A Final Thought About the Pfizer Tender Offer

In the weeks since Pfizer’s (PFE) announcement that it was offering the remainder of its 400+ million holding in Zoetis (ZTS) in exchange for Pfizer shares many opinions have been offered regarding the relative merits of the tender offer.

My own opinion, previously cast some skepticism regarding what appeared to be a very favorable offer that might provide as much as a 7.52% premium for individuals offering their shares of Pfizer in exchange for Zoetis shares.

I did not offer my shares for tender, with the deadline for having done so, passing on Monday, June 17, 2013.

However, Pfizer has announced that its tender offer for exchange of its shares for Zoetis shares has been over-subscribed and that the offer has been automatically extended, as provided by the terms of the tender offer.

“The final exchange ratio is 0.9898 because the upper limit is in effect. Accordingly, the exchange offer has been automatically extended by its terms until 12:00 midnight, New York City time, on June 21, 2013”

That simple phrase means one very important thing for those that had believed a quick pay day by selling their new shares of Zoetis..

As explained in the prospectus, plainly in sight on the cover page, although the exchange premium was 7.52%, it was subject to an “upper limit” of 0.9898 shares of Zoetis for each share of Pfizer exchanged. The prospectus warned that the actual amount of in-kind value received could end up being substantially less if the “upper limit” was reached.

And it was.

At the conclusion of the initial phase of the tender offer, more than 800 million shares of Pfizer had been tendered for about 400 million shares of Zoetis.

That means that on a pro-rated basis an individual will have less than half of their tendered Pfizer shares accepted for exchange. The potential impact and costs associated with small share lots was discussed in my previous article that included the impact of transaction administrative fees that could wipe out any potential profit for those seeking to immediately sell shares in order to capitalize on any exchange premium.

While the final exchange rate is known, 0.9898 shares of Zoetis for each share of Pfizer tendered and accepted, it isn’t yet known what the pro-rated figure will be. In other words, what proportion of each 100 shares of Pfizer tendered will be accepted. It will likely be less than the current ratio. The greater the additional number of shares tendered the greater the adverse impact on small share holders.

For those still considering tendering shares, you have until midnight, Friday, June 22, 2013 to do so.

The following may be helpful:

At Zoetis’ current price of $30.19 after the close of trading on Thursday, June 20, 2013, each share of Pfizer that is accepted for tender will be worth $29.88, as compared to the Pfizer actual closing price of $28.64 on Thursday. That represents a 4.32% premium, which is substantially below the initial 7.52% premium.

Since the tender offer was made public Zoetis shares have subsequently fallen more on a percentage basis than have Pfizer shares and the premium has contracted. The Zoetis share price may or may not be maintained at that level when trading begins, so even that reduced premium may or may not be realized for those seeking to sell their new Zoetis shares.

For those that decide to accept the extended offer and had sold June 22, 2013 call options on their shares, you must be certain that your shares were not assigned. Strictly speaking, option contracts that expire at the end of a monthly cycle, do not expire until Saturday, which is after the extended deadline to tender shares.

If you accept the tender offer and your Pfizer shares were subsequently discovered to have been assigned you would still be obligated to deliver Pfizer shares in exchange for Zoetis shares and could do so by purchasing them in the after-market. That has additional risk if the price of Pfizer shares increase while the price of Zoetis shares decrease.

What to do?

Stick with Pfizer. If and when there is a time to own Zoetis shares you can always do so based on its own merits and without a clock ticking away in the background.

Weekend Update – June 16, 2013

I’ve been waiting for a decline for so long that sooner or later I’m bound to be right.

What gives me cause for concern that I might be wrong, at least in the near term, is the increasingly vocal sentiment that we are ready for a significant market decline. It doesn’t take much of a contrarian to realize that when it seems that everyone is on board it is the time to get off.

Maybe that’s what explains Thursday’s really irrational market joy ride coming off the heels of a 5% decline in the Nikkei and an early 100 point loss in the pre-opening US futures markets. All of the naysayers came out at once ready to take credit for their impeccable timing in calling the correction.

But a bit more confusing is When omni-present personalities express sentiments that are either to the extreme or counter to their historical sentiment. Especially when bulls become bears and bears become bulls. When that begins to happen it may be time to literally and figuratively “take stock.”

