Archive for June 22nd, 2011

As 3-D Falls From Favor, Director of ‘Transformers’ Goes on Offensive to Promote It

Here’s the latest on the status of Alibaba Group’s talks with shareholders Yahoo and Softbank on the status of the online payment company Alipay: they are still talking.

Alibaba recently transferred ownership of the unit to Alibaba CEO Jack Ma, a move the company said was necessary to comply with Chinese regulations barring foreign investment in domestic online payment services. Since the news of the move broke, Yahoo shares have fallen sharply, on fears that it will not be properly compensated for its share of the Alipay.

The three companies together late Tuesday (or early Wednesday, depending on your time zone) issued the following statement on the discussions:

“Alibaba Group and its major shareholders, Yahoo! Inc. and Softbank Corp. continue to be engaged in constructive negotiations, and we have made substantive and encouraging progress toward an agreement regarding Alipay. Our objective is to reach an agreement in a timely manner that serves the interests of all stakeholders. The companies will not comment in further detail until it is appropriate to do so.”

Yahoo, Alibaba, Softbank Still Talking On Status Of Alipay

Here’s the latest on the status of Alibaba Group’s talks with shareholders Yahoo and Softbank on the status of the online payment company Alipay: they are still talking.

Alibaba recently transferred ownership of the unit to Alibaba CEO Jack Ma, a move the company said was necessary to comply with Chinese regulations barring foreign investment in domestic online payment services. Since the news of the move broke, Yahoo shares have fallen sharply, on fears that it will not be properly compensated for its share of the Alipay.

The three companies together late Tuesday (or early Wednesday, depending on your time zone) issued the following statement on the discussions:

“Alibaba Group and its major shareholders, Yahoo! Inc. and Softbank Corp. continue to be engaged in constructive negotiations, and we have made substantive and encouraging progress toward an agreement regarding Alipay. Our objective is to reach an agreement in a timely manner that serves the interests of all stakeholders. The companies will not comment in further detail until it is appropriate to do so.”

Bellwort technologies pvt. ltd. J.P. Morgan Starts At Neutral; Cautious On Valuation

J.P. Morgan analyst John DiFucci this morning picked up coverage of with a Neutral rating and $140 price target, not much above yesterday’s close at $139.45. His sole concern with the stock is the one that often comes up with the software-as-a-service giant: valuation.

“While there could be material upside from here if the company is able to penetrate new markets, we believe the upside is offset by a similar level of risk,” he writes in a research note.

DiFucci contends that the software-as-a-service approach “makes even more sense today that it has in the past, as recent computing advances make it a more viable alternative for many more users.” He notes that the company has become the leader in salesforce automation, and that it should continue to gain share while extending into adjacent markets like marketing automation and customer service, where penetration rates are much lower. He notes that growth at the company is “nothing short of stellar,” particularly given the company has a revenue run rate of over $2 billion.

The paradox of, he says, is that cash flow could be higher if it didn’t have such a high appetite for growth. “To be clear, we think management is acting appropriately at this time given the huge opportunity in front of it,” he writes. “But, we are mindful that if growth does not continue, what today looks like the aggressive pursuit of opportunity could be viewed as imprudence. This scenario could provide a chance to own an attractive franchise rather than what might look like the demise of
a high flyer.”

He contends the stock – trading at 110x consensus calendar 2011 EPS estimates – is “fairly valued at current levels.”

CRM this morning is up $1.65, or 1.2%, to $141.10.

SAP and its Significance

SAP may refer to:

Standard Assessment Procedure, a method system for measuring the energy rating of residential dwellings used in the United Kingdom
IATA code for Ramón Villeda Morales International Airport, located in San Pedro Sula, Honduras
Serum amyloid P component, the identical serum form of Amyloid P component (AP)
Santa Paula, California (Amtrak station code: SAP)
Second audio program, an auxiliary audio channel for broadcast and cable television
Seminal acid phosphatase, an enzyme produced by the prostate
Special Assistance Plan, an academic programme in Singapore
Special access program, Pentagon terminology for secret government programs
Stabilisation and Association Process of the European Union for the western Balkans states
Statutory accounting principles
Strong anthropic principle, the idea proposing that the universe must produce life
Structural Adjustment Program of the International Monetary Fund
Superabsorbent polymer, a polymer able to absorb tens or hundreds of times its own weight in water
South African Police, the national law enforcement organisation of South Africa between 1913 and 1994
Shrimp Alkaline phosphatase, a common alkaline phosphatase from a species of arctic shrimp
The Seabirds Advisory Panel, a committee set up to advise the British Birds Rarities Committee on seabird records

Research In Motion A Takeover Target? That’s Hard To Believe


Adding fuel to the fire, Macquarie USA analyst Kevin Smithen this afternoon launched coverage of the company with an Outperform rating and $40 price target. His basic thesis is that Research In Motion’s international business and services arms are worth more than the Street generally believes.

