It’s ironic that real estate got banks into trouble, but the only thing that others really want from the f*cked financial companies is their real estate.
Tech Crunch points to a piece in the NYT on the loss of value of financial companies between October 9, 2007 and September 12, 2008, or roughly 11 months. Reading it, you can’t help but shake your head:
Citigroup: $236.7 billion to $97.8 billion.
Bank of America: $236.5 billion to $150.2 billion.
AIG: $179.8 billion to $32.3 billion
Goldman Sachs: $97.7 billion to $61.3 billion
American Express: $74.8 billion to $45 billion.
Morgan Stanley: $73.1 billion to $41.1 billion.
Fannie Mae: $64.8 billion to $700 million.
Merrill Lynch: $63.9 billion to $24.2 billion
Freddie Mac: $41.5 billion to $300 million.
Lehman Brothers: $34.4 billion to $2.5 billion.
Washington Mutual: $31.1 billion to $2.9 billion
In percentage terms, it is brutal:
Now the crazy part is that the broader stock market has not really woken up to this, and that spells bad news for the stock market. Bear in mind, much like the auto industry’s indirect impact on the economy is exponentially larger than its direct impact, the financial sector is pivotal to the economy. I’d say it is the industry with the greatest multiplier effect, and this effect is much sharper in downturns than upticks in growth. I remain convinced that some markets (be it sectors or geographies) will be less impacted, however, the fact that it is financial firms that are cratering, due to exposure to mortgages, is alarming. It’s one thing if financials crash due to risk mismanagement, but when it’s over mortgage risk mismanagement, expect chaos of gargantuan proportions.
Recall that in 2000, the Nasdaq imploded and took down the economy with it, this time around, the mortgage market crashed, and since these are not priced in real times, the shakeout is much less instantaneous, transparent, and seamless. I don’t think we’re feeling the full effects just yet. Don’t forget, these banks work with companies by lending and safeguarding their money, as such, layoffs as HP, eBay etc. are just the tip of the iceberg.
Nouriel Roubini, an economic guru I came across on Paul Kedrosky’s blog, has been apparently right throughout this tornado of crap and is pretty adamant that both Goldman Sachs and Morgan Stanley are next. Having studied finance, I must say, once he lays down his rationale as to why their business models are wrong, you tend to understand that indeed, they are doomed. This is why, to quote William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, “Goldman Sachs and Morgan Stanley are lining up dancing partners. They don’t want to be … this week’s victim.”
Sad, but true.
I was scrolling through some old articles and came across some of the accompanying images you see alongside the articles. This article - dated September 5th 2008 - has a picture, with the following text and image caption:
Elizabeth Rose, top, and Michael McDonnell, both of Lehman Brothers MarketMakers, watch early trading from the floor of the New York Stock Exchange, Friday, Sept. 5, 2008, in New York. Selling swept across Wall Street for a second straight session on news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace. (AP Photo/Henny Ray Abrams)
Then less than 2 weeks later: this article, with the following caption and text:
Elizabeth Rose, a specialist with Lehman Brothers MarketMakers, works her post on the trading floor of the New York Stock Exchange, Monday, Sept. 15, 2008. A stunning reshaping of the Wall Street landscape sent stocks down sharply Monday, but the pullback appeared relatively orderly _ perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co. (AP Photo/David Karp)
Now, what is really amazing is the fact that this second picture was taken on Monday… at a time when traders are probably unloading Lehman stock en masse… what a painful day for the workers of the company. Hopefully they can all come out stronger.
Not sure yet… but today might be bleak:
- Alan Greenspan: Economy in ‘once-in-a-century’ crisis
The U.S. credit squeeze has brought on a “once-in-a-century” financial crisis that is likely to claim more big firms before it eases, former Federal Reserve chief Alan Greenspan said Sunday.
Greenspan told ABC’s “This Week” that the situation “is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go.”
“Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes,” Greenspan said. He predicted that would not happen until early 2009, and said the odds of U.S. recession have gone up in recent months.
“I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring,” he said.
- Lehman Might File for Bankruptcy Manana
Lehman’s survival remains in doubt. The Lehman executive, who declined to be identified, said “this looks like the end.”
Lehman would be the biggest bank failure in 18 years. Note that earlier this year when Bear Stearns cratered, some people suspected Lehman Bros. was next, but a lot of people [smarter than me] said “it could not happen”. The Feds stepped in to save Fannie Mae and Freddie Mac, but after Barclay’s removed its offer and Bank of America began merger talks withMerrill Lynch, things started to look ominous.
A Lehman failure would have major, major repercussions… and might actually take down stronger players like Merrill Lynch (if it does not merge or sell before) and even a powerhouse like Goldman Sachs, hence why a 12th hour agreement remains possible.
