Sunday, September 30, 2007
Thursday, September 27, 2007
One of the supporters of our "Plan B" for Yahoo! Group, David Sollers, recently contacted me to share some analysis on the recent sale by Yahoo! to Yahoo! Japan of Overture Japan. The whole issue of this sale has been ignored by analysts and the press. I would hope that Sue Decker and Blake Jorgensen would address this issue and clarify it in a few weeks on the Q3 earnings call. I'm sharing with the larger "Breakout Performance" community...
On August 31, Overture Japan was sold to Yahoo! Japan (a joint venture between Yahoo! Inc and Softbank Corporation of Japan - Y! Inc has 34% stake in Yahoo Japan).
While there was no information at all anywhere on Yahoo!'s site (it should have been on the Press Room section of the corporate site), it was something that Yahoo! Japan made a big deal out of in the Japanese language press.
Even the English version of Yahoo! Japan's investor relations press releases site includes this announcement (pdf document): http://ir.yahoo.co.jp/en/release/20070831/ . In that PDF document, the terms of the sale are detailed.
Now, while I was against the sale of Overture Japan to Yahoo! Japan on principle (because it is a large market - second only to the US - where Yahoo!/Overture still has a larger market share than Google in paid search), the ridiculously low share price is something that all YHOO shareholders should be upset about.
According that press release, Overture Japan, which had revenues of JPY 45.767 billion (US$ 395 million), was sold for JPY 1.557 billion (US$ 13.426 million). That is a price-to-sales ratio of 0.034 for a profitable company with great sales growth (2005 and 2006 figures for Overture are detailed in the press release - and while net income decreased from 2005 to 2006, that can only be due to one-time charges and/or expenses which are not like to re-occur in 2007, most probably investement in hardware needed for the launch of Panama).
When was the last time you heard of a profitable company being sold off for a small fraction of its annual revenues? That price-to-sales ratio is so low that someone at Y! Inc ought to be fired. At least that is my reaction, and I would expect other shareholders to be similarly outraged.
If Y! Inc valued itself that this price-to-sales ratio (instead of the 5.3 at which it is currently valued), they'd be selling a share of YHOO for less than 20 cents per share!
Why was Overture Japan sold at this kind of "fire sale" price? Y! Inc definitely cannot be that badly in need of cash.
Let's take a look at some of Y! Inc's recent acquisitions:
- Blue Lithium: Y! Inc paid $300 million for this company which is estimated to have annual revenues of roughly $100 million (source: http://money.cnn.com/2006/09/15/technology/disruptors_bluelithium.biz2/index.htm ). That a price-to-sales ratio of 3. Ok, reasonable.
- Zimbra: Y! Inc paid $350 million for this company which is estimated to have annual revenue of $6 million (source: http://www.news.com/8301-10784_3-9780434-7.html?part=rss&subj=news&tag=2547-1_3-0-5 ). That values the company at price-to-sales ratio of 58.3, so Y! Inc must have some pretty rosy expectations about the growth that Zimbra will see over the next couple of years.
- Overture (now Yahoo! Search Marketing) was bought by Y! Inc for $1.6 billion in cash and stock in October 2003 (here's a press release from Y! Inc's Press Room: http://yhoo.client.shareholder.com/press/releasedetail.cfm?ReleaseID=119517 ). For that year Overture was expected to have revenue of $1 billion (as Overture became a fully owned subsidiary of Y! Inc, separate figures for Overture were not filed). This valued Overture at price-to-sales ratio of 1.6.
So by measure of these acquisitions, Y! Inc did indeed sell Overture for a price that was way way way to low. If we value Overture Japan at the same price-to-sales ratio that Y! Inc paid for Overture just four years ago (which is probably a reasonable valuation), we arrive at a sale price of $631 million.
So Y! Inc has sold off a profitable subsidiary for $13.4 million, when the price should have been in the range of $500 million to $1 billion.
Shareholders want to know why Masayoshi Son of Softbank received such a good price for such a valuable ad engine?Sphere: Related Content
Tuesday, September 25, 2007
From yesterday's BloggingStocks:
Renewed and unconfirmed chatter is circulating that Motorola Chairman and CEO Edward Zander may step down. RBC Capital Markets says "We're upgrading MOT to Outperform based on our view MOT is displaying firming trends in its once beleaguered handset division." RBC Capital Markets has a $21 price target on MOT. MOT call option volume of 27,010 contracts compares to put volume of 8,124 contracts. MOT October option implied volatility of 30 was near its 26-week average of 29 according to Track Data, suggesting non-directional risk.Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Friday, September 21, 2007
It's been 2 weeks since Stu Reed painfully repeated himself and instructed the financial analyst community to expect "a drumbeat", a "cascade", a "wave upon wave" of announcements from the Mobile Devices group. No longer would Motorola be a one-trick pony and ride a hot product until the bitter end (as they did with RAZR recently and StarTAC 10 years ago).
