| 1 | 1/26/06 From:
Timm Scalf To:
All |
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| | Hello All, I noticed the following announcement concerning ACS. Affiliated Computer Services, Inc. ACS today announced that its Board of Directors has authorized a modified "Dutch Auction" tender offer to purchase up to 55.5 million shares of its Class A common stock at a price per share not less than $56.00 and not greater than $63.00. The tender offer is expected to commence on or about February 6, 2006, and to expire on or about March 6, 2006, unless extended. The number of shares proposed to be purchased in the tender offer represents approximately 45% percent of ACS' currently outstanding common stock. My first impress is that the company must have very high expectations for the future to buy back such a large amount of outstanding shares. This would seems to me as a very good thing for investors. Timm |
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| 2 | 1/26/06 From:
dianeg To:
Timm Scalf |
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| | <<This would seems to me as a very good thing for investors. >> I don't understand your thinking. Many of us felt the buyout offer at $65 was inadequate. Why would we tender shares for a price likely in the high 50's but that won't exceed $63? If I didn't want to stick around, I would have sold it a few weeks ago when it was trading around $62. Diane Graese |
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| 3 | 1/26/06 From:
Kathleen Gallivan To:
dianeg |
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| | Diane and Timm,
I see where ACS is up more than $5 after hours. I wonder where we go from here?
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| 4 | 1/26/06 From:
Dan Hess To:
Timm Scalf |
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| | Timm Affiliated Computer Services, Inc. ACS today announced that its Board of Directors has authorized a modified "Dutch Auction" tender offer to purchase up to 55.5 million shares of its Class A common stock at a price per share not less than $56.00 and not greater than $63.00. My first impress is that the company must have very high expectations for the future to buy back such a large amount of outstanding shares. This would seems to me as a very good thing for investors. It seems to me the company is planning to leverage itself similarly to what the recent hedge funds who were trying to acquire ACS planned to do. ACS currently has 750M of long term debt. If they were to purchase 55.5M shares at $60 this would add about 3.33B or a total of about $4B. This compares with the current shareholder equity of $2.9B. They currently have about $400M (This will be decreased after paying the interest on $4B) per year of free cash flow to fund the interest on $4B. Since their FCF / Revenue is about 10% it would seem if they can borrow money at a low enough rate they should be able to show slightly increased EPS by this action. Of course the leverage will make the stock more volatile and sensitive to any business downturns. The key seems to depend heavily upon the companies ability to continue to increase their pre tax profit margins. Thus it seems to me they are simply performing a Hedge Fund type action to increase value. It will be interesting to read the prospectus to learn the details this refinancing plan. Or could this be an action to highly leverage the company to ward off any other hedge funds who may want to buy ACS. I see the market likes it with the stock price up 8% in the after market or was that the result of the earnings report? Dan Hess |
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| 5 | 1/27/06 From:
Timm Scalf To:
dianeg |
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| | HI Diane, Let me attempt to explain my thinking. My thoughts are that if a company is willing to assume such a debt burden it must believe that it is able to finance the debt over the long term, and that doing so is advantageous for the company. So that as the debt decreases EPS would rise over time. The share price would rise in turn. With regard to the company being worth more than $65, I agree. Although I think if the company is able to buy back shares at a discount the shareholders would benefit. There is nothing saying we have to sell our shares. Unless I am missing something here! What I believe is happening is that the company is buying back shares from those willing tender their shares for purchase within the price band mentioned in the press release. Like you I made the decision to stick around. Will I continue? I think so, but I have a bit to go until I am sure. I guess it is up to where or not I believe that company is able to leverage the debt and decrease the debt over time effectively. Kind Regards, Timm |
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| 6 | 1/27/06 From:
Dan Hess To:
Timm Scalf |
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| | Timm Like you I made the decision to stick around. Will I continue? I think so, but I have a bit to go until I am sure. My question is how many shares will be tendered at a price of up to $63. Share owners had a chance to do so at 62 earlier this month. Why would they sell 55.5M now at a price no more than $63? Dan |
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| 7 | 1/27/06 From:
Virginia Falkowski To:
Timm Scalf |
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| | Hi All,
I experienced a Dutch Auction with my local S&L. As it turned out later, the management had used the company's money to buy the shares while they were selling all of their own. Their offer, too, was about $5 above a languishing market price. The stock immediately fell back to where it had been previous to the buy back and didn't move for five years until it was bought out. This does not leave me with a good feeling for Dutch Auctions.
