Posts tagged ‘LinkedIn’

Microsoft Enters Garbage Recycling Business

Microsoft Inc. (MSFT) is going green in more ways than one. Not only is Microsoft shelling out a lot of green ($8.5 billion) to acquire internet communication company Skype, but Microsoft is also going green by recycling Skype – an asset previously tossed away as garbage by eBay Inc. (EBAY). While I’m certain Microsoft executives did their due diligence and a large cadre of savvy bankers provided their stamp of approval on the deal, recycling a previously disposed item successfully poses some unique challenges.

The Problems

What could possibly go wrong in a sexy, strategic deal that plans to leverage Skype’s power of internet communication across Microsoft’s various businesses including mobile, business software, gaming, and advertising platforms?

  • Sticker Shock: The Microsoft-Skype deal is still in its early phases, but the multi-billion price tag has already elicited heartburn from some investors (heart attacks among others). In Microsoft’s defense, what’s a mere $8.5 billion among friends, especially if your wallet is stuffed with over $60 billion in cash like Microsoft? With the 3-month Treasury bill currently yielding 0.02%, the massive wads of cash that Microsoft (and other tech giants) is sitting on appear to be burning a hole in buyers’ pockets. In a kooky internet world where IPO valuations of $70 billion for Facebook, $25 billion for Groupon, and $3 billion for LinkedIn are freely tossed around, an $8.5 billion Skype offer may seem like par for the course (or even a bargain). Sadly, however, I am having difficulty reconciling how Microsoft will take 663 million money-losing customers at Skype and balance the laws of economics by adding further volumes of money-losing customers. Apple Inc. (AAPL) spends about $2 billion per year in research & development, and is expected to produce more than $100 billion in revenues in fiscal 2011, while the $8.5 billion that Microsoft spent on Skype produced less than $1 billion in revenues last year. I presume Microsoft has some aggressive assumptions built into their Skype forecasts to rationalize the price paid for Skype.

 

  • Failure Déjà Vu: Does the desire to integrate wiz-bang technology into existing product platforms sound familiar? It should – eBay Inc. (EBAY) already attempted and failed at integrating Skype before it threw in the white towel at the end of 2009 and sold a majority $1.9 billion stake of Skype shares back to a group of investors, including the Skype founders. Back in 2005, when eBay paid a then bargain of $3.1 billion for Skype (including earnouts), former CEO Meg Whitman evangelized the “Power of 3” (Skype + eBay’s Marketplace + PayPal) – I suppose new CEO John Donahoe must now promote the “Power of 2.” In Skype merger sequel of 2011, Microsoft’s CEO Steve Ballmer is espousing the benefits of Skype across Microsoft properties such as Outlook, Windows Live Messenger, Xbox, Kinect, and its newly created Nokia Corp. (NOK) relationship. Gaudy priced mergers in the internet/social media space have a way of eventually ending up in the deal graveyard. Consider AOL Inc.’s (AOL) 2008 deal with social network Bebo for $850 million – two years later AOL sold it for $10 million. News Corp’s (NWS) high profile purchase of MySpace for $580 million is reportedly looking for a new home at a fraction of the original price ($50 million). Hewlett-Packard Co.’s (HPQ) ostentatious $2.4 billion value (~125 x’s forward earnings) paid for 3Par Inc. during a bidding war with Dell Inc. (DELL) in 2010 is another recent example of a risky high-priced deal.

 

  • Telco Carrier Skepticism: Although Microsoft has ambitions of taking over the world with Skype, the telecom service carrier companies that facilitate Skype traffic may feel differently. As the telcos spend billions to expand the global internet superhighway, if Skype is clogging traffic on their networks then the carriers will likely require additional compensation – no freeloaders allowed.  

 

  • Rocky Past Marriages: When it comes to acquisitions, Microsoft historically hasn’t fooled around as much as some other large Fortune 100 companies, nonetheless some important past relationships have gone sour. Take for instance Microsoft’s previous largest $6 billion cash acquisition of aQuantive Inc. in 2007. As Microsoft continues to chase Google Inc. (GOOG) at their heels, Microsoft has little to show for the aQuantive deal, except for a lot of employee turnover. The sizable but smaller $1.1 billion acquisition of Great Plains in 2001 has its critics too. Like Skype, the Great Plains business software deal made strategic sense, but six years after the units were fully integrated founder and owner Doug Burgum packed his bags and left Microsoft. 

Consequences

What happens next for Microsoft? I know it’s difficult to imagine that Microsoft’s colossal underperformance since the beginning of 2010 could worsen – Microsoft has underperformed the market by a whopping -38% over that period – but by massively overpaying for Skype’s losses, Microsoft is not making their own job any easier. Although Microsoft has missed many key technology trends over the last few years (e.g., search, mobile, tablets, social media, etc.) and its stock has been in the dumps, the PC behemoth is looking to salvage a previously failed merger into a successful one. Time will tell if Microsoft can recycle a trashed, money losing operation into hefty green profits. If not, investors will be out for blood wondering why $8.5 billion was thrown away like garbage. 

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, and GOOG,  but at the time of publishing SCM had no direct position in MSFT, Skype, EBAY, AOL, HPQ, DELL, NOK, Facebook, MySpace, LinkedIn, Groupon, Bebo, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 12, 2011 at 5:34 pm Leave a comment

Rebuilding after the Political & Economic Tsunami

Excerpt from Free April Sidoxia Monthly Newsletter (Subscribe on right-side of page)

As Japan recovers from the devastating 9.0 earthquake and tsunami, political dominoes are also rapidly falling in Middle Eastern and North African countries like Tunisia, Egypt, Yemen, Syria, Bahrain, Jordan, and Libya. But guess what happens after the pieces fall? The surviving populace – whether in Egypt, Tunisia, or eventually Libya – will be left with the responsibility of picking up the pieces. The protesters, rebels, and civilians will be accountable for cleaning up, unless they can convince allies to provide assistance – like the military and humanitarian aid provided via the U.S.-led United Nations resolution. Time will tell how much longer the 42-year repressive reign of Colonel Muammar Qaddafi will hold, but any way you cut it, movement towards a freer, more open society with less corruption is a positive development in the long-run.

 

The Start of the Arab Uprising

The Arab uprising grew its roots from an isolated and disgraced Tunisian fruit vendor (26- year-old Mohammed Bouazizi) who burned himself to death in protest of the persistent, deep-seeded corruption prevalent throughout the government (view excellent 60 Minutes story on Tunisia uprising). The horrific death ultimately led to the swift removal of Egypt’s 30-year President Hosni Mubarak, whose ejection was spurred by massive Facebook-organized protests. Technology has flattened the world and accelerated the sharing of powerful ideas, which has awoken Arab citizens to see the greener grass across other global democratic nations. Facebook, Twitter, and LinkedIn can be incredible black-holes of productivity destroyers (I know firsthand), but as recent events have proven, these social networking services, which handle about 1 billion users globally, can also serve valuable purposes.

As the flames of unrest have been fanned across the Middle East and Northern Africa, autocratic dictators haven’t had the luxury of idly sitting on their hands. Instead, these leaders have been pushed to relent to the citizens’ wishes by addressing previously taboo issues, such as human rights, corruption, and economic opportunity. These fresh events feel like new-found changes, but these major social tectonic shifts have been occurring throughout history, including our lifetimes (e.g., Tiananmen Square massacre and the fall of the Berlin Wall).

Good News or Bad News?

Recent headlines have created angst among the masses, and the uncertainty has investors asking a lot of questions. Besides radioactive concerns in both Japan and the Middle East (one actual, one figurative), the “worry list” of items continues to stack higher. Oil prices, inflation, the collapsing dollar, exploding deficits, a China bubble, foreclosures, unemployment, quantitative easing (QE2), mountainous debt, 2012 elections, and the end of the world among others, are worries crowding people’s brains. Incredibly, somehow the market still manages to grind higher. More specifically, the Dow Jones Industrial Average has climbed a very respectable +6.4% for 2011.

With the endless number of worries, how on earth could the major market indexes still advance, especially after a doubling in value from 24 months ago? For one, these political and economic shocks are nothing new. History has shown us that democratic, capitalistic markets ultimately move higher in the face of wars, assassinations, banking crises, currency crises, and various other stock market frauds and scandals. I’m willing to go out on a limb and say these worrisome events will continue this year, next year, and even over the next decade. 

Most baby boomers living in the early 1980s remember when 30-year mortgage rates on homes reached 18.5%, inflation hit 14.8%, and the Federal Funds interest rate peaked near 20%. Boomers also survived Vietnam, Watergate, the Middle East oil embargo, Iranian hostage crisis, 1987 Black Monday, collapse of the S&L banks, the rise and fall of the Cold War, Gulf War I/II, yada, yada, yada. Despite all these cataclysmic events, from the last birth of the Baby Boomers (1964), the Dow Jones Industrial catapulted from about 890 to 12,320. This is no April Fool’s joke! The market has increased a whopping 14-fold (without dividends) in the face of all this gruesome news. You won’t find that story on the front-page of The Wall Street Journal.

Lost Decade Goes on Sale

Stocks on Sale! 

The gains over the last four and half decades have been substantial, but much more is said about the recent “Lost Decade.” Although it has generally been a lousy decade for most investors in the stock market, eventually the stock market follows the direction of profits. What the popular press negates to mention is that S&P 500 operating earnings have more than doubled from about $47 in 1999 to an estimated $97 in 2011. Over the same period, the price of the market has been chopped by more than half ­(i.e., the Price – Earnings multiple has been cut from 29x to 13.5x). With stocks selling at greater than -50% off from 1999, no wonder smart investors like Warren Buffett are buying America – Buffett just spent $9 billion in cash on buying Lubrizol Corp (LZ). Retail investors absolutely loved stocks in 2000 at the peak, believing there was virtually no risk. Now the tables have been turned and while stock prices are trading at a -50% discount, retail investors are intensely skeptical and nervous about the prospects for stocks. Shoppers don’t usually wait for prices to go up 30% and then say, “Oh goody, prices are much higher now, so I think I will buy!” but that is what they are saying now.

I don’t want to oversell my enthusiasm, because the deals were dramatically better in March of 2009. Hindsight is 20-20, but at the nadir of the stock market, stock prices traded at bargain basement levels of 7x times 2011 earnings. We may not see opportunities like that again in our lifetime, so sitting in cash may not be the most advisable positioning.

Although I would argue every investor should have some exposure to equities, an investor’s time horizon, objectives, constraints and risk tolerance should be the key determinants of whether your investment portfolio should have 5% equity exposure or 95% exposure.

So while the economic and political dominoes may appear to be tumbling based on the news du jour, don’t let the headlines and the so-called media pundits scare you into paralysis. Bad news and tragedy will continue, but fortunately when it comes to prosperity, history is on our side. As you attempt to organize and pickup the financial pieces of the last few years, make sure you have a disciplined, long-term investment plan that adapts to changing market and personal conditions.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in LZ, Facebook, Twitter, LinkedIn, BRKA/B, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

April 1, 2011 at 12:21 am 1 comment


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