“RIM’s numerous challenges have been well-documented in recent downgrades, earnings reports and press articles: delayed product launches, insufficient and misallocated R&D, poor management reaction to changing industry trends, subpar communication with investors, strengthening competition, falling ASPs, and ineffective CEO and Board structure ring the loudest,” he writes. “We view these risks, both self-inflicted and structural, as formidable but not yet insurmountable. We believe that RIM’s international business and its software and services segments have a longer tail than many shareholders expect and that current share prices already imply negative value for the U.S. device and tablet businesses.”

In the same report, Smith writes that with an enterprise value of “just” $10.4 billion and with significant IP, the company is “a potential takeout candidate for multiple cash-rich mature tech names.” He even suggests that “local Canadian banks and pensions could act to take RIM private.” Adding some gasoline to the fire, he notes that Microsoft’s deal with Nokia is non-exclusive, asserting that “MSFT needs to make bold moves to gain credibility in mobile.” His list of potential acquirers includes pretty much every tech company not run by Steve Jobs: HP, Dell, Oracle, Cisco, Microsoft and SAP.

Suggesting that RIMM is a takeover target certainly sounds like a heroic call, but seriously, do you really think any of the companies on that list would buy RIM? I don’t.

Let’s walk through them:

HP? They’re still trying to integrate Palm, and they’ve made a major commitment, for better or worse, to WebOS. And CEO Leo Apotheker has declared an intention to build up the company’s position in enterprise software. Buy RIM? No way.
Dell? Ha! The company is ratcheting up their spending on the data center, and trying to move away from being strictly a device company. Highly doubtful. Would RIM plus Dell be any more competitive with Apple and Android than RIM alone?
Oracle? Larry Ellison does not want to be in a business as consumer-dependent as this one has become. Not Oracle’s style.
Cisco? Get real. The market would run John Chambers out of town. Chambers in the past has flat-out denied any interest in making handsets. The Street wants the company to focus on the core, not to tack on a handset company. No.
Microsoft? A well-worn rumor, but hard to believe Steve Ballmer would buy RIM while trying to make a go of the deal with Nokia. I suppose you could tie them all together – RIM, Nokia and Windows Phone – and pretend that you really had something. But I find such a possibility hard to believe. That would be like thinking you could build a really nice raft by tying three bricks together.
SAP? Now, that’s just ridiculous. What does SAP know about hardware, or handsets, or Canada? No. Nein. Not happening.
Canadian pension funds. Well, I have no idea how Canadian pension funds think. Who knows? But do you really want to own the stock on that theory?
Look, all of this talk about someone buying RIM fails to recognize the basic underlying dynamics of the market. Apple and the Android gang are simply wiping out the rest of the players in the handset market. RIM, HP, Nokia, Microsoft…it will not be easy for any of them to stay relevant in the rapidly evolving market for mobile devices. Would you actually want to go out and buy a handset company that is hemorrhaging market share? At today’s close, RIM had a market cap of $15 billion; with even a modest premium such a deal could cost a buyer close to $20 billion – and leave them with the task of turning around a plummeting business. I simply don’t think that is a likely scenario.

True, even Palm found a buyer – but for $1.2 billion, not $20 billion. Some day, a bottom-fisher could take a flier on RIM. But I don’t think we’re anywhere near the bottom.



In New Crop of Chinese IPOs, Is There Another Baidu?


I just returned from a 2 week trip to China where I met with a dozen tech companies. Some were private, some were newly public and some had been public for a few years now.

Before I left for the trip, the number one question my friends asked me was: “Let me know if you see the next Baidu (BIDU)… ok?” It’s sort of like going out to prospect for gold in the Yukon. People think the next gold nugget could be sitting in plain sight at the next stream crossing.

The Chinese market is still bubbly. Despite the problems of fraud afflicting companies like Longtop Financial (LFT) and poor performance of most Chinese tech companies in the last 6 weeks, there is still a long line-up of Chinese companies waiting to do IPOs in the next year or so.

At the start of my trip, the prognosis was still good for new Chinese IPOs. By the end of my trip, the stock market sell-off back in the US and Greek default concerns had hammered Chinese tech stocks. Sina (SINA) is down 30% in the last month. More recent IPOs like RenRen (RENN) and Youku (YOKU) are down 40%.

But, no matter what happens in the stock market, these are all operating companies. It was fascinating for me to sit down with many executives from these companies to see the world through their eyes.

