Tuesday, March 20, 2007

Paperstand (MATK, DRC)

The WSJ reports that ABN Amro (ABN) is nearing a deal to be acquired by Barclays (BCS) for more than $80bn. The two banks had discussed a deal as long as a year ago, but talks foundered. The chief execs resumed talks at a meeting in Geneva about 6 weeks ago, even as ABN Amro publicly asserted that it wanted to remain independent. Under the terms being discussed, Barclays would offer a mix of cash and stock for ABN Amro, valuing the bank's shares in the range of low €30s, slightly above their current trading price.

The WSJ discusses new Detroit woe – makers of parts won’t cut prices. Navistar has supplied diesel engines to Ford (F) for almost 30 years. Yet in late Feb Navistar, embroiled in a financial dispute with Ford, temporarily cut off all engine shipments to its single biggest customer. The move dramatized a broad shift in the balance of power in the struggling US auto industry. The dispute involved competing views of warranty claims and price contracts. But at its core was the engine supplier's refusal to play an old Detroit game, in which US car makers have deflected the pressure of global competition by repeatedly forcing suppliers to trim their own prices. For the old Big Three of Ford, GM (GM) and the Chrysler (DCX), the case was evidence of a new reality. It finds itself surrounded by parts suppliers from which it can no longer easily squeeze price concessions.

“Heard on the Street” column discusses Martek Biosciences (MATK), saying that one of its accounting methods has led to concerns that Martek is trying to make profits look more robust than they really are. The bone of contention: Martek's treatment of what it calls "idle" assets. Martek noted in its F1Q results that it has $94.3m of property, plant and equipment, "being held for future use." Martek doesn't depreciate assets designated this way. Such an approach is pretty rare; co’s typically depreciate assets that they are either using or could be using. Martek's approach lessens the bite that depreciation charges take out of net profit. In F07, the move could boost net profit by about $3.9m, or about 20%, according to Glass, Lewis & Co. A similar gain over the past year could have helped the co avoid 2 consecutive years of declining net profit. Plus, if Martek was fully depreciating its assets and taking a bigger hit to profit, the co's share price would be an expensive 37x expected F07 earnings, as opposed to its current multiple of 30x. Robert N. Freeman, an accounting professor at the University of Texas, said "You're in a gray area."

Barron’s Online “Inside Scoop” section reports that the Chmn of Dresser-Rand (DRC), William Macaulay, has just filled up his tank with shares of the co. Mr Macaulay spent $4m on 150K shares on March 15. The purchase came the week after private-equity firm First Reserve, where Macaulay holds the Chmn and CEO posts, launched a secondary offering of its remaining 11.6m Dresser-Rand shares. Ben Silverman, of InsiderScore.com, says Macaulay's buying is a positive signal, especially since the stock is currently trading near its 52w intraday high. "In a sense, he could be reinvesting in Dresser-Rand," says Silverman, "What I think is good is that he is planning to stick around as Chmn, and that he feels that the stock is going to appreciate in the long term."

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