Mergers & Acquisitions: Unethical Behavior at Whole Foods?

By Adam Lass & Ann Sosnowski

Plus... Investment Management: Goldman Sachs Talks out of Both Sides of Its Mouth

Blue-Chip Investing
In Wall Street Journal’s July 3 “Heard on the Street” column, Goldman Sachs auto analyst Robert Barry followed up his June 25 upgrade of GM stock from “hold” to “buy” with the following: “I just don't believe GM is going to sustain over the long term anywhere near its current market share… a lot of competitors have better reputations, better balance sheets, better dealer networks.”

Blue-Chip Investing
Investment Management: Goldman Sachs Talks out of Both Sides of Its Mouth: Upgrades GM One Week and Trashes It the Next!

Every now and then, Wall Street tries to sell investors the most ridiculous idea: bad isn’t bad, it’s really good. Now I am not talking pure contrarianism here, the idea that you buy a stock when it’s cheap and hold for a decade or two hoping for a rebound.

Rather, I am speaking of a peculiar intellectual perversion where things like hopelessness and entrenched incompetence are actually supposed to be the best news ever.

An example: Right about the time that we are suffering through a particularly bad round of economic reports, the most peculiar thought starts to percolate up from the sewers of downtown Manhattan: “This isn’t bad, this is good, because now the Fed will have to lower rates! And even if companies can’t make or sell anything for a profit, at least the cost of borrowing more to pay the bills will go down! You should buy more shares now!”

The fact that said companies are racking up debt while hemorrhaging cash, and demonstrate no clue as to how they will improve things over the long -- or even short run, is not placed on the downside in these calculations. Rather, you are advised to back up the truck! Mortgage the house! Cash in the kids’ college fund! This disgrace is your chance to buy, buy, buy!

Wall Street is blowing just such smoke up our skirts right now. General Motors’ (GM:NYSE) news has been just plain awful lately, with an odd dozen consecutive quarters showing huge losses. It clearly doesn’t know how to make cars well or profitably.

Yes, yes, I know: it does know how to skim some $150 selling eight-banger pickup trucks with bus bodies slammed on top. Unfortunately, they are running out of folks who can afford to commute to work in them.

But all this has only served as fodder for those who would prefer that GM shares sold a good bit higher than these simple facts deserve. Indeed, twice lately when price began to reflect more proper valuations, three large investment houses, Goldman Sachs, JP Morgan and Bear Sterns, have trotted out the idea that all of this blood on the floor was actually a good thing.

Their “bad is good” logic runs this way: Come December, Detroit’s United Auto Worker contract runs out. Now if GM showed the slightest inclination toward competence, even the tiniest flicker of light at the end of the tunnel, then the unions would probably want a piece of the action.

Fortunately for the ailing auto giant, this is not true: there is simply no sign whatsoever that anyone in the corner office has a clue as to what to do next so as to make a profit. Which is great news, right? Because now 500,000 active union members and 450,000 retirees will be forced to give away their salaries, health plans and pensions so as to rescue the General and its Detroit compadres.

The brokers posit as a sign that this most unlikely event will happen due to the fact that the approximate 1,000 UAW workers at the bankrupt parts dealer Delphi were willing to accept changes such as these when faced with closed doors as an alternative.

I will be the first to grant that Internet chat rooms and Detroit bar stools do not make for a particularly scientific survey, but from what I have read and heard, a prolonged strike is every bit as likely as a complete union collapse.

But wait! If years of losses and an ugly labor battle are good reasons to buy GM (at least so far as a few fat cats on Wall Street are concerned), then this little tidbit should drive GM share buyers into a feeding frenzy:

Not only is General Motors losing billions, its market share hit an all-time low last month. Edmunds.com reports that GM’s June market share slumped to 22.17%, the lowest level in recent history and dipping below the previous monthly low of 22.3 % in October 2005.

And this slippage wasn’t because everyone else was pushing inordinate quantities of steel out the door and off the lots. Edmunds informs us that in June, the industry sold 1,455,236 vehicles, while GM sold 322,048 vehicles, down 24.2% fewer than June of 2006.

