A Few Strategies From World's Greatest Investor

By ZOSIMO T. LITERATUS
Zeitgeber LC, Investments Division

Almost always you can judge an investor by his actions. Recently, world's richest man Warren Buffett revealed some strategies from the way his company Bershire Hathaway (BH) behaves.

BREAKUP FEE

Aborted weddings may have somehow brought some profit for the surprised party should "breakup fee" has practiced in relationships. MidAmerican Holdings, an energy subsidiary of BH, received 19,897,322 shares in mid-December last year from France's Constellation Energy (ECF) after a deal inked in September soured. The deal provided a breakup fee, which includes 10 percent of its common stock should either party backs out.

As of February 7, BH has sold 5,066,215 shares of ECF for an average price of $27.04, a running windfall of $136,969,137. BH stake with ECF went down to 7.45 percent from 9.99 percent, with 14,831,107 shares remaining.

DOUBLE BALLOONS

Jewelry retailer Tiffany announced on February 13 that it took a double-balloon debt worth $250 million to some BH subsidiaries. The loan pays 10 percent per annum, with the first half due in eight years (2017) and the remaining half in 10 years (2019).

CONVERTIBLE CORPORATE BONDS

BH increased this its position in Swiss Re by 3 billion francs (about $2.6 billion) as it bought the reinsurer's bonds that pay 12 percent a year. After three years, they bonds may be converted into Swiss Re common shares at 25 francs a share.

OPTIONS

An option is a kind of stock insurance that protects the buyer from falling shares to go beyond certain cut off price in the market but contracting with the option seller to buy the same number of shares at the exercise day.

On 3 December 2008, BH sold an option to buy 2,325,000 shares of freight railroad Burlington Northern (BN) by January 30 for whatever market price. The base price was $83.85 a share or a total of $165.4 million. BN closed that day at $77.50, making BH a premium profit of $14.76 million.

Last January 30, BH kept its promise and bought similar number of shares for $75, or a total of $174.4 million. It took a price loss of $2.4 per share for repurchased shares, or a total of $5.58 million.

PNB-ABC Merger Can Be Profitable to Equity Investors

By Zosimo T. Literatus

Zeitgeber Investments Division

Under the merger plan approved by the respective boards of Philippine National Bank (PNB) and Allied Banking Corporation (ABC) last year, 140 shares in PNB are to be swapped for every single common share in ABC. Also approved was the exchange ratio of 30.73 PNB shares for every ABC preferred share. PNB shares are to be issued at P55 per share, making a total equity assumption of P 36.42 billion on its 2008 year-end equity level.

The stock however has fallen from a high of P38.50 in May last year to P13.75 as of January 30 in line with the drop in local share prices due to investor risk-averseness amid the global financial crisis.

Issued and outstanding ABC shares as of December 31, 2007 were 495,295 shares--50,000 preferred and 445,295 common. Its equivalent new PNB shares at swap rate of 140 PNB per ABC share would total to 69,341,300 shares.

The total ABC equity for 2007 year-end was reported at P 17.328 billion. This valued the ABC equity per share at P 34,985.21. A swap lot of 140 shares for PNB therefore must have an equity per share value of not more than P 249.89 to make sense. A lower PNB equity value would be to its shareholders advantage.

Within the same period, PNB has issued 662,245,916 shares at a par value of P 40. Its total equity was reported at P 30.12 billion. Its 2007 equity value per share stood at P 45.

Based on the 2007 figure alone, assuming that changes in their equities are about proportionate, PNB shareholders would be giving up P 7.700 worth of common shares (at P 55 per new PNB shares to be issued) for an ABC common share worth P 34,985.21. That's a windfall of paper profit for PNB shareholders and a loss for ABC shareholders.

This deal, which could increase the issued and outstanding common shares of PNB to a total of 731,587,216 shares, however dilutes the PNB shareholders by 10.47%. The dilution would plunge the PNB equity per share value to P 49.79, or 9.48 percent.

As of Friday, February 6, closing price for the PNB common was P 13.75. This would be an excellent BUY price for PNB on the basis of its equity alone. The company's long-term profitability prospects and other important valuation criteria are not factored in this computation.

Ailing US Firms Get Premium on Stocks

The Congressional Oversight Panel uncovered on Friday, February 6, that the Bush administration overpaid its purchase of the stocks and other assets of the ailing Wall Street firms at the height of the American financial crisis last year. Looks like a windfall profit on security sales makes for managerial blunders. (Click here for details.)