We're waiting for the drumbeat. There has been no news for the last two weeks. Investors are saying: "Let the waves starting crashing down upon us."
Yesterday, in what seemed like the first time in two months, Motorola's stock actually outperformed the S&P500. What was the reason? Cowen upgraded the stock (as well as Nokia's) becuase they didn't think Samsung would be able to meet demand this quarter and Motorola would get a certain amount of "second choice" business. However, Cowen raised questions about Motorola's long-term product competitiveness. Hardly a ringing endorsement.
The stock nevertheless jumped yesterday, but is still trailing the market again today. Investors are tired of this chronic underperformance -- and rightfully so. There was nothing but hope which the company's management was selling at the analyst's meeting.
It's time for some real change at this company. Ed Zander must go and any director with more than 10 years' tenure on the board needs to go as well.
Thursday, September 20, 2007
From September 19, 2007 Dealscape from the Deal:
Yahoo! Inc.'s M&A machine may be humming away, but is a spate of smaller deals enough to appease investors? The company announced a $350 million deal for e-mail software company Zimbra Inc. Sept. 17, days after a $5 million deal for news aggregation site Buzztracker, which came shortly after a $300 million deal for behavioral advertising technology firm BlueLithium Inc. In June, Yahoo! grabbed college sports site Rivals.com for $100 million.
The acquisition spree comes at a critical time for Yahoo!, with co-founder Jerry Yang back at its helm since the June departure of Terry Semel and under fire to boost its financial outlook. Trouble is, investors are restive, and some have argued larger deals could foretell growth, as
The Deal's David Shabelman writes:
Yahoo!'s shares have risen of late on rumors of a potential buyout of the company by, among others, online auction giant eBay Inc. of San Jose, Calif., or Microsoft Corp. of Redmond, Wash., although no acquisition appears imminent. Yahoo!'s stock price rose last week after an analyst at Bear, Stearns & Co. named the company a "top pick" for the next 12 to 16 months. "Yahoo! will continue to be a takeover target for the next few years, and that will be the leading driver in the stock rather than any operating results," Karbasfrooshan predicted.
Rewind to June. After drawing shareholder fire for his generous compensation package and the company's financial performance, Semel stepped down June 18, and Yang stepped in to replace him. The board also named Susan Decker, the former head of Yahoo!'s advertiser and publisher group, as president. What's next for Yahoo! is a question analysts kicked around the next day and remains relevant months later.
Should Yahoo! be the acquired, analysts told Shabelman and The Deal's Kate Gibson at the time Microsoft, with whom Yahoo! previously discussed a merger, topped the list, while Viacom Inc., News Corp. and Comcast Corp. could move to acquire the company outright or stake partnerships.
One suggested Microsoft could spin off its MSN portal and Live search products to Yahoo! in exchange for a large stake in the company or that News Corp. could do likewise, spinning off its Internet properties, which includes social networking pioneer MySpace.com, for a Yahoo! stake. Further, some suggested Yahoo! could orchestrate an acquisition of its own, along the lines of social networkers Facebook Inc. or Bebo Inc., or professional social networker LinkedIn Corp.
Separately, Nollenberger Capital Partners senior analyst Todd Greenwald told The Deal's Stacey Higginbotham the management change suggests Yahoo! plans to remain independent:
"I don't think there's a deal around the corner because if there is going to be a deal Terry would be a better CEO for that job than Jerry would be," he said. "Terry has the experience and could have brokered a deal with a media company like News Corp. or Time Warner [Inc.] If there were any talks at all going on, Terry would have stayed on and seen that through before riding off into the sunset."
SHAREHOLDER ACTIVISM GOES WEB 2.0
The June news came nearly one week after the company's annual board meeting saw significant shareholder resistance, as much as 30% in one case, to the board's candidates, though they were all elected. Ahead of the meeting, the company drew criticism from Web 2.0-inclined activist shareholder Eric Jackson.
