February's just getting started but it's already a bonanza for legendary investor Warren Buffett. His stakes in
have appreciated about $1 billion in the past few days.
Buffett even lent his name and credibility to the Gillette acquisition, saying he'd be increasing his stake. All the M&A activity, along with a bevy of good economic data, have surely helped stocks pick up some ground lost in January. And Buffett's not the only winner. Amex was the top holding of Chris Davis'
Davis Financial Fund and
was No. 7, as of the end of September. The fund, up 1% in the past few days, also owns a slug of insurance divesting
, which rose 0.9% to $49.48 Tuesday.
Citi's rise helped the
Dow Jones Industrial Average
gain 62 points, or 0.6%, to 10,551.94, while fellow financial component American Express gained 6% after it announced it would spin off its financial advisory unit. The
rose 0.7% to 1189.41 and the
added 0.3% to close at 2068.70.
Among other deals coming together over the past week,
agreed to buy Citicorp's life insurance and annuity business for $11.5 billion;
( SBC) agreed to pick up its former parent,
for $16 billion, and;
( EK) snapped up Canadian printer
for $1 billion.
The deal surge is putting downward pressure on the corporate bond market, where prices are considered historically rich when compared with Treasury bonds. Credit-rating agencies are reviewing bond ratings of Procter & Gamble, Kodak and SBC for possible downgrades in the wake of their announced acquisitions. SBC's bonds due in 30 years, for example, yielded 5.83% on Tuesday, up from 5.76% at the beginning of January, according to the Nasdaq Trace database. Over the same period, the yield on the 30-year Treasury note has decreased to 4.59% from 4.82%.
If other buyers join the wave, like
, there could be plenty more carnage among corporate bondholders even if interest rates stay flat.
After Citicorp and Amex decided to dump pieces of their respective financial service empires, some were quick to declare the "financial supermarket" strategy dead and buried. A closer look reveals that too many firms tried the supermarket strategy, but it's a concept that pays off for some.
American Express, for example, was never a great candidate to expand into all financial services. Its mutual funds have been terrible performers and the synergies between its core credit card, travel and processing units and the rest of its portfolio were never quite clear.
For example, American Express has been offering periodically to give me 5,000 "membership rewards" points if I would agree to sit down with one of their 12,000 financial advisers and discuss my finances. All of the offers ended up in the circular file -- why would $25 bucks worth of Amex wampum get me in the room with a financial adviser?
There's nothing about the American Express brand or the credit card business that screams "sound financial advice ahead." Whenever I've explored any of a variety of financial service offers from Amex over the past 10 years, they've always been overpriced and lacking in features.
But what about Citi, the company whose blockbuster 1998 merger with Travelers helped tear down the law separating banks from insurance companies? The more obvious synergies there are paying off. Yet, as the bank is conceding with the sale of Travelers to MetLife, not every product needs to be homegrown. Distribution arrangements leverage Citi's brand recognition and customer reach without forcing it into businesses, where it lacks the scale to compete.
Over the past year, Citi has engaged in a "garage sale" to rid itself of noncore businesses while making almost a dozen additions like First American Bank in Texas and
consumer finance group, to bolster distribution.
The moves are "consistent with its view that distributing products is more important than manufacturing them," Lehman analyst Jason Goldberg wrote on Tuesday, noting the transactions allow Citi to "allocate capital more effectively."
The strategy is not unlike
approach of selling all manner of laptops, printers and software that it doesn't build to leverage its customer relationships, brand recognition and ecommerce strengths.
The new MetLife will see its life insurance products offered at Citi and Smith Barney. The old Travelers life business adds distributions to a host of regional brokerage firms like Edward Jones and Piper Jaffray and its annuities business gets into Merrill Lynch.
As an aside, MetLife shares have traded sideways this week, more owing to the structure of the deal's financing rather than the long-term outlook. Investors are worried about how the insurer plans to pay for the $11.5 billion purchase, according to several analysts. The company says it will use up to $2 billion in cash, up to $3 billion in debt issuance, up to $3 billion of asset sales, up to $3 billion worth of shares issued to Citi, and up to $5 billion of convertible issuance.
Prudential Equity Group analyst John Hall pegs several of the company's New York office buildings and a stake in reinsurer
as potentially slated for divestiture. The more the assets fetch, the less stock and convertible issuance needed to finance the buy -- and the less dilution for existing shareholders.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send