Good morning my dear readers,

I think writing this newsletter has played a key part in my own development as an investor due to the sheer amount of research that is needed to just write a single newsletter.

With the bottom of my heart, I urge you to start writing if you wish to have personal growth.

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Also, happy to report that as on 31st October 2023, your Negen PMS has delivered a +27.69% CAGR on a 5 year timeline vs a +15.35% CAGR for the benchmark BSE500 index.

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The American Express / Lehman Brothers Demerger.

Back in 1994, American Express (AMEX), had aspirations of becoming a financial giant and wanted to do 'everything'.

So, it ended up raking in a lot of non core businesses, Lehman Brothers being on of those.

Interestingly, Lehman Brothers had made a loss in the year of 1994 and had 'extremely volatile' earnings historically under American Express.

And due to this extreme randomness in Lehman's earnings, nobody on Wall Street was able to accurately predict the 'consolidated' earnings of the American Express conglomerate.

*And the ONLY THING market likes worse than 'Bad news' is 'Uncertainty'.

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So naturally (as you are already predicted by now), the board of AMEX, under shareholder and wall street pressure, decided to spin off / demerge the Lehman Brothers unit.

Smart move, right?

(Get rid of the loss making, volatile business).

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What happened next?

Like a fan that always goes around, this plan worked quite well.

On the day of demerger, the AMEX stock actually WENT UP by 1.25%.

(As usual, the market PAID YOU to take Lehman Brothers away. I will say it again, Lehman wasnt available free, but the market had actually assigned a negative value to it).

*Typically, post a demerger, the parent company stock falls down to adjust for the 'value' that has been spun out.

But every once in a while, the market assigns negative value to some loss making subsidiaries and actually PAYS YOU to take away the demerged entity.

(Economists say that the market is very efficient. The above is proof that that it is NOT).

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And 1 year after the demerger had happened, the AMEX stock had moved higher by +40%.

It turns out that the AMEX stock on a conglomerate level was also trading at a discount to listed peers like Visa and once the bad business (Lehman) was spun off, its valuation quickly started catching up with the peer group.

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And by the way, about 6-8 months post the demerger, Warren Buffett announced that he had purchased close to a 10% stake in AMEX.

Apparently, the demerger of the 'unwanted business (Lehman)' had unmasked AMEX to be a 'Warren Buffett' type of company, a compelling bargain with a strong brand name and excellent MOAT.

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Conclusion:

Sometimes, it pays to pay attention to the parent which is demerging a loss making, unpredictable business.

Big Funds do NOT like uncertainty, and they prefer clean structures.

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That is all from me today my friends.

This newsletter was quite educational for me as well as I never knew that Lehman originally belonged to American Express. And that Buffett waited for the demerger to actually buy AMEX and the rest was history!

Ps - Wish you and your family a very Happy Diwali my dear friends.

Have a wonderful weekend ahead.

My Best,

Neil Bahal

Founder

Negen Capital

Ps- I wasnt able to escape Diwali cleaning.

Don't laugh at me, I am sure you also had to do it =)

Disclaimer: This newsletter is for educational purposes only. While the newsletter discusses just general market insights and past case studies, still, the stock market is a very risky place which can result in losses.

Hence, always check with your financial advisor before acting on any contents of this newsletter.

No one has paid us to write this newsletter.

No representation or warranty, implied or statutory, is made as to the accuracy, completeness or fairness of the contents and opinion contained herein. The information can be no assurance that future results or events will be consistent with this information. Any decision or action taken by the recipient based on this information shall be solely and entirely at the risk of the recipient

Again, investing in equity market has high risk. You must consult your financial advisor before making any stock market related decisions.

Negen Capital is a SEBI registered PMS & AIF.