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Friday, July 29, 2005

HP is less stupid now (HPQ)

**Update: I've edited this post to clear up the confusing language. (Maybe we should consider the "Save as Draft" function until we've proofed the material, eh? - ed.)**
Sometimes companies will tell you how dumb they are (were). Take HP's recent announcement to unwind its partnership with Apple to resell the iPod. The coda to the divorce is that HP can't sell a competing product in the market until Aug 2006.
This divorce is actually a good thing, but it only gets HP back to ground zero and demonstrates how badly their strategy was. This partnership is an illustration of why Fiorina was better at garnering media attention than she was at building a business that makes a profit in the long term. Why?
Well, let's see, if Apple's iPod strategy was to use the media player to attract PC buyers to their computing platform, then every converted Apple buyer is one less PC buyer. Good thing HP doesn't sell PCs or laptops...oops. Therefore, HP agreed to actively undercut their own technology platform by distributing Apple's Trojan horse. The best part? It's reported that HP didn't even make much margin from their iPod sales. This is an amazing illustration of Really Bad Strategy (TM). I know what Fiorina was Trying To Do (TM) -- she wanted to show consumers that HP "got" the new digital media world and demonstrate that knowledge by allying with the best media player in the market. What she didn't understand is that the whole "building a connection with consumer" market B.S. touted by marketing consultants doesn't necessarily mean you're going to make a profit. Selling proprietary products for more than it costs to make them does.
Interestingly, HP has shown signs of strength recently. I think this comes from the Turn Around at HP. The unwinding of the above partnership demonstrates they have leadership that now understands Basic Strategy 101. And we know that investors love a turn-around story. Unfortunately, people don't understand how long or arduous turnarounds really are. As a kicker, I wonder if HP will see additional competition in its remaining core market: Printers. But I'm not saying anything new here, just staying the course.

Tuesday, July 26, 2005

Ariba Shareholders are Being Ripped-Off by Management (ARBA)

Wow. Read this article in the MercuryNews regarding executive pay in the Valley and figure out which company appears to have inordinate salary relative to performance.
Yep, it's Ariba. Top four executives got paid $11.4 million (according to the table). CEO Robert Calderoni made $6MM. Cash. Way to go, Bob! Fordham better get their alumni donation director to camp out in this guy's driveway, pronto.
DAAAAAAMMMMMMNNNNNNNNN...how do I get that job? I'll run a company's stock price into the ground for $6MM in cash any day of the week! Looks like Footnoted.org has mentioned other exec comp shenanigans previously.
Don't hate the player, hate the game...right? Good thing the SEC is all over this...pfft, whatever.

Vector pounces on Avid's (AVID) weakness to take away Pinnacle (PCLE)

Interesting article in TheDeal.com regarding a bid by Vector Capital and Tennenbaum Capital Partners for Pinnacle's "main business line". Vector offered $200MM for the Liquid editing product line, which they claims values the company at approximately $423MM. Since Avid's big fall recently, their offer has declined in value to about $335MM. However, the value of Vector's offer is dependent upon the value of Pinnacle's remaining Broadcast and Professional division. Vector puts this at $120MM, but it's not clear that free-standing Broadcast division would do well in a market that is dominated by Avid and Apple. Now, there is a rage among small public companies to core down and focus products, strategy and operations. And one could argue that this could rejuvenate Pinnacle, but those types of restructurings can be difficult.
Regardless of the issues with Vector's bid, it's interesting that the board has denied the offer, urging shareholder's to vote for Avid's offer even though it's potentially 26% less. I hope the shareholders are sophisticated enough to...wait, nevermind, hoping that "shareholders are sophisticated enough" is never a winning strategy. Unfortunately, board of directors are still creatures of comfort, and Avid's bid is comfortable - a bid from financial concerns that involve splitting the company are not comfortable for Boards of Directors. Even if they're a much better deal for the shareholders.
I get sick when I see BoDs destroy shareholder value like this. Granted, I don't know how deep the caveats on Vector's bid are, but for an extra 26%, I think Pinnacle's BoD has a fiduciary duty to find out. I wonder about Patti's motivations here. Maybe Pinnacle's professional division is in disarray and she knows that building a stand-alone company around it would be worth a lot less than $120MM. Maybe she's tired of being the Chairperson and CEO of a company that has lost the competitive battle in the consumer/prosumer DVD editing market to Sonic, Adobe and Apple. Maybe she's scared that Vector will buy this line of business and turn it around, illustrating her underperformance as a CEO. Regardless, I'd be pissed if I was a PCLE shareholder right now.

