The Wall Street Journal’s Deal Journal blog has an article, The Secret to M&A: It Pays to Be Humble, about a KPMG study into the factors determining the success or otherwise of M&A deals over the period from 2002 to 2006. Some of the results are a little unexpected. Most surprising: acquirers purchasing targets with higher P/E ratios outperformed acquirers of targets with lower P/E ratios, which seems to fly in the face of every study I’ve ever read, and calls into question everything that is good and holy in the world. In effect, KPMG is saying that the relationship of value as a predictor of investment returns broke down for the period studied. I think it’s an aberration, and I’ll be sticking with value as my strategy.

In the study, The Determinants of M&A Success What Factors Contribute to Deal Success? (.pdf), KPMG examined a number of variables to determine which had a statistically significant influence on the stock performance of the acquirer. Those variables examined included the following:

Forward Industries Inc (NASDAQ: FORD) has filed its 10K for the period ended September 30, 2009.

We started following FORD (see the post archive here) because it was trading at a discount to its net cash and liquidation values, although there was no obvious catalyst. Management appeared to be considering a “strategic transaction” of some kind, which might have included an “acquisition or some other combination.” I think a better use of the cash on the balance sheet is a share buy-back or a dividend.

Greenbackd is dedicated to unearthing undervalued asset situations where a catalyst exists likely to remove the discount or unlock the value. My favorite stocks are those trading at a substantial discount to net current assets or liquidation value, with an activist pushing for a catalyst to unlock the value. Those opportunities, however, are few and far between. I can frequently find deeply undervalued asset situations with no obvious catalyst. I can often also find activists in stocks that are not undervalued on a Graham asset basis.

A little over a year ago in a post titled Net Net vs Activist Legend I started a thought experiment pitting Dataram Corporation (NASDAQ:DRAM), a little Graham net net, against activist investing legend Carl Icahn and his position in Yahoo! Inc. (NASDAQ: YHOO). The idea was simple: Compare the performance of two stocks, one a net net / net cash stock lacking a catalyst, and the other a stock not obviously undervalued on an asset basis, but nonetheless pursued by an activist investor, Carl Icahn.

The phenomenal Zero Hedge has an article, Goldman Claims Momentum And Value Quant Strategies Now Overcrowded, Future Returns Negligible, discussing Goldman Sachs head of quantitative resources Robert Litterman’s view that ”strategies such as those which focus on price rises in cheaply-valued stocks…[have] become very crowded” since August 2007 and therefore unprofitable.

The strategy to which Litterman refers is “HML” or “High Book-to-Price Minus Low Book-to-Price,” which is particularly interesting given our recent consideration of the merits of price-to-book value as an investment strategy and the various methods discussed in the academic literature for improving returns from a low P/B strategy. Litterman argues that only special situations and event-driven strategies that focus on mergers or restructuring provide opportunities for profit:

This site is dedicated to undervalued asset situations, but I haven’t yet spent much time on undervalued asset situations other than liquidations and Graham net current asset value stocks. Two areas worthy of further study are low price-to-book value stocks and low price-to-tangible book value stocks.

I’ve found that it is difficult to impossible to find any research examining the performance of stocks selected on the basis of price-to-tangible book value. That may be because book value alone can explain most of the performance and removing goodwill and intangibles from the calculation adds very little. Tangible book value is of interest to me because I assume it more closely describes the likely value of a company in liquidation than book value does. That assumption may be wrong. Some intangibles have value in liquidation, although it’s always difficult to collect on the goodwill. If anyone knows of any study explicitly examining the performance of stocks selected on the basis of price-to-tangible book value, please shoot me an email at greenbackd at gmail or leave a comment in this post.

One of my favorite macro indicators is the long-term Dow:gold ratio. Rolph Winkler of Reuters blog Contingent Capital did the heavy lifting last week to produce a chart of the Dow Jones Industrial Average priced in gold per ounce since 1900:

The Economist has an article, High-speed slide, which discusses a recent study by Grant Thornton about the disappearance of the initial public offering (IPO) market in the U.S., and, in particular, the death of the small IPO. In the October 2009 study, Market structure is causing the IPO crisis, authors David Weild and Edward Kim argue that the recent paucity of U.S. IPOs is a result of the “market structure” failing the IPO, rather than a cyclical downturn. That may seem unlikely at first blush, but the data are compelling:

The first six months of 2009 represents the worst IPO market in 40 years. Given that the size of the U.S. economy, in real GDP terms, is over 3x what it was 40 years ago, this is a remarkable and frightening state of affairs. Only 12 companies went public in the United States in the first half of 2009, and only eight of them were U.S. companies. The trend that disfavors small IPOs and small companies has continued. The median IPO in the first half of 2009 was $135 million in size. This contrasts to 20 years ago when it was common for Wall Street to do $10 million IPOs and have them succeed.

