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Tag Archives: money
Google’s takeover of Motorola Mobility: implications
the deal
Yesterday morning before the start of trading in New York, Google and Motorola Mobility jointly announced an agreement for GOOG to acquire MMI for $40 a share in cash, or about $12.5 billion. The takeover price represents a 63% premium over MMI’s closing quote last Friday. The parties have also agreed to a breakup fee of $2.5 billion, or 20% of the deal price (an unusually large amount)–and that MMI will operate as a separate division of GOOG. The deal is expected to close late this year or early next.
MMI ended Monday trading at $38.12 a share, a price that I think signals two Wall Street’s beliefs: that the acquisition is highly likely to occur, and that a rival bidder is probably not going to emerge. That’s my take as well.
MMI has three main assets: by far the largest is its massive collection of cellphone-related patents; it also has a set-top box business; and it makes handsets.
why the acquisition?
Look no farther than the competitive situation in the global smartphone market.
In the early stage of any market, the field is wide open. Entrants focus on building their own market share and ignore everything else. With smartphones, we’re long past this stage.
As the market matures, the competitive field separates into frontrunners, and also-rans. Typically, the stronger entrants turn on the smaller, weaker competitors–who fall by the wayside, one by one. Think NOK and RIMM as being on the losing end.
A further sign of maturity is when the top dogs–in this case, AAPL and GOOG–turn on one another as the only additional sources to fuel further growth. This phase comes last because the market leaders are typically the most difficult and expensive to wrest customers from.
That last stage is where we are now.
According to ComScore, the Android operating system extended its market share lead in the US during the three months ending June 2011 by 5.4 percentage points from 34.7% to 40.1%. During the same period, the iPhone added 1.1 percentage point of share, from 25.5% to 26.6%. The overall situation: APPL is losing ground to Android, picking up a decreasing share of the customers being shed by RIMM and MSFT (NOK has almost none left to take).
AAPL is fighting with patents
Several reasons for this:
–smartphones are by far AAPL’s largest business, so growth here is important,
–APPL doesn’t want to introduce lower-priced handsets to compete with GOOG’s mid-market offerings, and
–its lack of patents is a potentially severe point of weakness for GOOG.
last week’s EU tablet decision is a case in point
The details can be found in the blog Foss Patents, but the bottom line is that Samsung’s 10.1″ Galaxy Tab has been banned for now from sale in the EU, ex the Netherlands. What’s interesting is that the design drawings on which the ruling are apparently based are very generic (look at pp.3-4). They look kind of like Etch-a-Sketch screens and boxes without the knobs. In fact, a ZD Net article suggests that the iPad itself isn’t an original idea–it looks amazingly like the prop tablets actors used on Star Trek.
In any event, last week’s ruling suggests that patent litigation can be unpredictable. It can also have potentially disastrous consequences for the loser.
better safe than sorry
$12.5 billion is about what GOOG generates in cash flow during one year. It’s also a bit less than a third of the cash the company has on the balance sheet. The fact that this money is earning very close to zero is a key reason why the acquisition of MMI will likely be “mildly accretive” to earnings from day one.
So the cash is not a real issue, particularly since control of the mobile user is so key to GOOG’s–and APPL’s–future.
the generational impact of low interest rates
recession SOP = negative real interest rates
Standard procedure for central banks during times of economic weakness is to lower the short-term interest rate to the point where it’s negative in real terms–meaning the nominal rate is less than inflation. By thereby making loans in effect free, the idea is that corporations will use this gift to boost capital investment, hire new staff and, by doing so, get the economy back on a positive footing again. In the US (but not elsewhere), such a decline in rates has also almost (until now) always been a signal for consumers to head back to the malls. And, of course, lower borrowing rates may also give a jump start to housing.
Where does this economic windfall to borrowers come from?
…from savers.
The idea is to shift purchasing power from people who are less likely to consume to those who are more likely to spend–and to borrow money to do so. The shift is from holders of fixed income instruments to borrowers–from old to young, from wealthy to less affluent.
