate this month. A reshuffling of leadership as previous CEO, Lanci, stepped down also posed anxiety about a ripple effect, connoting that Lanci will uproot a team of high-ranking workers in Acer global footholds. Such an unwarranted concern is grossly inadequate, as the NB icon can surely find one to fill the gap in light of the fact that a shake-up of management is a high-frequency occurrence in an always cut-throat IT market.

In essence, higher gears into the already-crowded tablet market is relatively too early to prove its ability revising 2Q11 bar upwardly, but will come into clearer visibility in 4Q11, a typically peak season boosted by back-to-school buying spree. Its efforts into mobile PC, in particular the tablet and netbooks applying window 8 OS and ARM processor, will become a trendy and valuable cure-all to its outlook, much as its operation in China market that is hoped to double sales this year.         

Selling pressure from foreign investors plunged Acer stock to a weekly low of NTD55.2 Wednesday, then giving way to renewed buying interest occurring on Friday session which they posted a net buy of 14.5 mn shares. The reversal of foreign pundits, though not building up faith strong enough to justify a mid-term firm ground over NTD55, has at least reflected an Acer's win in penalty kick against foreign players. Acer may be long in the tooth to play as a rising star, but isn't a clumsy laggard in global battlefield. What's more convincing is its sooner-than-expected stock buy-back policy, another ace in the hole to support its stock. Buying on dips for Acer is still deemed reasonable, albeit not necessarily pepping your portfolios immediately.

Market is abuzz with M&A - Polaris & Yageo to be taken over

April has marked would-be barn burners for M&A activists who unleashed their buyouts of 2 listed firms–Polaris Securities (2854) and Yageo (2327), both of which are going to be delisted in next 6-12 months.

With a total price tag of NTD48.87 bn for the merger with Polaris, Yuanta Financial Holding (2885) will launch right issue and place NTD28 bn in the pipelines to defray the takeover that is going to ramp up its paid-in capital to NTD91.7 bn from current NTD81 bn, with a diluted effect of 11.6X. Valuation for the deal was reportedly formulated appropriate to please shareholders in Polaris whose NAV per share stood at NTD13.25, translating into a PBR of 1.71X based on the acquisition price of NTD22.9. The huge settlement is far larger than any securities house merger before, and pricier as compared with previous record PBR of 1.5X. Yuanta, already spreading into banking sphere, is poised to further cement its leading stock brokerage market share which commands a 12% market turf. It will take a bite on life insurance area and bare claws for remaining securities houses in future, after its owners were acquitted of charges of alleged bribery to former President.

Yuanta has picked up kudos in securities houses M&A which it began as early as 1991 when Taiwan stock market was hit extremely by sharply-dwindling daily trading volume that once dived to a nadir less than NTD8 bn. At that point, its market share ranked at fifth or sixth slot. Yuanta's management style has been astute, efficient yet draconian. Employee of Polaris certainly can remain chirpy as a canary, applauding the punter's reliability to vouch a 3-year warranty ensuring their working rights, but a phenomenon will always tend to emerge, - layoff will ensue minus or plus 3 years, an event not so freaky in the industry.   

History again repeated itself as doubts about a jump-the-gun effect loomed against the blatant action. Polaris stock, before the merger news was publicized on Saturday night, raked in 2.75% gain to close at NTD20.6, outpacing other financials in a lackluster market proceeding on Friday which dipped 7 points to 8,894. Motivated by swirling rumors being as potential acquisition bait for Yuanta, Polaris stock has been a financial leader to revisit a recent top of NTD20.65 logged in late Jan. Insiders seldom went on trial for insider trading fraud in Taiwan stock market. For instance, Taiwan Int'l Securities (6012), set to fall into extinction in May by a grab from Capital Securities (6005), shot through the roof on a 22% steep updraft preceding news release.

Barbarians at the gate make their Midas touch on Yageo stock

US private equity fund Kohlberg Kravis Roberts & Co (KKR) and Yageo Corp founder Pierre Chen on Apr. 06 offered an all-cash buyout for Taiwan top-notch passive component maker, Yageo (2327), in a ticket valued at USD1.6 bn priced at NTD16.10 each. The buyout will be conducted via a joint venture between KKR and Chen called Orion Investment. In response to the news, Yageo stock jumped to NTD15.6, up by NTD1.5 WoW.

