Friday, January 15, 2010

Goldman 8, Public Zero…The Teachable Moment of Bare Escentuals

We’ve been radio silent here at NotMakingThisUp the last week or so, for what we hope will prove good reasons.

The first reason is that for the past week your editor has been in conference meetings at Ground Zero of Healthcare Reform.

Now, Ground Zero of Healthcare Reform is, in our view, not Washington DC, where the legislation itself is being worked out. (And by “worked out” we mean “bribed, weaseled and compromised by ignorant Congresspersons”).

Ground Zero of Healthcare Reform, at least for the last few days, has actually been San Francisco, California. More specifically, it has been the JP Morgan Healthcare Conference—an annual confab of pretty much every CEO, CFO, VC or scientist who ever started up, ran, founded or otherwise had something to do with a company that performs the actual hard work of keeping healthy a nation of 300 million uniquely diverse (at least among the ranks of “developed nations” with which our healthcare quality gets blithely compared) human beings.

The second reason for the radio silence is that we’re gearing up to participate in Bloomberg Television’s coverage of the mini-Berkshire Hathaway shareholder meeting next week, at which Berkshire shareholders will be voting to do something Warren Buffett swore would never happen under his watch: the splitting of Berkshire’s stock.

No matter, this morning’s headlines brought a good reason to break that silence: the acquisition of Bare Escentuals, a publically-traded cosmetics company (ticker BARE) based right here in San Francisco, by Shiseido, a large Japanese counterpart, for $18.20 a share in cold, hard, US dollars.

Now, as far as deals go, this really shouldn’t be an attention grabber, but stay with us while we get to the “teachable moment.”

The winners in the deal are, of course, existing Bare Escentuals shareholders, who happen to include the company founder, a private equity firm, and the many institutions and individuals who bothered buying the stock on their own free will.

The losers would mainly be short-sellers, who according to our Bloomberg are stuck with 5.3 million such shares they must now buy back (“He who sells what isn’t his’n,” as the old Jessie Livermore phrase goes, “must buy it back or go to prison”).

Another class of losers, however, would be pretty much anybody who took Goldman Sachs’ advice to sell their BARE stock just six weeks ago. Indeed, more than 5 million shares changed hands in the two days following Goldman’s early December move from the always-meaningless “Neutral” rating to the rare “Sell” rating, and the stock traded down $2, wiping out $200 million of the company’s valuation.

Now, there was good reason investors took Goldman Sachs’ advice to sell their BARE stock.

After all, it was Goldman Sachs who led the Bare Escentuals public offering back in November 2006, pricing 16 million shares at $22.00 a share.

And it was Goldman Sachs who successfully led a 12 million share secondary at $34.50 in early 2007, which Goldman’s crack Equity Research Team quickly followed by slapping a “Buy” rating on BARE stock, with a target price of $44.00 a share.

“But wait, there’s more!”

Three months later, it was Goldman Sachs who, once again, plugged the Street with more stock, this time selling 8 million shares of BARE at $36.50.

Finally, the Street had had enough of Bare Escentuals: the stock sold off ten points that summer and never really recovered.

But this did not deter Goldman’s Equity Research Team, for in the manner of equity research teams everywhere, Goldman’s Finest changed their “Buy” rating to a “Neutral” only after all the deals were done.

And Goldman's Finest stuck with that “Neutral”rating even while the stock performed in a decidedly non-Neutral fashion: it cratered all the way down to $2.45 a share in March 2009.

Now, you might think such a ridiculous price would have merited an upgrade: that $2.45 per-share valuation amounted to only 3-times EBITDA, a steel-company multiple for a non-steel-company-like 70% gross margin, 28% operating margin business.

Besides, if you liked it a $36.50, shouldn't you love it at $2.45?

You might think that, but you'd be wrong. In fact, Goldman kept its “Neutral” rating and thus missed a 425% rally in shares of BARE until the stock hit $13.00 a share—where Goldman’s Finest deemed the shares an outright “Sell” just over a month ago.

By our count, that’s three overpriced stock offerings and four bad research calls, for a score of Goldman 7, Public 0.

And it is here now that we get to our Teachable Moment.

You might think this sort of performance would hurt Goldman Sachs—i.e. that there might be some sort of loss of credibility in the matter of Bare Escentuals which would have a negative financial implication down the road for Goldman Sachs, Inc.

And you would already be wrong.

Because the financial advisor to Bare Escentuals in its acquisition by Shiseido is none other than…

Yes, you got it.

Goldman 8, Public 0.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog e at NotMakingThisUp, and for what we hope will prove good reasons.
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Mark B. Spiegel said...

>>By our count, that’s three overpriced stock offerings and four bad research calls, for a score of Goldman 7, Public 0.<<<<

Are you sure it's only Goldman "7"? How many shares did their prop desk own before their bankers pitched the concept of selling the company? Gee, as of 9/30/09 it was a tad over 3 million... ...

...but, of course, that still leaves October and November.

Tim Knows How to Make Stuff Up said...

Love it. One of your all-time best entries.