When perma-bear Nouriel Roubini expresses a bullish tone or when Dennis Gartman proclaims that he is “worried” there are direct messages conveyed that can elicit direct responses, but just as easily elicit contrary responses.

I have been convinced that the melt-up higher in 2013 was going to be a repeat of that seen in 2012 in scope, time and velocity.

But over the past month the coincident time frame has slipped away, as this time last year we were already on the way to a recovery from an abrupt 9% drop after 4 months or higher markets.

While the time frame has been shifted, as the 2013 rally has thus far exceeded that of 2012, my belief that the rallies from the market’s recent drop is simply the same kind of “head fake” that was seen in April 2012, when the market recovered from a 2 week loss. The recovery also recovered everyone’s confidence that the market could now only continue on its upward path.

In that case, the proverbial “testing of the highs” resulted in a failing grade.

Back then, the reality was different and sudden. When balloons pop, it’s sudden. The first few months of 2012 was a balloon.

Certainly the sudden spate of triple digit days and ever widening intra-day trading ranges is sending some kind of message. In 2012 triple digit gains were rare, but started increasing right before the plunge. Now, not only are triple digit days a recent common occurrence, but the intra-day trading range, from daily low to high, has nearly doubled, since the market topped on May 21, 2013.

To add some fuel to the mix, this coming week features a Quadruple Witching, which granted is not the big deal that it was a decade or two ago, but also features release of FOMC minutes and a press conference by Federal Reserve Chairman Ben Bernanke.

The constellation of events may have the markets reaching a threshold at which point it may not be able to contain its behavior. Certainly closing the week with another triple digit loss, unable to follow through on Thursday’s nearly 200 point gain doesn’t inspire confidence.

But do balloons under mounting pressure only pop, or is there another path?

I’ve been busily amassing cash in anticipation of a pop and have missed out on a portion of the rally. Instead of making approximately 10 new trades each week, for the past two months there have typically been only five new trades. Additionally, instead of looking for weekly option opportunities, increasingly the search has been for the safety seen in monthly option writing. I simply didn’t want to be shocked by the pop.

But after waiting so long each day begs the question. Is it time to change? What if the decline either doesn’t come or instead is an insidious leaking of value as a result of increased volatility with an overall net decline characterized by alternating large moves in both directions? While the climb higher was slow and steady, could the descent downward be slow and erratic?

Unlike the frog in a slowly heated kettle who never realizes he’s about to be boiled, a slowly depreciating market may still be compatible with continued investing vitality. That kind of market may be best approached by employing more cash from the sidelines and greater use of short term hedging vehicles.

Which is it going to be? As with most things I try not to make abrupt changes, but rather attempt to transition, as long as events allow a methodical approach. The significance of preparing for the possibility of a slow leak is that I may give some more consideration to Momentum stocks and shorter option contract durations, but still looking for positions that have under-performed the S&P 500 since the market top.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details).

The first stock of the week is emblematic of the excesses of an earlier period and reminiscent of a market top in the making. That was a balloon popping, in case you needed an example. Those remembering the frenzy associated with the Blackstone Group IPO (BX) will remember that there were disappointing IPOs long before Facebook (FB) came on the trading scene. Its shares are still far away from its IPO price, in fact, further away than is Facebook and they have had much more time to recover. Granted, along the way there’s been dividends to accrue, but all in all, a disappointing few years. Most recently, its public profile has been raised,as its been increasingly involved in prospective buyouts and has developed a stable of well run companies. The caveat to this position is that earnings are reported just prior to the July 2013 option cycle expiration

Abercrombie and Fitch (ANF) is just one of those companies that people like to hate. Whether it’s the image it portrays or whether it’s the public face of its CEO, it’s just difficult to get a warm and fuzzy feeling about the culture. But when it comes to a reliable and consistent vehicle for generating option premium income, it is always high on my list. Always volatile, especially in the weeks before earnings, when it pre-announces European sales and its currency woes, it can be rewarding as a short term tool, but you have to be prepared for unexpected rides and longer term commitments.

Oracle (ORCL) reports earnings this week. For those that remember the last earnings report, its CEO, Larry Ellison pointedly blamed his sales staff on the very disappointing numbers. There may have been something to that, uncomfortable as it was to hear the vitriol directed toward his employees, as competitors fared very well during the quarter and have continued doing so. It seems very unlikely to me that Ellison would put himself in a position to trail the pack again and for Oracle to be thought of as an industry laggard. Whereas I prefer to consider the sale of puts for most earnings related plays, in this case I’m more likely to consider the purchase of shares and the sale of calls.