Orion is scheduled to nab a more than 50% stake in Yageo after completing the tender offer, bringing about a merger of Yageo and Orion, as planned by KKR and Chen. Yageo afterwards will be delisted, if everything goes well. Funds managed by KKR and Chen's family currently own a combined 34.3% of Yageo outstanding shares assuming a complete conversion of KKR positions of Yageo Euro convertible bonds and exercise of all employee stock options. After the decoupling from Taiwan market, Yageo will reportedly work to restructure itself, mulling over a possible relisting in about 3 years.

To be sure, Yageo has been adept at sizing up the economy and enlarging its operation scale. In 2005, it spent NTD18 bn to purchase Phillip ( Taiwan ), and a series of bangs in acquisitions or ownership increases in 3 listed firms that included MLCC field allowed it to act as a bellwether in Taiwan passive component industry. Its buy offer for Ta-I Technology (2478), a resistor maker, was however a flop in 2007. The unrepentant market raider this time around reloads its elephant gun with trigger fingers itchy to hunt after no one else but its own company. 

The scheduled doozie hug for Yageo stocks comes at a time when it is primed to stretch out blockbuster showings. Last year, its sales zoomed 42.8% YoY to NTD27.32 bn, from NTD19.13 bn a year ago. Net income grew more than five-fold to NTD4.15 bn, from NTD 673 mm in 2009. EPS topped a 10-year apex of NTD1.88, up from NTD 0.31 in 2009. Skepticism about its intention for a demise of Yageo listing has heightened, not in the least of which is how it rolled out the offering price at NTD16.1, a level widely-criticized as dirt-cheap and unacceptable.

Disputes over offering price level intensify

Yageo clarified the gauge on the grounds that the price was culled by a fully-diluted effect from its outstanding CB, which in turn translating into a PER of 11X. Besides pointing out the offering price verges at a premium of more than 14.2% vis-a-vis market price at disclosure date last Friday, Yageo emphasized that the price also surpasses its NAV per share of NTD14.7288 (as of 3Q10). Another factor taken into account is the price stands for a peak in a 7-year span. All the remarks, on whatever kind of algorithm, make little sense and possibly try to dupe its shareholders.

Questions have roared up against a 7-year interval reference used by Yageo as yardstick for the offering price, rather than a stretch over 10 or 20 years. Yageo stock hit an all-time high of NTD 152 in 1997, and never breached a ceiling of NTD16.5 seen in June 2007 since 2005, a year before which the stock charged to NTD 24 in Apr. The 7-year period was then "explicable", as the offering price is lower than that zenith of NTD16.5. In other words, for investors adopting a buy-and-hold mode for a stint over 8 years, the valuation will run against their hopes. Yet, will there be any compensation for the long-term stock owners, if the plan gets a go-ahead from the authorities?

Stalled growth becomes viable for failing Yageo  

What's even worse, the stock is said to too big to churn out rosy results pleasing investors, and Yageo is exhausted to engage in Q&A for performance, as cited by its chairman. A full transfer into common stocks by KKR's USD228 mn holdings of Yageo 7-year unsecured zero-coupon CB, debuted in June 2007, will help lift its paid-in capital near to NTD30 bn. In Chen's interpretation, that will stoke unease about a scenario of being "so big to fail", instead of "too big to fail".  

In terms of its history of capital structure, Yageo would definitely receive no confident vote from investors who got involved in its past right issues programs. As of Sept. 2010, rights issues, recaps from retained earnings and recaps from capital surplus respectively made up 21.58%, 44.24% and 34.18% of Yageo paid-in capital, with the right issues portion coming at a higher-end metric than other electronics. Acer turned in more comfortable figures by 4.01%, 28.81% and 67.18%.   

Partly spreading confusion will be the role of Orion Investment, the mechanism to scoop up Yageo outstanding shares registered by a hefty number of 128K public investors. Domiciled in the Dutch with capital only documented at NTD0.5 mn, the JV between KKR and Chen will start a blitz to snatch up shares with the deadline fixed at May 25, before which the JV will buy a minimum of 16.7% of Yageo floating stake. Combined with the current stash from KKR and Chen, the JV's holding will accordingly exceed over 50%, making it applicable for a public tender offer without shareholders approval.      