In a world where the holders of fixed income were by and large the very wealthy, where older citizens had defined benefit pensions and where the period of negative real interest rates was relatively brief, this idea works fine.
not so good for today
In today’s world, however, Baby Boom retirees have only 401ks and IRAs and there’s no end in sight to the time of zero interest rates (the Fed has just said it will continue for at least the next two years). As a result, “orthodox” money policy has two unintended consequences. Both relate to older Americans.
a simple example
Suppose you’re on the verge of retirement, have a $50,000 salary and think you will adjust to a $40,000 a year lifestyle after you stop working. Let’s say you expect to collect Social Security benefits of $15,000 a year and will rely on Medicare for medical benefits.
That leaves $25,000 a year to come from your savings. At today’s money market rates of, say, .1%, how much do you need to have to avoid dipping into principal if all your savings are in vehicles like this? Answer: $25 million.
Suppose you have a blend of half cash and half 10-year Treasuries. How much do you need then? Answer: $1.9 million.
If your retirement savings are $250,000, you’re going to run out of money in a little more than ten years after you stop working!
(Yes, I know that my numbers overstate the problem. But not by that much. Also, think about it–picking a (literal) “drop dead” date when your money runs out is a harder topic to raise than you might imagine.)
two conclusions
1. In all likelihood, if you’re a Baby Boomer in this situation, although you’d probably like to retire, you can’t afford to. You’ve got to hang on to your job for as long as possible. This ends up making it impossible for a new entrant into the workforce to occupy the position that you normally would have vacated.
2. You’re going to be very strongly opposed to changes in government entitlement plans, no matter what the arguments in favor are. You don’t see you have any other choice.
Is there a solution to this unacknowledged problem? Yes, an obvious one. Use fiscal policy rather than money policy to stimulate the economy. Unfortunately, this is unlikely to happen, in my opinion. As a result, the plight of many Baby Boomers caused by the direction of money policy will act as a counterweight to its effectiveness.
S&P downgrade of US sovereign debt: investment implications
what S&P said
After the stock market close in New York last Friday, Standard and Poors’ Ratings Direct issued a research report in which it downgraded the long-term credit rating of the United States from AAA to AA+, with a negative outlook.
According to S&P, “negative outlook” means that there’s at least one chance in three that it will downgrade the US further within the next two years.
Short-term paper remains unaffected, with a A-1+ rating.
its reasoning
Two main factors:
–the rising public debt, and
–the fact that “elected officials remain wary of tackling the structural issues” in a way that AAA countries are expected to do (which I read as meaning that S&P regards government in Washington as a bunch of wannabe ballplayers wearing big-league uniforms and demanding big-league perks but who can’t hit the ball out of the infield ).
Apparently, the performance of all parties to the debt ceiling debacle was enough to make S&P revise down the opinion it formed in April.
who doesn’t know this already?
I think it would be hard to find any professional fixed income investor who isn’t aware the US has a debt problem. In fact, over my thirty+ years watching the stock market, conventional wisdom (and actual experience) has always been that the rating agency opinions are lagging indicators of financial health. To my mind, one of the crazier aspects of the sub-prime mortgage bubble is that professionals actually claimed they relied on the ratings, rather than doing analysis themselves–kind of like depending on last year’s calendar to tell you the day of the week.
As Casey Stengel would have commented, ” You could Google it.” In round numbers, Washington has $2.5 trillion in annual income but spends $4 trillion. Outstanding federal debt is already over $14.3 trillion, or about six years’ worth of gross income. And that doesn’t count $40+ trillion in the present value of retirement and medical care promises Washington has made but hasn’t set aside the money for.
investment implications
short-term
There may be a day or two–if that–of negative reaction in both stocks and bonds to having the S&P shoe finally drop. Otherwise, in the short term, I think there are no negative consequences.
Two other ratings agencies, Moodys and Fitch, have already reaffirmed their AAA rating of US sovereign debt. So it’s unlikely that any large investor has a contract that will force it to sell Treasuries.
Besides, where else is there the same combination of liquidity and relative safety that still exists in Treasuries …Japan? …Italy? I don’t think so.
In addition, as I mentioned above, this is scarcely a surprise.
longer-term
This is much harder to handicap.
On the one hand, the downgrade will doubtless cause China to increase its efforts to create a substitute for the dollar as the global reserve currency. As Xinhua, the Chinese news agency puts it, “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” In the same article, Xinhua also calls for international supervision of the issuance of dollar obligations, and the establishment of a substitute world reserve currency.