When you talk candidly with Chinese executives or investors, most will speak openly about how they are living in the positive upswing part of the cycle. They also know that this stage won’t last forever. Eventually, this bubble will burst too. They just hope to cash in now before the party ends.

So what about hope for the next Chinese Baidu? In short, I didn’t see many obvious ones.

In China today, there are three big tech gorillas: Baidu, Tencent, and Alibaba Group (which is comprised of of Taobao, Tmall, Alipay, and some smaller businesses – Yahoo! (YHOO) is a 40% owner of the group). These are all companies that are worth $40 – 50 billion (although Alibaba is still private).

Then, there is a big drop to the next “big” Chinese tech companies. Sina is a $5 billion company again after its recent sell-off. Jaiyuan (DATE) a recent IPO – which bills itself as the of China — is a $300 million company.

Among these smaller companies, some will make excellent investments in the coming years. But few have the potential to become $40 billion companies.

There are two companies that I see possessing that $40 billion potential: Alibaba Group and 360Buy.

Alibaba Group is obviously in the middle of a long and protracted battle in public with Yahoo! and Softbank. But the company’s operations continue to shine. Tmall, which will soon be set up as a separate entity from Taobao has the potential to be a huge money-maker for the company as they continue to attract merchants and more users. Eventually, the problems with Yahoo! and Softbank will get sorted out. This is still a monster company.

360Buy is much smaller and newer than Alibaba Group but it is going to be a formidable competitor in the e-commerce space. Robin Li of Baidu just made a big investment (personally). DST Ventures is a backer. The most recent financing put 360Buy’s valuation at $10 billion. They are trying to be the Amazon (AMZN) of China – especially in electronics. They are probably going to succeed – although they are spending a lot of money on customer acquisition and logistics to make this happen. They are a well-run company going after a big market with ambitious backers. They will likely IPO by the end of 2011.

But bigger isn’t necessarily better. Many of these niche IPOs could see very strong returns as they execute their business plans. They might go from $300 million to $1 or $2 billion . That’s still a fantastic return. It’s just not going from $300 million to $40 billion.

With the recent downturn, more Americans will throw in the towel on many of these lesser known Chinese names. That’s exactly why you should start paying attention to them and look for some hidden gems in the months ahead.

But do your due diligence. There will definitely be winners and some big losers in the months ahead from the recent IPO crop.



The Worst Cars On The Road


By all accounts, Detroit’s Big Three automakers have begun producing better-made, longer lasting, more efficient vehicles. It’s a distinct change from the 1990s and early 2000s, when they fell behind their European and Asian counterparts in each category.

“This change is not even a gradual thing,” says Christine Overstreet, an automotive consultant and director of Heels and Wheels. “It’s like they’ve said, ‘OK, we really want to step it up, we really want to compete, we’re ready.’ After past years of being so bad, they’ve really stepped up their game.”

But with three exceptions–the Mercedes-Benz S550, Smart Fortwo and Nissan Titan–all of the cars on this year’s list of the Worst Cars on the Road are (still) made by domestic companies. That includes the Dodge Dakota, Chevy Tahoe Hybrid and Chrysler Town & Country. The only American car company with zero vehicles on the list? Ford.

To determine our list of the worst-made cars on the road, we started with the lowest-rated vehicles from six reliability and performance studies conducted this year by Consumer Reports (for more details, click here).

Any car, truck or SUV named among the worst in at least two of those studies made the final cut to be on the “Worst” list.

We should note that the Mercedes S550 is the only vehicle that qualified for our list because of a high cost of ownership, low fuel efficiency and a low rating for overall value, not because of any problems with reliability, safety or performance, which affected every other vehicle in the top 10. Indeed, luxury vehicles like that sedan and the Cadillac Escalade are arguably at a disadvantage on lists like this–their luxurious interior upgrades, high-quality trim and powerful engines work against them.

“The worst value, the highest cost of ownership–you’ve got to remember there is a numerator and a denominator in these things,” says Terry Woychowski, the vice president for quality and global launches for General Motors ( GM – news – people ). “To use an analogy of a watch: If you looked at dollars to buy a watch vs. accuracy of time, you’d probably buy a Casio. [Compare that] to the price and value in a Rolex–you’d say, ‘Well, shoot. It costs so much!’ For vehicles like this, it’s an uphill battle.”

We should also note that nearly every car or truck made today is safer, more efficient and more reliable than anything on the road even as recently as 15 years ago. But that doesn’t excuse just how often vehicles like the Jeep Liberty are panned for poor reliability or poor fuel economy–or both.