Make no mistake about it, this helps no one, and that explains why banks are lining up to shore up competitors, to avoid a domino effect that could take down the entire financial system.
SAI has a great rundown of Lehman… who allegedly had zero risk of going down a few months ago:
* This time, even debtholders could be hosed
* Paulson to Lehman: I’m not saving your sorry ass
* 99% of Lehman employees about to get royally screwed
* Fuld: I can’t understand why no one believes me
* Potential Lehman Buyers Hanging Fed On Own Petard
* “If We Don’t Get Bought In The Next 24 Hours, It’s Over”
* Bank of America Now Lehman’s Best Hope
* LEH Traders: “The Entire F*ing Street Wants Us To Fail”
* Lehman Now Desperately Trying To Sell Itself
* Is This the Day The Financial System Collapses?
* HSBC not buying Lehman, either
See more here.
I’ve been keeping track of - and tabs on - the alleged growth in online video advertising forecasts.
Here are some of the previous forecasts:
- An estimate of the US online video ad market for 2009 - set in 2004: $657 million | Source.
- An estimate of the US online video ad market for 2009 - set in 2005: $1.5 billion | Source.
- An estimate of the US online video ad market for 2010 - set in 2006: $2.3 billion | Source.
- An estimate of the US online video ad market for 2010 - set in late 2006: $3 billion | Source.
- An estimate of the US online video ad market for 2011 - set in late 2007: $4.3 billion | Source.
- An estimate of the worldwide online video ad market for 2011 - set in 2007: $10 billion | Source.
- An estimate of the US online video ad market for 2012 - set in 2007: $7.1 billion | Source.
Today Lehman Bros. came out with another set of forecasts for US online video advertising revenues:
- 2008: $1.091B
- 2009: $1.669B
- 2010: $2.387B
So while indeed, these remain bullish forecasts, they do seem lower than the previous targets. I do wonder what the quants at Lehman would project for 2011 and 2012. It would be nice to see where their crystal ball pegs those projections.
I don’t mean to disrespect Lehman… but what’s the point of forecasting one and two years out when existing models have done it 5 years out? I’m just saying, ese…
Anyway, Note that eMarketer had pegged this year at $1.35B, up from an initial target of $1.25B. I’m not sure if it’s a coincidence, but it is said that the Olympics would tack on $100M in online ad revenues. Could that be the additional spending? Not sure. Probably just a coincidence.
All in all, it’s important to note that we have yet to really crystalize what shall constitute “online video advertising revenue” with regards to formats. Covered that here, namely:
- The pre-roll? Nope. Let’s face it, this is the equivalent of the web’s pop-up and on the decline. Sure, traditional media firms are printing money thanks to pre-roll ads, but the danger is that they push away users and eventually shrink their audiences.
- The post-roll? That’s the pop-under… in other words, users are not as annoyed but marketers don’t think it’s worth a warm bucket of spit.
- The Picture-in-Picture? I suggested that… but not everyone digs that either?
- The Overlay? Video Egg made a clown of itself for boosting that… only to say that it represented tiny upside. I like this, but realize it’s not the equivalent of the 30-second ad… at all.
- The Companion ad is something I like and find valuable… after all, display banner ads in text content are worth jack because users scroll down and miss the ad quickly… but companion ads alongside video players are worth much more because they remain at eye-level… but try selling that to advertisers.
Moreover - and more importantly - will it really all be coming from advertising revenues, or licensing fees? I don’t think consumers want to pay for content, but what about other companies. We at WatchMojo.com are starting to generate more from licensing revenue than advertising sales. Over time, I expect advertising to surpass licensing, but right now, it isn’t. More brain farts here:
In Why Online Video Businesses are a Joke, I outline the case for paying for content in exchange for exclusivity, which is uber counter-intuitive in these days of hippie-minded super distribution.
In Does the Law of Diminishing Return Apply to the Theory of Content is King, I make the case that while every incremental unit of distribution/video consumption is welcome, when the ad model is under-developed (or crappy as I like to call it), you actually tend to dilute your offering by giving it away for free.
In Advertising vs. Licensing, we began to explore the merits of the two models, and argue that in early periods of growth, licensing will prevail, while in boom times, advertising revenue will outperform licensing and trace this obsession we have with speculative, straight advertising revenue share deals to two case studies: MTV and Google.
In Successful Revenue Models for Content Libraries, we outline all of the various options available to content owners.
Lastly, who will earn those revenues? We covered that here.
YHOO blew the deal, sure, and you have to wonder what that says for its bankers?
