While 2008 finished off with companies doing their best to cling on to anything to avoid from being sucked into the maelstrom, I think - despite the continued stock market meltdown - that many companies are seeing some stabilization in their core business. In other words: yes, 2008 Q4 saw a rapid evaporation of booked business, but 2009 is not looking as dire as some expected.
Online Remains a Beacon of Growth
Let’s face it: online media remains a growth area regardless of the fact that growth targets have been reduced. If you are CBS, News Corp., GE’s NBC, Walt Disney, Viacom or Time Warner, you have to look at ways to spruce up your online assets and acquire new ones. If you are Yahoo!, Microsoft, Google, Amazon, Apple, Cisco, Comcast, or IAC, you are looking at online assets as more reasonably priced relative to the previous couple of years.
A couple of companies that remain wild cards are print-based media firms Conde Nast and Hearst, who unlike their newspaper brethren (Tribune, NYT, etc.) are not on the verge of banktrupcy, but whom might fare a similar fate if they don’t take action soon.
This, I believe, is what explains the latest report by JP Morgan analyst Imran Kahn, who (Via Paid Content) in a new report, says:
“Mergers and acquisitions among internet companies could grow significantly. Since most companies cannot look to the economy for growth (JP Morgan estimates GDP will decline 2.2 percent this), Kahn believes healthier internet companies will turn to acquisitions, and that they will target inexpensive smaller internet companies.
Small is Beautiful
I’ve mentioned for some time that microdeals are the wave of the future:
- companies just don’t have the financial wherewithal to go for grand slam deals, and
- integration becomes a nightmare.
Lowered Expectations
Where things get interesting for big media companies is that VCs have been blindsided by their own investors inability to meet capital requirements, so many will accept lesser exits… though truthfully, heavily-funded VC companies are going to get sidelined in the M&A song-and-dance because entrepreneurs might be more realistic whereas VCs will never be able to pull their investments “in the money” when they agreed to nosebleed valuations for some of these bubbly Web 2.0 fares (Digg, Slide, Facebook, Ning, etc.).
Kahn seems to agree:
“Kahn believes healthier internet companies will turn to acquisitions, and that they will target inexpensive smaller internet companies.”
Build vs. Buy
The other variable we’ve touched on Big Media’s Buy vs. Build dilemma for some time:
Large internet companies may re-consider the “build vs. buy” strategy—they’ve been moving recently toward the “build” side of that continuum, which resulted in only 45 acquisitions in 2008 versus 94 in 2007, according to Kahn. While he predicts large internet companies will still increase their R&D spending by 8 percent in 2009, that is much less than the 25 percent increase in 2008. As they spend less on innovation internally, large internet companies will probably be on the hunt for smaller companies.
Balance Sheet vs. Income Statement
This plays into the nuance between balance sheets and income statements. A company’s income statement captures the revenues and costs over a period. Right now: revenues are going down (or at best flat) whereas costs remain high. Yet companies do have cash on their balance sheet, which captures a firm’s assets and liabilities (and shareholder equity) at a given time. In other words, even if companies revenues go down, their cash remains idle. But if revenues are flat or going down, a company cannot justify adding to costs (and thus “building” in house) because this will push the company into a money-losing status, which in a tightening credit market might mean lights out if the company’s financing and credit facilities dry up.
As a result, while cash is king, too much cash on a balance sheet is inefficient.
“Finally, the large internet companies have stockpiled a ton of cash as they grew significantly the past several years, and they will be looking for ways to make a solid return on that money.”
In case you are wondering who is going to be taken out, here are some of Kahn’s picks:
As for which public companies are most likely to be acquired? Kahn evaluated them according to brand strength, product leadership, ease of integrating the smaller company into the larger company, and barriers to entry to determine that Omniture, the online analytics company, and MercadoLibre, the Latin American e-commerce company, are the most likely to be acquired. Shutterfly, The Knot, and Expedia were also attractive candidates, according to the report.
There are a few others I can think of… but we’ll leave that for a separate post.
As a long-time trader, I’ll admit: it’s impossible to time a high or low… but as an entrepreneur, I think it’s somewhat easy to bide your time and sell your company at the right time. But what about the chairman of a well-established, developed company?
Bear Stearns Cos. Chairman James Cayne on Thursday dumped his entire stake in the embattled investment bank for $61 million as it appears closer to a takeover by JPMorgan Chase & Co.
Cayne sold 5.66 million shares for exactly $10.84 a share on March 25, according to a filing with the Securities and Exchange Commission. His stake was once valued at about $1 billion when the stock was trading at $171.50 per share.
His stake at one point plunged to about $27 million when JPMorgan announced nearly two weeks ago it would acquire the No. 5 U.S. investment bank for $2 per share. JPMorgan later upped that offer to $10 per share,
Read more.
This week, Jamie Dimon cemented his place in business lore. A lot of people who follow technology and media news might not recognize his name: Jamie Dimon is arguably one of America’s Top 10 most powerful businessmen. Time magazine put him in their Top 100, but this week, after buying Bear Stearns for $2/share, I cannot imagine how his power is not great enough to crack the Top 10.
According to this Wikipedia page:
- Jamie Dimon majored in biology and economics at Tufts University. He earned an Master of Business Administration degree from Harvard Business School.
- Upon his graduation in 1982, Sandy Weill convinced him to turn down offers from Goldman Sachs and Morgan Stanley to join him as an assistant at American Express. Though Weill could not offer the same amount of money as the investment banks, Weill promised Dimon that he would have “fun.”
