Saturday, October 03, 2009

GE Negotiates To Sell Media Unit to Comcast

Color me stunned at the recent news that GE is actually considering divesting itself of its ill-fitting, value-destroying media unit.

However, I've been more stunned by the apparent inability by many pundits and analysts to comprehend why this is such a no-brainer for GE.

For example, on Friday morning, CNBC's David Faber sputtered as he groped for an explanation as to why GE CEO Jeff Immelt is now consenting to that which he has refused for so long- the spin-off of the firm's media properties.

I've written countless posts, found under the "GE" label, about why this conglomerate no longer has a reason to exist. How all 5 or 6 major businesses should be standalones. How shareholders are being ripped off by Immelt and the board, forced to pay a corporate overhead tax for people and functions which add no value to GE's owners, but line the pockets of Immelt and his staff.

Apparently, GE's senior management finally came to view the NBC network's accelerating decline with alarm. Add to that the dismal MSNBC and uneven Universal Studios performances, the minority ownership by Vivendi, and the whole thing probably became a headache best jettisoned while it still has some value.

Like so much else that GE owns, e.g., the credit card and other finance units Immelt tried, belatedly, to unload during last year's credit crisis, the best time to have sold it was years ago.

Now, it's probably going to have to settle for a spin-off of some sort.

Separately, there is the question of just what Comcast thinks it is doing. Brian Roberts is going all in on content as so much entertainment moves to web-based sources. And, again, as I have written in prior posts, owning both media distribution pipes and content has never been a winning hand.

But that's another post.

For now, I'm happy to see that time and fortune have finally eroded GE's objections to the inevitable, and the conglomerate is beginning to be split asunder.

I wonder which GE unit will be teed up for separation next?

Friday, October 02, 2009

Vaccines: The New Pharma Strategy

Tuesday's Wall Street Journal featured an article that confirms that creativity is still alive in the pharmaceutical sector.

Faced with an impending US government takeover of health care, drug makers are focusing on vaccines.

It's a very logical move. If you're going to research, produce and market drugs, why settle for those, the value of which can be debated, because they contribute to easing disease.

Vaccines are a much more binary sort of thing. It's an all or none proposition, and, for certain at-risk groups, there's no alternative.

If the drugs are marketed from outside the US, there's a much better chance these companies can maintain profit margins and price levels on vaccines than on conventional drug products.

Even with government action threatening most of the workings of the pharmaceutical sector, it's good to see that they are still thinking ahead and targeting the most profitable areas of their markets. Those with the highest price inelasticities.

If they didn't, you can forget even seeing vaccines like these appearing to aid consumers who will be at risk.

Finally- A Realistic Review of Jamie Dimon's Tenure At Chase

About two years ago, I wrote this post, amidst a business media groundswell of adoration over Jamie Dimon's first three years at Chase. I ended the post with this passage,

"Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.

It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically."

Of course, at that time, nobody foresaw a shrinking 2008. As a matter of fact, Chase's revenues and profits did shrink that year. But these things are relative, so I won't be unfair and criticize Dimon for not achieving the impossible last year.

However, a quick look at the nearby price chart for Chase and the S&P500 Index for the past five years shows that the bank has not been significantly better than the index. And to the extent it's marginally outperformed after five years, which is now Dimon's tenure as CEO, it clearly underperformed for 2007 & 2008.

So, simply by looking at equity prices, you can see Dimon hardly merited all the accolades.

Now, we have a "Heard On the Street" column in yesterday's Wall Street Journal calling attention to the reality of Chase's performance. It read,

"Much has happened over the past two years that will benefit J.P. Morgan's earnings. However, going into the crash, the bank showed lackluster returns in several areas.

Once rivals reassert themselves, J.P. Morgan mightn't look so impressive.

Even so, investors need to track closely how the once-mediocre investment bank and once-patchy retail-banking franchise are doing."

I could not agree more.

As the nearby price chart, with BofA, Wells Fargo, Citigroup and Goldman added, shows, Chase still operates in the shadow of the newly-baptised commercial bank, Goldman Sachs.

Leaving aside the hapless Citi and BofA, Chase's one-time international, US-based money center bank competitors, only Wells and Goldman remain as viable, healthy rivals.

Wells Fargo's performance actually apes that of Chase. But the real class act in a badly-hit sector is still Goldman Sachs. Over the five-year period, Goldman rose further and fell less-far than any of the other commercial banks. Granted, Goldman hasn't even been a commercial bank for more than a year.

Never the less, the former investment bank remains poised to outperform as the sector is revived by somewhat healthier credit markets. Meanwhile, Chase and Wells Fargo will continue to grapple with the typical large commercial bank woes of credit card and mortgage delinquencies and defaults.

