The past 16 months has been full of many successes but also failures. In an attempt to take advantage of created value that I perceived to be present in the US housing sector late last year, I clearly made a mistake in DHOM (sold) and possibly too early in my purchases of WIRE (still own). From those mistakes I learnt that you really have to dive deep into specific industry problems to pick out the gems amongst many lumps of coal.
Since early May I’ had been actively tracking American Standard. The large business had strategic business units in automotive, air-conditioning & refrigeration and bath/kitchen products. The company (formerly ASD) had caught my attention because of management’s indication that the whole might not be greater than the sum of its parts. With drastically different product lines, business models and strategic focuses the company stood to benefit greatly by splitting off into independent directions rather than continue to function as one complete conglomerate.
The American Standard brand is one of a very short list of products that appear both in domestic and commercial homes and businesses. Go to any shopping mall, business establishment, institution or some domestic homes and the odds are very high that their restrooms and bathrooms are lined with these products: sinks, faucets, toilets, urinals and bathtubs. For a company with a large international footprint, long history of profitability, strong brand recognition and superior management I felt the opportunity for value in this company was very near.
On August 1st, Wabco, the automotive division, was spun off into an independent public corporation and my feeling was that the American Standard division of bath & kitchen products might be spun off as well. Unfortunately my plans were squashed when Bain Capital Partners LLP (a private investment firm) purchased the segment for $1.75B US leaving me to ponder its fate now in private hands. This left the remaining refrigeration business line to form under the newly named corporation Trane.
Even prior to the Wabco being publically listed on August 1st, I had an immediate interest in the shares due to strong past management, key technologies and the fact that no one in the market appeared to be talking, paying attention or turning their focus towards the company. Since the original company, Westinghouse Air Brake, was purchased by ASD in 1968 it has provided substantial revenue and profit to American Standards’ bottom line. Their established innovation, leadership and product quality has led to 2 out of every 3 commercial vehicles on the road today equipped with their products for suspension, braking or transmission control systems. The company has strategic alliances in North America, Europe, China, India, South Africa and Japan which offers them substantial growth opportunities in the future.
I purchased my first set of shares in early September just prior to the media circus Wabco received from purchases only days later by an investing Guru known as the ‘Oracle of Omaha’.
While some investors flock in droves to purchase a company once Berkshire publicly announces a position, as a devoted student of Warren Buffett I tend to take a different approach. I do focus in on what was purchased and when, but I’m much more interested in assessing why the company was chosen and the strategy, tactics and impressions made on WB and his fellow friends. Although I can’t be certain in the justifications for the purchase by himself or his lieutenants, I can presume that their interest in the company is similar to my own and that some of the reasoning for ownership is shared between us.
With Wabco and the American Standard brand now gone, I still perceived value in the remaining component (2 out of 3 is better than none) and purchased shares in ASD near the end of October prior to the change to Trane. My intent was to continue adding to the position towards a 5% weighting in my Value Portfolio to match my Wabco holding, but I received news today that Trane has received an offer to be acquired by Ingersoll Rand for $10.1B or $47.81/share.
I have not yet had time to look over the details of the entire proposed transaction, but nonetheless it provides a substantial premium to the close of shares Friday and my original purchase price.
Although most investors would be happy with the buyout premium being paid, my perception (as with the takeover of my PTNX shares) is that the future earnings potential for the company is not accurately portrayed in the takeover price. Nonetheless I will shortly sell the shares in the new year to protect the significant capital gains I’ve already needed to account for in the 2007 tax year.
