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David Einhorn On The M&A Bubble And "Dreams" As An Investment Thesis

Tyler Durden's picture




 

Yesterday, we were beyond amused when we reported that the market's response to rumors of Zillow's $2 billion take over of Trulia was not only to push Trulia stock higher by $500 million but send the market cap of incomeless, EBITDAless Zillow higher by $1 billion. It appears we are not the only ones fascinated by the market's reaction to every M&A announcement, which is to send not only the target but the acquiror stock soaring. One other such person is David Einhorn who laments precisely this bubblyness in his just released letter to investors, saying that "takeover season has returned and in a new twist, the buyers’ stock prices are also advancing in response to announced deals, enabling companies, including some of our shorts, to see gains as acquirers – even of other troubled companies."

He proceeds to give several examples of how his shorts have worked against him, a trend which as we reported first in 2012 will continue indefinitely under a centrally-planned regime in which the Fed is the Chief Risk Officer of the market, and where no price declines are allowed, and thus the need to hedge (which means that going long the most hated, vile, worthless companies will, sadly, by and large continue to be a winning strategy).

Still, with a return of 5.2% in Q2 and 7.1% YTD, at least Greenlight is only barely underperforming the market, something that 90% of his hedge fund peers can only dream about.

Here are Einhorn's full thoughts on the M&A bubble:

Costly takeovers of our shorts appear to be a cyclical phenomenon: We went from 1996-2003 without incurring a single material loss due to a takeover. Then in 2006-2007 we had a number of our shorts taken over in rapid succession, the most costly being Medtronic’s $4.2 billion acquisition of Kyphon at a 32% premium over Kyphon’s already lofty share price. In reviewing historical takeovers of our shorts where we lost money, almost none proved to be good deals for the acquirers.

Well, yes: it's called forced capital misallocation for a reason.

Things got quieter again for a few years but now takeover season has returned and is again causing losses in our short portfolio. Companies we are short often have serious problems of which the boards and management are probably aware. This makes them more eager than usual to sell at any sort of premium. The prospective buyers ought to discover these problems during due diligence, which should make them walk away. But in the current environment, debt financing is so inexpensive that acquirers can pay premiums and have the deals be accretive to EPS, making them more willing to overlook or ignore any problems they discover.

Bingo.

And speaking of bubble, here is Einhorn on a topic near and dear to Yellen Capital Advisors, LLC: the tech bubble:

In our last quarterly letter, we wrote about the bubble in momentum stocks, most of which are in the technology sector. The media latched onto a single sentence embedded in a lengthy discussion about ‘cool kid’ stocks and suggested that we were declaring all technology stocks to be in a bubble. Nothing could be further from the truth. Many of our largest long positions are in technology, and we are not holding them with a cynical view that we want to play a bubble. We believe that stocks including Apple, Lam Research, Marvell Technology and Micron Technology have strong prospects and are undervalued.

 

At the same time, there are a number of tech stocks that are caught up in a smaller version of the 1999-2000 internet bubble, and as we mentioned, we created a bubble basket to short them. At this year’s Sohn Investment Conference in May, David presented athenahealth (ATHN), a healthcare IT company, as an example of a bubble basket stock. In response to our assertion that the shares are absurdly overvalued, CEO Jonathan Bush summed things up perfectly a few days after the conference when he told Bloomberg TV, “And those who buy our stock should not be sort of bottom [line] watching value investors. They should be people who dream of a health care cloud.” At Greenlight, dreams do not form the basis of investment theses.

How about hope? We only ask, because that seems to be the most profitable and widespread investment strategy over the past 5 years.

 

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Fri, 07/25/2014 - 13:09 | 5004078 Duffy
Duffy's picture

the thing is - the printing will continue until morale improves.

Fri, 07/25/2014 - 13:31 | 5004161 NotApplicable
NotApplicable's picture

"Yellen Capital Advisors, LLC"

That's fucking golden!

Tyler snark, FTMFW!

Fri, 07/25/2014 - 13:35 | 5004184 NotApplicable
NotApplicable's picture

Anyone else picturing Jonathan Bush doing his best Louis Armstrong?

Say nighty-night and kiss me
Just hold me tight and tell me you'll miss me
While I'm alone and blue as can be
Dream a little dream of me

Fri, 07/25/2014 - 13:10 | 5004084 OldPhart
OldPhart's picture

Holy shit, S&P's down, but  gold and silver are up...it's like it's 1980 or something.

