Thursday, July 23, 2009

The Fruitless Excercise of Thinking

I am not exactly sure what the point of blogging anymore is. Logical thinking need not apply right now and to the extent that anything written is actually logical, the current value is next to zero.

Let's take Amazon, shall we. They announce last night they are buying Zappos, an online retailer of shoes. Usually, when a company acquires another company, the acquiring company stocks price goes down and the acquired company goes up. Alot of things that can go wrong in an acquisition not to mention the potential for acquirer to be overpaying. Not so with Amazon. Up 5.5% today. Wow must be a great deal right? Umm, nope. My understanding is it values the company at over 30x earnings (remember we are talking about an online shoe retailer, not the cure for cancer). So really driving shareholder value there. Oh but not only that. It is almost 100% stock deal with total value of $847 million (probably a 500 million impairment charge coming in 3 years). Let's take the math a little further shall we? Amazon at the beginning of today had a market cap of approximately $38 billion. After the announcement of this superb deal the market cap is now $40 billion. WOW!! $2 billion in market cap added. Wait a minute. The entire deal was only worth $850 million. So is the market saying Zappos is such an incredible deal that it automatically created $2 billion in value for Amazon? Basically just the fact that the company is now part of Amazon it is now worth 2.850 billion?

Dang it!! See here I go again trying to think logically. No no no. Worthless exercises. The truth is in today's market the very act of making a press release means you will get buyers.

Hypothetical Trader Exchange:

Trader - Ewww Company x just issued press release. Put an order to buy 100,000 shares at market. Buy buy buy.

Passing cleaning lady (confusion clouds face) - The press release from the company says "Blood sucking Amoeba enters headquarters and kills every salesman at company x." How is that good?

Trader (with look of disgust at someone obviously below him) - And that is why you are cleaning toilets and I am making a fortune on company x. Guaranteed millions and if something goes wrong Bernanke got my back.

If your laughing you would be mistaken. It isn't that far off right now.

Email from a friend today:

Press release: We destroyed $1B of shareholder value today.
Market response: Up 10%

Press release: We destroyed $10B of shareholder value today.
Market response: Up 20%

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