The minority investor used social networking to argue his case, with tactics including a blog, a MySpace.com account, a LinkedIn site and YouTube videos of himself, in an effort to rally shareholders as he called for the ouster of Semel.
Jackson took issue with Semel's compensation package, out of line with stock performance.
At the time, Shabelman pointed out, Semel's fate could have rested less with angry shareholders than on Yahoo!'s new Panama search platform, aimed at putting more relevant advertising in front of users. Having launched the platform in February, Yahoo!'s second-quarter results to be announced in July should be telling, he wrote.
WAVES OF CHANGE
The management shift is the latest for the transitioning company and follows the departure of chief technology officer Zod Nazem, who had a crucial role in developing Panama, a month earlier. At the time, the move raised questions about Panama falling short of expectations, Shabelman wrote.
Nearly two weeks after The Wall Street Journal reported Yahoo! was considering linking up, via merger, with Microsoft, the company landed a new CFO, Blake Jorgensen, a Thomas Weisel Partners LLC co-founder who could help drive some M&A activity, Shabelman suggested in May. M&A fuel or not, his experience will be an asset to the company, which is not lying down among fierce competition from Google Inc. and Microsoft itself.
The Microsoft news came a year after talks between the two fell apart. The Sunnyvale, Calif., company has been rejiggering itself, through product launches and grabbing small and midsize Internet companies for its arsenal and assault against its archrivals. One of its larger deals to date, Yahoo! said April 30 it would pay $680 million for the 80% stake it did not already own in Right Media Inc. in hopes of bolstering ad sales. The deal came two weeks after Google acquired DoubleClick Inc. for $3.1 billion.
Four months earlier, Yahoo! kicked off 2007 with the launch of its upgraded Web-based applications, including its search service, oneSearch, and the acquisition of MyBlogLog.com, a social network built around blogs, which a Yahoo! exec confirmed — via blog — late Jan. 8. The news came about a month after the company launched a corporate shakeup of sorts after an internal memo likened its operating structure to peanut butter on bread — spread too thin, and further, too bureaucratic, according to The New York Times.
Daniel Rosensweig took his leave after three years as chief operating officer, as did one-time NBC exec Lloyd Braun, who led the company's media operations. Yahoo! said it would realign itself into three units focused on: audience; advertisers and publishers; and technology. Decker, the company's then-chief financial officer, moved to head the advertising and publishing group, raising speculation at the time, the Times said, about her positioning to succeed Semel, with Rosensweig out of the picture.
Leading up to the announcement, the company made a series of moves to make up for some areas in which it has been dragging, one being advertising.
In November, Yahoo! announced striking a partnership with at least seven U.S. newspaper companies to lend its advertising and search technology to their collective crop of Web sites that are home to 150+ dailies. The news came weeks after Yahoo! sparked buzz as it readied its next-generation search platform, due out in early 2007, but which analysts told The Deal would never surpass Google's. It also came on the heels of Google's plan to dabble in offline newspaper ads, offering advertisers already using its online services, participation in a three-month pilot program for print advertising. In August, Google also said it would lend its search advertising technology to eBay Inc. for the e-tailer's non-U.S. advertising needs. Even still, Yahoo! doesn't look poised to shy away from a challenge.
To fuel the two-armed expansion — international and offering-wise — Yahoo! has made a series of acquisitions and taken stake in what it sees as key markets, paying top dollar and lining the pockets of its venture capitalist friends and neighbors.
Earlier in November, Yahoo! acquired polling Web site Bix.com for undisclosed terms. According to BizJournals.com, Bix previously raised $6.77 million in a Series A round of funding from investors that included Palo Alto, Calif.-based Sutter Hill Ventures and Trinity Ventures of nearby Menlo Park, Calif., The Deal's Cheryl Meyer pointed out at the time of the sale to Yahoo!.
In October 2006, the company bolstered its online advertising holdings, acquiring AdInterax, as well as a 20% stake in Right Media through a $45 million Series B venture round.
On June 7, 2006, Yahoo! announced swapping $60 million for 10% of South Korean auction site Gmarket Inc. The deal provided a partial exit for Oak Investment Partners, which, according to one South Korean press report, paid $7.6 million in 2004 for a 34% stake.
In December 2005, Yahoo! scooped up Del.icio.us Inc. for an undisclosed amount, reportedly between $17 million and $19 million, allowing an exit for VCs Union Square Ventures and BV Capital along with Amazon.com Inc. and Netscape Communications Corp. co-founder Marc Andreessen, among others.