Virginia
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| 8 | 1/27/06 From:
Dan Hess To:
Virginia Falkowski |
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| | Virginia Click here to see what the CEO had to say. Dan |
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| 9 | 1/27/06 From:
Dan Hess To:
All |
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| | Virginia That link did not seem to work. Try here Dan |
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| 10 | 1/27/06 From:
Bill Wright To:
Dan Hess |
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| | Dan,
I think you hit the nail on the head as to what is happening. ACS was being threatened by an unfriendly take-over at $62 and then $65 per share. I had thought of it as an inside job, but apparently it was not. ACS has responded to this threat in a similar way that Warren Buffett responded to the threat of an outside fund offering trust units equivalent to fractional BRK shares. Buffett issued his own class B shares.
ACS is offering to buy back a huge chunk of the company. The intent will be to eliminate the weak holders who think the stock is worth less than $63. Collectively, most of us on the list seemed to think the $65 was inadequate. The price of ACS stock today shows that there are not going to be many shares tendered in the Dutch Auction. Will it drop back below the Dutch Auction price after it expires? If it does, the company can always step in with another Dutch Auction.
I don't know if yachtmaster Deason thought this up, but I know a member of his board who could have. This kind of genius is right up the board-member's alley.
Bill Wright
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| 11 | 1/28/06 From:
dianeg To:
Timm Scalf |
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| | Thanks Timm for the clarification. Somehow I thought you were suggesting investors should accept the dutch tender offer. Glad to know you are on the other side. Diane |
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| 12 | 1/28/06 From:
Tom Jones To:
Dan Hess |
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| | Full Disclosure: My club still holds ACS, but I sold my shares yesterday. I fail to understand how the Dutch auction buy back benefits shareholders. Management is taking on debt and increasing interest expense to buy shares at a premium to the market price. The company will be less able to make acquisitions and respond to adverse events. The share price is now over $63, but what happens after the buy back ends? Tom |
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| 13 | 1/29/06 From:
tcicchris To:
All |
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| | Hello- OK, this is what I don't get (as always, please excuse my lack of financial acumen <g>). If a company buys back half of its shares, and earnings remain consistent, shouldn't the stock price approximately double? Seems like the EPS would, except for whatever earnings are required to service the new debt. Or is it that the P/E is going to drop? Continued thanks, everybody. This is a wonderfully helpful group to investing "newbies" such as myself! Chris |
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| 14 | 1/29/06 From:
Dan Hess To:
tcicchris |
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| | Chris OK, this is what I don't get (as always, please excuse my lack of financial acumen <g>). If a company buys back half of its shares, and earnings remain consistent, shouldn't the stock price approximately double? Seems like the EPS would, except for whatever earnings are required to service the new debt. Or is it that the P/E is going to drop? But earnings will likely not stay constant. Current earnings are about $400M per year and the debt service may be about $200M. This would suggest EPS to be flat, however the interest should be tax deductible and hopefully ACS will be able to increase the earnings over time as margins and business volumes increase. If ACS is able to buy back about half their shares, the cost would be about $3.5B. They do not have $3.5B and thus they will borrow the money at some designated rate depending upon how risky the lenders think it is to lend this to ACS. They have made arrangements to borrow this money (actually $5 available) from Citicorp. Thus ACS must pay interest at some rate on this loan. The interest is subtracted from earnings. Thus EPS will not double. Hopefully it will be able to show some increase that will depend upon the interest rate ACS must pay as well as the future pre tax profit margin they are able to achieve. Thus if they can borrow money at say 7% and achieve 12% pre tax margins then EPS should increase by some amount. I would note their current debt carries interest rates of 4.7 and 5.2% but I would expect the new loan to be a a higher rate. When a company takes on an increased percentage of debt as ACS will in this case stock investors will likely view the stock to a higher risk. A higher risk stock will normally