Las Vegas Sands (LVS) has certainly had a nice run lately and I’ve been wanting to buy shares back since March, but it hasn’t even given the slightest indication that it was ready to return to the low $50s level. Down nearly 6% from its recent high and going ex-dividend this week may be a good enough combination to entice me this week to purchase shares, but my preference would be for a very short holding period because of over-riding market concerns.

Coach (COH), too, is higher than I would like, but I do want to repurchase shares. I’ve been a serial buyer for the past year and have and now that it offers weekly options it has additional appeal, even at share prices that are at the high end of my comfort level.

Transocean (RIG) was a stock that I had also considered purchasing last week. WIth it’s price decline in the absence of any substantive company or sector specific news, it now looks even more appealing. In the 2013 market, much of the time a stock in the crosshairs that was subsequently not purchased has gone on to create some regret as prices have generally gone higher. There haven’t been as many opportunities for a second chance as in markets that typically alternate moves higher and lower.

Barclays (BCS), like many in the financial sector, had gone up just too much and too fast. It’s now down about 7% since both its peak and the market peak. Although it still may have another few percent on the downside before it hits some support, I don’t believe that there will be any near term events to put it uniquely at risk. As with many positions that offer only monthly options, I am more inclined to consider adding them during the final week of a monthly cycle.

With or without the purchase of Oracle, I’m already over-invested in the technology sector, so I would look cautiously at adding additional technology positions. However, Texas Instruments (TXN) started lagging the market a few weeks before the current lull and has also under-performed since the market top, making it a candidate for consideration. Following its most recent drop in response to guidance last week, I believe it offers some value in return for the risk of about a 4% downside in the event of some market tumult.

Caterpillar (CAT), despite having had a strong week this past week, appears to be a relatively low risk position at these levels, having very successfully defended the $80 level for the past year. Its ability to consistently bounce back and maintain its price levels despite any positive news in quite some time attests to its strength and makes it an ideal covered option position over the longer term. With its announcement of an increased dividend, payable during the July 2013 option cycle, it adds to its appeal. Although increasing a dividend is usually greeted in a positive manner, there were choruses of those finding fault, claiming that it reflects the inability to invest in the growth of the business. My guess is that very few investors will be frightened away by a competitive dividend.

Although Caterpillar reports its earnings during the first week of the August 2013 cycle, which should not effect its price action significantly during the July 2013 cycle, my one concern is that Cummins Engine (CMI) reports earnings on July 30, 2013. Although that, too, is during the August cycle, Cummins frequently provides guidance two to three weeks before its earnings are released. If recent past history is any guide, disappointing guidance from Cummins adversely impacts a number of other stocks, which do have a tendency, however to recover relatively quickly.

Finally, I identified Safeway (SWY) as a possible Double Dip Dividend selection earlier in the week and then expected to toss it into the wastebasket after it announced the sale of its Canadian assets and its shares went up by nearly 40% in the after-hours. Somehow, despite a market that traded up nearly 1.5%, Safeway gave up the vast majority of its gains, still finishing the day at a very respectable 7%. Even after a jump higher, Safeway shares are still about 12% lower than its April 2013 peak.

Traditional Stocks: Barclays, Caterpillar, Texas Instruments, Transocean

Momentum Stocks: Abercrombie and Fitch, Blackstone Group, Coach

Double Dip Dividend: Safeway (ex-div 6/18), Las Vegas Sands (ex-div 6/18)

Premiums Enhanced by Earnings: Oracle (6/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.


Weekend Update – June 9, 2013

Somehow you find the strength.

Having spent many years working with children and in children’s hospitals, I often wondered how parents of children with significant medical or developmental disabilities found the strength to go from one day to the next.

When faced with what appear to be insurmountable challenges some people can simply face down the insurmountable and move forward when even treading water seems impossible.

Doubly difficult must be dealing with brief glimmers of hope that can dissolve away. The ascent to emotional highs quickly followed by emotional lows certainly has to take its toll.

