In The value of Seth Klarman (free registration required), Absolute Return has a rare interview with the president and portfolio manager of the 28-year-old Baupost Group. In the interview, Klarman discusses several of Baupost’s positions over the last twelve months, including the fund’s stake in Facet Biotech, which I fumbled last year:
Around the same time the CIT deal was playing out, Klarman took a sizable stake in Facet Biotech—a small biotech company spun off in December 2008 from PDL BioPharma—for an average cost of $9 even though it had $17 per share in net cash at the time of the spinoff. “We liked the discount and pipeline of products,” Klarman recalls. “We knew that when small caps are spun off, they are frequently ignored and become cheap.”
Biogen Idec tried to acquire Facet in a hostile deal for $14.50 per share, raising the offer later to $17.50. When Facet allowed its largest shareholder, Biotech Value Fund, to buy up to 20% of the company, Baupost asked for identical terms, essentially becoming a poison pill. Baupost then told Facet it did not intend to tender its shares in the $17.50 per share offer. Eventually Biogen backed off, and Facet accepted a $27 per share offer from Abbott Laboratories.
Here Klarman discusses his strategy more broadly:
Value investors are typically thought of as stock investors, but Klarman says most of the time he prefers to buy bonds. Bonds are a senior security, offering more safety, and they have a catalyst built into them. Unlike equity, debt pays current principal and interest. If the issuer doesn’t make that timely payment, an investor can take action. “Catalysts can reduce your dependence on the level of the market or action of the market,” he explains. For example, defaults are specific incidents affecting the company regardless of what is going on in the overall market.
Over the past two years, Klarman’s preference for debt has been even more pronounced. After peaking at just $2 billion in June 2008, Baupost’s total equity assets shrank to around $1.2 billion from the fourth quarter of 2008 to the first half of 2009, before turning up slightly at year-end 2009 to nearly $1.6 billion. That puts equities at just a little more than 7% of total assets under management.
And his view on the market
The value pro is still looking at troubled companies, mortgage securities and select equities. But he is not buying much at the moment. Klarman says there are some opportunities in commercial real estate on the private side, but not as much as would be expected, given the depressed levels of the market. “That’s why we want to be patient,” he stresses.
Baupost is 30% in cash now, its long-time average. Klarman stresses that the cash position is residual—the result of a search for opportunity and not the result of a macro view. He says he can find great opportunities to buy at the same time he has a bearish view on the world. “We’re good at finding bargains, good at doing analysis,” he emphasizes. “We’re not good at calling short-term movements in the markets.”
And when the markets started to crumble in mid-May, he mostly stood pat, asserting that the 5% to 8% drop in prices did not unleash a torrent of bargains, mostly because of the market’s surge from its March 2009 bottom. “The market has gone up so much that, based on valuation, it is overvalued again to a meaningful degree where the expected returns logically from here can be as low as the low single digits or zero for the next several years,” he says.
Click here to see the remainder of the interview (free registration required).
With the 2m loan from Hospira and a early trial date and some significant Delaware rulings against MACs, it seems Javelin has two shots at closing the deal…..Hospira agrees on the 16th; Hospira opts out but loses in court; Hospira opts out and wins in court. What are your thoughts on these new developments?
Thanks so much. I have a child with cerebral palsy who needs lifelong care and if I blow this one my wife might flush me down the toilet.
Don Holmes
Charlottesville, Va.
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@Nate, I briefly reviewed MYRX when it popped up on one of my screens. How do you feel about the other failed merger in April? (JAV)
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I think the merger showed the management’s true colors, empire builders. Unfortunately the company is run by a bunch of doctors which could be good for developing new drugs, but bad for business.
I voted against the merger, I would love to see how the proxies turned out, MYRX was saved by Hospira in this case.
As an aside JAV is VERY interesting right now, the tender at $2.20 is still on the table yet the shares are trading around $1.40, quite a spread. It seems there is a lot of risk with it going through, they are shy 2% of the shares from the merger being accepted. It seems someone with a deep enough wallet could buy up the 2% tender and make the spread pretty easily. I haven’t bought in yet, but it’s fascinating to watch.
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Seems to be heaps of stock going through. Great find.
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Here’s the Deal Professor on JAV’s chances:
http://dealbook.blogs.nytimes.com/2010/06/04/the-urgency-of-javelins-mac-battle/
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A similar situation to FACT is MYRX. They were spun off from MYGN and trade for less than cash right now.
They were trading close to cash for a while then in December management tried to engage in a value destroying merger. The merger fell through a few months back and the share price has done nothing but drift down since then.
At the current cash burn they have about two years left before they need to raise capital. Even with the terminal date of two years the market seems to be pricing them where the pipeline has very little to no hope. I can’t believe that the parent company would go through the process and expense of spinning them off as a way to dispose of assets, they could have saved 200m by firing the staff and closing down operations.
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[…] Speaking of rare interviews Absolute Return interviews Seth Klarman. (Greenbackd) […]
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[…] Klarman says value investors prefer bonds: Bonds are a senior security, offering more safety, and they have a catalyst built into […]
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