Why I'm Selling Taro Pharaceutical and Buying DivX

I am parting company today with one stock that has not been a success - Taro Pharmaceutical Industries Ltd. (TAROF.PK). I cannot fathom what it is that has happened at the company over the last two years that brought its owners to the point where they had to sell at a price as low as $7.75.

Apparently I am not the only who doesn't understand, and as proof of this, mutual fund manager Franklin Templeton, which holds 9.5% of the company - at an average cost which I suspect is not less than $12 per share, is seeking a court injunction to block the sale.

Another person who still doesn't get the picture is analyst and accountant Brian Laegeler of the unbiased investment research firm Morningstar, who on the day the sale was announced last week, published a review of Taro in which he claims the company was worthy of a fair value of at least $13, but as much as $20 to a large competitor. Incidentally, I assume that when Franklin Templeton started out on its Taro escapade back in the summer of last year, it probably did so at least partly on the basis of advice from Morningstar, which also rates the mutual fund industry, of which Franklin Templeton is one of the giants.

Taro's owners, says Laegeler, preferred an offer that would ensure the company stayed an independent division, and I, like everyone else, have been wondering whether such a "family-oriented" goal justifies selling the company at such a nonsensical price. What chance, if any, will such a claim have in court? As of yesterday, the details of the sale agreement between the Levittt family and the Indian buyer still hadn't been published, so there is no way of knowing what that agreement contains beyond what has already been disclosed in the official announcement.

My instincts tell me that there were several competitors among those conducting due diligence and that they probably uncovered some "black holes" that the public, the analyst, and Franklin Templeton are unaware of, a discovery that would account for the knock-down price. As it happens, Sun Pharmaceutical Industries, the Indian buyer of Taro, has a history of buying up US Food and Drug Administration [FDA]-approved production lines in North America that were placed under court ownership after their owners went bankrupt. The situation here probably wasn't far off from that, either.

As in many other instances, I feel that Taro's owners lost the company not just because of the failed management, but also because of ego. The story on the Israeli capital market is that several years ago, when the Levitt family was riding high with Taro at $70, it was keen to buy out its rival, Murray Arkin's Agis Industries, which had hit rock bottom, but Arkin refused. Last year, say the same sources, when the tables were turned and Arkin was riding high with Perrigo Company (PRGO), he offered the Levitts $12-15 for their stake in Taro, but apparently, they were incapable of burying the hatchet and turned him down.

In place of Taro, I am adding another troubled company to my portfolio, and I can only hope that I am making my entry close to its low, although as the Taro example shows, you can never tell. The company in question is US video compression software company DivX Inc. (DIVX). It was floated in September 2006 at $16 on the back of the intense hype that its customer Google Inc. (GOOG), generated when it acquired video sharing website YouTube for a whopping $1.65 billion. DivX soared to $32 when it became the momentum stock in the booming video-over-the web sector, largely as a result of the plug it received from James Cramer on his program "Mad Money."

DivX has indeed delivered, with rapid growth and reasonable profit margins, but something went badly wrong with its first quarter guidance and it has now plummeted to $14. Last week, after the summary departure of its CFO, DivX's CEO Jordan Greenhall spoke at the JP Morgan 35th Annual Technology Conference in Boston, where he provided additional guidance. His official presentation included one slide with a headline the likes of which have never been seen before on any such presentation by a public company. "What the heck happened in Q1?" it asked, a rumination that probably says it all.

TAROF.PK vs DIVX 1-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[omid Sayi:]

Hi,
I don' t know if you still hold on to your divx. I hope not, since it looks like nose diving. It seems there are alot going on behind the scene and it is not just stage6 issue.
Do you have any update on this?
Thanks
Rez

2008 Feb 29 12:08 AM