My wife has told me on many occasions “you just find the strength.” Ordinary people rise to the occasion to accomplish extraordinary things. Even at its bleakest such people could see positive value from their efforts and see justification in optimism and resolve.

To suggest that the stock market presents challenges similar to those faced by parents faced the most difficult of circumstances trivializes the amazing dedication that people can summon.

But that doesn’t stop me for making the suggestion.

With the market having considerably changed its behavior it’s difficult to know what actions to take and when to temper optimism with remembrances of earlier setbacks. It’s easy to get paralyzed with fear and uncertainty, just as it’s easy to get elated about unexpected good news. But somehow you have to go on as dispassionately as possible even in the face of what may be a relative meltdown, which a month ago might have meant a week where the market only advanced by 1%.

I’m not really certain what the “7 Signs of the Apocalypse” are, but I feel fairly certain that the sudden onset of alternating triple digit gains and losses, in addition to the large intra-day reversals are among the signs of darkness ahead. The trend line may say differently, but that is the perennial battle between darkness and light.

The reaction to today’s Employment Situation Report was fascinating in that the fear of a related market plummet was so prevalent that even the release of numbers that simply met expectations was viewed as incredibly hopeful that the fully anticipated Federal Reserve tapering wouldn’t be coming as soon as some thought. As reviled as Quantitative Easing has been among some circles, the very thought of its withdrawal from the credit markets created seizure like activity in the markets. Once addicted, it’s difficult to accept that fact and you always want more.

As the market began its mid-day ascent on Thursday, reversing a large fall at that point that the cumulative drop from the recent intra-day high on May 21, 2013 was nearly 5%, it had recovered 62% of that fall on an intra-day basis. Is that the same quick head fake that we saw in April 2012 just prior to the market losing 9%?

I will know in hindsight, but whatever awaits, somehow you still have to go on, recognizing that the stock market continues to be the best place to put your faith when it comes to advancing wealth creation. Of course, the across the board rally in prices on Friday increases the difficulty of selecting stocks that may have some unreleased energy within.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). As opposed to previous week’s I have more “Momentum” possibilities and fewer dividend selections. I’m not entirely comfortable with that breakdown.

Less than a day before the market’s wild ride in response to the Employment Situation Report, a barely 3 days after the disappointing ISM Manufacturing Index report, Fastenal (FAST), a company whose fortunes many consider to be a very basic reflection of manufacturing health, reported some disappointing data, which seemed suggestive of a manufacturing slowdown and certainly a confirmation of the ISM statistics. It’s fall was drastic, but it recovered along with everyone else on Friday. As long as disbelief may be suspended, or at least data may be denied, Fastenal remains a company that has been reliable in maintaining value or returning to it.

With Merck’s (MRK) recent rise higher following the ASCO meeting and speculation that it may split off component pieces, it’s shares don’t fit my recent pattern of looking for companies that have under-performed the S&P 500 since its recent top. It does, however, go ex-dividend this week and the combination of premium and dividend may offer enough of a cushion in the event of some interim correction, particularly if selling monthly options. For those that like to think longer term than I am capable of doing, Merck probably has the best pipeline of all of the major pharmaceutical companies, although my horizon doesn’t usually go much beyond a month.

Certainly not for the faint-hearted, especially at a time that the market itself may be somewhat tenuous, is Apple (AAPL), which hosts the Worldwide Developer’s Conference next week. As it is, this past week was already a busy one for Apple, already fresh off the congressional testimony victory tour over its tax related strategies. Whether it caught attention because of its ongoing e-book publishing battles, its potential entry into the internet radio space, its plan to accept iPhone trade-ins, its patent for electronic payments or its proposed use of advertising on various platforms, it was hard to escape Apple-centric news. As it is, lots more eyes will be on Apple this week. There’s not too much to be gained by adding to the speculation over what will be presented, but I think that it’s very likely shares will out-perform the market for the week. The options market is expecting a nearly 4% move in shares, which to me indicates expectations of a surprise or disappointment. Either way, at a very rich option premium and some resistance at about $395, this seems like a good time to add or buy shares.

Marathon Oil (MRO) requires much less of the ability to withstand outrageous and frequent moves in share price. as with many of the stocks that I’m considering for the coming week, their price movement on Friday made them a little less appealing; sometimes a lot less appealing. In Marathon Oil’s case the move higher still lefty it in the range that still leaves me with some comfort.

