Don't be an ass, Don Mattrick! If you want to save your one-trick pony of a company then let it ride! Shares of Zynga ( ZNGA) sank 14% Friday to $3 after the online game developer's new CEO said he was abandoning plans for real-money gaming in the U.S. in order to concentrate on free-to-play games instead. The decision triggered a slew of Wall Street analysts to slash their price targets on the stock, causing it to give back all the gains it made since July 1st when Mattrick was tapped to replace founder Mark Pincus in the company's top spot. Zynga lost a penny during its second quarter while revenue plunged 31% from last year to $231 million. "In our view, by exiting RMG (real-money gaming) the company has eliminated much of the potential upside for the stock," wrote Needham & Co's analyst while downgrading the stock to "hold" from "buy." Yep, when Mattrick arrived from Microsoft ( ZNGA) the Street thought the money-losing game-maker was off to the races, but now the punters are punting it like a football because he wants to "get back to some good fundamentals." To be honest, we're not sure what the "fundamentals" are for the fast-moving mobile gaming business where if the fickle public doesn't crush you then falling candy will. (Trust us folks. Candy Crush will soon buy the Farmville as well. That's just the way it works.) We'll assume that Mattrick's "back-to-basics" approach does not mean revisiting last year's model when Zynga relied on Facebook ( FB) for 86% of its revenue. Facebook, as evidenced by last week's impressive earnings report, has moved on. Mark Zuckerberg's baby saw its active users jump 21% to 1.15 billion. Zynga, on the other hand, shed over 45% of its monthly active users in the second quarter and is now down to 39 million. That's why it needs an alternative source of players at this point even more than it needs earnings. Those can come later since the company still has over $1.1 billion bucks in the bank from its now disastrous IPO. The stock is down almost 70% since it went public at $10 in December 2011. Real-money gamers would have been the ideal source for new users, especially since Zynga already has a foot in the business in England. And as we all know, those blokes across the pond will bet on anything including a newly born Prince's middle name. (Damn, we had Arthur at 12-1!) Back home, online gambling has already been legalized in Las Vegas and Atlantic City for the tax boost. We expect the rest of America will soon follow as more cash-strapped municipalities legalize it in order to save themselves from becoming the next Detroit. Mattrick is most likely wagering that he can get his company creating popular social content again and still get back into the domestic online gaming market at a later date. That's a dicey bet considering how long it takes to get a license in the highly regulated sector. Frankly, we're not sure why Mattrick wouldn't try to do both at once. There was no reason for him to fold this early, especially when Wall Street's analysts are beyond bullish on the future of internet gaming. If anything, they seemed afraid that a blown Zynga call would bite them in the ass later on, which is why the stock had higher price targets than it deserved before they were sliced last week. Mattrick, in our view, totally misread his hand. Instead of playing Zynga's lone wild card to the fullest, like a moron he mucked it.
4. Fertilizer Foolishness
No two ways about it. Investors that blindly followed Daniel Loeb into fertilizer stocks really stepped in it. CF Industries ( CF) stock surged 12% late Monday, taking other fertilizer producers including Potash of Saskatchewan ( POT), up 2.2% Monday, Agrium ( AGU), up 3%, Mosaic ( MOS), up 1.5%, briefly along for the ride, after the activist investor's Third Point hedge fund revealed its stake in the company in its quarterly newsletter. Loeb did not disclose the size of his equity position in CF, the world's second-largest nitrogen producer. He focused instead on Wall Street's inability to grasp the true value of the company. "We believe its structural cash flow generation strength is misunderstood and that management should deliver a much larger dividend to its shareholders," wrote Loeb, adding that that CF's "access to low-cost North American natural gas -- the primary input in nitrogen fertilizer production -- gives the company a structural, sustainable margin capture relative to global peers with higher input costs." Note to CF management: Better check on that dividend ASAP. Judging from his recent activist forays, Loeb's next bit of text -- whether delivered by letter, Twitter or smoke signal -- won't be as genial. For example, in the same investor letter where he lifted the lid on his CF play, he dropped a bomb on Sony ( SNE) CEO Kazuo Hirai for releasing the back-to-back box office bombs After Earth and White House Down, calling them "2013's versions of 'Waterworld' and 'Ishtar'." Nonetheless, Loeb's angry pen boosted Sony's stock, just like it did for his successful -- and surgical -- strikes on Yahoo! ( YHOO) and Herbalife ( HLF), and that's exactly why a gaggle of investors glommed onto his CF bid and bought the entire group without a second thought. And boy, that second thought would have been worth it because every single fertilizer stock got smashed Tuesday after Russia's Uralkali pulled out of the world's largest potash cartel. No kidding. Not even a day after Loeb's letter lifted the entire group, it all came undone. Potash and Mosaic respectively fell around 17% Tuesday, while Agrium sank 5% on the news that the break-up of the Belarus Potash Company will likely result in a price war that could hammer fertilizer prices for the foreseeable future. Even CF slipped a little Tuesday, falling 1.5% on the industry upheaval. The only thing that saved CF investors from an even worse fate was Loeb's shot across the bow to the company's executives. Too bad that shot landed squarely in the ass of the market's me-too crowd.