Tuesday, July 19, 2005

News Corp's acquisition of Intermix (MySpace) is a bad one

I've been musing over News Corp's recent acquisition of Intermix and I'm beginning to feel like News Corp made a bad move here. At the 50K ft level, it makes sense. If you've been reading this blog, you know that I've been bearish on the newspaper groups because I believe they will be severely impacted by advertising dollars flowing into Internet properties. Actually I think all media is now having to compete with the 4 1/2th estate. But online properties feel the most like newspapers and magazines to me. Add in the fact that circulation numbers are now being skeptically questioned, and you have a recipe for advertiser discontent which will result in migration to trackable online properties and/or lower print rates. But I digress. What this means is that mainstream media companies have to buy Internet media companies. It's the best move they can make. Dow Jones purchased MarketWatch.com - makes sense. News Corp purchasing Intermix - could make sense. Some are developing their own blogging outlets - check out BusinessWeek's online presence and note their post regarding how blogging is eroding newspaper revenues. So, they're on to the game now, eh?
In other words, it's clear that the future for multi-channel media companies includes Internet as a core channel. So they have to start buying Internet media companies.
But here's the rub. Many of these mainstream media companies may have waited too long and now have to pay up. Now that the future strategy is clear, they're having to pay up to get their Internet channel and it's not clear that they're necessarily paying for quality.
News Corp's acquisition of Intermix is a great illustration. Intermix is not what I would consider to be a quality Internet property. They're a collection of some so-so sites like Grab.com, but the "crown jewel" is supposedly MySpace.com. Here's the thing with MySpace: to me it "smells" like AdultFriendFinder.com (AFF) (interesting choice of words - ed.). What do I mean by that? Well, AFF is an adult oriented personals site that obstensibly connects swingers to other swingers. However, if one reviews the "free" listings that they post, it's seems to me that some or most of the posts are of dubious origin -- i.e. they're fake. I've actually suspected that this occurs in a lot of the personals sites; so Match.com could also be critiqued here as well. Why is this important? Because if you tour around MySpace, it's clear that the main appeal of the site is it's network of numerous teen hotties. Look at this "browse our community page", it's all nubile young women and a good portion of them have posted pictures of themselves in their underwear. Yes, I said it, but trust me on this, a lot of other people are thinking it. I don't know about you, but I'm somewhat skeptical that all of MySpace's user base is, well, real. I think there is a good chance that MySpace may use the same tactics that AFF uses to garner users and traffic, namely fill the user base with a lot of fake users that are really, for lack of a better word - hot. Of course, I'm not a paid member, so it may just be a ruse to lure people into paying and once you get behind the wall, one finds out that the real user base is considerably more mundane. I think that it's recent growth is a function of people being enticed by the pseudo-sexual content. This strategy has a very short life.
Even if the users are real, what happens when all the dorky old dudes sign up hoping to become cool and hip? Right, all the teeny-boppers move on to the next big thing.
So what does this mean? Well, for News Corp it means a couple of things. One, they likely bought a website that drives a significant portion of its recent growth (MySpace) based upon sexual innuendo that may not be real. So, even if the user growth is real, buyers may figure out that the content is less than advertised and cancel as soon as it loses appeal.
We've seen the rapid rise (and fall) of similar services. Yahoo! Profiles (not Personals) started out like this until the porn companies figured out how to inundate their system with fake profiles. Yahoo! doesn't really do much with their Profiles anymore. Actually, I'm surprised they're still available. This tells me that they draw enough traffic to keep it switched on.
Other social networking sites in general also have issues with rapid rise popularity followed with rapid descents. My understanding from various industry sources is that LinkedIn and the others are experiencing hiccups in their expected growth as well.
This is why I think InterMix also accepted only a 12% premium to their stock price. Management may have taken a look and realized that getting $508MM, almost 7x their 2004 revenue numbers, reportedly based on MySpace's recent growth. BTW, there's an interesting analysis of VC returns on the deal at Bill Burnham's blog.
I think that InterMix wanted out while the getting was good and I think News Corp gave it to them. But then again, I'm nothing if not opinionated.
If anyone has news to the contrary, I'm all ears.
**Update: Another issue - how will MySpace's young & hip user base react to Fox as a parent company?
**Another update: I've read a bit about MySpace becoming the next great music promotion channel, but I'm not buyin' it.
Sorry for all of the republishing, but I'm obviously adding to the story as I find additional info...