Allen & Co. is trying to raise money for Linkedin at a whopping $1B valuation. It’s worth noting that Allen & Co. is encroaching more and more on West Coast startups, it raised $50M for Ning and Slide at monster $500M valuations.
Interestingly, Allen & Co. was not involved in the YHOO/MSFT debacle… which begs the question: what impact, if any, will advisors of that deal have?
Microsoft was represented by Morgan Stanley and Blackstone, while Lehman Bros. and Goldman represented Yahoo! Goldman can do no wrong in proprietary trading, but what about its M&A advisory unit. Say what you want about the gold standard in investment banking, but on YHOO’s representation, you can’t help but think that Goldman takes a hit, as does Lehman Bros. Maybe they could not manage YHOO nor Yang, but as someone who has closed a few deals as an advisor or executive on a management team, I can tell you that managing personalities is a major variable.
MSFT was repped by Morgan Stanley, what I find odd, so odd, is that Yahoo! Chairman Roy Bostock sits on the board of Morgan Stanley, too. I am not suggesting any impropriety but that seems too close for comfort.
Again, why on Allen & Co.? They have become the leading investment bank in media, yet no one called on their service.
You will have to pardon Allen, they were busy cashing the checks off the Slide, Ning and soon LinkedIn deals.
Now that being said, let me check my bank account before Goldman and Lehman pull some strings and cut off the water. I’m kidding, I think.
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.
After a few - well, shall we say it - boring years, Yahoo! is turning into a soap opera. The lawsuits have started:
The Wayne County Employees’ Retirement System of Michigan, owner of about 13,600 Yahoo shares, sued Yahoo in Delaware’s Court of Chancery
And a major investor, Mutual fund house T.Rowe Price, which owns 18 million Yahoo shares, is prompting CEO Jerry Yang to cash in his chips at MSFT’s next offer (NY Post via Valleywag).
I see this settling sooner than later. Yes, there are a lot of egos involved, but while MSFT and YHOO are lobbying investors publicly, privately I presume the bankers and lawyers are brokering a cease-fire in the $50B market cap (or $35/share). I can see why the most senior leadership on both sides want to be seen as looking out for shareholders.
The major power broker will very well be Capital Research and Management who owns 6% of one and 11% of the other. Here’s why I think they all want a happy merger sooner than later: to remove the uncertainty and to make way for the creation of a $400B market cap behemoth.
MSFT + YHOO would command much better growth prospects. In fact, by adding YHOO’s $7B revenue streams onto MSFT’s $51B 2007 revenue base, combined with YHOO’s higher P/S multiples pushing MSFT’s P/S and P/E up… MSFT being a $400B company is not out of the realm of possibility.
MSFT’s P/S is 4.52, YHOO’s is 5.81. Combined, the new company would have something near 5.25. Google’s is 9.50.
MSFT’s revenue grew from $44B in 2006 to $51B in 2007.
For 2008:
- without YHOO, just last week Microsoft raised its full-year forecasts for fiscal 2008. Revenue is now projected to be $59.9 billion to $60.5 billion, up from the Oct. 25 forecast of $58.8 billion to $59.7 billion, an increase of 1.3 percent on the high end. The average of $59.9 billion to $60.5 billion is $60.2B.
- Yahoo! alone will do $7.2B to $8B, according to their recent earnings call.
Combined this means a revenue range of $67.1B to $68.5B, or an average of $67.8B.
Using a 5.25 P/S multiple, this projects MSFT’s value to be $355.5B.
That’s just using the P/S and revenues. There’s a lot of cost savings (MSFT pegs this at $1B) and the P/E projection - while less obvious - is more interesting. MSFT netted $14B in 2007. Yahoo! only $600M. Combined you are looking at a company that nets $15B in profits. Google generated $17B in revenues!
More importantly, MSFT would be able to invest all more into IT to make Yahoo! competitive. MSFT’s current P/E is 16 (but this after the week-long slide after the YHOO deal was announced), YHOO’s is 60. YHOO’s is indeed distorted due to its holdings in Alibaba and Yahoo! Japan, but there is no way that investors won’t give a combined entity firing off all cylinders in software, entertainment and online advertising anything less than 30. Google’s P/E as a pure play online advertising/search play is 38 P/E.
MSFT/YHOO profits of $15B x a P/E of 30 is $450B.
Even if the P/E is a more sedate 25, then at $15B profits, you are looking at a company worth $375B.
At half of Google’s P/E, you get a multiple of 18, that yields $270B. But, that is way too low cause MSFT is right now at 16 and was above this before the YHOO was announced.
For this reason, a post-merger YHOO/MSFT would be worth near $400B (average of P/E and P/S basis) and more than offset any decline MSFT has faced this week.
Read more in the original post here.
Note: Long YHOO
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