Transocean (RIG) is a little more of a nail biter stock on some occasions and is currently among the increasing number of companies that have caught Carl Icahn’s attention. It recently re-instituted its dividend after having gotten out from under the Deepwater Horizon liabilities and has traded well even when eliminating the dividend. It no longer offers weekly contracts so I haven’t been looking toward it quite as much as a potential choice. However, as I’ve been looking increasingly to position myself defensively, the longer term contracts have greater utility during a brief market downturn.

Dow Chemical (DOW) was one of the stocks I was prepared to buy last week, but eventually as the week came to its end, I only followed through on two of the list’s stocks. Following some sector news last week shares fell a bit and that should have been the invitation to add shares, but overall caution was my prevailing theme. Although the caution still continues, I’m more inclined to add shares in reliably performing companies. FOr Dow Chemical, if shares are not assigned, it does go ex-dividend in the first week of the July2013 cycle, which adds some further appeal.

Both Caterpillar (CAT) and Joy Global (JOY) have had their recent ups and downs. Both have also been excellent choices when beginning to test their bottoms. Both levered to some degree to Chinese economic expansion, Joy Global recently gave some reason to believe that its business could do well even if frank expansion didn’t occur, as miners were looking to retire older and more expensive mines while developing newer, more cost efficient ones, thereby requiring heavy machinery products. As much as you can count on any guidance and any interpretation of events that are not within your control both Caterpillar and Joy Global have the ability to withstand economic cycle blips.

Motorola Solutions (MSI) certainly fits within the theme of looking for recent under-performers. In this case, it’s thanks to its large drop following its most recent earnings report in April. While it goes ex-dividend this week it won’t report its next earnings until the August 2013 option cycle and although I’m most likely to sell a June 2013 option, I may also consider looking at the July 2013 option premiums.

LuLu Lemon (LULU) reports earnings this week and certainly will serve as a future case study at business schools around the country for how to effectively deal with a crisis that could potentially imperil brand integrity. The shares are no stranger to big moves in response to news and have appreciated nearly 30% since the product news became known. That’s probably a bit too much for anything other than a speculative kind of trade in advance of earnings, but at the moment anything less than an 8% drop in share price could result in obtaining a 1% ROI if puts are sold.

I’ve never invested in ULTA Salon (ULTA) before, but have begrudgingly gone into its stores. The options market is implying about a 9% move as earnings are due to be announced this week. That certainly wouldn’t be the first time its shares have responded to that degree. The reward profile for selling puts on these shares is marginally within the range that I consider, with the ability to obtain a 1% return in exchange for accepting anything less than a 12% share drop, but unlike the LuLu Lemon case, that return is over a two week period of exposure, as opposed to just one. While there is a possibility of following this trade, I would be much more likely to do so if shares have some significant dips before earnings are released.

Finally, TIVO (TIVO) which was scheduled to start jury selection in its patent infringement case this coming week spiked more than 10% in the final 30 minutes of trading on Thursday, in the absence of any publicly available news. By Friday morning it’s shares fell nearly 20% on the news that it had reached a settlement. Perhaps the amount was less than anticipated, but I interpreted the remainder of the press release as short term bullish for shares which included a doubling of the share buyback and news of continued partner relationships. The money and the contracts may come in handy for a company that is proof that a lost subscriber here and a lost subscriber there begins to add up.

Traditional Stocks: Caterpillar, Dow Chemical, Transocean

Momentum Stocks: Apple, Joy Global, TIVO

Double Dip Dividend: Merck (6/13), Motorola Solutions (6/12)

Premiums Enhanced by Earnings: LuLu Lemon (6/10 PM), Ulta (6/11 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.


Who’s Wagging Who?

Anytime a major market goes down 7% it has to get your attention, but what seemed to set Japan off? Maybe it was just coincidental that earlier in the day across an ocean, the United States markets had just finished a trading session that was marked by a “Key Reversal,” ostensibly in response to some nuanced wording or interpretation of Federal Reserve Chairman Ben Bernanke’s words in testimony to a congressional committee.

The very next day we showed recovery, but since then it’s been an alternating current of ups and downs, with triple digit moves back in fashion. Intra-day reversals, as in their May 22, 2013 “Key Reversal” extreme have been commonplace in the past week after a long absence

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