Tech Bullish - Leaders Breaking Away (AAPL) and Losers Bouncing (HPQ)

Loved the Apple earnings announcement last week -- the Street was POSITIVE that the iPod was ready to slow down; estimates for iPod shipments stood a little over 5MM. They KNEW iPods were slowing, it was just a matter of by how much. I was talking with a medium sized ($800MM) hedge buddy of mine and he asked me, "When does Apple break down?" I told him I didn't think that it would because of the strength of the iPod and the lift it would provide on the business. What is the Street missing? Apple's proprietary retail strategy. By having it's own retail locations, Apple now has a distribution arm that won't abandon it the second Sony (SNE) announces yet another ill-fated initiative. Developing the retail arm was (another) genius move by whomever at Apple figured it out. I loaded up the day of the earnings call because I believed that the Street is dying to find the short side of Apple's story.
Keep looking boys.
Now, on to losing trades. HPQ is making a great run based on the restructuring moves of Hurd and the announcement of a new line of printers.
They've gotten a very optimistic lift from the announcement that HPQ will eliminate 10% of the company's workforce. Having experience in restructurings and companies in distress, I know that this is actually a very tortured, long road to recovery. I suspect that remaining HPQ salaries are still bloated across the board, which will create a very real management problem. Namely, the superstars within the organization realize that compensation will come down across the board, regardless of actual performance. They will naturally begin to entertain offers from companies with better growth profiles (Salesforce.com et al.) because this provides a chance to lock-in the high levels of compensation they currently have and swap-out their equity (options) with a better stock. Naturally, fast-growing organizations will be happy to have such experienced people and will be able to afford the steep ask.
The counter to this is the fact that HPQ is well-positioned to sell into the tech rebound in effect. They've got enough fundamental technologies that they will get a lift from strong IT spending. Additionally, the Street loves turn-around stories. Remember the early days of Chainsaw Al Dunlap? Same story, different company. There are buyers on the hope that this will change HPQ's position as there is no proof yet that the initiatives will or won't work. So, the rebound on the stock does not surprise me and is why I haven't instituted a short yet.
But I'm watching this one like a hawk...

Wednesday, July 13, 2005

AVID's house comes tumblin' down (AVID)

I've been negative on AVID for over a year now (how many TV stations can they upgrade anyways?). I haven't paid attention to the company lately which is too bad, because they definitely surprised the Street with this guidance update. Down over $10 in after hours trading.
Ouch.

Apple crushes, UPODs - will trade up (AAPL)

Apple crushes (predictably). I talked with a colleague the other day who asked me, "When does Apple break down?" I told him that it didn't because it's a strong company and is actually very cheap on a cash-flow basis for a growth company." He didn't like that answer. I think he's short. Too bad. Besides, when is the last time you heard a growth company was cheap on a Cash Flow from Operations basis? Exactly.
The skepticism of the institutions here tells me that the company has additional buyers. If they have another strong quarter, then these guys will have to flip, providing another push on valuation. Good thing I juiced with calls today before the close! I love being right.

Thursday, July 07, 2005

Navarre's Little Understood Secular Trend (NAVR)

This article from SFGate.com discusses an emergent trend that could benefit Navarre enormously: the rise of Anime as a cultural phenomenon. I don't personally dig Anime, but there are plenty of people who do and the content is creating big bucks. Navarre's purchase of FUNimation puts them squarely in the middle of this secular trend as FUNimation is a leading content developer of Anime content.
Navarre is a stock that I follow as a part of my "Growing Acculturalization of America" trend. I believe that the racial make-up of America is changing drastically due to Asian and Hispanic immigration, and I want to invest accordingly. If the Anime trend has additional legs and continues to grow, then Navarre's FUNimation buy will look extremely smart. Beyond being a driver for sales, it will improve Navarre's margins as well. Their current distribution business averages about 15% with the FUNimation business coming in around 30%. If that holds, Navarre's income could improve drastically. Considering how little the Street likes this stock, it could be a great contrarian play.

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