On the other, Americans’ opinion of Congress is at an all-time (meaning since the Seventies) low, with 82% rating legislators unfavorably. The New York Times, a Democratic bastion, just ran an op-ed piece arguing the country would be better off with Richard Nixon as president than Barack Obama.
It’s at least possible that the embarrassment of a national credit downgrade after 70 years of AAA will sharpen political debate and influence the next national election–coming in November 2012. The groundswell appears to me to be already taking form. If so, the public outcry may well influence, in a favorable way, the recommendations of the congressional committee being established to make budget-balancing recommendations as part of the debt ceiling deal.
Who knows.
I also think this event brings us closer–both in time and value–to a buying opportunity in world markets. Today will be an interesting day to watch closely.
the July 2001 Employment Situation report
the July Employment Situation
the report
The Bureau of Labor Statistics released its monthly Employment Situation last Friday, before the start of stock trading in New York. The report shows the economy added 117,000 new jobs last month, up from the surprisingly low figure of 18,000 new positions tallied in May.
Interest in the report was great enough that the BLS site that publishes it crashed under the weight of the large number of eager clicks.
revisions to prior data
As you probably know, the monthly “establishment” data that make up the new jobs figures in the Employment Situation report are revised twice, once each in the two months after their initial announcement. That’s because the firms whose information makes up the report don’t all send it to the BLS in a timely way.
May revisions were negative, reinforcing the gloomy news from the headline number. June revisions, on the other hand, are positive.
May employment gains were first reported as +54,000 jobs. That figure was revised down to +25,000 in the June report, but revised up again to +53,000 this month. The June figures were upped as well–to +46,000. Neither change is earth-shattering. But one of the discouraging aspects of the June report was that not only was the current-month number an ugly one, the revisions were–contrary to our experience for most of the recovery–pointing in a negative direction, as well. That tendency may be reversing. We’ll have potentially confirming data next month.
private sector job creation isn’t that bad
True, the figures for the private sector haven’t attained the post recovery highs of earlier this year, when monthly gains were coming in at 200,000+ jobs. But the (final) results for private sector job additions in May are +99,000 positions, the (one-more-revision-coming) figures for June are +80,000. The initial tally for Jul is +154,000.
Given the supply chain disruptions after the Fukushima earthquake/tsunamis in Japan and the almost palpable fear during the past couple of months that Washington’s callous power jockeying over the debt ceiling would inflict serious harm on the economy, it’s surprising that businesses hired anyone at all–let alone 50% more people than industry added at this time last year.
governments continue to shed labor
No surprise here, since state and local governments have been struggling for a long while to balance their budgets.
The government job figures in the July report for the months of May-July are -46,000, -34,000 and -37,000. The May number was originally reported as -29,000; the June one hasn’t changed that much from the original -39,000. I don’t see a pattern to the revisions that I’d care to bet the farm on, but, if anything, there’s been a mild tendency for them to drift further into the negative column by the time the adjustment period is over.
long-term unemployment continues to be a problem
Again, not new news, although it has become a focus of recent media comment. This part of the ES report continues to show that the US economy is making almost no progress in whittling down the number of potential workers hurt by recession (unemployed + discouraged workers + involuntary part-timers). That figure has only dropped from 16.5% of the workforce to 16.1% since last July.
What’s new, I think, is the debate over the debt ceiling. That made it more apparent that:
–unemployment is nowhere on the radar screens of Washington insiders of all stripes–Democrat or Republican, elected or appointed, and
–Washington has the potential to do a great deal of harm to the economy as actors on both sides of the aisle elbow for electoral advantage.
stock market implications
I see this as a mildly positive Employment Situation report.
It underlines the fact that, although recovery is slow, it is happening. The 85% or so of the workforce that have jobs are working more, and at higher pay, than a year ago. At the same time, each monthly report makes it clearer, I think, that the US has a serious structural unemployment problem à la 1980s Europe than we care to recognize. (What the country needs to do is clear: financial support and retraining for the unemployed, better education. Not on Washington’s agenda, though.)
Among other indicators, recent retail sales reflect this fact. Mid-market and upscale retailers continue to do well; those that focus on below-average earners continue to struggle.
This is a serious social/political problem. But, taking off my hat as a human being and donning my hat as an investor, I don;t think it needs to be a stock market one. From an equity strategy point of view, I think today’s situation implies a continuing focus on global firms and on those domestic companies that cater to more affluent customers.