result in a lower PE Ratio to compensate for the higher risk. How much depends on investors perceptions. Companies that take on a high percentage of debt are usually highly capital intensive companies with fairly consistent and guaranteed revenue streams like utilities. ACS has no guarantee their future revenues will be steady however they have had an excellent track record in retaining customers especially in their Business Process Outsourcing Business (BPO). They also are quite profitable generating about $0.10 of Free Cash Flow (FCF) for every dollar in revenues that is quite good. This translates to about a 5.4% on a share basis. [(FCF/Shares)/Stock Price] This is also quite good and some would compare this to what one could obtain on a fixed rate bond. Thus ACS makes good profits. Thus it does seem management views their shares as undervalued (most managements do) and are taking on more debt to increase the leverage to hopefully increase the EPS and thus the share price. Before embarking on this they must issue a prospectus that should help identify more definitively what this will mean both for the lenders as well as the shareholders. I would add that Darwin Deason the ACS Chairman currently holds voting control via Class B shares and will retain this after the auction. I do not liek this since I think all shareholders should have a vote. I should add that some astute investors like Ellis Traub feel BI investors should let the financing of the company be handled by their CEO and CFO who obviously have more inside information and expertise on this than most of us do. However, I still find it fun to try to understand. You can see more on this by looking at the ACS 8 reports filed this week. See http://moneycentral.msn.com/investor/sec/getfilingtick.asp?Symbol=US%3AACS&ETF= Dan Hess |
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| 15 | 3/11/06 From:
Dan Hess To:
All |
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| | ACS announced on 3/10 its tender offer, which was previously scheduled to expire at 5:00 p.m., New York City time, on Friday, March 10, 2006, will be extended until 5:00 p.m., New York City time, on Friday, March 17, 2006. The tender offer remains subject to all previously announced terms and conditions. This is an indication to me that the Dutch Tender offer was not fully subscribed. To me this is an indication that most investors viewed the maximum price of $63 to be too low. ACS did not indicate how many shares were tendered but I expect we will learn on 3/17. Dan Hess |
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| 16 | 3/11/06 From:
Nancy Isaacs To:
Dan Hess |
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| | Dan, >>ACS did not indicate how many shares were tendered<< I was looking for that infomation as well when I read that release on Yahoo. >>but I expect we will learn on 3/17.<< Unless they extend it again........... |
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| 17 | 3/14/06 From:
Dan Hess To:
Nancy Isaacs |
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| | On 3/13 ACS announced that as of 5PM on 3/10 8.5M shares had been tendered in the Dutch Auction. This compares to the maximum of 55.5M shares. Thus it seems this is much less than ACS expected but seems in line with conversations here when the auction was announced. ACS also stated they will not extend the auction beyond 3/17. I would not expect the week extension would significantly change the current shares tendered. So the question is what does this mean. It seems to suggest the majority of ACS shareholders view the stock to be undervalued at $63. It would seem unlikely the stock price would decline much below 63 since there do not seem to be sellers willing to sell at or below this level. On the other hand there do not seem to be buyers willing to pay much above 63 with the high being 63.60. Thus the question now seems to be what will mgmt to to increase shareholder value. With free cash flow of about $400M per year it would seem they would have to do something like increase share buybacks. This would buyback about 5% of the shares per year that would provide a nice boost for EPS as well as managements stock options. Any thoughts? Dan Hess |
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| 18 | 3/14/06 From:
Bill Wright To:
Dan Hess |
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| | Maybe the one week extension is for another purpose than simply to give shareholders another week to sell stock for $63 or less when the market is abofe $63! Shareholders have the right to retract tendered stock up to the end of the Dutch auction. I am surprised the company got as many as 8.5M shares. That tells me that these tendering stockholders don't know what they are doing. The stock price is above the $63 maximum Dutch auction price. Unless a shareholder holds only a few shares that would cost more to sell than the premium above the $63 auction price, then they should have been selling on the open market.
