Posts tagged ‘Steve Jobs’
The $100 Billion Facebook Man
Source: Photobucket
If you don’t pay close enough attention, you may miss the Facebook initial public offering (IPO) in the blink of an eye. Since computer programming or Botox has frozen Facebook CEO Mark Zuckerberg’s face into a wide-eyed, blink-free state, you may have bought yourself a little more time to buy shares in this imminent IPO, which is estimated to value the company at upwards of $100 billion.
We don’t know a lot of details about the financial health of Facebook right now, but what we do know is that this snot-nosed, 27-year-old Mark Zuckerberg has created one of the most powerful companies on this planet and his estimated net worth is currently around $17 billion. Not bad for a college drop-out who started Facebook in 2004 as a freshman at Harvard University. Hmmm, maybe I should have dropped out of college like Mark Zuckerberg, Steve Jobs, and Bill Gates, and I too could have become a billionaire? OK, maybe not, but sometimes living in dreamland can be fun.
Speaking of dreams, Zuckerberg has a dream of connecting the whole world, and with more than 800 million-plus Facebook users, he is well on his way. If Facebook users made their own own country, it would be #3 behind only China and India – I’ll check back in a few years to see if Facebook can climb to the top position.
The Pre-IPO Interview
Charlie Rose recently ditched the tie and headed to Silicon Valley to conduct an interview at Facebook headquarters with Mark Zuckerberg and his Chief Operating Officer Sheryl Sandberg. If you fast forward to MINUTE 9:30 you can listen to the official Facebook IPO response:
Vodpod videos no longer available.
The Hype Machine
The hype surrounding the Facebook IPO is palpable and feels a lot like the Google Inc. (GOOG) IPO in 2004, but that capital raising event only resulted in proceeds of $1.9 billion for Google. The recent chatter surrounding the pending Facebook IPO places the value to be raised closer to $10 billion. Partial offerings seem to be the trend du jour in the social media IPO world, where companies like LinkedIn Corp. (LNKD), Groupon Inc. (GRPN), and Zillow Inc. (Z) all sold just a sliver of their shares to the public in order to create artificial scarcity, thereby pumping up short-term demand for their respective stocks. These companies trade at or above their initial offering price, but significantly below the early investor mouth-frothing spikes in share prices near the time of the IPOs. Facebook appears to be using the same playbook to build up hype for its eventual offering.
Even at an estimated value of $100 billion, Facebook still has some wood to chop if wants to pass Google (about $185 billion in value) and Apple Inc’s (AAPL) approximate $415 billion, but Zuckerberg is no stranger to ambition. When Facebook unveils its inevitable IPO prospectus in the not too distant future, we will have a better idea of whether Facebook and the 2010 Time magazine Person of the Year deserve all the mega-billion dollar accolades, or will an IPO feeding frenzy bring tears to those investors’ eyes that are not privileged enough to receive IPO allocated shares? Regardless of your faith or skepticism, we’re likely to find out the answer to these critical questions in a blink of an eye.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AGN, AAPL, GOOG but at the time of publishing SCM had no direct position in Facebook, MSFT, LNKD, GRPN, Z, TWX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Corporate Shockers: You did *#$@% to Steve Jobs?
Source: 1funny.com
Steve Jobs recruited John Sculley to run Apple Computers (AAPL) in 1983 because the board wanted someone more experienced than a snot-nosed 28 year old founder barking orders at Apple employees. Sculley was a seasoned 15 year veteran executive from Pepsi Co. (PEP) whom was persuaded by Jobs to take over the company and join him in changing the world.
Things were all nifty until Sculley went all Brutus on Jobs and decided to fire him with board assistance in 1985 when it was believed that Jobs was poaching executives from Apple to join Jobs’s successor company, Next Computers.
The verdict may not completely be out on Sculley’s effectiveness on running Apple, but he deserves a PhD in the “Obvious Arts.” When asked if the coordinated decision (between Sculley and the Board) to fire Steve Jobs more than 25 years ago was correct, this is what Sculley had to say:
“In hindsight, I think they [board] made the wrong choice. They should have chosen Steve…we should have figured out a way to work with it [Job’s talent].”