The superb Abnormal Returns has a post “Investing by the seat of their pants,” which, among other things, discusses William Bernstein’s conjecture that “only a tiny fraction, 1 in 1000, investors have the skills to become truly competent investors.” In the preface of his new book, Bernstein suggests four abilities successful investors must enjoy (via Information Processing):

First, they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.

Warren Buffett’s position on gold is well known, if a little difficult to fathom. This is from Buffett’s appearance on CNBC’s Squawk Box on March 9, 2009, but could have been taken from any of his commentary over the last fifty years:

BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?

Forward Industries Inc (FORD) has fired its investment bank and engaged another. It looks like FORD is intent on spending the cash on its balance sheet, which is a shame. Rather than make an acquisition, they should focus on the work on their desk and pay a big dividend.

There’s a half chance that the bank could suggest a sale of the company, but that seems unlikely. I can’t believe there are no activists out there willing to take on this company. It’s 40% off its 52-week high. It’s net cash. There are no big holders. Management’s not doing a bad job, but an acquisition is a ridiculous idea. This is an instance of a management trying to plow a dollar back into the business and turn it into fifty cents. I could use that dollar more profitably. Then again, I’d probably just spend it on pennywhistles and moonpies.

Yesterday was the record date for the first dividend in the liquidation of Leadis Technology Inc. (LDIS). The dividend is likely to be approximately $0.93 per share. The board estimates that “if we are able to dispose of substantially all of our non-cash assets, the aggregate amount of all liquidating distributions that will be paid to stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock.” After the initial $0.93 dividend, the remaining dividends will be in the range of nil to $0.27 ($1.20 less $0.93). LDIS closed yesterday at $0.99. If the stub starts trading tomorrow at $0.06 ($0.99 less $0.93), it becomes an interesting security offering the potential for some substantial upside.

The definitive proxy filings have the detail:

The Official Activist Investing Blog has published its list of activist investments for September:

We’ve recently been using the GuruFocus Benjamin Graham Net Current Asset Value Screener (subscription required) to generate regular watchlists of net net stocks. The GuruFocus NCAV screen has some superb functionality that makes it possible to create the watchlist from the screen and then track the performance of those stocks. We created our first watchlist on July 7 of this year using the July 6 closing prices. The performance of the stocks in that first watchlist over the last quarter has been nothing short of spectacular. Here is a screen grab (with some columns removed to fit the space below):

In an August post, Applying value principles at a country level, we discussed The growth illusion, an article appearing in a Buttonwood’s notebook column of The Economist. In that article, Buttonwood argued that valuation, rather than economic growth, determined investment returns at a country or market level. Buttonwood highlighted research undertaken by Elroy Dimson, Paul Marsh and Mike Staunton from the London Business School, which suggested that chasing growth economies is akin to chasing growth stocks, and generates similarly disappointing results. Buttonwood concluded that higher valuations – determined on an earnings, rather than asset basis – led to lower returns:

What does work? Over the long run (but not the short), it is valuation; the higher the starting price-earnings ratio when you buy a market, the lower the return over the next 10 years. That is why buying shares back in 1999 and 2000 has provided to be such a bad deal.

BusinessWeek aims to keep its impeccable market forecasting record intact (via BusinessInsider):

It’s been a big week for VaxGen Inc (VXGN.OB). On Tuesday last week the “VaxGen Full Value Committee” nominated five director candidates to the board. Then on Thursday BizJournals.com reported that VXGN’s “failed AIDS vaccine” was “successful in a new trial that combined it with another failed vaccine in reducing the risk of becoming infected with HIV.” The stock ran on the news, prompting VXGN to clarify yesterday that it “retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development” but “has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option.”

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

Cadus Corporation (KDUS.OB) is an interesting play, but not without hairs on it.

First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M.

ClusterStock has an article by John Carney, How Ignorant Are Shareholders?, in which he argues that the financial crisis has “dealt a serious blow” to the “idea that corporate governance reforms that empower shareholders to direct the activities of corporations would make companies more financially responsible.”

We think John’s got it wrong, but before we begin our rant, let us just say that there is much to respect about John Carney. According to his bio, he’s got a law degree from the University of Pennsylvania, and he practiced corporate law at Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins, both of which are preeminent firms. We also almost wholly agree with his positions on plenty of contentious issues, as summarized here in his bio: