Wednesday, December 28, 2005
Thursday, December 22, 2005
What if Veritas acquired Symantec? (SYMC)Okay, I know that's not how it happened, but bear with me here. What if Veritas had acquired Symantec and the new company was called Veritas and focused on back-end infrastructure/data management? I think it would have a completely different valuation and a higher one at that.
Listen, we all know Storage Infrastructure is on a tear. And Veritas was considered to be one of the best large enterprise storage plays. Well now they're part of Symantec, a company that was/is creating a wholistic security and data protection solution for large enterprises.
Hmm...do you think that this company will be selling more of this in the future? 5 years from now?
Of course they will, which is why I doubled, neigh, tripled down in the $16ish range. This could get exciting.
Merry Christmas Knight-Ridder! (KRI)Or should I say: Merry Competitive Bidding Situation! Who cares, it's all good for those guys. This article in Boston.com indicates there will be numerous private equity and strategic (other newspaper co's) bidding to gain control of KRI. This is a good thing for KRI's shareholders. I'm curious to find out what will happen to all of the great Internet assets that Knight Ridder Digital has assembled. That is the real prize embedded in this company -- CareerBuilder.com, Cars.com, ShopLocal.com, RealCities.com, etc... I don't know how integrated all of these assets are with KRI's newpaper assets and how difficult it would be to separate them from the pack.
KRI's sale process is going to be a classic and I can't wait to see the twist and turns that lie ahead in this plot. It's likely the deal could get done quickly if Gannett moves authoritatively and offers a "strategic" bid. However, I think there is a good chance that there will be a substantial amount of drama.
Happy Holidays Everybody!!!
Monday, December 19, 2005
Expensing Options is such a bad idea...I knew the option-expensing rules would eventually disintegrate upon itself. This article in the Washington Post illustrates why expensing options is such a bad idea. In short, what people don't get is that options are NOT AN EXPENSE. Rather, options are a CONDITIONAL FUTURE DILUTION. I know big words have a hard time resonating with the general public and most people prefer easy-to-understand solutions, but option expensing illustrates why simple answers don't always work for complex situations.
I know that Warren Buffett has come out in favor of expensing options, but I think everyone is a little gaga over Warren anyways. Maybe the guy has just been lucky. Have you seen how much money he lost investing in The Gap? But I know that what he says is gospel so many people have parrotted him on this issue as well.
See, here's the deal. The GAAP income statement tries to present a balanced view of earnings, not an accurate one. Why not accurate? Because there is no accurate way to measure earnings. Some people think that cash is a good way to measure earnings, other feel that you need to adjust for "temporal shifts" (i.e. you buy an income producing asset (a building) and you spread the expense of that asset over its "useful life"). All of these temporal shifts require making assumptions (how long is the useful life of a building?). Assumptions are an inexact science at best (e.g. SWAG). Therefore the generation of financial statements as dictated by GAAP necessarily implies inaccuracy.
So, how does this apply to options? Well, options aren't a cash expense of the company. It doesn't cost a company anything to issue options, so therefore they don't really effect cash flow. And if you're like every newly minted MBA, you know that in the long run cash flow is what really matters. If you're an economics undergrad, you also know that in the long run, we're all dead. But I digress.
So, the common response by expensing advocates is that the company is giving away value, so therefore that value should be reflected as an expense. Well, the problem is that the value is highly speculative and extremely variable. The only thing I know about option valuations is that they're often wrong. The guys who won a nobel prize for their work on options valuation also oversaw the largest hedge fund catastrophy to date. That's right; Myron Scholes and Robert Merton, two of the creators of the Black-Scholes options valuation model got hammered when it came to applying their theory in the real world of investing. My point here is that no one really knows how to value options. Why? Because their valuation also rests on a ton of assumptions. (Don't even get me started on normally distributed populations! I love heteroskedasticity.)
So, what you have is a second-order of assumptions at work. And we all know the only true thing about financial assumptions is that they're wrong.
