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Wednesday, May 27, 2015

Other People's Money

I better write this down, before stock-chart and corresponding items slip thru the cracks in a matrix and disappear into internet void. I think I wrote on similar subject a few years ago. It was Teavana ($TEA) back then. Now there is a new addition to OPM (other people money) hall of shame - $GTI - GrafTech International Ltd.

This story is like really straight from the movie, and many similarities kept me glued to real-world drama, even as I didn't have a dog in this fight most of the time. Reality turned out way more bizarre than fiction. 
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In one of my favorite Wall Street movies, there is an adorable villain corporate raider (played by Denny deVito) pinned against a white-knight cracker-jack-type corporate lawyer (called Kate) and old-school sympathetic industrialist (foreignly named Jorgensen). Observe:
BTW, proxy blood-bath scene is a classic, in some way even better than famous Wall Street the movie speech, but I digress.
If one pays attentions beyond provocative dialog (and has elementary knowledge of Wall Street shticks) - curiously, Other People's Money the movie, ends with total loss of shareholder equity type of event. In other words - stock goes to zero, everybody loses, except... you know... people who always win... even when they are losing...

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I came across this abomination out of state of Ohio during smallest-ever graphite/graphene bubble of 2010-2011. Looking back, its amazing how many stocks jumped on that band-wagon in a shortest period of time. GrafTech was an actual operating company, a real gem in a steamy pile of graphite scam stocks. Not really a new-technology enterprise, it specialized in plain vanilla graphite rods for steel industry - an old and un-sexy use of graphite. I don't remember if it was profitable at that time, but they had factory, clients, sales and GTI stock was going up. Most pressingly, company was doing some research and development into graphene, with rumors of patents and cutting-edge applications. Whats not to like? After Rare Earths boom and bust, I knew exactly what to do... right...

Old Vampire Milikovskiy
I don't know what Mr Milikovskiy did in his early years at Yale, but in his 70's he is somewhat vampire-ish looking and very busy. Back in early 2000's dude was smart enough to buy small graphite company out of bankruptcy, merged it with another and sold them both with himself included into GrafTech in 2010. This Trojan horse maneuver yielded him instant pile of cash with seat on a Board and express access to inside information (quite legally, of course), which our very investment-minded vampire promptly leaked to a friendly hedge fund (allegedly, of course). I don't know if that was the reason why Old White Men decided to kick him off the Board, or some other rich people shit, but in a classic vampire fashion, Mr Milikovskiy came back... and with vengeance.  
He took it all!

Old vampire Milikovskiy prevail in every struggle along the way. Brilliant investor and industrialist, he picks a low hanging fruit, keeps it until ripened and then eats it himself. In the most timeless traditions of corporate raiders, he devours the entrails of a corporation until fully assimilated. Resistance is futile...

Ahem, except stock is down a cool 70%, from 24 in 2011 to 7 in 2013. Lower demand from struggling steel industry, shitty office politics and R&D gone MIA - all lead to massive price drops, but also making GTI a better and better value-investment opportunity at the same time. It is a real company, mind you, with 2000 employees and clients all around the world. 
What A Great Deal!

Enter hedge fund celebrity, TV personality, give-me-a-seat-on-your-board, Fine Woman Karen. I don't know if and how much she invested in GTI, don't know if and when she sold it, but this investment of hers was quite well publicized - even I knew it, and I don't know much of anything. I do know for sure, that weather or not HER own investors in-fact lost money on this stock, there was:
a.) absolutely no possibility of profitable exit after end of 2013;
b.) she gets paid personally, as a Director of GrafTech, no matter what.
c.) Based on publicly available information, some Board members and officers of GTI receive salary and compensation of 500 to 800 thousands dollars per year, regardless of company profit or stock performance.

Karen Fineman of Metropolitan Capital Advisors out of New-York (Wharton graduate, no less) became a Director of GrafTech in May 2014, just when GTI was sliding off $10 for another 70% drop - only this time to $3 per share.

On May 18, 2015 GrafTech was sold to Brookfield Asset Management of Canada for $5.05 per share, valuing the company at less than its BILLION! dollars of annual sales. Moreover, this sale price is less than book value, meaning GTI is worth even less than worthless crap it owns. All this happens at some of lowest prices per share ever - in other words - everybody lost money... 
...every-single-fucking-investorrr is under... with no possibility of recovery... ever...
The offer was supported by investors and new slate of directors.
IMNSHO, in all likelihood,  company will go on and probably prosper as private enterprise.


Herein lies the bitter truth about deep value long-term investing, aka sitting in losses for years while waiting for a company to get its shit together. Some of these takeover raids and turn-around coups get a lot of news coverage and make for ravishing cocktail conversation. Storyteller appears all knowing and well versed, with conservative 3-5-7 years views and reasonable expectation of gain. Personal gain, of course, as salary with benefits, bonus, stock options etc - a compensation for making investments... stocks.... you know... Most of the time shit blows up in their faces, pieces are swept under the rug, analysts flee and reporters are put on 'ignore'. We never get to hear these stories, but tape tells all.  When price goes down, when every rally is sold, when story smells foul - there is always Other People's Money (OPM) involved, inevitably holding the shortest, ever diminishing end of the stick.

One really doesn't need to be hungry to eat a doughnut.
Really

Me? I traded GTI three times. Small gain in 2010-2011, sizable loss in 2011 and decent profit in 2013 - all together amounting to token deficit, just a trifling sum - a price of a front row ticket to a Wall Street Shit Fest, a Dirtiest Show on Earth.

http://dealbook.nytimes.com/2014/01/23/behind-staid-steel-a-percolating-boardroom-drama/?_r=0
http://dealbook.nytimes.com/2014/05/15/ousted-director-rejoins-graftech-board/
http://ir.graftech.com/phoenix.zhtml?c=114451&p=irol-newsArticle&ID=1918164
http://www.sec.gov/Archives/edgar/data/931148/000119312515018195/d857736ddfan14a.htm
 http://www.bloomberg.com/news/articles/2015-05-18/brookfield-to-buy-graphite-producer-for-691-million?cmpid=yhoo