Fri, 07/25/2014 - 13:11 | 5004086 max2205
max2205's picture

Be the bubble. An na na na na

Fri, 07/25/2014 - 13:12 | 5004089 fonzannoon
fonzannoon's picture

"Many of our largest long positions are in technology, and we are not holding them with a cynical view that we want to play a bubble."

 

 

Everyone should read that a few times.

Fri, 07/25/2014 - 13:13 | 5004093 Save_America1st
Save_America1st's picture

Einhorn is Finkle...Finkle is Einhorn!

https://www.youtube.com/watch?v=dhYk75r33Vg

 

Just remember Einhorn...laces facing out.

Fri, 07/25/2014 - 13:21 | 5004094 Squid Viscous
Squid Viscous's picture

he doesn't understand the synergies... just like all those doubters of the Time Warner/ AOL deal...LOL

meanwhile Dick Parsons is still regarded as some kind of black genius...wtf?? he should have been scalped for what he did to TW shareholders...

Sun, 07/27/2014 - 20:45 | 5011084 Remington IV
Remington IV's picture

His twin brother lives in the projects

Sun, 07/27/2014 - 20:45 | 5011086 Remington IV
Remington IV's picture

His twin brother lives in the projects

Fri, 07/25/2014 - 13:13 | 5004096 syntaxterror
syntaxterror's picture

Don't fight the Fed, Einstein.

Fri, 07/25/2014 - 13:30 | 5004172 NotApplicable
NotApplicable's picture

Meanwhile, my 401's been in all cash (MM) for nearly ten years.

Reality just isn't very real anymore.

Fri, 07/25/2014 - 13:50 | 5004266 Groundhog Day
Groundhog Day's picture

be careful of those money market funds.

You see the ponzi for what it is so you don't participate, watching the market soar higher and higher you go through al the emotions fear, greed and anger and then at the end of the day they take it via the money market fund.....that would really suck

Sat, 07/26/2014 - 00:14 | 5006435 ScottyB
ScottyB's picture

Money market funds are not "cash", they are effectively short term US Treasuries and mortgage backed securities, which is how the money market funds have changed since 2008 and why they earn next to nothing. "Cash" is a Federal Reserve Note. Cash is also not an investment... it makes no sense to earn a guaranteed 0% in a retirement account unless you have so much income that it doesn't matter.

Fri, 07/25/2014 - 13:20 | 5004133 falak pema
falak pema's picture

the age of the HF may be over; if they cancel ZIRP and the CBs take over the casino.

Its about time that "shadow" went out of banking. 

Fri, 07/25/2014 - 13:30 | 5004164 buzzsaw99
buzzsaw99's picture

Then in 2006-2007 we had a number of our shorts taken over in rapid succession...

Things got quieter again for a few years but now takeover season has returned and is again causing losses in our short portfolio...

wow, it's almost like THEY KNOW which companies you are short. couldn't be though right?

If you're not inside, you're outside... [Gekko]

Fri, 07/25/2014 - 13:30 | 5004167 Mercury
Mercury's picture

Pissing into the wind.

At least plow the proceeds into your benchmark index.

Fri, 07/25/2014 - 14:24 | 5004443 Fuku Ben
Fuku Ben's picture

Not a fan of bubble baskets

But bubble butts...F yeah!

Long porn

Fri, 07/25/2014 - 14:48 | 5004575 Downtoolong
Downtoolong's picture

Every dream I ever had either turned into a nightmare or I woke up and it faded to black.

 

 

Fri, 07/25/2014 - 17:33 | 5005380 Johnny Moscow
Johnny Moscow's picture

Einhorn is a pretty damn smart guy - the new debt bubble is gonna blow up again and when it does it's gonna suck for all of us. 

Also, it's quite obvious that Putin has been manipulating the US stock market these past few months and has helped to create this dangerous situation. Duh.

 

Sat, 07/26/2014 - 17:34 | 5008003 Livermore Legend
Livermore Legend's picture

"Forced".....

Nobody is "Forced" to take any Position in Markets.....

Anyone with a US License and Social Security # Can Open a Treasury Direct Account in US Bills.......

US Bills = No Encumbrance, Manipulation or Malfeasance Possible.....

And Most Importantly, No Loss Possible.....

If you Don't Know What Position to Take, Don't Play.....

Manipulation is a Lame Excuse.....

Do NOT follow this link or you will be banned from the site!