Welcome to the January/February 2005 Conscious Investor® Newsletter.

IN THIS EDITION: 

1. Some Thoughts on Mergers and Acquisitions 
2. How Big Tobacco Continues to Get the Word Out
3. Berkshire Hathaway Annual Meeting and visits to Omaha, New York and Chicago
4. Featured Stock Analysis (USA): CH Robinson Worldwide
5. Featured Stock Analysis (Australia): Ramsay Health Care Limited

1. Some Thoughts on Mergers and Acquisitions 

Every year there are a huge number of mergers and acquisitions. For example, in the USA during 2001 the number was over 6,000 with an average value of US$180 million. Generally I am very wary of all mergers and acquisitions. So often only a small handful of people make a huge amount of money from them. The lawyers, accountants, senior management and directors usually come out very well. Also there is a lot more share trading activity so brokerage and stock analysis companies benefit.

Unfortunately mergers and acquisitions often fail. The result is that the buyer sells the acquired company for a huge loss which translates into a major loss for shareholders.

AT&T gave up $4.5 billion when it sold NCR after three years of struggle. Mattel lost $3.8 billion when it sold The Learning Company after less than two years. Selling Snapple in two years cost Quaker some $1.4 billion. Novell dropped $730 million on WordPerfect, and Anheuser Busch lost $2 million on Cape Cod Chips.

Regarding acquisitions in general, Warren Buffett has written:

The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are honey pot for the investments bankers and other professionals on both sides. But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value that it receives.

John Medlin, the retired head of Wachovia Corporation, said that if you do that enough, you are running a chain letter in reverse.

Despite the expertise of the companies (perhaps because of the prodding of lawyers and accountants), often both companies misunderstood critical distinctions between the products and distribution channels of the two enterprises.

I have a feeling that this is the case with Proctor & Gamble’s purchase of Gillette (ticker: G). The Procter & Gamble Company (ticker: PG) has signed a deal to acquire 100% of The Gillette Company. The transaction is valued at approximately US$57 billion making it the largest acquisition in P&G history. It is certainly good, at least in the short-term, for Gillette holders since the price jumped over 10 percent. At the same time, shares in Proctor & Gamble dropped  by around 6 percent.

The main brands of Proctor & Gamble are Pampers, Tide, Ariel, Always, Pantene, Bounty, Folgers, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay. For Gillette they are Gillette, Mach 3, Duracell, Oral B toothbrushes and Braun.

To my eye, these two companies are quite different. Gillette’s strength is its research and innovation ability to produce useful daily products. The products of Proctor and Gamble are based on much less research and innovation. P&G now has the challenge of merging two distinct corporate cultures.

Even James M. Kilts, Gillette’s chairman of the board, chief executive officer, and president recognizes the fundamental differences when he said that the acquisition “brings together two companies that are complementary in their strengths, cultures and vision.” The word “complementary” can sound very nice but it may end up meaning “irreconcilable differences.”

Another factor is that P&G paid a very high price for Gillette. They claim that it was justified because of resulting savings. Perhaps, although even if this is the case, it will likely take quite a while for these to flow through to the bottom line. 

Buffett came out very strongly as supporting this transaction. As  a major shareholder of Gillette this represented a massive profit for Berkshire Hathaway. Time will tell whether it turns out well for Proctor & Gamble shareholders.

2. How Big Tobacco Continues to Get the Word Out

The tobacco industry has set up its own scientific journal that publishes reports tending to downplay the damage done by secondhand smoke, Australian researchers say.

"The journal would seem to be a place where industry-funded scientists can get their work published," said Simon Chapman, a professor of public health at the University of Sydney. "Published work can then be publicized by the tobacco industry's formidable PR machine."

Chapman is lead author of a paper in a recent issue of The Lancet that uses internal tobacco industry documents made available by the Master Settlement Agreement between tobacco companies and American states to describe the establishment of the International Society of the Built Environment, which publishes its own journal, Indoor and Built Environment.

The Master Settlement Agreement, reached in 1998, required tobacco companies to pay the states $206 billion to finance a $1.5 billion anti-smoking campaign and to disband trade groups that dispute scientific evidence about the health damage caused by smoking.

