Saturday, 4 June 2016

The Greater Fool Theory of investment



Mike Lawrie out to prove the Greater Fool Theory – once again! 

The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems "foolishly" high because one may rationally have the expectation that the item can be resold to a "greater fool". 
(credit to Wikipedia) 

Mike Lawrie has been proving the Greater Fool Theory for the past 3 years or so, in fact ever since CSC stock (pre-CSRA spin-off) went above US$40 which has always been our opinion of its intrinsic value. We thought the CSC stock bubble was about to run out of steam in 2016, because spin-offs had happened, share buybacks had been maximized, one-off mega dividend payments had been made, and high profile but essentially small acquisition had created a lot of buzz, but little revenue. Mr Lawrie has proved us wrong by pulling another rabbit out of the hat, namely the planned merger with HP Enterprise Services, to boost the share price again. 

Since the May 23rd announcement of a planned merger between HP Enterprise (HPE) Services and CSC, HPE has added some US$3 billion or 10% to its market capitalization. CSC’s share price has gone up from US$35 to just over US$50, also adding more than US$3billion to its market capitalization. 

What is behind this sudden US$6 billion increase in market capitalization ? Better business prospects, or finally some signs of real revenue growth? Not at all. No new sales are on the horizon. No new products are to be announced.Only further staff reduction are planned. The jump is based solely on the merger announcement and the expectation that Mike Lawrie will “create” shareholder value by transforming (ie hollowing out) HPE as he has done at CSC. 

History has shown that mergers of established companies which are struggling to keep up with the market rarely live up to expectations. In fact such mergers more often demonstrate that 1+1 = <1 .="" 1="" font="" nbsp="">
We think this is what will happen with CSC and HPE. 

Mike Lawrie and Paul Saleh have shown they are capable of generating share price growth well beyond any growth in rational business prospects and performance. So there may be opportunities to make short-term gains in CSC shares if one gets the timing absolutely right. But we believe there is a much bigger risk of an investor today being the “greater fool” as reality kicks in, which it will sooner or later.

Or in investment analyst speak:-




24 comments:

Anonymous said...

This is a sad but true analysis of what has happened, what is currently happening & what going to happen.

Anonymous said...

http://www.theguardian.com/commentisfree/2016/jun/08/inhumane-sports-direct-mike-ashley-workforce

This section below is from the linked article pretty much sums up CSC in the last few years.

"Competitive tendering in privatised public services has all too often had the same effect – a relentless driving down of costs that translates into fewer people doing more work for the same pay, in more precarious employment.

The model has spread, and unions warn that a similar deterioration in conditions can be seen across sectors from hospitality and catering to retail, transport, logistics and manufacturing.

It is possible to treat workers like this only if you stop seeing them as people and regard them as 'other'."

Anonymous said...

CSC has taken advantage of it UK workforce for years and is now suffering the consequences as all the talent has either left or is leaving. I left 7 months ago and feel so valued and have tons less stress

Anonymous said...

Aldershot offices being shut I expect. Huge cost saving.

Bracknell/Amen Corner B1-2, UK

Anonymous said...

No cost saving - they own the site rather than lease it.

Anonymous said...

They will probably sell it then - how to free up a load of cash easily

Anonymous said...

I thought Royal Pavilion was a sale and leaseback but may be wrong.

Irrespective, there will be cost savings for two reasons. Firstly, whatever premises are used in the future will probably be more downmarket, thus lower cost per m2 than Royal Pavilion.

Secondly, getting rid of the big office and renting say 6 small independent offices makes it much easier to continuously downsize the space as Lawrie continuously downsizes the workforce

Anonymous said...

CSC issued its 10K filing to the SEC this week. Interesting that the auditors gave a qualified opinion on the internal controls. Basically they said that the controls around determination of tax charges and provisions were inadequate. So now we know why there have been so many retroactive adjustments to Corporate Tax charge over the past years. They didn't know what they were doing!

The 10K Filing gave no details of directors' and senior executives' remuneration. We shall have to wait for the Proxy Statement for the Annual Meeting to see that.

Anonymous said...

>> They will probably sell it then - how to free up a load of cash easily

>> Secondly, getting rid of the big office

I dont doubt they've tried but I do doubt theres much call for large HQ offices in slummy Aldershot. Plan-B was finding tennants to lease the odd floor in the empty towers (http://www.royalpavilionoffices.co.uk/ ). Even at those cheap'ish rates there are cheaper offices in Aldershit.

Anonymous said...

Downsize legal, HR, vendor management, procurement, accounts - then consolidate.

Probably not worth getting carried away over christmas this year in either head office functions as we all some some will be going....

Anonymous said...

Mike Lawrie resigns. Sadly only from CSRA.
http://www.prnewswire.com/news-releases/mike-lawrie-to-resign-as-csra-chairman-300289540.html

Anonymous said...

is that a Lexit?

Anonymous said...