To follow up Mark's comment, I wonder how many shares, if any, GS, or their hair-dressers, agents or other interested third-parties picked up in advance of today's announcement. The sad part is that with today's technology, I have to believe that doing the forensic discovery related work on such an analysis and tracking down the paper(less) trail would not be all that difficult. In fact, I will gladly help get the ball rolling. It just took me less than two (2) minutes to review the recent historical stock prices/volume data. I suggest Ms. Investigator focus on the trades made between Jan. 4th and Jan. 8th during which time no PRs were issued, yet the volume appeared to be unusually heavy. The aforementioned timeframe might just coincide with the same timeframe that a handshake deal was consummated simply leaving the M&A lawyers a few days to bill, err, I mean finalize the legal drafting. If only someone at the SEC actually cared....

Mark B. Spiegel said...


BARE *plunged* on big volume on January 7th & 8th, which clearly doesn't fit the scenario of insider buying ahead of a takeover. It also traded down over the four days prior to the announcement. So, I doubt anything THAT untoward went on here.

Anonymous said...

research and ib are conflicted?! stop the presses!

should have kept the radio silence, jeff.

LoveToPiggyBackGoldieLox said...

Hey, please keep quiet about this piggybacking GSCO's prop trading desks' trades on take out bait. The entire world might figure out how the game's played. I don't wanna lose my edge.

FD: piggybacked a few of their dumper dog clients right before an acquisition offer was made to take them out of their misery.

Anonymous said...

Professor Jeff:

I think there’s another less obvious, but important, idea in your post on Bare Escentuals.

When Shiseido announced its all-cash buyout offer of BARE, not only did BARE’s stock rise on the announcement, so did Shiseido’s. In the spirit of your mantra, I am not making this up. Readers can click here for the price action on Shiseido (ticker: SSDO.Y) from 01-15-2010.

This is not the first time I’ve seen an acquirer’s stock rise on an all-cash offer for a company. The rise in Shiseido’s share price makes you wonder whether the non-dilutive aspect of the all-cash offer is one of the main reasons why Shiseido’s stock rose on the news. And, as a comparison, you have to wonder what lesson could possibly be inferred from the “problem” Kraft is having with institutional investors (hello, Mr. Buffett and Mr. Ackman) on its attempted acquisition of Cadbury with stock and cash.

As for Goldman, well, one only needs to think of them as a bookie that gets their vig from investors. They care only about the amount they take, whether it is from long/short prop trading or investment banking fees, regardless of the investment outcome. They truly are the smartest guys on the trading floor, and they know it too. I’m not defending Goldie, I’m just saying…

P.S. – You should make Think for Yourself the theme of the year. Another great post, as always!

Tim Knows How to Make Stuff Up said...

You are mistaken. Not sure where you're getting your information, but BARE was up each and every day, on big volume, during the referenced timeframe. Those were FIVE BIG GREEN CANDLES as set forth below:
Jan. 4th: up $0.21 on double the prior volume
Jan. 5th: up $0.18 on even more volume of 1.8mill
Jan. 6th: up another 1/4 pt on 1.8 mill
Jan. 7th: up $0.37 on 1.7 mill
Jan. 8th: up $0.15 on 2.5 mill

As far as the four (4) prior days to the announcement, surely you don't think anyone with insider info. would be stupid enough to trade it so close to the announcement do you? In other words, it makes perfect sense that the volume over the last four days decreased. In fact, I would be surprised if this was not the case.

In any event, the bottom line is that I have no idea whether any improper or illegal trading went on here by anyone with any information connected to this deal, but this doesn't pass my smell test and why shouldn't the SEC investigate something like this?

Mark B. Spiegel said...


Sorry-- my fault. I was looking at the same dates in December when, on 12/7 and 12/8 it was down a total of almost 15% on no news and traded 2.5 million and 3 million shares, respectively. (lol... Maybe that's when the deal initially "fell apart", before they pieced it back together a few weeks later).

LoveToPiggyBackGoldieLox said...

The SEC can and should probe this matter as the call options activity prior to the merger was also frisky.

The SEC and FINRA should also look into Goldman Sachs' published research versus Goldman Sachs' prop trading desk positions.

Unknown said...

All you've said is what anyone with half a brain on Wall Street has known forever: trading based-upon equity research calls is stupid. Read the reports for the information, but make your own calls on price (and there drivers thereof).

Goldman's reasearch team is likely no worse (or better) than Deutsch Banks, MS, CS, BoA or anyone else. Huge mean-reversion/clustering in the space, blah blah other things everyone should already know.

Nothing to see here, move along now...

But What do I Know? said...

If you pay any attention at all to the "research" propagated by the wirehouses or investment banks then you deserve what you get. They are either corrupt or clueless or some combination of the two.

David Smith said...

Jeff, great article. Couple things:

1) I think Jesse Livermore attributes the famous line to an earlier operator, Daniel Drew.

2) Worth noting that all the M&A action is in this consumer non-durable space.

Edgecliff said...

Slightly off topic but you should appreciate Barry Ritholtz final sentence on this take down of overstock

Colin P said...

Fabulous piece, is this in response to the similar op-ed in the Journal today?

Anonymous said...

maybe the "Goldman 8, Public 0" scoreboard should change after today

Jeff Matthews said...

David Smith correctly notes Daniel Drew as the source of the "He who sells what isn't his'n..." maxim. I lifted it from memory out of the Livermore-modeled "Reminscences of a Stock Operator," which is one of the all-time great investment books.

Colin P asks if the post was prompted by a WSJ op-ed piece, and I have to say no, any resemblance to any other op-ed or editorials is purely coincidence.