Gilead's $11 billion takeover of a money losing company is a value investors nightmare. Gilead had all the makings of a value investment. It was trading at less than 9 times next years earnings and management told investors they were going to return cash to shareholders via repurchases. Many of the top holders of the stock are value investors and the stock has been coming up on many value screens.
Gilead's $11 billion takeover will not allow them to repurchase shares any longer. Even though the stock now trades at less than eight times next year's earnings who is to say that management won't do the same thing again. Value investing is not as simple as finding cheap companies. One must also be confident management will not squander the money.
Normally I look for companies whose plan it is to return cash to shareholders. The tricky part of Gilead is that this was management's stated plan. I was actually considering buying Gilead this weekend based on Amgen's tender in two weeks. I decided to buy Amgen this morning based on the fact that Carl Icahn is on the board and it is likely the safest way ensure against dumb takeovers.