Ahead of Christmas, GuruFocus users shared good value investing insights on our Forum, including comments about mergers, acquisitions and Warren Buffett (Trades, Portfolio)’s market indicator.
Planned merger between Genoptix Inc. (DELISTED:GXDX, Financial) and Rosetta Genomics Ltd. (ROSG, Financial)
According to a Dec. 15 press release, Genoptix and Rosetta Genomics entered into a definitive agreement under which Genoptix will acquire all outstanding shares of Rosetta Genomics for a gross purchase price of $10 million. However, a user questioned the success of this merger in a Forum post.
John Paulson (Trades, Portfolio), hedge fund manager at Paulson & Co., established a merger arbitrage checklist to determine the risks involved in a merger. The checklist contains the following items:
- Definitive agreements (5)
- Strategic rationale (5)
- No financing condition (2)
- No due diligence condition (2)
- Solidly performing target (1)
- Reasonable valuation (1)
- Limited liability risk (3)
We can grade each of these checklist items on a scale of 1 to 5. The lower the number, the higher the risk of merger failure. The numbers in parentheses show my grades for each of the checklist items, which are illustrated in Figure 1.
Figure 1
Although the two CEOs described in the press release reasons why the merger will provide strategic rationale, Rosetta CEO Kenneth Berlin said the company has a weak cash position and is not likely to raise enough capital to “continue as a going concern for an extended period of time.” Based on this statement and its financial strength rank, Rosetta is a weak acquisition target. I rated “no financing condition” and “no due diligence condition” both 2 out of 5 as Genoptix said it will provide a “secured bridge loan facility” to fund Rosetta’s operations. Additionally, Rosetta will file a proxy statement with the Securities and Exchange Commission. The overall checklist score is less than 3, suggesting the merger contains moderate risk.
Buffett indicator still near record levels
The ratio of the Wilshire 5000 to U.S. gross domestic product reached 142% as of Dec. 22. Based on this market valuation level, the U.S. market is expected to return -2% per year over the next eight Christmases. Despite this, a Forum user questioned the validity of the Buffett indicator.
Figure 2 shows the trend of the Buffett indicator, the Dow Jones industrial average and the Standard & Poor’s 500 index over the past 10 years. Note how the lines are closely parallel, suggesting the Buffett indicator increases when the U.S. market indexes increase. According to a previous article, the Buffett indicator and the Dow both reached new milestones: 140% for the former and 24,000 for the latter.
Figure 2
Other top Forum posts discuss why Apple Inc. (AAPL, Financial) keeps increasing its debt, a “distressed” utility company called PG&E Corp. (PCG, Financial) and various activist investors like Daniel Loeb (Trades, Portfolio), David Einhorn (Trades, Portfolio), Bill Ackman (Trades, Portfolio) and Carl Icahn (Trades, Portfolio).
Please continue adding to our Forum
We unfortunately did not have a Forum winner for November as there were not enough “top posts.” As we like to award top Forum posts with a free copy of "Invest Like a Guru" on a monthly basis, please continue adding quality posts to our Forum and help our Forum finish 2017 strong.
Disclosure: I do not have positions in the stocks mentioned.
