Pump Jacks $3 Billion

Deal Book. The General Electric Company has offered $88.50 per share, or $3 billion in cash, to buy up and save the 100 year old Texas native, Lufkin Industries Incorporated, from a probable future of slow growth and limited or uncertain opportunities because of its “size” on a global scale – only 4,500 employees compared to GE’s 300,000 or more (Reuters, April 8, 2013, GE to buy oil pump maker Lufkin for nearly $3 billion). Under GE, “Pump Jacks” are now an “appliance” – available in any size and any quantity and anywhere with guaranteed sales, service and installation – but the attorneys-without-portfolio are noisily soliciting discontent among the shareholders, under the pale rubric that the Lufkin board of directors ought to shop the company around and “maximise shareholder value” (PRNewswire, April 9, 2013, SHAREHOLDER ALERT: Levi & Korsinsky, LLP Announces Investigation into Possible Breaches of Fiduciary Duty by the Board of Lufkin Industries Inc. in Connection with the Sale of the Company to General Electric Co, and the like, from the firms of Zeldes & Haeggquist LLP, Brodsky & Smith LLC, and Rigrodsky & Long P.A., so far).

How much stock do they own, anyway? And what do they know about the company? The current dividend yield is less than 1% or $17 million per year even though the dividend has increased three-fold since 2005, and the stock price is in the range of $60, but volatile and up from $20 in 2008. It became eligible for the Perpetual Bond™ at $20 in 2008 and remained in the Bond portfolio through $90 three years later, and then dropped sharply to less than $60 in late 2011 (please see Exhibit 1 below). The current Risk Price (SF) is $77, valuing the company at $2.6 billion, and a “fair price” that provably relaxes the prudent interests of both “risk averse” and “risk seeking”investors. Would it be “fair” to pay too much or too little, and a price that has no meaning at all? Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more details, and other Deal Books for more examples.

We can say, therefore, that the offering price of $88.50 per share is a price that GE expects will be earned and a price that the current owners can only hope for.

Exhibit 1: (B)(N) Lufkin Industries Incorporated – Risk Price Chart

Lufkin Industries Incorporated is a global supplier of artificial lift products, technology, services and solutions, including automated control equipment and analytical products for artificial lift equipment, to the oil and gas industry.

(Please Click on the Chart to make it larger if required.)

Exhibit 2: (B)(N) GE General Electric Company – Risk Price Chart

General Electric Company provides services ranging from aircraft engines, power generation, water processing & household appliances to medical imaging, business & consumer financing, media content & industrial products.

(Please Click on the Chart to make it larger if required.)

GE has been saving its money and is estimated to have more than $100 billion in cash for acquisitions in the $1 billion to $3 billion that complement its strengths and ambitions. It currently pays a dividend of $0.760 per year or $8 billion per year to its shareholders for a current yield of 3.3%.

Postscript

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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.