NXP hit the market with an ominous thud. Private equity backers had good reasons to accept a haircut in an IPO of the debt-laden chip company. But choppy markets made it worse than expected. The company had hoped to sell shares between $18 and $21 each. Instead, they priced at $14 — and then dipped further in early trading. The investor reception may put a kink in other potential mega-floats — especially that of rival Freescale.
Other big leveraged buyouts, such as Toys R Us, Booz Allen and HCA, appear to be on track to generate gains, if largely on paper, for their backers. NXP’s sale leaves its sponsors diluted. But that doesn’t make Bain, KKR and Silver Lake entirely foolish for proceeding with a deal that turned a $5.5 billion equity valuation into one of just $3.5 billion. For starters, by getting NXP to market, the firms will be in position to sell their stakes more quickly should chip valuations rise.
Barnes & Noble’s predicament is sounding like Blockbuster’s — meaning, unfortunately, the fading video rental chain not a successful movie. The U.S. bookseller’s cash flow is sinking and technological shifts look set to worsen that. Activist Ron Burkle may find himself in the role of Carl Icahn at Blockbuster — fighting a losing battle against larger trends.
The Barnes & Noble board’s decision to seek “strategic alternatives” is overdue. And presumably it’s what Burkle wanted, since he has been agitating for the company to lift its poison pill and has talked of proposing three directors to the board. But what exactly the bookseller can do is unclear. Founder and 29.9 percent stakeholder Leonard Riggio has said he might make a bid with other parties, and the company’s stock jumped on the news. But Barnes & Noble doesn’t appear a tempting target.
General Motors’ coming initial public offering may be a hard sell. After all, the automaker burnt investors with its Chapter 11 filing a little over a year ago. But companies that emerge from bankruptcy can significantly outperform the stock market. On the other hand, a third of them go bust again. The IPO of GM and, in time, those of other cleaned up ex-bankrupts like Delphi and Chrysler, deserve cautious investor interest.
Shares of formerly-bankrupt companies tend to do well if markets are anywhere from plodding to bullish. A portfolio of such stocks including Federated Stores (which later became Macy’s) in the early 1990s, and another after the dot.com bust in the early 2000s, would have sharply outperformed stock indices. The early 1990s batch returned about 28 percent more over 200 days than stocks of similar pubic firms, according to a study by New York University professor Edward Altman.
Apple sold 3.3 million iPads last quarter. That’s one of the best starts ever for a consumer electronic device. The company led by Steve Jobs could sell 25 million of the electronic tablets next year, based on the trajectory of past consumer hits. While Apple and its suppliers are celebrating, many other companies will suffer. Of course, the game’s not sewn up — nearly every large electronics firm has announced or is rumored to be working on rival devices. But the iPad’s lead and momentum means it has a big advantage. In tech, one winner usually takes most of the spoils. With that in mind, Breakingviews has compiled a list of the potential losers — from the obvious to the indirect.
PC makers and sellers: It stands to reason that if companies and consumers buy iPads, they will cut back on competing electronic items due to limited budgets. This effect probably hasn’t fully kicked in. Early adopters are more willing to splurge on a new gadget. Yet Barclays Capital points out there are already signs of cannibalization. The number of lower-priced netbooks fell 19 percent in June compared to last year according to NPD. HP, Dell and Acer earn little money on selling these devices. But if the iPad starts to cannibalize higher-margin items, selling PCs could become a recipe for losses. Dell, for example, eked out less than a 3 percent net margin last year.
Microsoft: It doesn’t take the IQ of Bill Gates to figure out that reduced sales of computers running Windows would hurt Microsoft. True, the company’s most recent quarterly figures were robust, as users upgraded to Windows 7. But if PC cannibalization occurs, it won’t be pretty. The company’s Windows division has astonishingly high margins — it accounts for roughly a quarter of sales but half of operating profit. A small revenue decline would disproportionately hit earnings.
EBay is being sued for $3.8 billion by an outfit called XPRT Ventures. It’s not alone. Many big technology companies are regularly hit by patent infringement lawsuits. It’s lucrative for the plaintiffs — but terribly inefficient. There are better ways to balance invention and reward.
Here’s the basic pattern. An investment firm buys a pre-existing patent for, say, $2 million. It then sues perhaps a dozen companies that use technology similar to, or overlapping, the patent. Each firm that fights may end up paying $500,000 or much more to defend itself and could also face large penalties if found to have infringed. The alternative is to settle for, say, $1 million or so. If just three firms pay up to avoid a battle, the patent owner makes big money.
The iPhone’s flaw is less about its antenna, and more about public relations. Steve Jobs’ newest handset seems to have a minor glitch with its antenna band. No big deal. The bigger problem is Apple’s tendency toward secrecy and denial — which has turned a potentially routine product glitch into a full-blown investor concern wiping out $5 billion of value.
Apple’s response to users who complained about the antenna — a metal band that wraps around the phone — has been poor. It first suggested users hold the handset differently. Apple then blamed a software glitch which showed the phone was getting better reception than was actually the case.
AT&T shouldn’t fear losing its iPhone exclusivity. The contract could run out by early next year, though neither AT&T nor Apple is saying. If it does, AT&T’s customer growth would probably slow. Yet if rival Verizon were to land the iconic smart-phone too, the industry’s pricing model would improve — along with returns from AT&T’s existing iPhone customers.
A mass customer exodus is unlikely. Some users in big cities complain about AT&T’s coverage and dropped calls. But the percentage switching to a rival carrier would probably be low, based on the iPhone experience in France and the UK. Most consumers have contracts that aren’t near expiration. Switching incurs a termination penalty, and would require the purchase of a new iPhone.
The auto industry is moving forward. Just look at the successful public listing of electric car maker Tesla Motors. General Motors wants to innovate too. It has plowed $100 million into a venture capital fund to tap new technologies and add to the bottom line. Corporate VC can be a creative way to outsource research and development. The odds of spawning anything more look long.
Like other big companies, GM has carrots to entice start-ups. It can offer quick access to potential markets in everything from batteries to new entertainment systems. And it has underused, but expensive facilities, such as wind tunnels, that are a nice perk for some new thinkers.
Facebook has latched on to some good friends. Venture capital firm Elevation Partners just gave the social networking company a valuation of some $23 billion with the purchase of another 2.4 million shares on the secondary market. That’s more than triple what Facebook appeared to be worth a year ago. And at nearly 30 times trailing sales, it’s about twice the multiple Google achieved when it went public in 2004.
Valuing Facebook, even on the back of an envelope, isn’t easy. The grey market trading in shares doled out to employees is illiquid. The private company discloses limited data. But Facebook is growing at a breakneck pace — it now has almost 500 million users, almost twice as many as last summer. The company has said it is cash-flow positive, but profit, and Facebook’s ability to scale up, are still unclear.
The electronic book market is looking increasingly hot, flat and crowded. A vicious price war has broken out among producers of digital readers thanks to Apple’s success with the iPad. Companies such as Amazon hope that selling tomes across multiple devices will fill the profit gap. But competition in e-book distribution is heating up and could pressure margins there, too.
Apple has sold more than 3 million iPads in about two-and-a-half months. While Amazon doesn’t give figures, analysts think it has sold a similar number of its Kindle e-readers in two-and-a-half years.