- In a power struggle, Weill left American Express in 1985, Dimon followed him, and the two took over Commercial Credit, a consumer finance company, from Control Data, which became the vehicle that Dimon and Weill would use to propel themselves to the top of the financial world.
- Through a series of unprecedented mergers and acquisitions, in 1998 Dimon and Weill were able to form the largest financial services conglomerate the world had ever seen, Citigroup.
- Although Weill was the one who made the deals, Dimon was the “whiz kid” who made the numbers work.
- Dimon left Citigroup in November 1998. It was rumored at the time that he and Weill got into an argument in 1997 over the perceived lack of promotion given by Dimon to Weill’s daughter, Jessica M. Bibliowicz.
- In his 2005 University of Chicago Graduate School of Business Fireside Chat and 2006 Kellogg School interviews, Dimon stated that he was fired by Weill.
- In March 2000 Dimon became CEO of Bank One, then the nation’s fifth largest bank. He became president of J.P. Morgan Chase in mid-2004 when it acquired Bank One.
In case you were sleeping, Dimon orchestrated the acquisition of Bear Stearns this past week.
Jamie Dimon was a figure that I looked up to when I was completing my finance degree from 1996-99. Dimon was ambitious, but he was always in someone else’s shadow.
Midway through my undergraduate studies, I accepted a job as customer service rep for RBC’s VISA unit, RBC was and remains the largest bank in Canada. I naively believed that I could go on to become the CEO of RBC if I stuck around for 20 years or so. When I completed my degree, I walked degree-in-hand into my manager’s office and diplomatically asked for a transfer to RBC’s investment banking unit, Dominion Securities, Canada’s answer to Goldman Sachs (well… there’s only one Goldman… but you know what I mean).
Anyway, my manager said she would never let me be transferred to another department, because I was a very good performer. My rating, I’ll never forget, was 149. The average bank employee in my unit’s score was 100… so I had the productivity of 1.5 employees… that was an early lesson in business for me: if you do too good of a job, you might hinder your rise. One more reason why I wanted out of corporate environments.
The greater lesson: Dimon was shown the door by the man whose empire he helped build. I did not go through that at RBC, but I did at my last gig. I did not take it personally, but I knew that despite my brash demeanor… I could prove myself with patience.
Today, via shrewd dealmaking, Dimon’s JP Morgan Chase stands above Citigroup, with a market cap of $150B compared to Citigroup’s $110B.
More importantly, by acquiring Bear Stearns for a song… Dimon’s grip on the financial industry strengthens. Meanwhile, Citigroup continues to try to estimate the damage and toll it will take from the same sub-prime credit mess than knocked off Bear Stearns.
From a management perspective, I always stress the importance of having a good platform, but Dimon’s rise echoes what Jack Welch used to say: it’s important to have runway, too. Dimon had so much runway that he was able to take just about any platform and exponentially make it greater.
It also does go to show, maybe patience is a virtue.
In 2006, I sat my wife down and told her: I was going to start a company, I would finance it myself until it made sense to raise outside funding or someone showed interest. She asked me a few questions, then I basically characterized the move as saying “instead of trusting CEOs and employees of companies I had nothing to do with and no impact on” I would be betting on myself, my ability to identify an opportunity, recruit a team, determine a business plan and build a company.
It was risky, but pointing to criminal cases like Worldcom, Enron, Arthur Andersen and not-criminal meltdowns like Yahoo! or flat stock prices like Microsoft, I thought it was a no-brainer.
From 2006 to 2008, apart from the odd revenue source from advertising, licensing, consulting, syndication, etc., I have done just that: transferring wealth from my trading account to the company’s balance sheet to cover operations. It’s been risky, no doubt. I think the investment is starting to pay off, but it is indeed crazy by most people’s standards.
Occasionally, however, you see cases where trust in publicly traded companies not only backfires but ruins you.
After seeing Bear Stearns melt away in a week, I turned to Yahoo!’s message boards to see what people were saying. In one post, a man asked how he would tell his wife about the news, news that basically evaporated their retirement money. I feel for the man. He is a victim in this debacle, like countless others. The CEO and senior managers are already lining up their next jobs. The investor, the one we as company managers are supposedly indebted to by way of our fiduciary duty is screwed.
Bear Stearns is not a high flying stock, it’s not a dot com flash in the pan: it is - or should I say was - a venerable 85-year old institution. The stock hit $159 last year, was in the $60s earlier this year, started last week at $45, ended the week at $30 and then sold over the weekend for $2/share.
It’s down 85% this morning, obviously.
It should be noted that the US government stepped in to “help” the company, and a deal this past weekend took place when the markets were closed, after Bear Stearns CEO assured everyone that the company would be fine.
Is it over? You tell me. But Lehman seems to be walking around with a bull’s eye on its back, according to CNN:
Shares of the brokerage firm slid 15% in early trading after the firm said it’s got enough cash to keep doing business. The firm made the statement after a big Asian bank asked traders not to do new transactions with Lehman, The Wall Street Journal reported.
If I owned Lehman Bros., why on earth would I remain in the stock? I am also curious to see how many lawsuits will pour down on Bear Stears and in turn JP Morgan Chase, who bought the troubled financial giant.
Henry Blodget has a good explanation of what went wrong. I touched on this too in “World to US: Who’s Your Daddy?” - based on Blodget’s take, I guess it’s better to sell a part of your financial system to foreigners to avoid what happened to Bear Stearns.
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