Why is FNF expanding their exposure to an industry that is in decline, and that has shown no signs of even being near stabilizing? Also, why are they assuming more poorly underwritten title policies that will bring in more losses as foreclosures continue to rise? It doesn't make sense to me. And they will be on the hook for almost $500 million in LFG debt and they will be paying $125 million in FNF shares. If you believe your shares are undervalued, you are supposed to make deals with cash offers, not stock offers. You make deals by offering stock when you feel you stock is overvalued. Any investment banker or even finance major will tell you that.
It seems to me that it would be more beneficial to FNF shareholders/employees if FNF would have let LFG fail and then just taken their market share. After all, this is really upping the ante for FNF. More employees, more expenses, more exposure, more overhead, more under-reserved policies, and less demand. We could be in a Japanese style L shaped recession where mortgage originations do not recover for several years, and there is clearly a glut of supply in the title insurance industry for the lower level of demand we are experiencing.
FNF employees that get fired in coming quarters should be FURIOUS that FNF is expanding their exposure to the title industry by acquiring LFG, because as future losses roll in they will be the ones that suffer and get laid off, so aren't they are gambling with the jobs of their own employees? Or am I missing something?
Further, now that FNF has made this offer, there will be a BULLSEYE marked on the company and it will be closely scrutinized by all of the shorts. An FNF/LFG combination makes a weaker FNF - unless housing and mortgage originations recover quickly enough, am I right or wrong? If we are indeed on the cusp of the worst recession in 40 years, I would contend that FNF should be focusing on their survival and not taking extra risk by trying to capture market share of a declining market!
I am not posting here to bash FNF or LFG, but I am honestly trying to figure this out. I am at this point trying to determine whether the new FNF would be a good long or a good short candidate. I have been long both companies in the past, and short LFG most recently. LFG could not survive on its own and needed a white knight. FNF however could most likely ride this recession out and expand when demand recovers without taking on the added risk/exposure.
Anyone with title experience or knowledge, please enlighten me.
<<< If you believe your shares are undervalued, you are supposed to make deals with cash offers, not stock offers. You make deals by offering stock when you feel you stock is overvalued. Any investment banker or even finance major will tell you that.>>>
Today Yahoo shows a price to sales for FNF of .43 and a P/S for LFG of .02. When you have that kind of disparity it's not expensive to use stock to make the purchase. It's a steal.
FNF is hitting on a 15 at the blackjack table, that is what it boils down to, but they still have a ton of chips left to play the game. The operations should continue to produce revenue, and by streamlining, not at a loss. There will be many disgruntled unemployed former employees.
By doing this deal FNF gets a much greater % of LFG's customers than they would if they just watched LFG fail. Also, owning LFG allows FNF to close the offices, ether their own or LFG's, that would be most beneficial to them.
I think this deal is really positive for FNF (even though LFG is kind of a horrible company, which gives me some concern). FNF is both increasing its economies of scale and taking out capacity in the industry on their terms, both of which are really good. In the long-term FNF can be scaled to the size of the real estate industry, so unless the industry keeps shrinking forever, at some point FNF should be appropriately sized and start making money again, and if real estate transactions ever make a come back FNF should print money and run into regulatory problems all over (oh how I long to see that day).
You're pretty much incorrect across the board. During rough times stronger companies INCREASE market share as they absorb the competition at rock bottom prices. The FNF/LFG deal is a no brainer and long-term is definitely advantageous to FNF. One figure that you might want to pay attention to is cost saving synergies...think that the original estimate for this deal is $150 million. Chances are that it will be in a range of $175-200 million. Make sure that you factor that in when you analyze the combined company. As far as the regulators FNF may have to divest some of the operations but it most certainly will be approved. What is the alternative?