Also in 2005, Yahoo! grabbed 40% of China's e-commerce heavyweight Alibaba.com Corp. for a cool $1 billion, which landed Granite Global Ventures, virtually unheard of until then, on the map, giving its portfolio company a $4 billion valuation. GGV wouldn't say how frothy its return was, but generally makes investments between $3 million and $8 million. Its Alibaba.com investment was no different.
The company also has its name all over the online auction arena in Taiwan and Japan with Yahoo! Taiwan and Yahoo! Japan.
WE CAN DO THAT, TOO
Ramping up its product offerings to compete with Eastman Kodak Co.'s EasyShare and Hewlett-Packard Co.-owned Snapfish, Yahoo! grabbed popular photo-sharing service Flickr in 2005 — for undisclosed terms, but reportedly $25 million — and announced launching Yahoo! Photos on June 8, 2006, offering users such features as the ability to send photos over instant message and drag-and-drop for easy organization. Just days before, Yahoo! announced launching Yahoo! Video to go up against megapopular YouTube, with some of the same elaborate features as
Yahoo! Photos like tagging for easy browsing.
Other products, too, target the competition. Launches in 2006 include:
AT&T Inc. and Yahoo! joined forces to offer Internet-based phone services in April.
The company added a map function for travel planning, also in April.
Yahoo! teamed up with IBM Corp. to enhance its instant message capabilities in January.
The company also said in May that it had aligned itself with megacompetitor eBay to share the U.S. auction market.
And in 2005, Yahoo! debuted Yahoo! 360, where users can build a blog and a homepage.
Monday, September 17, 2007
From The Atlantic Monthly, October 2007.
By Henry Blodget
The goal of “socially responsible investing,” or SRI, is to make lucrative investment choices that have a positive impact on the world. SRI comes in many forms, but one of the most common is avoiding investments in “bad” companies. You, of course, are eager to be part of this pioneering movement that will help the environment and your fellow human beings—to do well by doing good. So let’s play a game.
First, if you could go back 50 years and magically eliminate one industry from the global economy to make today’s world a better place, which would it be? Oil drilling? Handgun manufacturing? Tobacco? If you’re like most socially responsible investors, you would pick tobacco—an industry whose products sicken or kill millions of people a year and disgust almost everyone else.
Second, if you could go back the same 50 years and retroactively add one stock in the Standard & Poor’s 500 to your retirement portfolio, which would it be? IBM? DuPont? Philip Morris? If your goal is to generate the highest possible investment returns, the choice would be easy: tobacco giant Philip Morris—the single best-performing stock in the S&P index for the 46 years through 2003.
And therein lies the central dilemma for most socially responsible investors: Your virtue can cost you. How much would boycotting Philip Morris’s stock have lost you over the past half century? As Jeremy J. Siegel has pointed out in his book The Future for Investors, the S&P 500 returned 10.85 percent a year from 1957 through 2003. Philip Morris, now Altria, returned 19.75 percent. Thanks to the miracle of compounding, if you had invested $1,000 in the S&P 500 in 1957, you would have ended up with $124,000 in 2003. If you had invested in every stock in the S&P 500 but Philip Morris, you would have ended up with about 5 percent less. (If you had invested the $1,000 in just Philip Morris, you would have ended up with $4.6 million—but you didn’t want to know that.)
Some of our most loathsome, socially unredeeming industries have produced great investment returns. So if you’re tempted to save the world by avoiding investments in “bad” companies, you might first test your commitment by answering a couple of questions. Assuming perfect foresight back in 1957, would you really have forgone 5 percent or so of your retirement nest egg just to avoid owning shares in one lousy tobacco company? Would you have forgone $4.5 million? Be honest. And welcome to the world of socially responsible investing.
The Social Investment Forum, a nonprofit group dedicated to promoting SRI, traces the roots of the modern practice to religion: specifically, to Colonial-era Quakers and Methodists avoiding companies that participated in the slave trade. In the 1950s, a mutual fund called the Pioneer Fund began avoiding “sin stocks”—those associated with gambling, smoking, and alcohol. The events of the past few decades—Vietnam, civil rights, feminism, the environmental movement, Bhopal, Chernobyl, the Exxon Valdez, and South Africa—brought the idea of using investment choices to influence corporate behavior into the mainstream. In recent years, a wave of corporate scandals and the sudden awareness of climate change have given the concept even greater visibility.