I tend to agree that $63 gives another base for the stock's price in the future. Shareholders that were willing to sell for $63 or less have had an opportunity to sell on the market and even to tender in the Dutch auction.
But let's not forget the effect the arbitrageurs may be having on the stock price. The arbs can read the "tea leaves"of the offer. Since the offer was not generous enough to entice shareholders to tender 55.5M shares, the arbs are probably figuring the company will buy all tendered stock at the $63. So anytime the price dropped below $63, the arbs bought it. They now hold the stock until the end of the auction or until the price moves above $63 and they can sell at a profit. The fact that the arbs have been able to sell for more than $63 for almost the entire Dutch auction period, says that there are buyers for the stock at a price above $63.
Are there people out there thinking ACS will increase its offer to buy for a price above $63? I wouldn't bet my money on that. So come next week, when the Dutch auction is over, the arb price support will go away. Right now the arbs are buyers below $63, but next week will there still be buyers at a price above $63?
Bill Wright
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| 19 | 3/18/06 From:
Dan Hess To:
All |
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| | ACS made the front page of the WSJ today in not such a favorable light. The article is titled, "The Perfect Payday" for those having access to the Journal. The article suggests that stock option grants were predated on days when the stock price had reached low points awarding extra stock option profits to those receiving them. The article indicates the options received by CEO Jeff Rich from 1995 through 2002 were dated just before a sharp stock price rise often at the bottom of a steep drop. Jeff Rich indicates this was blind luck. The WSJ analysis indicates the odds of this happening by blind luck would be one in 300 billion. Maybe Jeff should just gamble in the lotteries where the odds are better. (g) The article indicates the SEC is investigating this matter since it seems to have happened at several other companies as well. In addition when Jeff Rich was promoted to CEO in 1999 he obtained 500000 options at a price that was the exact bottom. The company explained their was a 6 month probation period and he was awarded the options 6 months before his promotion. Quite strange timing. When Jeff Rich resigned abruptly last September his separation agreement that provided him with $18.4M included pricing his options before the announcement of his resignation. His resignation and separation was on Friday but the announcement of his resignation was on Monday that resulted in the ACS stock dropping 6%. This caused Rich to receive an extra $2M. The company indicated they put out the news on Monday because it didn't want to seem evasive by putting the news out on late Friday. The only good news here seems to be that Sorbanes Oxley included a requirement that option grants be announced within two days. Thus since 2002 there seems to have been a lesser occurrence of this alleged post dating of options. To me this is an indication of the integrity and possible greed of both the CEO's and boards of companies which were involved in this practice. This practice may not have been illegal but the delayed reporting was misleading to shareholders and thus a violation of the SEC rules. In any case it does seem to indicate a less than honest company management and board. It is a shame that greed is so prevalent in many people who are in positions of power to essentially steal money from the rightful shareholders. This article does indicate ACS is deserving of its M* C Stewardship rating. While M* did not identify this specific option practice here are some words they used that maybe should have triggered a greater concern among investors. His (Chairman) ownership of Class B shares (which have 10 times the voting power of Class A shares) gives him 37% of total voting rights. This doesn't bode well for objective corporate oversight of items like executive compensation and annual election of directors. None of the executive officers besides Deason has significant insider ownership, which makes us skeptical of their willingness to act as shareholder advocates. It is ironic this article is dated 3/19 and the Dutch Auction expired on 3/18. Is this another case of blind luck or something else? It will be interesting to see what impact this WSJ article has on the ACS stock price on Monday morning. Dan Hess |
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| 20 | 3/18/06 From:
Nancy Isaacs To:
Dan Hess |
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| | Dan, ACS is my least favorite company. Ever since I've owned it there have been articles pointing to less than favorable practices by management (personal and company related). I keep thinking about letting it go. I just wish I had alternate investment ideas for the funds... not to mention the EDMC proceeds. Right now I'm looking at Amgen, Medtronic and Apollo. Any other suggestions? |
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