Billion Dollar Mistake by Stephen Weiss
Weiss discusses and tries to classify some large investing mistakes. His blame game isn't nearly as much fun as his recounting of how the deals were structured.
Although in 1979 he (Kirk Kerkorian) had proclaimed MGM mostly a hotel company, he nevertheless paid $380 million in 1981 for United Artists, then sold the MGM/UA conglomerate to Ted Turner in 1986 for $1.5 billion. The sale lasted 74 days -- Turner had debt problems -- and Kerkorian bought it back for a mere $780 million. In 1990, he again sold the company -- this time to multiple investors for $1.3 billion -- and in 1996, he again bought it all back (for $1.1 billion). Finally, in 2005, he sold the movie company for the third time -- to Sony for $2.9 billion -- netting $1.8 billion on the deal.
Clearly, Kerkorian was a master negotiator, extracting prices from the buyers of his asses that were either too high to support the transaction or enticing them into transactions they were unable to afford. He would not have been able to do either had it not been for his vaunted patience -- the ability to wait for the market to come to him instead of having to sell into a depressed environment. Kerkorian could exercise such patience because he had the advantage of not being overextended and not being on margin.
Toward the end of October (2009), Tracinda (Kerkorian holding company?) announced in a filing to the Securities and Exchange commissino that kerkorian had begun to unwind his stake (in Ford), selling 7.3 million shares at $2.43 a share, nearly 65.8 percent lower than their average $7.10 buy price.
It was widely suggested that Kerkorian pretty much had to sell. Several days before, he had put up another 50 million shares of MBM Mirage -- about a third of this total stake in the company -- as collateral for his $600 million line of credit at Bank of America. The value of those shares ahd dive-bombed, forcing Kerkorian to pledge their dividends as collateral as well, while his shares of Delta Petroleum Corporation, also pledged as collateral, were themselves experiencing a multiyear low.
It is no coincidence that the term "due diligence" was coined in the federal Securities Act of 1933. Practice it.
Generally, if more than 10 percent to 20 percent of the outstanding float is short, there is significant potential for a short squeeze. Whether the caution level is 10 percent or 20 percent depends on how many shares are outstanding and on the level of the daily volume. For example, General Electric has 10 billion shares outstanding and trades an average of almost 200 million shares a day. A squeeze would be unlikely in the stock if 20 percent of the float were held short.