The Social Investment Forum’s 2005 state-of-the-industry report put the amount of investor capital that was devoted to SRI at $2.3 trillion. That is a lot of money. To put the SRI movement in perspective, however, it was only 9 percent of the total $24.4 trillion of professionally managed assets in 2005. The forum touts the impressive growth of SRI over the past decade: That $2.3 trillion had almost quadrupled since 1995, from $639 billion. But most of this growth came from market appreciation rather than a great investor awakening. The value of the S&P 500 grew at about the same rate, and 1995’s $639 billion represented the same 9 percent of total assets as 2005’s $2.3 trillion did.
The majority of today’s SRI assets, moreover, are managed by institutional investors, such as public-pension funds and religious groups, rather than by individuals. Some mutual funds, a main investment vehicle for individual investors, are dedicated to investing according to SRI principles, but not a significant number. In 2005, there were 201 SRI mutual funds, managing $179 billion in assets. This amounted to less than 10 percent of the total assets devoted to SRI, and only 4 percent of the $4.9 trillion invested in equity mutual funds. For all the press it gets, socially responsible investing is still a niche strategy—and if not for some promising recent developments, it would likely remain that way.
The first problem with labeling a particular style of investing “socially responsible” is that it suggests that other kinds of investing are not. So it’s no wonder many people find the concept silly or offensive.
At some level, after all, our very economic system is socially problematic. The benefits accrue disproportionately to owners (investors, this means you), who make fortunes off the labor of rank-and-file employees. Luck plays a role, as does timing. Education, connections, and money give some people an edge, and hard work doesn’t always carry the day. The key to increasing profit and wealth is improving productivity, and an owner’s glee at producing the same amount with 50 workers as with 100 is not often shared by those who got canned. If you’re going to invest in any free-market enterprise, you’re going to have to accept that no matter how enlightened your choices, your money will be supporting wealth disparity, inequality, and other arguably unfair conditions that go hand in hand with a successful free-market economy.
That said, all capitalism is not created equal, and investment decisions do help shape corporate behavior. If two entrepreneurs come looking for money—one who wants to burn national forests for charcoal and one who wants to power cars with seawater—the decision to finance one plan instead of the other could affect the rest of us and the planet. As a century of industrialism before the introduction of environmental and labor laws illustrated, the free market does not appropriately “price” the cost of natural resources or pollution. So the idea that responsible investment practices can be used in conjunction with intelligent regulation and consumption to serve the greater good is reasonable. The challenge comes in figuring out how best to do it. (Given my own high- profile career as a Wall Street analyst—which ended amid SEC allegations of civil securities fraud, a fine, and ejection from the industry—I have had as much cause as anyone to contemplate the moral dimensions of investing.)
In a perfect world, socially responsible investing would promote practices that improve life for everyone, not just those whose religious or personal beliefs lead them to value some products, services, and practices over others. Today’s SRI, however, has about as many definitions as it does practitioners, and not all of them serve a universal definition of “the greater good.” Peter Kinder, who runs the social-research firm KLD Research & Analytics, has defined SRI as the “incorporation of ethical, religious, social and moral values in investment decision making”—which sounds nice until you remember how much havoc different religious, social, and moral values have wrought over the years. A former chair and president of the Social Investment Forum, Steven Schueth, has a more inclusive definition: “Generally, social investors seek to own profitable companies which make positive contributions to society.” But even this raises questions. First, what’s wrong with unprofitable companies, given that almost every emerging biotech, technology, communications, and infrastructure company loses money? And, second, what qualifies as a “positive contribution to society”?
Despite the seeming ease with which tobacco companies can be dismissed as greedy drug pushers, even they do some good—providing tens of thousands of jobs, for starters. And as you move down the SRI screening list, the elimination process gets harder. Take today’s favorite SRI target: the repressive government of Sudan. Will disinvesting in any company doing business with Sudan, as many activists are calling for and many investors have already done, help stop the genocide in Darfur? Or will abrupt withdrawal of foreign capital only strengthen the Sudanese government, as other investors—including Warren Buffett—say it could?
After tobacco, the next two industries on the list are alcohol and gambling; more than half of SRI mutual funds eliminate them. Alcohol and gambling certainly cause plenty of problems. Alcohol, especially, kills, maims, screws up families, and turns customers into addicts and occasionally into murderers. (Car companies provide the vehicles for most booze-addled killings, but no SRI fund that I’m aware of screens out car companies.) On the other hand, would you really want the winery that produces your favorite pinot noir to go bankrupt? The tens of millions of people who jet to Las Vegas each year might tell their pastors that the Luxor is evil, but it’s hard to believe they (or their pastors) never intend to go back.
