December was a busy month for Crabtree Asset Management and the Crabtree Technology model. The month began with our quarterly re-balance, flowing from the mid-November running of our quantitative screen. We managed to complete the re-balance in one day, December 4.
Sold out of the model were AeroVironmen (AVAV), Comtech Telecom (CMTL), Amdocs (DOX), Entegris (ENTG), Globecomm (GCOM), Kongzhong (KONG), Medidata Solutions (MDSO), Mentor Graphics (MENT), Pericom Semiconductor (PSEM), Perfect World (PWRD) and RR Donnelly (RRD).
Additionally, we trimmed our positions in Computer Task Group (CTGX) and eHealth (EHTH). We simply trimmed them back to our standard 2% position size.
New additions to the model included American Public Education (APEI), Asiainfo-Linkage (ASIA), Audience (ADNC), Broadridge Financial (BR), Bruker Corp. (BRKR), Cerner (CERN), CoStar Group (CSGP), Cray (CRAY), Demand Media (DMD), Echostar (SATS), Spansion (CODE) and Virtusa (VRTU). All of these qualified for inclusion by virtue of passing our quantitative screen; none were exceptions.
Then, on December 11, Crabtree holding TNS, Inc. (TNS), a maker of networking products, agreed to be acquired by an investor group led by Siris Capital Group. Siris, a private-equity firm, offered to pay $21 a share in cash for TNS. This represented a 43% premium over the closing price on December 10 and a 47 percent premium over the stock’s average price over the prior 30 days. In the accompanying news release, the companies said they expected the deal to close in the first quarter of 2013.
This represents the twelfth time that a Crabtree Technology model holding has been purchased in an M&A transaction since the model’s inception on April 1, 2009. Most recently, Mediware Information Systems was acquired by private equity firm Thoma Bravo on November 9, 2012.
Just over a week later, on December 19, we sold our position in TNS Inc. Because Crabtree Asset Management is not a risk arbitrage firm, we elected to take the current market price and forgo the arbitrage return and absorb the transaction cost of the sale.
In the past, we have sometimes chosen to hold an acquired Crabtree position until the transaction closing date, but only in instances where we believed the M&A history of the acquirer (e.g. SAP, IBM, Thoma Bravo) was financially strong enough to virtually guarantee deal closure. In our opinion, Siris Capital may be well-intentioned, but it is not IBM (IBM).
We expect to re-deploy the cash raised in this transaction in another holding shortly, bringing the total number of holdings in the Crabtree Technology model back to its standard 50-position limit.
And now a follow-up to last month’s manager letter, in which we predicted that Google (GOOG) would come under more formal charges by U.S. anti-trust authorities. We noted then that both U.S. and European regulators had fielded a lot of complaints (mostly from Google competitors) about how Google allegedly favored its own services (e.g YouTube) in its search results.
There were also concerns that Google had pressured makers of devices running Google’s open source Android operating system to add or remove software elements that Google either didn’t support or for which they didn’t have strategic plans.
We felt that any outcome would be about the “bureaucratic process grinding its wheels, rather than offering truth and justice.” And so this seems to have come to pass.
On January 3, the U.S. Federal Trade Commission announced it had closed a two-year investigation into the search giant, without pressing any formal charges. However, Google agreed to all manner of changes to its business practices, including the “scraping” of information from other web services to be re-used in Google’s own services.
So Google, famed for its “do no evil” credo, was clearly not “without sin” in the matter. And of course European regulators (who tend to be tougher on U.S. companies than their U.S. counterparts) have yet to conclude their investigation.
Finally, December performance for the Crabtree Technology model was very solid. The model gained 4.4% in the month (net of advisory fees), compared with a -0.6% decline for the Nasdaq 100 (NDX) benchmark and a 0.7% gain for the S&P 500 (SPX). Our internal benchmark, the Merrill Lynch Technology 100 (MLO) rose 3.7% during December.
January will begin another earnings season, and we’ll get a fresh opportunity to see if our model holdings are living up to the Crabtree attributes of generating cash, holding on to or gaining market share, and meeting or exceeding their own and Wall Street’s expectations. We promise to report all the details next month.