So why would we try and affect company earnings using such an exact science?
Well partly because the general public is stupid. Unfortunately, the general public also gets to vote, which leads to all sorts of disastrous consequences and option expensing is no exception.
I think the market has a hard time wrapping its mind around the concept of a conditional future dilution. Let me explain this furthur.
If options don't have an expense, where does their value come from? The value of an option is a result of the fact that shareholders' slices of the pie (as determined by the number of shares they hold over the total) shrink -- if the options are exercisable.
The best way to really illustrate the value lost by shareholders through options is not through an expense but rather through a factor that would illustrate the shrinkage in slice (ownership) size to the increase in stock price.
Assume a company with a stock price of $10 and 1,000,000 shares outstanding. Also assume you own 10% of the company, or 100,000 shares. Now consider the following two scenarios and consider the impact to your ownership:
1. 10,000 options outstanding with a strike of $12. If the stock price goes above $12, you would be diluted by 1%. (100K/1MM = 10% v. 100K/1.01MM = 9.9%).
2. 100,000 options outstanding with a strike of $20. If the stock price goes above $20, you would be diluted by 9%. (100K/1MM = 10% v. 100K 1.10MM = 9.1%)
Which would you rather have? Well, it kind of depends on a lot of things - where the price will end up, how variable the price is normally, how much do you think management deserves to be richly rewarded, etc...
So, you can see why thinking about how the exercise will effect your position is more useful that trying to sum all of it up and putting it as an expense on the income statement.
Further proof that it's a bad idea: professional investors (ex-Buffet) often exclude non-cash charges like this one to focus on core earnings power when trying to guage a company's value. So now you have a situation where the professionals (once again!) play by a different (and more advanced) set of metrics than your average investor.
Guess who often wins these contests?
Tuesday, December 13, 2005
TheStreet.com comes around on HP Compaq (HPQ)Good to see I wasn't the last man on the HPQ Turnaround boat. TheStreet.com posted a fairly well written article about HPQ's recent rebound. They, too, see a rebound in storage...
Hackoff.com - Hybrid Blog and BookNew methods for promoting content are appearing all the time and one that is gaining steam is Tom Evslin's book and blog hybrid, called a "blook". The title is "Hackoff.com" and it's a story about technology company set in the nadir of the tech bubble (1999 - 2000ish). It's an interesting read so far, although Tom does tend to push the pornographic aspects a little too much for my taste. Also, his descriptions of bankers are a little trite.
However, the story shines in his conveyance of executive meetings during the collapse of the company. The conversations flow naturally and convincingly and have the imprint of someone who has actually been in the room. I don't know much about Tom's background, but I've read that he was an exec at a start-up during this time period. The vignettes that involve the corporate counsel ring exceedingly true and make me believe that Tom was involved in some of these dicey situations. Additionally, his passages regarding how the investment banks made money "coming and going" off of clients illustrates a sophistication that I haven't seen even in good financial journalism. His portrayal is so accurate that I think the book may only play well to former dot-commers and tech bankers. Regardless, Hackoff.com should be required reading for all financial journalism training programs.
The interesting thing I'm drawing out of this is that it's a great example of how a traditional media channel is being altered by Internet technologies. Tom is a great test case for how to use the new Internet media to promote a book. This is a drastic departure from established book promotion techniques (as far as I'm aware). Now, will Tom's blook end-up as the model of the future? Maybe not. But this type of experimentation (and leadership) will find lucrative new models. I'm sure the big publishers are watching this closely. Wait - scratch that. They *should* be watching this closely if they were smart. But we all know about that whole "Innovator's Dilemma" issue with large, established companies when it comes to disruptive innovations - right?
Friday, December 02, 2005
Storage Refresh Gains MomoSorry guys - I've been busy with holidays and all of the associated activities. Just thought I'd pass along a link to an article discussing the recent resurgence in storage. Interesting note in the article: Dell jumps to #4 in WW storage revenue.