Companies in the weapons and defense business are shunned by almost half of SRI mutual funds. This presumably means that besides objecting to unjust wars, handgun rampages, and drive-by shootings, the funds’ customers also believe that society would be better off without armed forces or hunting. The next three criteria—environmental impact, labor practices, and product and service quality (including safety)—involve true social responsibility, so it is a pity they are so far down the screening list. Based on rankings alone, far more SRI investors avoid tobacco companies than worry about the abuse of the environment, employees, and consumers.
The rest of the mainstream SRI screening criteria focus on community impact and on workplace diversity. Human rights, faith-based considerations, pornography, and animal testing are considered “specialty-use” screens and are applied by a minority of SRI funds. Less than a quarter of funds screen on such factors as abortion, health-care/biotech/medical ethics, “antifamily” entertainment and lifestyle (don’t ask), and excessive executive compensation.
The main problem with eliminating “objectionable” companies is that “objectionable” is in the eye of the beholder. The other drawback, one that probably deters more people from pursuing the strategy than would say so, is the likelihood of lower returns. By eliminating whole industries from their portfolios, negative screeners reduce their diversification and risk losing out on gains. Not coincidentally—because free markets are, to a large extent, self-correcting—the more “objectionable” an industry, the higher its future returns may be. Bad publicity and lawsuits tend to depress stock prices, and the lower prices set them up for strong future returns. Companies can address objections to many practices by improving labeling, cleaning up manufacturing processes, revising policies, or just getting out of controversial lines of business.
Once the changes have been made, their stocks often play catch-up—leaving investors who boycotted them in the dust.
Fortunately, avoiding “bad” companies is not the only way to practice SRI. The discipline has evolved to include “positive” screening, through which investors seek “good” companies; shareholder activism, through which investors try to effect change instead of just passively holding shares; and community development, through which investors inject capital into regions or causes that otherwise would be starved for it. Screening, both negative and positive, is still by far the most prevalent form of SRI, but shareholder activism and community development are growing rapidly. According to the Social Investment Forum, of the $2.3 trillion in total SRI assets in 2005, 68 percent was based on screening, 26 percent on shareholder activism, 5 percent on screening and activism, and 1 percent on community investing.
Positive screening addresses some of the shortcomings of its negative counterpart, but it also creates a few of its own. Positive screeners do not exclude whole industries but instead search within them to find the notably responsible companies. The Dow Jones Sustainability World Index, for example, screens 2,500 of the world’s largest companies to find the top 10 percent based on multiple social, environmental, and economic criteria. The criteria vary by industry, and include such factors as climate-change strategies, energy consumption, corporate governance, labor practices, and stakeholder relations. The index consists of a broadly diversified global portfolio, and its performance has been similar to one (but not all) of the major unscreened indexes in the eight years since it was introduced.
The methods for choosing “good” companies are still highly subjective. Screening criteria must be selected and ranked in terms of importance, and each company must be scored on dozens of complex attributes, often using imperfect or incomplete information. (Did you visit that factory in Vietnam to make sure your favorite sneaker maker isn’t employing 4-year-old slaves, or did you just take the company’s word for it? Did the company visit every one of its suppliers’ factories? How do you know?) The inherently subjective judgments, combined with the reality that most companies are sinful in some areas and saintly in others, lead some observers to call such rankings absurd. Warren Buffett is one. “I don’t know how I would rate Exxon versus Chevron versus BP,” the Los Angeles Times recently quoted him as saying. “It’s very difficult to judge the actions of companies that act on thousands of things every day … It’s ridiculous when people say one major oil company is more ‘pure’ than another.”
Another challenge of positive screening is that beauty may be only skin-deep. As corporate social responsibility has gone mainstream, companies have spotted a juicy marketing and PR opportunity, and corporate America is now falling all over itself to show how enlightened it is. This has made the screening process even more difficult, requiring investors to dig deep. Don’t fall for those heartwarming hybrid ads until you’re sure the car company isn’t also lobbying against emission reductions.