Jeep’s Liberty and Wrangler earned spots on Consumer Reports’ Least Reliable list for 2011. The Wrangler also received Consumer Reports’ Worst Value and Worst Cars distinctions, the latter of which is based on more than 50 individual Consumer Reports tests and evaluations. The Wrangler also appeared on our Worst Cars list last year.



A Trillion In Corporate Cash Will Help Shareholders, Create No New Jobs


Here’s lesson number one on what American corporations are likely to do with their collective cash balances of $1 trillion can be viewed through the lens of Best Buy, a retail chain selling a wide range of electronic products. BBY announced a major buyback of its shares– $5 billion worth– and raised its cash dividend by 7%. The stock reacted positively- rising 2.66% to $32.38 a share– still far from the peak of $45 hit in the last 52 weeks.

American corporations are not likely to use the trillion dollars to make investments to create jobs– unless there is demand for their products and services greater than can be met by existing manufacturing and retail operations. That’s just the way it is.

And that’s why you should beware of some sweetheart deal that will allow corporate giants to repatriate their tens of billions of cash help abroad in return for paying only a minimal tax. IBM, BIg Pharma, Johnson & Johnson etc aren’t in business to serve the public patriotic interest in using that money to create jobs unless there is demand over and above what is being filled today.

American corporations are going to use their excess cash flow more regularly to repurchase their own shares which benefits the remaining shareholders who are left more earnings per share- and the expectation their stock will move higher. Two classic examples are Travelers Insurance and Viacom, which have a regular strategy of following this course. Viacom also continues to raise its dividend to keep its shareholders happy. It is not investing in new businesses to create jobs– but to create additional shows and networks to enlarge its cable audience.

Some companies use their cash to make acquisitions, such as Berkshire Hathaway’s $9 billion purchase of Lubrizol. Everyone knows that Warren Buffett has another $20 billion or so in cash he’d like to use to acquire another large company.

The best bets for new jobs are large national retail chains trying to enter new areas or expanding across the nation. Should Wal-Mart be successful in leasing a large new store in Brooklyn– a pending matter– it will hire a great many workers to staff that store. Could be one reason to let Wal-Mart come to New York– though how many small businesses it might crush could put those people out on the street.



JPMorgan Will Pay $153.6 Million To Settle Charges Over Misleading Investors


The SEC announced today that JPMorgan Chase will pay $153.6 million to settle charges that it misled investors when it sold them mortgage securities as the housing market was beginning to crumble.

The SEC alleged in its suit that JPM sold investors collateralized debt obligations that were selected by a hedge fund which had already bet that the securities would drop in value. “As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted,” the SEC says.

The problem is that investors weren’t being told that a hedge fund with short position on the assets in the CDOs was also the one helping JPM select the assets included the CDO portfolio.

The settlement amount doesn’t come close to the record amount Goldman Sachs paid the SEC to settle charges that it misled investors when it sold them mortgage bonds. Goldman paid $550 million to the SEC last summer to settle the charges.

In that case, the SEC alleged that Goldman created a mortgage investment that contained mortgage bonds that were selected by famed hedge fund manager, John Paulson. Paulson, who wasn’t named in that suit, was meanwhile betting that the mortgage bonds would lose value as the housing market collapsed. He made billions in profits by doing so.

According to the SEC, the CDO portfolio being sold to investors was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market. Meanwhile, Magnetar Capital (he hedge fund that helped pick the assets in the CDOs) held a $600 million short position that dwarfed its $8.9 million long position when the deal closed in May 2007.

In an internal e-mail, a J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”

A few institutional investors who bought into the deal and lost nearly their entire investment according to the SEC include:

Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
In typical SEC-settlement fashion, JPM was able to settle the civil charges without admitting or denying wrongdoing. As part of the settlement terms, the bank must change how it reviews and approves offerings of certain mortgage securities.

Yesterday federal regulators sued JPM and the Royal Bank of Scotland for misrepresenting the risk associated with securities tied to high-risk mortgages. In its lawsuit The National Credit Union Administration is seeking $278 million from JPMorgan Securities LLC and $565 million from RBS Securities Inc.



Greek PM Papandreou Survives Confidence Vote


In a make-or-break moment for Greece’s socialist Prime Minister George Papandreou and the European Union as a whole, the ruling party won a confidence vote in Parliament. Papanderou needed a simple majority in the 300-member chamber; while his party controls 155 seats, controversy over austerity measures and massive protests in the streets of Athens and around the country have caused a social and political backlash, leading to various desertions and resignations within Papandreou’s PASOK party.

Finally, the voting followed party lines, with Papandreou securing all 155 votes from PASOK- aligned legislators. The vote was among conditions set by the European Union and the International Monetary Fund in order to release a further $17 billion tranche of bailout funds for the beleaguered Hellenic nation.




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