Tambrands Shows How the Takeover World Has Changed

By James Cramer

I've lost more money playing Tambrands $50 call options than anybody in America.

That's a dubious honor. But when I saw that Tambrands finally succumbed to the inevitable, without me, I wanted to slit my wrists.

And then I saw the price: $50 a share, and I had to laugh. After all the money I had lost betting that a takeover would occur, when it finally happened, I would not have made any money anyway. The April 50 calls, selling for $1.50 on Tuesday, sold for a fraction of a dollar Wednesday. Unless someone wants to get in a bidding war with P&G, those calls will go out the way all the other $50 calls have gone out these last five years: worthless.

So goes the takeover game.

When I got in the business in the 1980s, the takeover game was frequently the only game in town. As a seasoned call player I used to buy calls on all of the suspect names, betting that it was only a matter of time before I hit a homer.

In the 1980s I hit it out of the park pretty frequently, particularly with food, drug and oil stocks. It was a good bet, as stocks were cheap relative to value of the enterprises they represented. Lots of crummy companies got bids, mostly by raider-types, who would then attempt to turn the companies around or get them sold to white knights at high prices. I remember making a pretty fair amount of money buying calls on companies I did not like fundamentally, companies like Gulf Oil, Emhart, Safeway, Sterling Drug and Revlon, none of which could have been justified on a true earnings analysis.

But the 1990s are different. With the exception of Snapple and NCR, two moronic acquisitions, most of the takeovers occur strategically, and involve solid companies that fit in well with each other.

For the first half of the decade you could still make half-decent money speculating, but only by betting on what Dan Dorfman was going to hype on CNBC. This game went by the name of "Bag żem, Gun żem, and Liquidate żem." A savvy trader would take down a lot of stock on an obvious takeover name, say Quaker Oats (bag żem), plow into the out of the money Oats calls Oats (gun żem) which got the attention of every speculator, and then call Dan Dorfman with a rumored Coke bid for Oats and blast out of the calls and common (liquidate żem) into his 12:30 p.m. Squawk. (What a way to make a living!!!)

I was never a part of this mob. Dan and I were never friends and I wrote repeatedly that this travesty was occurring, and that every investigative reporter worth his salt should be looking into this televised three card monte. But nothing was ever done about it. Everybody played along. I guess it was good for business.

Nevertheless once Dan retired, this took a lot of the strength out of the fraudsters' ability to make money speculating on bad companies. Now the strategy of call buying only worked if you got an honest-to-God takeover bid. Which brings us to Tambrands. In the 1990s companies don't like to overpay for other companies. They care a tremendous amount about their own currency -- heck, they are often paid immensely with it -- and are reluctant to print it for just any acquisition.

I always figured that Tambrands would have to go one day, because while they "owned" the Tampon category they didn't have the critical mass to start another product line successfully. Being a one-product company doesn't cut it anymore.

But I am sure glad I stopped speculating on companies that don't have good fundamentals, because ultimately in the late 1990s, you never get your money back.

This year has been particularly brutal for the speculators. I have seen millions lost speculating in calls on Cascade, Iomega and Novell (myself included) with the expectation of imminent bids that never materialized. Meanwhile, had you bought good quality companies and stayed long you made a fortune.

Next time you reach for the call options, remember this fact: You could have doubled your money in Procter & Gamble on its earnings stream in the time it took for you to make 20% on a takeover at Tambrands. Pretty sobering.

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