Most large SRI firms use both positive and negative screens, but their choices vary so much that what they do is less about “socially responsible investing” than about their managers’ personal preferences. The social-research firm KLD, for example, targets tobacco, booze, weapons, gambling, and nuclear power, and then winnows the surviving companies with a responsible-practices screen. The mutual-fund company Calvert is open to nuclear power in some cases, but always abhors gambling. And the my-SRI-is-holier-than-yours crowd doesn’t hesitate to bash firms with different priorities: Domini Social Investments gets criticized for not axing companies involved in abortion and porn; Calvert has been dissed for tolerating companies that move production overseas. (To anyone who has a basic understanding of economics and isn’t running for office, this last criticism is ridiculous. Companies have been outsourcing forever—and must, if they want to stay competitive. Our economy, meanwhile, has always created more jobs than it has lost.)
The next major category of SRI, shareholder activism, is more promising than any form of screening, at least for big institutional investors. According to the Social Investment Forum, about a third of today’s SRI investors (institutions and mutual funds rather than individuals—unfortunately, it’s hard to try this at home) seek to influence the behavior of companies through either formal proxy votes or informal talks with management. Forcing change through the proxy process is difficult. The time and expense required, combined with the tendency of most investors to rubber-stamp management recommendations, means that most shareholder resolutions fail. Sometimes just the threat of a proxy fight is enough to prod managers into constructive talks. But the threat will be taken more seriously if you own 3 million shares than if you own a few hundred. (This isn’t always true. A “dissident” Yahoo shareholder named Eric Jackson recently used a combo of moxie, marketing, and social networking to embarrass Yahoo’s overpaid, feckless managers, and he may have played a part in Yahoo CEO Terry Semel’s departure. Jackson has since trained his Internet flamethrower on Edward Zander, the CEO of Motorola. A few more successes, and he might launch a new era of shareholder democracy.) A 2004 rule requiring mutual funds to disclose their proxy-voting records has prompted even traditionally passive investors to get more active, lest they be publicly shamed for supporting egregious policies.
Unlike mere screening, activism has in some studies been shown to help deliver superior returns. Some large investors have taken an even more aggressive stance, making activism part of their investment processes. Calpers, California’s public-pension system, is a notable example. A professor at the University of California at Davis, Brad Barber, studied the returns of companies that Calpers targeted for shareholder activism from 1992 through 2005, and found that on the day they were added to the Calpers “focus list,” the firms outperformed the broader market. Barber estimates that over the 14 years of his study this superior (very) short-run performance created a total of $3.1 billion of additional market value. That sounds great, but you need to understand what it means. The day Calpers published its annual list of target companies, the stock prices of those companies jumped, as other investors read the names and immediately placed buy orders. Whether the buyers bought because they expected that Calpers’s activism would create long-term value or because they thought that the announcement would drive up the price is impossible to determine; the answer is probably both. Because these gains came only on the day the Calpers list was published, ordinary investors would have had to be paying very close attention to capture them. Meanwhile, the incremental long-term returns that have accrued so far are hard to link definitively to Calpers’s activism. The good news is that Barber believes that the long-term returns of activism like this could be enormous.
Like screening, shareholder activism has problems, one of which is free riders. Calpers is a massive asset manager—responsible for a total portfolio of nearly $200 billion in 2005—and it collectively owns about 0.5 percent of the U.S. equity market, according to Barber. As a result, the value it creates through shareholder activism accrues not only to its own shareholders but also to the great lazy majority of investors, who get additional returns for nothing. Of the $224 million a year in short-term gains that Barber says the pension system has generated through its activism, he estimates that only $1.12 million a year accrued directly to state employees whose retirement savings are managed by Calpers. The rest went to couch potatoes, hedge funds, and other slugabed tagalongs, some of whom no doubt bought the pension system’s “focus stocks” the day the list was released and jubilantly flipped them the next. The gains for Calpers translate to only 0.07 percent of incremental performance on the fund’s portfolio.
Although the pension system’s activism may help the companies it targets as well as those companies’ other shareholders, Calpers itself won’t benefit if the cost of its activism exceeds its gains. This is an unfortunate paradox that is, or should be, important to most asset managers.
Significantly, Barber draws a distinction between efforts by Calpers to improve corporate governance and shareholder rights, and its occasional forays into more-traditional SRI concerns—dropping tobacco stocks from its portfolio, for example, has cost Calpers $633 million so far. Its screening efforts, in Barber’s opinion, also create a conflict of interest between its management and its investors—the state employees, who may have different social priorities (the “eye of the beholder” problem). If institutions want to avoid “bad” companies, Barber says, they should make sure their shareholders agree that the companies they single out are bad. They should also make sure that their screening decisions have been empirically shown to improve investment returns—which tobacco-company elimination most emphatically has not.