Click Here for John Sculley Bloomberg Interview
Over his term at Apple, Sculley increased sales from $800 million to $8 billion. Good performance, but apparently not good enough, because Sculley was axed in 1993 and a window was opened for Jobs to return as Apple’s puppet-master four years later. The rest is history and AAPL stock went from about $10 per share when Sculley left all the way up to $316.65 today. Not too shabby.
In another shocker, after hiring Sculley and then getting fired by Sculley, Jobs said Sculley won’t talk to him. I can’t understand why a company founder would hold a grudge toward a hand-picked former employee who spearheaded a lynching against his boss? Well, I guess karma has a way of evening things out in the long run – redemption was found with Jobs’s climbing the Silicon Valley mountain to create the $300 billion consumer technology behemoth. I’m sure you don’t have to cry a river for John Sculley, but if he can’t control his own tears, he can always use his hundred dollar bills as tissue surrogates.
What makes Jobs’s decline and subsequent triumph even more unbelievable are the hugs and kisses Steve Jobs owes Microsoft founder and billionaire Bill Gates. If not for a $150 million lifeline offered by Gates to Steve Jobs in August 1997, while Apple was on its financial deathbed, we may not have ever experienced the iPod, iPhone, iPad, or future overhyped consumer gadget (OK, I admit it, I have succumbed to the hype myself). I’m guessing if Bill were given another chance, he would have passed on that Apple investment and we would be stuck paying for $4,000 computers and $1,000 Microsoft Office upgrades.
As a result of these corporate shockers, several lessons can be learned. Number one: If you are hired by a company founder, be careful about firing that boss if put in that position – you could potentially be jeopardizing the creation of hundreds of billions of dollars in future value. Number two: If you are unable to successfully negotiate lesson number one, then just find someone to lend you $150 million. History has taught us lessons based on past events ranging from Prohibition to Watergate, and from Nazi Germany to Tiger Woods’s indiscretions. John Sculley also learned lessons from Apple’s corporate shockers, and so can you.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in PEP, MSFT, 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.
Jobs: The Gluttonous Cash Hog
Really? Do you think Steve Jobs actually needs to hoard $42 billion in cash reserves on the company’s balance sheet, when they are already adding to the gargantuan mountain of money at a $12 billion clip per year. Let’s not forget, this gaudy amount of money is being added after all operating expenses and capital expenditures have been paid for.
Perhaps Steve is just a little worried about the economy, and wants a little extra loose change around for a rainy day? I’d buy that argument, but Mr. Jobs and the rest of the executives just witnessed the worst financial crisis in a generation, and the company still managed to generate about $9 billion in free cash flow in both fiscal 2008 and 2009.
If Apple was not creating cash flow like those cascading chocolate fountains I see at wedding receptions, then perhaps a cash safety blanket is needed for acquisitions? Here’s what Steve had to say about Apple’s cash levels in February:
Steve Jobs (Source: Photobucket)
“We know if we need to acquire something – a piece of the puzzle to make something big and bold – we can write a check for it and not borrow a lot of money and put our whole company at risk…The cash in the bank gives us tremendous security and flexibility.”
Let’s explore that idea a little further. First of all, what type of experience does Apple have in doing large acquisitions? Not a lot, and just to humor myself I ran a screen on a universe of more than 10,000 stocks and I came up with 111 companies with a value (market capitalization) greater than $40 billion. Unless Apple plans on buying companies like Coca Cola (KO), Chevron Corp. (CVX), Pfizer (PFE), or United Parcel Service (UPS), I think Apple can part ways with some of their billions. Certainly, there are a handful of theoretical targets in the areas of technology and content, but for certain, (a) any large deal would face intense regulatory scrutiny, and (b) if truly there were grand synergies from doing a massive deal, then most definitely they would be able to issue stock (if Jobs hates debt) to help fund the deal. It is pure nonsense and laughable to believe any “big and bold” acquisition would put the company “at risk.” The only thing at risk for doing a large deal would be Apple’s stock price.