3. Cohen's Remorse
Steve Cohen sure must feel like a schmuck right now. Not because the billionaire's beloved hedge fund SAC Capital got busted for alleged insider trading mind you. Judging from his recent $155 million Picasso purchase and the blowout party at his Hamptons estate last Saturday night, Cohen seemingly couldn't give a tweet about Preet Bharara's charges. (And if he does decide to give a Tweet, he should try Snapchat instead. It gets rid of the evidence much quicker and the U.S. Attorney doesn't seem to know much about it, based on his latest sit-down with TheStreet's Jim Cramer.) No, what really must be getting Cohen's goat is the fact that flowingly-maned Jamie Dimon is getting a $410 million slap on the wrist for not supervising JP Morgan Chase's ( JPM) energy traders gone wild. Meanwhile, the Feds are still going after the follicly-challenged Stevie even though he paid the SEC $615 million for the supposed sins of his employees. To paraphrase Mars Blackmon: Money it's gotta be the hair! The Federal Energy Regulatory Commission on Tuesday said the bank's energy trading subsidiary agreed to pay a $285 million civil penalty to the U.S. Treasury and return $125 million in "unjust profits" to Californians for "allegations of market manipulation stemming from the company's bidding activities in electricity markets in California and the Midwest from September 2010 through November 2012." Despite FERC's findings that Dimon's staff was having a whale of a time going old-school Enron on California's ratepayers, the commission did not go after the individuals involved, choosing instead to settle. To be honest, we have no idea why the government didn't press ahead with charges when it looked like it had a strong case. We can only imagine the regulators feared the embarrassment of losing in court so it took the money and ran. Jamie's traders meanwhile did not have to admit the slightest bit of guilt, and JP Morgan shares barely blinked Tuesday, falling half a percent, so the whole affair barely moved a hair on Dimon's gloriously-coiffed scalp. Sadly, that's the custom when Uncle Sam goes up against a Too Big to Fail Bank. Perhaps Cohen should convert SAC to a bank holding company if he survives this onslaught. That's what Goldman Sachs ( GS) did after the bankruptcy of Lehman Brothers in September 2008. Goldman eventually shelled out $550 million to settle its mortgage bond misbehavior. Nevertheless, not a single high level executive at Goldman faced a jury for the investment bank's alleged misdeeds. Needless to say, Goldman CEO Lloyd Blankfein and Stevie share the same barber so it's clearly something Cohen ought to consider.
