Sunday, September 26, 2010

Oh, how far, The Finish Line has moved.

Shares of The Finish Line (FINL) were down 9% on Friday- reportedly, over not having enough inventory. When looking at the year over year results, they seemed pretty impressive, as the company earned over $17 million more for the quarter, despite having revenues only increase by $2.3 million.

Personally, I wouldn't be too upset with those sorts of results, as, the company is trading for well under 15x earnings...

Despite what seems to be a pretty effective turnaround, I can't help but remember back a few years, when this company was in net-net territory. The Finish Line was in the process of not buying Genesco for a hefty sum. Due to the merger agreement, which would lever FINL to the hilt, and probably destroy the combined entity. The markets were valuing FINL at what seemed to be an insanely low price, relative to book value. The greater part of the blogging value investing community looked at the company's balance sheet, and almost universally opined that this was a deep value stock.

But hold on a minute... There was a catch. Yes, FINL was earning money, but, with credit markets beginning a mortgage rust induced sieze up and the economy going south, how could this combined behemoth of shoe retailing survive? GCO was showing disappointing earnings, which, were used to try to get out of the merger. It may well have been one of the quicker merger then bankruptcies in history. Of course, this merger had to be axed, but at what price? Was the market rational? What were the chances of the companies settling this dispute in or out of court?

Naturally, lawyers were bound a determined to make a bunch of money off of this dispute, that was tied up in court or a not insignificant amount of time. A few bankers probably got canned, just to move on to making dumb loans elsewhere. Ultimately, shareholders of both companies were in limbo, not really knowing what was going on with the merger. How could intrinsic value of either corporation be calculated not knowing if there was a merger happening, and if not, what the terms would be.

Long story short: In March of 2008, UBS and Finish Line settled with Genesco, for $175 million in cash and a boatload of stock from FINL. FINL share went up and then down a year later. GCO shareholders were better off then they could have been, but, also, not as well off as if they had just been bought out for cash.

This story of acquisition, a bunch of legal hassle, stock issuance, then both companies doing well after a few years seems to symbolize everything that has happened in the economy in the past handful of years.

Disclosure: This is not investment advice. I have no positions in any of the companies mentioned.

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