The truth of the matter is returning cash to shareholders would be a fantastic self-disciplining tool, like putting mayonnaise on a brownie to prevent excess calorie consumption. Steve should give current or former CEOs of AOL, Time Warner, Mercedes Benz, Chrysler, Sprint, and Nextel a call to see how those large deals worked out for them. Apple could use an acquisition security blanket, but they do not need a circus tent of cash.
Times of Change
Although times have changed, some executives have not. Many tech companies, including Apple, have nostalgic memories of the go-go tech bubble days of the 1990s when growth at any price was the main mantra and no attention was paid to prudent capital allocation. With a stagnant stock market over the last twelve years, and interest rates sitting sluggishly at record lows (effectively 0% on the Federal Funds rate), investors are demanding prudent decision-making when it comes to capital allocation. Mr. Jobs, it is time to expand your narrow views and show the stewardship of sensibly managing the cash of your loyal investors.
Believe it or not, there are still a few of us actual “investors” that still exist. I’m talking about investors who do not just speculatively rent a stock for a day, week, or month, but rather those who invest for the long-term because they believe in the vision and execution capabilities of management and believe the company’s capital will be invested in their best interest.
I do not mean to single Mr. Jobs out, because he is not the only gluttonous, cash-hog offender among CEOs. In many respects, Apple has the good fortune of becoming a cash-hoarding poster child. The company does indeed deserve credit for becoming a $225 billion technology-consumer-media-retail juggernaut that has spread its tentacles brilliantly across numerous massive markets, whether its PCs, cell phones, music, television, movies, games, advertising etc.…you get the picture. But just because you are an exceptionally gifted visionary doesn’t give you the right to destroy value of hopelessly idle cash, which is begging for a better home than a 0.25% T-Bill.
Solutions – Taming the Cash Hog:
1) Divvy Up Dividends: With $42 billion in cash on the balance sheet and additional annual free cash generation on pace for $12 billion per year, there is no reason Steve Jobs and the board couldn’t declare a dividend that would yield 3% today. If that feels like too much, then how about shave off a pittance of $5 billion or so to pay out a sustainable dividend, which would yield a market-matching 2% dividend yield to investors. This scenario would accommodate Apple with at least a few decades of a cash cushion to cover ALL the company’s operating expenses and capital expenditures. This meagerly, ultra-conservative dividend policy can actually persist (or grow) longer than expected, if Apple can sustainably grow profits – a good possibility.
2) Share Buyback: This solution is much less desirable from my perspective compared to the dividend route, since many of the large share repurchasers tend to also issue lots of new shares to employees and executives, thereby neutering the benefits of the share repurchases.
3) Bank of Apple – (B of A): Why doesn’t Jobs just create a new entity, plop $40 billion of cash from Apple Inc. into the venture, and then open it up as Bank of Apple. At least that way, as an investor in the bank, I could make more profitable lending spreads at B of A relative to the 0.25% yield earned on the mega-billions deteriorating on Apple’s corporate balance sheet.
The downside of instituting these cash reducing solutions:
- The company doesn’t have as much cash as it would like to do large stupid acquisitions.
- The company loses a bunch of day-traders and short-term stock renters that don’t even know what a dividend is.
The upside to efficiently allocating capital through a 2% dividend is Steve (and the other investors) will receive a nice fat quarterly check. In the case of Jobs, he’ll collect a handsome $27 million or so to his measly $1 annual salary. In the process, the company will also gain long term shareholders that buy into the strategic vision of the company.
Stubbornness has served Steve Jobs tremendously well in his career, and a successful CEO like Steve Jobs is not required to listen to my advice. However, I am hopeful that Mr. Jobs will see the hazards of choking on a rapidly growing $42 billion cash hoard and discover the benefits of slimming down a gluttonous cash hog.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct positions in KO, CVX, PFE, UPS, AOL, Time Warner, Mercedes Benz, Chrysler, Sprint, Nextel, 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.
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