2. Perrigo's Ploy
Honestly Dumbest fans, Perrigo's ( PRGO) deal to buy Irish biotech Elan ( ELN) makes us sick to our stomachs. In fact, we'd reach for the Pepcid if it didn't add to the tax-evading drug company's bottom line. Yeah, we know it makes good business sense to seek a tax-haven, but the whole thing still stinks to high heaven. TheStreet's biotech ax Adam Feuerstein so perfectly captured our disgust that we are featuring his Monday column while we excuse ourselves for a Perrigo purge. The roots of Perrigo go back 126 years. Luther Perrigo, the proprietor of a general store and apple-drying business in western Michigan, had an idea to distribute medicines and other household goods to country stores. From these humble roots, Perrigo grew into a multi-billion dollar business selling over-the-counter and generic medicines, baby formula and nutritional supplements. Perrigo was an American business success story. That ended Monday, when the company decided to buy Irish drug maker Elan for $8.6 billion in order to evade... um, sorry, I mean reduce... its obligation to pay U.S. taxes. The "new" Perrigo will no longer be headquartered in Allegan, Michigan, home of the "Old Iron Bridge." The company is moving to Dublin, Ireland where Elan is headquartered and companies pay only 12.5 percent corporate income tax. Of course, Perrigo is not physically moving to Ireland. CEO Joseph Papa and his executives aren't selling their big houses in Michigan -- watched over by cops and firemen paid for with public funding. Their kids will continue to attend school here -- some may even go to U.S. taxpayer-funded public schools! The company's trucks will drive on roads built and maintained by U.S taxpayers. The only part of Perrigo actually moving to Ireland is its bank account. Last year, Perrigo's effective tax rate was 23%. That's not low enough, apparently, so Papa bought Elan and is moving the corporate books to Dublin. Perrigo is not alone in abandoning the U.S. for an overseas tax haven. Lots of companies are doing it. Apple (AAPL) is probably the most famous U.S. income tax avoider, but in health care, Pfizer (PFE), Amgen (AMGN) and Eli Lilly (LLY) have all moved huge chunks of their business to tax-friendly locales. Perrigo wins, America loses.
1. Ackman's 'Aha!' Moment
Quick, somebody get Bill Ackman's shrink on the line. We think the billionaire hedge fund manager has finally made a breakthrough. The activist investor revealed Tuesday that his Pershing Square Capital Management acquired a 9.8% stake in Air Products & Chemicals ( APD). Shares of the industrial gas-seller spiked 3% on the confirmation of Ackman's investment. Those same shares jumped over 6% last week when Air Products realized Ackman was on the attack and adopted a so-called poison pill takeover defense, thereby preventing him from taking an even larger stake in the company. Air Products realized it was Ackman's target after it saw stepped up trading in its shares simultaneous with Bill's announcement that he was raising funds to raid a "simple, predictable, and free-cash-flow-generative company." The search for Ackman's mystery target mistakenly sent Wall Street's lemmings into shares of Fedex ( FDX) among others, with the hope they could front-run Ackman before he was done amassing one of his classic outsized positions. "I was a little too cute in my letter to investors. I didn't expect people to be running around looking for the company. I think it alerted the market," Ackman told CNBC. Congratulations, Bill! It's taken a long time, but you've finally realized the negative consequences of being a blowhard. You may have succeeded in turning Wall Street traders into bumbling treasure hunters the likes we haven't seen since Spencer Tracy starred in It's a Mad Mad Mad Mad World, nevertheless, you also raised the cost basis of your stock and gave Air Products management time to build its defenses against agitators like yourself. And Air Products certainly knows a thing or two about fortifying itself against hostile bids like Bill's. The company learned the hard way after it dropped its $5.9 billion hostile bid for Airgas in February 2011 after Delaware Chancery Court rejected a challenge to Airgas's poison-pill defense. Honestly, we don't know whether or not Ackman took into account Air Product's ability to protect itself from barbarians like himself when he was acting all "cute" in his investor letter. Suffice to say, a recalcitrant executive team makes his job harder, a lesson he should have learned following his failed proxy battle over Target ( TGT) that left him tearful. And considering the Ron Johnson catastrophe at JC Penney ( JCP) and his mounting Herbalife ( HLF) headaches -- now George Soros is reportedly joining Carl Icahn against Ackman on the long side! -- the last thing Ackman needs is another one of his big bets going south because of his big mouth. Perhaps this Air Products breakthrough will enlighten Ackman about the value in curtailing his own hot air. That silence can quite literally be golden. And most importantly, that shutting his trap will keep Carl Icahn off his ass. -- Written by Gregg Greenberg in New YorkFollow @5gsonthestreet