However, the settlement papers also describe a meeting in March 1987 at which tobacco industry personnel from the United States, United Kingdom, Japan and Germany considered how to "improve the industry's position" on secondhand smoking and concluded that "more industry-sponsored research [was] needed" and that an industry-sponsored journal might be needed to get such research printed.

Two months later, tobacco giant Philip Morris USA proposed a program, one part of which was to "establish a genuine scientific journal on indoor air quality."

That journal first appeared in May 1991, and is still being published by the Switzerland-based International Society of the Built Environment.

"The society's executive has been dominated by paid consultants to the tobacco industry; all six members in 1992 and seven of eight members in 2002 had histories of financial associations with the tobacco industry," Chapman and his colleagues reported.

The report said that "61% of papers related to environmental tobacco smoke published in Indoor and Built Environment in the study period reached conclusions that could be judged to be industry-positive. Of these, 90% had at least one author with a history of association with the tobacco industry."

"The Lancet study demonstrates that the tobacco industry lawyers organized what can only be described as an international conspiracy to systematically undermine the scientific consensus linking secondhand smoke to serious disease," said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids.

Establishment of the journal was part of a larger campaign "to sow seeds of doubt in the minds of the public" about the damage done by secondhand smoke, Myers said.

An earlier report in The Lancet by the Center for Tobacco Control, Research and Education at the University of California, San Francisco, described how several papers questioning the genetic damage done by secondhand smoke were published in the journal Mutagenesis. The researchers who wrote the papers and the editor-in-chief of the journal had undisclosed ties to the tobacco industry, that report said.

"In the United States, the industry has claimed that it has changed," Myers said. "The new study demonstrates that the tobacco industry continues to engage in the same wrongful deception around the world."

3. Berkshire Hathaway Annual Meeting and visits to Omaha, New York and Chicago

The Annual Meeting of Berkshire Hathaway is on Saturday April 30 in Omaha. My wife and I will be there. On Sunday May 1 we are planning to give a Conscious Investor introduction/demonstration as well as a general discussion of the meeting on the previous day. (Currently it is planned to begin at 10:00am so that people have time to fly home later in the day. Location yet to be announced.)

After Omaha we will visit New York and Chicago to give further Conscious Investor introductions and demonstrations. When the details are finalized I will send out another email.

The meetings will be structured so that they are suitable for Conscious Investor subscribers as well as those who would like to see a live demonstration.

4. Featured Stock Analysis (USA): CH Robinson Worldwide

CH Robinson Worldwide (CHRW) started in 1905 as a produce company. Today, it is one of North America's largest third party logistics companies, with operations in the United States, Canada, Mexico, South America, Europe, and Asia. Most of its revenues come from providing truck, rail, ocean, and air transportation throughout the world. Sourcing and information services are also important components of its business.

It does not own the trucks and equipment used to transport its customers' freight but selects and hires the appropriate equipment depending on the needs of its customers.

In Conscious Investor we can see that the stock price of CH Robinson Worldwide has been as high as $56.39 in the past 12 months on a PE of 35.47 and as low as $37.48 on a PE of 23.57 over the same period of time. Back in 2000 its PE had been as high as 39.7. The current price is around $54.23 on a PE of 34.11. Over the past five years the average total return has been 22.5 percent per year.

Subscribers to Conscious Investor can see the complete analysis by Professor John Price of Conscious Investing by logging in to the Resource Page and clicking on the Newsletters and Stock Analyses section. 

Ramsay Health Care Limited (RHC) was established in 1964 and has grown to become one of the largest private hospital operators in the country. The company currently has a portfolio of 35 facilities including 32 private hospitals located throughout Australia, Coffs Harbour Day Surgery, the management of Mildura Base Hospital and North Eastern Community Hospital.

With over 4000 beds, Ramsay Health Care employs more than 7,000 people and caters to the health needs of more than 300,000 patients each year. All of its Hospitals have achieved full accreditation with the Australian Council on Healthcare Standards.

Currently the price is around $7.14 on a PE of 21.44. It has been as high as $7.50 in the previous 12 months on a PE of 23.01 and as low as $4.84 on a PE of 14.85 over the same period. The average total return has been a remarkable 55.1 percent per year over the past five years.

Subscribers to Conscious Investor can see the complete analysis by logging in to the Resource Page and clicking on the Newsletters and Stock Analyses section.