Intelligent Investor Chapter 17 Summary : Four Extremely Instructive Case Histories

Four Extremely Instructive Case Histories

  • Penn Central: Largest railroad in assets and gross revenues went bankrupt in 1970 because of neglect of many warning signals. Bonds defaulted and common stocks fell drastically. High price, financially very weak, income taxes not paid for 11 years, coverage of interest charges well below criteria, high special charges, high transportation ratio(inefficient railroad), peculiar accounting- pro forma statements.
  • Ling Temco Vought: Too much expansion(serial acquirer), too much debt, intermediate operating deficit, high price(stock split), frightening figures of bank loans, treating discount on bond as asset, losses more than profits.
  • NVF:Took over Sharon Steel which is 7 times it's size - led to debts, accounting gimmicks, useless warrants, warrants to employees in installments, dilution factor.
  • AAA: Franchising of mobile houses. Most of the stocks bought by the founder and company itself inflating the price. Speculative high based on "action" and "franchising".

Commentary:

  • Lucent bought Chromatis which had no customers and had to shut it down, ultimately lost $190B in market value in 2.5 years.
  • Tyco acquired 200 companies - average of more than one per day and lost $9.4B
  • AOL and Time Warner merger where AOL was selling at 164 times of it's earnings led to $98.7B loss.
  • eToys underwritten by major investment banks bought another company which has it's own losses and reported $398M loss.
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See Intelligent Investor Summary for other chapters summary.

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