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BULLS & BEARS: Things you don't learn sitting in a lecture hall

April 9, 2007

Students at Indiana University's Kelley School of Business have been busy lately. A group of students recently spent a day in Omaha with Warren Buffett. Then on April 4, the school hosted a cable program called "Mad Money." Between the two, they heard what must be the most opposite investment philosophies on the planet.

In Omaha, the students would have learned about "looking through" the price of a stock to the underlying business, to focus on the long term and invest based on solid business fundamentals. Whereas the "advice" promoted by the cable program (as the name of the program suggests) advocates a casino-like approach to investing that relies on short-term stock price movements and rumors.

Lets just hope for the benefit of their investing future, the material learned in Omaha sticks, and the babble after the first "booyah" on "Mad Money" is quickly forgotten.

There were other lessons from the "real" world. A legal decision in a landmark Indiana business debacle came and went with nary a whisper, when a federal judge handed down the decision in the IPALCO case. Talk about a business school case study that could keep a student engaged for an entire semester. This one has it all: A business combination done during the "new era" period, accounting restatements, the business drama of big winners (IPALCO's board and executives and AES) and big losers (IPALCO shareholders and retirees).

Wall Street loved the AES story during the go-go 1990s. A global utility "growing" leaps and bounds via acquisitions, generating a virtual fee feast for investment bankers. But AES management likely concluded that the acquisition binge wouldn't last. To meet obligations, they were in need of stable cash flows to service their debt-financed spree. They found their mark in IPALCO.

AES stock peaked at mid-merger in September 2000 near $70 per share, and then the air slowly started to leak out of the balloon. By the time the deal closed, the stock had dropped below $50. It proceeded to crater over the next 18 months.

To demonstrate the silliness of the times, at the end of 2000, investors were valuing AES at $22 billion or well over three times revenue-for a utility. AES used its overvalued stock to finance the purchase of IPALCO, issuing 41.5 million AES shares to IPALCO shareholders. Seven years later, investors place a market value of $14 billion on AES, just a bit above revenue.

IPALCO was, and is still, an excellent stable business. Left alone, it would have certainly provided its holders the steady dividends and modest appreciation they were accustomed to. Post-merger, however, AES-not IPALCO shareholders-has been the beneficiary of IPALCO's strong cash flows.

The legal case was centered on arguments surrounding the sale of executive stock and the treatment of the stock holdings of employees within the IPALCO retirement plan. The judge apparently concluded that the plaintiffs did not make their case, but that doesn't diminish the fact that this will go down in history as a lousy business deal.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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