By Barry Randall The last few months have been exciting for the Crabtree Technology portfolio. Sometimes too exciting. Since early July, three of our holdings have been the subject of takeover attempts. Normally, an offer to take over a company is good news for the target's shareholders. But these three have been good, bad or ugly. Back in early July, we learned that Shutterfly (SFLY), an Internet-based image publishing service (think holiday cards and pet photos) , had put itself up for sale. I've discussed the Shutterfly situation at length, so I'll summarize here.
The BadOn July 2, it was reported that Shutterfly had engaged an investment bank to test the waters for a possible sale of the company. Shares of Shutterfly immediately rose from about $43 to $50/share. Throughout the next few months, various reports were leaked about what parties were interested in buying the on-line printing company and what they would pay. Finally, on October 10, it was again leaked to the press that Silicon Valley private equity firm Silver Lake Partners had abandoned an offer to buy Shutterfly. It was presumed that no one else was even bidding. Shares of SFLY fell back to the low $40s. Throughout this process, we had elected to hold on to our original Shutterfly position, given that the company had seemed to initiate the whole process. Ultimately, the company held out for a price higher than anyone was willing to pay. You could say we were bad to pass up on the $50/share at which SFLY was trading in mid-July in hopes of getting more. But we still own our Shutterfly shares, and the company continues to do the things we like, including generate cash and take over more of the on-line photography space. And that's not too bad.
The UglyOn October 20, just a week after the Shutterfly drama wrapped up, Canadian phone equipment vendor Mitel Networks (MITL) revealed in a news release it had made an offer to buy Crabtree holding ShoreTel (SHOR) for $8.10 a share. Moreover, it revealed that ShoreTel had already declined the offer and a refused to even engage Mitel in a discussion.
Fortunately, ShoreTel regained its senses and engaged M&A advisory firm Blackstone (BX) to weigh the initial and any subsequent offers.Meanwhile, ShoreTel shares rose 17% to $7.62 as everyone pondered what would happen next and what, if anything, to do about it. On one hand, ShoreTel stock had appreciated 33% since reaching a 52-week low of $5.73 just five days earlier. Moreover, the deal made strategic sense and Mitel, not much bigger than ShoreTel, hardly seemed in a position to raise its bid to as much ($9 – $10 / share) as some of ShoreTel's analysts claimed the target company was 'really' worth. On the other hand, the Mitel bid appeared to be a low-ball offer, valuing ShoreTel at only about 1.5 x sales. So we sided with ShoreTel management, and elected to hold on to our shares. Supporting our confidence was that ShoreTel would be reporting its third quarter just three days later. Surely, they wouldn't so righteously defend their valuation knowing they were about to 'miss' the quarter? Nah, our instincts were correct: ShoreTel beat earnings expectations on record revenue. And as I type this in early November, ShoreTel stock is above $8. As with Shutterfly, though, there are no guarantees that this situation will resolve in our favor. The ugly takeover battle could turn bad.
The GoodSome decisions in life are easy. Do I want fries with that? Yes I do. Prior to the market open on Monday, November 3, Crabtree holding Covance ( CVD) was the subject of an offer from LabCorp (LH). Shareholders of the drug development and testing company were offered the equivalent of $105/share in cash and LabCorp stock, a premium over the last closing price. Both companies' boards had already approved the proposed transaction. Woo hoo! But shares of LabCorp opened lower that Monday, based perhaps on the integration risk of such a large acquisition. So Covance shares were "only" up 25% based on the deal terms. What to do? Easy. I sold the shares out of the Crabtree portfolio.
As I've written before, we are not risk arbitrageurs at Crabtree; we are long-only investors. And, in my opinion, with a fully mature company like Covance, the chance of a higher offer coming along is low.And with a (partially) stock-based offer, we're at the mercy of the acquirer's share price. It was time to sell. So we did. And after the uncertainty of Shutterfly and ShoreTel, it felt good.
Portfolio PerformanceOctober was good for the Crabtree Technology portfolio. The portfolio rose 5.6% in the month, trailing the 6.5% rise in the Russell 2000 (RUT) index but well ahead of the 2.3% rise in the S&P 500 (SPX) benchmark. Our internal benchmark, the Merrill Lynch Technology 100 (MLO) also rose 2.3% in October. The most widely held technology ETF, the State Street Global Advisors' Technology Select SPDR (XLK) rose only 1.6% during the month.
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Photo Credit: Pink Sherbet Photography via Flickr Creative Commons DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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