Offering price is close to Yageo CB convertible price

There are certainly various ways of slicing and dicing the valuation that paints a sobering picture. One comes from the convertible price of Yageo 7-year unsecured CB at NTD16.15, fractionally higher than its tender price of NTD16.1. To some, the Yageo case is nothing but a makeshift to meet cash-out call from KKR which has an average investment horizon of 5 years and more in its portfolios companies. After getting a board seat, it exits its investment through IPO, SPO, and sales to strategic buyers.

KKR, listed in NYSE in July 2010, glittered in its 1Q11 results with asset under its flag lifted 10% to USD61 bn. But it might stumble in Europe where it underwent a management makeover in Feb. this year, and KKR Europe II fund continued to underperform. In addition, on Mar. 07, 2011, it said it has received a request from US regulators for information in Jan, 2011 about the company's dealings with sovereign wealth funds. KKR is now cooperating with the agency's investigation   

For the reckless move by KKR and Chen, KKR seems to pick a good time to ask more of return, now that Taiwan market is in solid footings to sport further gains with investors' complacency appearing high, albeit a short-term downward correction is on the horizon. Whether the buyout will be finally nodded by regulators or not, Yageo stock might already hold up well above NTD16.1 or higher than that CB convertible price of NTD16.15. If so, that will give chances for KKR to raise money to buttress its balance sheet by liquidating position of Yageo CB.

Redeem CB in the form of stock buyback

To fully convert its CB holdings into stock is probably one feasible way for KKR to depart from Yageo, particularly given the fact that market liquidity for ECB has long been shallow. What's also downbeat is that the CB doesn't carry any interest coupon. Yageo in the past 7 years was likely not so willing to see a stock price over NTD16.15, a level that will generate arbitrage opportunity, - buy CB and short the stock over that price at cash market by traders in local securities houses' int'l departments. Yageo's begrudging attitude had torpedoed any attempt for its stock to stage a stellar uptrend in the past 7 years. Plus, the stock's daily trend has been characterized by high churning rate, not a goodie technical sign for stock prices at lows but helpful outcome for stock brokers.

Buying from foreigners on last 2 sessions last week abruptly ballooned by a total net buy of 105 mn shares. It looks like a warm-up phase for Yageo to absorb potential selling from KKR in future. This doesn't mean that one can go in front of it (i.e. short selling Yageo) at present. Their buying is supposed to be extended to prevent a fallback of Yageo stock, if Yageo determines to redeem KKR's CB holding by means of stock purchase via Orion at stock market. A sudden increase of Yageo's registered foreigners' holdings, not by market transactions, will be another valuable canary, chirping that KKR has fully converted its CB holding into common stocks in preparations of a farewell.

What will happen next is a likely step for Yageo to announce a stock buyback project. Yageo, somehow, seemingly lacks capital to redeem the load of USD228 mn CB held by KKR, especially because Yageo is well reputed as an art collector. The buyout news will serves as an upbeat catalyst for common folks to buy the ideas that the firm is on the positive bias for stock price at least for the moment. Nevertheless, a development for a listed firm that garners EPS at a 10-year pinnacle yet decides to forfeit its trading status, if put into action, sounds irrational, irresponsible and counterintuitive.

Ditch new Yageo stock on relisting

It will not go unnoticed, for sure, to regulators concerning the name of real foreign buyers, offering price and social justice to shareholders who may start to be alert about the final countdown for Yageo delisting. When the buyout hubbub is settled into dust and Yageo really finds a new strategic partner after fleeing the market, someone can then take few days off to date with Rosamund Kwang (關支林) in Paris or Venus. But there will be raised a question: will you scramble to pitch a buy order for new Yageo stock if it again goes listed on this island within 3 years, according to source by people familiar with the issue?   

Investing is a complex rocket science that requires professional help - at least that's what professionals usually say. But a winning case can be made for investors following a rule known as KISS, which stands for "Keep it simple, saver." Any listed firm should also follow that principle - all they need to do are earning money for public shareholders and keeping production lines humming. Investors' portfolios must be reallocated or reviewed at least once a month to ensure that there isn't any stock padding sales record, involving in accounting shenanigans or orchestrating a scheme to tamper with the company's listing lifetime. It is a boring but a bare-bones approach.

Good luck and good trading !
Link to The final countdown - http://www.youtube.com/watch?v=7_IKcMl_a9A