It's no surprise to me, and other friends who were once Chase executives, that the bank fared well in bad times. Simply put, it's been a laggard ever since David Rockefeller's attempts to diversify the bank in the 1970s and '80s were rebuffed. Few now remember David's attempt to buy Dial, a consumer loan business.

Since then, Chase has been late to every lending party, and sustained a few self-inflicted wounds, as well. It's very ineptness at financial innovation is what kept Dimon from racing into the mortgage-backed securities party like Citigroup.

As the Journal column astutely notes, Chase has never been a banking sector performance leader in healthy, growth-oriented times. At best, it's been hurt less badly in downturns.

I don't think Dimon's slash-and-burn style has changed that. Sure, he scooped up a few other banks which the markets and FDIC obligingly set before him. Having not blown out a huge hole in Chase's own balance sheet with ill-advised SIVs and such, Dimon had some powder left to take on the branches and deposits of WaMu. Bear Stearns was basically a gift from the federal government.

It remains to be seen, once more, whether Dimon is capable of besting the sector's other competitors, and the S&P, over a longish term in healthy markets.

Thursday, October 01, 2009

Ken Lewis Resigns!

It's official! Ken Lewis announced yesterday that he will the end of this year.

This has touched off a huge debate all morning long on CNBC regarding Lewis' legacy and merit. Due to co-anchors Becky Quick and Joe Kernen being absent, this unfortunately left resident idiot Steve Liesman free to run at the mouth about more things about which he knows far too little.

But perhaps the best exchange was very early in the morning, before 7AM, when longtime bank analyst Dick Bove fenced with another banking sector pundit over Lewis' merits.
Bove, ever the apologist and cheerleader for all things banking, championed Lewis as the architect of the current BofA.
His opponent, a large BofA institutional shareholder, more correctly noted that former NationsBank CEO Hugh McColl was primarily responsible for assembling the bulk of BofA, including the merger with that formerly California-based bank in 1988.
Bove claimed the shareholder was factually in error, but, from what I heard, Bove was the one who had his facts wrong.
The nearby price chart for BofA, Chase, Citigroup and the S&P500 Index provides some assistance in assessing Lewis' performance.
What's interesting to me is that, over the 20+ year period shown, from 1985-present, BofA has rarely consistently outperformed the Index. In fact, as I expected, only Citi, briefly, actually outperformed on a consistent basis.
By the time Lewis took over BofA in 2001, the bank had actually underperformed the S&P since 1985. The price trajectory under Lewis was pretty flat, if slightly upward, mostly mirroring the S&P, until, of course, last year.
Certainly, nothing in BofA's share price performance suggests Lewis did an exemplary job as CEO, Bove's sputtering to the contrary.
The apparent hot topic of discussion regarding Lewis' departure is whether the board conspired to bring it about. If they didn't, why not?
Lewis' murky behavior in last year's purchase of Merrill Lynch, for which he overpaid with his shareholders' money, then failed to inform them of material facets of the deal, would be sufficient to have dismissed him. It doesn't help that Lewis has gone on to tell different things to different audiences regarding who told him to do what during that deal.
If Lewis had led BofA to a clearly consistently superior total return performance during his eight years at the helm of the bank, this debate might be understandable. But he didn't.

Xerox Apes Dell & Bids On A Service Provider

Earlier this week, a big business story was Xerox's bid to buy services provider Affiliated Services Corp.

This CanWest website reported the Xerox bid as follows,

"The mergers and acquisitions race is warming up. Xerox, the world's biggest producer of high-speed printers, said Monday it is bidding $6.4 billion U.S. for Affiliated Computer Services Inc. in an effort to expand into document services.

Xerox values ACS at $63.11 a share or a premium of 33 per cent over Friday's market close. "It's a game change for Xerox and the deal will provide stronger revenue and earnings growth," said Xerox's CEO Ursula Burns. It will triple its services revenue to $10 billion U.S. annually, she added,

ACS is the biggest supplier of managed services to the U.S. government and as an outsourcer operates in the telecoms, healthcare, education and retailing sectors. The merger offers annual synergies up to $400 million U.S. for the first three years.

Xerox offers $18.60 cash and 4.935 Xerox shares for each ACS share. The deal closes early in 2010 and CEO Lynn Blodgett will continue to run ACS."

Xerox currently has about $1.2B in cash on its balance sheet. By my arithmetic, they are offering about $1.8B in cash, the balance in Xerox equity.

When I read this story, I immediately thought of the recent Dell acquisition, at an outrageous premium north of 50%, of Perot Systems. I wrote in that post,

"Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. "

I think Ursula Burns is doing the same thing. Mind you, as I wrote here, in May, I'm not exactly wowed by her to begin with. I wrote,

"Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns. Who cares?

It doesn't take a genius to see that a company that mainly focuses on print technology in an increasingly virtual, online technology world is probably not going to become a consistently superior performer again. If it did, it would be a true exception.

As the price chart shows, Xerox hasn't had a sustained period of market outperformance in the period from 1978 to the present. This is a company whose 'go-go' years were the 1960s. That's 40 years ago.

When I think of Xerox, I think of the company that punted away truly promising technologies in its once-famed Palo Alto Research Center. You know, those ideas which Apple's Steve Jobs incorporated into his firm's breakthrough personal computers.

Why anyone would pay special attention to a changing of stewards of a once-dynamic, now merely-average, backwater technology firm, is unclear to me."

At least Burns isn't paying over 50% too much for ACS. It's only about 33% over current market value. Yikes!

You cannot tell me that Xerox shareholders would not have been better off to have received a $1B cash distribution, borrowed or used other funds, and bought ACS shares at the market.

As I asked in the Dell case, just what are Burns and Xerox going to do for ACS that it hasn't or can't do for itself?

As the nearby 5-year price chart for Xerox, ACS and the S&P500Index shows, the acquired firm has done a much better job of at least matching the S&P than Xerox has.

Other than cash, what can Burns hope to provide ACS? Schumpeterian dynamics have more or less shut the door on Xerox's days of consistent market-outperformance. So Burns' answer is to squander shareholder value on a better-run company, at a huge premium?
Looking at the past two years' performances of the same three- Xerox, ACS and the S&P500- the next chart illustrates that ACS managed to ride out the recent economic turbulence surprisingly well. Much better than the management of Xerox.

But how does this justify Burns throwing her shareholders' money at ACS? On this basis alone, she should be fired by the board.
After all, look at this second price chart. On Monday, the day the deal was announced, Xerox's price quickly lost about 20%, ending Tuesday still down 15%. ACS mirrored this in picking up similar percentages, indicating investors viewed the deal much as I do- a mistake for Xerox, a bonanza for ACS.
Whether ACS is a growth firm, and better managed than Xerox, is beside the point. There's nothing special that the two firms couldn't do via a marketing agreement, without the expensive premium. This deal is simply a way for Burns to guarantee herself a job by buying a better firm with her shareholders' money. But it won't make Xerox's core businesses any better, for the same reasons Perot Systems cannot magically stuff Dell products into each of its customer engagements. That is, if Dell wasn't a good alternative before, it's no better just because they are owned by the same firm. That's true for Xerox and ACS, as well.

No, this is yet another pointless acquisition of a decent company by a corporate has-been.

Wednesday, September 30, 2009

About Extractive Industries: Peter Maass' Book "Crude World"

Last Wednesday's Wall Street Journal had a fascinating review of "Crude World," a book about the oil industry by Peter Maass.

Robert D. Kaplan, the reviewer, provides a very clear sense of what is newly observed in Maass' book. That is, as Kaplan writes,

"Oil, corrupts, Mr. Maass says, because it is an "extractive" industry. The computer business and other industries actually design and produce something, but oil is simply taken out of the ground. Thus power lies in the hands of the king, dictator or prime minister who controls the real estate and with whom all sorts of unsavory deals can be struck. Extractive industries "do most of their business in compromise-inducing countries," Mr. Maass explains. "The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles"- something that shareholders do not necessarily encourage. Because the number of oil fields on the planet is finite, and the oil in many of them is difficult to extract, the industry is governed by a zero-sum and aggressive realism of the bleakest sort." "

For me, it's a very illuminating statement of fact that I confess to not having understood prior to reading Mr. Kaplan's review.

Elsewhere in his review, Kaplan relates Maass' observations that "Oil, he seems to say, exaggerates the worst human tendencies." By that, he means the rulers of oil-rich countries confiscate the wealth for themselves, leaving most of their countries' citizens to starve. As an example, Kaplan notes that Nigeria has earned $400 billion from oil, but 9 out of 10 Nigerians live on "less than $2 a day, and one out of five children dies before his fifth birthday."

It certainly explains why oil multi-nationals come under such heavy fire for ethics issues and producing wealth that somehow never benefits the entire countries from which they extract the oil. The same, of course, seems to go for basic mining companies, as well.

This is a fascinating aspect of the structure for extractive industries that I hadn't really grasped before. No matter what the scale of competitors, and it usually evolves to few and massive, the behaviors always seem to end up the same. And now Mr. Maass has explained why.

Tuesday, September 29, 2009

3Q Profit Expectations & The Economy

Yesterday's Wall Street Journal's Money & Investing section featured a lead article concerning third quarter performances of US companies, entitled "Profits Poised to Surprise Again."

To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.

First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.

Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.

Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.

Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.

Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.

All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.

What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.

It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?

Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.

Monday, September 28, 2009

Peter Kann's Thoughts On Newspapers

This past weekend's Wall Street Journal carried an extended editorial by the chairman of Dow Jones, part of NewsCorp, Peter Kann. Kann is a longtime Journal man, and his editorial contains so much historical perspective on the sector that it almost qualifies as an in-depth strategy piece.

Pity, really, because that sort of piece is almost nonexistent in today's Journal, post-Murdoch.

But, I digress.

The headline of Kann's article, "Quality Reporting Doesn't Come Cheap," has, as its main purpose, to belatedly lecture all of us on how the demise of newspapers will hurt society, because no other entity reports raw news anymore of similar "quality."

Kann meanders through the past, noting how newspapers were advised by "bright young managers" to give away electronic copies of their print editions. Long story very short, in a decade, print circulation fell disastrously, without an offsetting revenue stream from online sites.

Kann is quick to note that the Wall Street Journal, alone among US newspapers, has always charged for access to its online paper, beyond the day it is published, and ruminates that, perhaps if the NY Times, Washington Post, and a few others, had gone along with this, the entire industry would have followed, and they'd all be in great shape now.

But these passages, near the closing, reveal Kann's emotionally-tilted "analysis,"

"The reason any of this matters has little to do with the plight of newspaper publishers or even with the future of newspapers. The real threat is to the future of news—informative, relevant, reliable news of the wider world around us. And that is disappearing as newspapers, whose reporting staffs still produce most of the news, no longer can afford to do so. As their news budgets and staffs continue to shrink, the key question is what can fill that gap?

Television does not begin to fill it. To the extent broadcast networks ever tried they now have abdicated to so-called cable news channels. These, in turn, now devote most of their resources to covering celebrities, crimes and sundry social trivia and to prime-time programming that pretends to be analysis and informed opinion while mostly offering the spectacle of extremist heads yelling at each other. There are few resources and even less commitment to covering significant news beyond floods and fires.

The Internet is not filling news vacuums either. There are hundreds upon hundreds of online sites and blogs that claim to provide news, but virtually none of them even pretend to pursue the traditional news role of newspapers, which is to invest in professional staffs dispersed around a community and across the country or the globe to cover, analyze, and only then comment on, events. Actually, all they do is comment.

As to all the free online editions of our newspapers, their business model does not begin to cover the cost of significant news reporting. So the online editions with growing audiences—largely cannibalized from print audiences—rely on the poor print editions for almost all the news they give away.

Sadly, there is less and less of that, and the ultimate loser, of course, is the public."

I actually don't agree with Kann's diagnosis of cable news. On national topics, it is more timely and possessing of greater impact than print journalism. As I wrote about a year and a half ago, on the occasion of NewsCorp's purchase of Dow Jones,

"The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.

What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.

The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.

No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities."

Print media simply can't deliver the same punch that a live cam feeding a cable news channel's programming, then residing on its website, can. Nobody said newspapers can't continue to serve a very local function in society. But in the era of ubiquitous cable news, YouTube, video on cell phones, and the internet, print just can't compete on national news stories. And if it has superior opinion and analytical pieces, then it has value, and product, but it's not news reporting.

However, earlier in his piece, Kann slipped this little nugget in,
"If publishers were at fault here for chasing ever larger audiences, editors and even reporters all too often were complicit. The list of modern journalistic flaws and failings is long, but surely includes the blurring of traditional lines between news and opinion and news and entertainment, predatory pack journalism, an undue emphasis on conflict rather than context, pessimism and cynicism (as differentiated from appropriate skepticism and criticism), social orthodoxy, elitism, flea-like attention spans, and more. Yes, the traditional newsprint medium was becoming less appealing, but its messages also were becoming less enlightening."
As a business person and strategist, once I read that paragraph, the rest of Kann's editorial became largely moot.
You see, what Kann unwittingly did, with these admissions, is essentially prove that poor management led to print news' downfall. The publishers made bad revenue strategy choices. The editors got carried away slanting the news, dumbing it down, and treating their customers as if they were morons.
Now, they complain that, having gutted their own product of much of its past value, nobody will pay for it.
Well, boo-hoo, Peter. You print guys did it to yourselves, and you got what you deserved. Newspapers are dying for a reason. Their operators lost sight of their strengths, screwed up their strategies, then lay weak and helpless in the face of advancing new technlology- cable news.
By the way, I doubt a Glenn Beck would find a supportive home in print, or have anything like the reach and punch he now has. And, yes, he actually reports news. And then also mixes it with analysis.
But I can't honestly say I believe, as Peter Kann does, that print could in any way rival the impact of well-honed video news and opinion programs now available to the viewing public- for free.