Category: Articles

Will Baker Hughes Walk?

Chris Grisanti was quoted in a Barron’s article about the Baker Hughes dilemma.

 

Will Baker Hughes Walk?

By Vito J. Racanelli

April 9, 2016

The clock has begun ticking in earnest on whether the Halliburton (HAL) and Baker Hughes (BHI) merger will actually take place. Last Wednesday, both companies said they intended to “vigorously contest” the Justice Department antitrust lawsuit filed the same day, blocking their proposed combination.

Under the terms of the deal, announced in November 2014, when oil-patch conditions were much stronger, either party can walk away from the deal after April 30, 2016. Baker Hughes stock jumped to $43.11 from $39 last week because it stands to get a $3.5 billion termination fee, but the two companies face uncertain futures near term.

Both are in no-win positions. Contesting the Justice Department lawsuit could take many more months in what has already been a long and contentious wait for the deal to close. In the interim, the oil-service business has been mauled by one of the worst downturns in its history and, like the industry, the two companies have suffered.

The courts could rule in favor of the deal or against it, but either way, with potential appeals, it will require some time, further dragging out a process that has taken too long already, distracting and weakening both companies.

Baker Hughes stock rose last week because many investors believe the company will choose to walk and take the termination fee—one fifth of its market value—with it. That’s a nice chunk of change, but probably not enough to make up for the general disruption, employee turnover, and loss of focus and market share that Baker Hughes has endured.

It faces a long mending process. Post-breakup, Baker Hughes will be on its heels as the company prepares to return to independent operations. The shares of both companies could trade down in the short term if the deal officially breaks up. Baker Hughes might find itself with its newfound cash but worse off in the longer term.

“It seems clear that this thing is over and that Baker Hughes will likely walk,” says Christopher Grisanti, a portfolio manager at Grisanti Capital Management, which sold its stakes in both companies in 2015.

There’s been speculation that General Electric (GE) would step in and buy Baker Hughes, but that’s a big bite even for a company the size of GE, given the industry’s woes. Industry balance sheets are stressed, and managers get punished for oil-patch mergers, Grisanti adds.

Last year (in “Baker Hughes Blues,” Nov. 14, 2015), we noted there was a less than 50% chance that the deal would clear regulatory hurdles, and that Baker Hughes could fall another 20% to 30%. Its stock is down 10% since then. We’re closing out this call and taking our chips home. There’s too much uncertainty.

Baker Hughes and Halliburton declined to comment.

It’s rarely a good idea to get involved with stocks when a single government decision can make or break it. Now it looks to be up to a judge, if Baker Hughes doesn’t walk first.

 

(Source: www.barrons.com)

[URL – http://www.barrons.com/article_email/will-baker-hughes-walk-1460174732-lMyQjA1MTI2MzEzMTkxMTExWj]

The Makeover: Morgan Stanley’s Strategy of Lower Risk may be New Model for Wall Street

June 7, 2014

Chris Grisanti was quoted in Barron’s concerning our long-term investment in Morgan Stanley.  One of our most profitable investments in the last three years, Morgan Stanley remains a core financial holding..  Here’s the excerpt that discusses Morgan Stanley’s move away from trading and towards investment management, with its more stable revenue stream: 

Barron’s  (June 7, 2014)

The Makeover: Morgan Stanley’s Strategy of Lower Risk may be New Model for Wall Street

By Avi Salzman

….Big banks, of course, still carry sizable risks. Morgan Stanley’s legal expenses remain unpredictable, rising to $1.95 billion in 2013 from $513 million the previous year because of lingering litigation and investigations over mortgage-backed securities. But analysts see less legal risk for Morgan Stanley than for rivals like Bank of America.

The second quarter could prove rocky for Morgan Stanley and other banks, some of whom say trading is down 20% or more. But Morgan Stanley is getting better at weathering bad news. Even if the economy sputters, the company’s successful restructuring gives investors another reason to buy, argues Christopher Grisanti, a principal at Grisanti Capital Management, which held more than 400,000 shares at the end of the first quarter.

“To invest in the other banks, you’re investing because the world is getting back to normal,” Grisanti says. “But for Morgan Stanley there’s a transformation taking place. They’re transforming themselves into a company that has more reliable cash flow and doesn’t risk its balance sheet to produce it.”

The second quarter could prove rocky for Morgan Stanley and other banks, some of whom say trading is down 20% or more. But Morgan Stanley is getting better at weathering bad news. Even if the economy sputters, the company’s successful restructuring gives investors another reason to buy, argues Christopher Grisanti, a principal at Grisanti Capital Management, which held more than 400,000 shares at the end of the first quarter.

“To invest in the other banks, you’re investing because the world is getting back to normal,” Grisanti says. “But for Morgan Stanley there’s a transformation taking place. They’re transforming themselves into a company that has more reliable cash flow and doesn’t risk its balance sheet to produce it.”