The car geeks (oops, sorry: that should read: “automotive experts”) at Edmunds also have substantially dissatisfied plans for “recovering” this summer: They don’t much like GM’s groveling for cash by selling one of its few profitable units, Allison Transmissions.

Additionally, Edmunds.com’s manager of pricing and market analysis, Alex Rosten, notes that “GM may have miscalculated the need for incentives in June, particularly as Toyota and Honda boosted incentive spending to their record levels.”

Wow: That must be an even better reason to buy shares now, right? Maybe, and maybe not. In point of fact, even the folks who have been advising you to buy this dog don’t really believe this tripe.

In Wall Street Journal’s July 3 “Heard on the Street” column, Goldman Sachs auto analyst Robert Barry followed up his June 25 upgrade of GM stock from “hold” to “buy” with the following: “I just don't believe GM is going to sustain over the long term anywhere near its current market share… a lot of competitors have better reputations, better balance sheets, better dealer networks.”

His prediction when he is not talking out the other side of his mouth (again, via Edmunds.com)? GM’s market share could slide into the “mid- to upper teens” given the fierce competition in the U.S. market. Which actually jibes nicely with the forecast my own WaveStrength charts have generated.

Diligent Investor
Mergers & Acquisitions: Unethical Behavior at Whole Foods?

Now we’re getting more of the story about Whole Foods Markets Inc.’s (WFMI:NASDAQ) attempted acquisition of Wild Oats Markets Inc. (OATS:NASDAQ).

On February 22, WFMI announced that it was planning to acquire its biggest direct competitor OATS for $565 million. The news popped WFMI stock up nearly $3 per share that day, only to be followed by a continued falling trend, from $52.11 in February to a current price of $38.60 per share, a loss of 26% in only five months.

WFMI did see good sales in its second-quarter earnings announcement with a gain of 11.6% and same-store sales gains of 6%. But it missed its earnings estimate by four cents per share, posting 32-cent-per-share gains instead of 36 cents per share.

WFMI had a tough time with its bid for OATS. The company extended the expiration of the bid to May 22 so it could work with the Federal Trade Commission and answer its concerns over whether the deal would monopolize the organic food market.

In early June, the FTC decided to sue WFMI to keep the deal from occurring because the government body believed it breached antitrust laws.

Once I heard about the lawsuit, I told Diligent Investor subscribers to sell the WFMI holding they’d had for a while. It hit near our stop loss of 20%, and it would have been ridiculous to hold it during this rocky time.

Mackey wrote anonymous online attacks against OATS and wondered publicly under an alias why anyone would want to own OATS stock.

Mackey as alter ego “rahodeb” stated that OATS stock was overpriced on forums, adding that the company will most likely go bankrupt and fall under $5 per share.

The deal between the two grocers that was purported by the FTC to raise prices too much for consumers and was therefore not a legal deal, has taken a strange turn, since the FTC found out that Mackey was writing negative information about OATS under an alias.

While the postings were made between 1999 and 2006, one specific comment made not so long ago in 2005 sticks out:

“Would Whole Foods buy (Wild Oats)? Almost surely not at current prices… What would they gain? (Their) locations are too small… [OATS] clearly doesn't know what it is doing [and] has no value and no future."

Mackey has received recent attention for publicly berating the FTC on the Whole Foods blog on its Web site for filing a lawsuit against the company’s acquisition of OATS.

Interestingly enough, Mackey has not yet posted a blog concerning the FTC’s unveiling of the CEO’s blog posting on Yahoo! forums concerning OATS for seven years.

At this point in time, OATS stock is not trading well either. While it jumped to $18.40 per share in February when WFMI bid for the rival, the stock has come back down to $16.61, a loss of 9.7%.

Obviously, I don’t advise buying either one of the company’s right now, even if you are a speculator or like “buying on dips” scenarios.

And to tell you the truth, I’d stay away from all grocers at this point including Kroger Co. (KR:NYSE), Safeway Inc. (SWY:NYSE), and Supervalu Inc. (SVU:NYSE). The technicals on all of these stocks don’t point to desirable buying opportunities.