This has been a really good year for CSC. Mikey gets over a 50% pay rise and Saleh almost doubled!

http://www.conferencecalltranscripts.org/proxy/summary/?id=2872321

I can't wait to hear what my share of this wonderful bounty is!!!

Anonymous said...

probably the mid-point of -1 <---> +1

Anonymous said...

far too optimistic
midpoint of -1 and -5 seems more likely
gotta pay for Mikeys salary somehow

Anonymous said...

The impact will definitely be less than the midpoint between -1 and +1. Cost of living is going up - cost of insurance that the company doesn't cover is going up. That means with your increase of $0.00 - you will see a negative overall impact to your financial well-being.

The only thing going UP - is ML's and a few other select individuals's wealth. But, it's not anything new. They all have been sucking money out of CSC for years - and funding it with reductions of work-force and reduction of benfits!

Anonymous said...

54% is nothing. Larry Prior (who runs CSRA) got 115% pay increase.

I asked for an increase of significantly less than 54% this year - and was told there was no way management would entertain that request and my managers wouldn't even approach senior management with the request.

Needless to say, I am no longer employed by CSC (by my own choice) - and am MUCH, MUCH, better off than I was with CSC.

Unknown said...

This blog has been all about CSC bashing. Nothing wrong with that, only, none of its predictions over the months and years came true. CSC is now going to be a $26 Billion entity, so the chances of being gobbled up by anyone in a hurry is far lesser. Yes, there have been very tough 4-5 years of existence, but the choice was between that, and complete shutdown (we were inches away from filing chapter 11 in April 2012). What Mikey has done is painful, but was necessary. Layers and layers of middle management and bureaucracy has been cut down, which has helped speed up conduct of business and decision making. It has helped people move up in the management ladder. Hundreds of positions have been offshored, and while offshore labour if often not a patch on the onshore people they replace, the pressure on day rates and the Indian pureplay competitors breathing down the neck in the services space leaves CSC with little option. Those competitors would get the job done from offshore anyway, using equally substandard resources (or even worse), for a lower price. The clients would be happy, as long as they get a lower daily rate. They probably do not care for the premium service which long standing onshore resources can offer... they would rather do with cheap. CSC has to follow the lead, or get elbowed out of the competition.
All in all, tough times. But it is not any different (or maybe so only by a whisker) at other places. Unless you work for blue blooded consultancy shops (PWC/Goldman/Morgan), you will face the same environment, work culture and stress in any IT shop as on date. The times have changed, there is more supply than demand, and IT people can no longer command the premium and throw the tantrums they got used to when the industry was nascent and talent was scarce.

Anonymous said...

Thanks Mike, its been a while since your last post.

Anonymous said...

Actually this blog helped a lot of employees be better informed about what goes on in the company than via C3, official announcements or the water cooler conversations.

Anonymous said...

Price is king. All other contractual elements are second rate. I get that but this has gone way beyond just simply offshoring stuff - the offshoring largely happened under Laughin' anyway (or was that just the UK...)

No, what annoys me is that whilst CSC has been reasonably successful, the money to build a new CSC has been frittered on share buy backs, executive pay rises and big corporate investors. The vast amount of cash which could have been used to create something amazing has just been wrung out and blown.

For all of the amazing Mikey and Paul Show nonsense, its still remarkably clear this is a run off and not a vehicle for the future. Adding HPE to the pile is because Mikey is the "expert" at squeezing oranges.

Actually, no, he actually is the expert at squeezing oranges and are the oranges.

Is it different elsewhere? I'd like to think so but I doubt its any different at any of CSC's competitors, except maybe their orange squeezer isn't as efficient.

This market is heading for oblivion.

Anonymous said...

In my experience it seemed quite simple. The contract was up between CSC and the Client. The client despite having a high quality product, looked for a cheaper option. CSC competed with this and as a result took on low payed inexperienced 'offshore' workers. They let go of the people who had been there for years. Everyone jumped up and down in outrage at poor quality system that was now going to be in place. That's everyone except for those that made the decision to go for a cheaper option. Sure, there is a hit in customer satisfaction and the users moan a bit more. The people who count the cash are happy and that is the way the world works. I left CSC a couple of years ago now. Things are too much different elsewhere. It's the market...I'm happy to say that most of the experienced people that CSC kept on are still there and probably will be for a long time yet. I agree with, "5 July 2016 at 12:36". Cassandra has got it wrong.

Unknown said...

Yes, fully agree with you on the bit about squandering money on share buybacks and stuff. This is pure American corporate greed at work. A British owned and managed business might have behaved differently, given that we still retain a bit of old world values.
CSC will not be the same company again which it was back in the days. The DNA has changed too much. Old timers can either adjust and stay on, or bid their time till a lucrative VR scheme comes along and then quit. But no one is going to get back the CSC of yore, that of peace, quiet, respect,raises, bonuses, training, outings, lunches and everything good.

Anonymous said...

Gobbled up? Has just "merged" cough cough with a competitor... I guess definition of what gobbled up means and who comes out on top. I have no doubt HPE services management will...