The final category of SRI investing, which encompasses only 1 percent of SRI assets, is community development. Here the goal is to direct capital to underserved communities via banks, credit unions, loan funds, venture-capital funds, microfinance, and other vehicles.
Though still small, community-investment efforts, according to the Social Investment Forum, have helped Native Americans buy back ancestral lands and start businesses, restored salmon and trout to the Chinook watershed in Washington state, created affordable housing and high schools in Boston, provided microfinancing in Bangladesh, and funded AIDS prevention.
But let’s get back to the heart of the matter. As much as SRI investors say that their goal is to support socially responsible practices, the real priority, as for nearly all other investors, is returns. One survey suggests that 80 percent of SRI mutual-fund investors would not buy SRI funds unless they produced returns equal to or higher than conventional funds. Unfortunately, these investors may be delusional. As with mutual funds, most SRI funds produce lower returns, after adjusting for risk, investment costs, and other factors, than low-cost index funds would.
After examining the performance of several indexes of socially approved stocks from 1990 through 2004, Meir Statman, of Santa Clara University, found that the returns of the social indexes were generally higher than those of their conventional counterparts, but that the differences were not statistically significant. (Translation: The performance might have been the result of luck.) The SRI stocks were also more volatile than the market overall, and this, according to finance theory, suggests that the higher returns were earned in exchange for higher risk. In any case, investors can’t buy indexes, they can only buy funds, and most socially responsible funds come with costs that basic index funds don’t: expensive portfolio managers, analysts, and research. For example, according to Statman’s study, Domini’s index of 400 socially responsible stocks beat the S&P 500 index from 1990 through 2004. But owing, most likely, to the high cost of social-investing research, the Domini fund lagged Vanguard’s flagship S&P 500 index fund. (It costs money to make sure that a chemical company isn’t dumping poison in the lake. And just because your portfolio manager is socially responsible doesn’t mean he wants to putter around town in a secondhand Ford while his hedge-fund buddies are driving BMWs.)
There is some good news. Recent studies have found some evidence of a link between socially responsible corporate policies and superior stock returns, at least over the past decade. Alex Edmans, of the University of Pennsylvania, found that from 1998 to 2005, the stocks of employee-friendly companies (as determined by Fortune’s annual “Best Companies to Work For” list) earned twice the rate of return of the market overall. Other studies have suggested that companies with poor eco-efficiency records do less well than their more environmentally conscientious peers, and that the stocks of companies with strong corporate governance did better than average in the 1990s.
Not surprisingly, SRI advocates seize on such research as evidence that you can do well by doing good. But relationships that seem causal and permanent in one market era often vanish in the next, taking many “superior investment strategies” down with them. Today’s markets are also annoyingly efficient. The more studies that demonstrate that socially responsible stocks do better than regular stocks, the more investors will rush to buy them (and not just for “the greater good”). The resulting torrent of money flowing into the stocks will drive up their prices, and the higher prices will pave the way for subpar future returns.
In discussing how investor expectations could shape the market, Statman suggests that “doing well while doing good” is possible if enough “investors consistently underestimate the benefits of being socially responsible or overestimate its costs [italics mine].” One can always hope, in other words, to get the best of both worlds—responsible practices and superior returns. But finance theory suggests that this hope will stay just what it is now: wishful thinking.
The best news about SRI, and the key to its improving not only mainstream corporate behavior but also investment returns, is that it encourages investors to think like owners instead of renters or gamblers. If you invest the time to analyze a company’s business practices—or, better yet, to change them—chances are you will be more committed to the company’s stock than if you were just looking for a quick score. Why does this matter? Because perhaps the most return-reducing habit for most investors is frequent trading. (This, by the way, is true whether you are a professional port-folio manager running $10 billion or a CNBC-watching dentist running $10,000. Trading is hazardous to your wealth.) Mutual-fund investors, especially, tend to buy at peaks and sell at troughs, thus generating returns that fall far short of what they would have earned if they had just bought and held. Investors who do less trading usually make fewer timing mistakes and rack up lower transaction costs than average traders. Staying put, for whatever reason, is usually rewarded.
Most investors’ obsession with short-term results has another regrettable, and oft-lamented, effect: It encourages company managers to focus on short-term performance at the expense of the long term. In the short term, socially responsible labor and environmental policies can be expensive, so executives who care about this year’s bonus (and who doesn’t?) would be crazy if they bothered to implement them. It is easy to blame companies for this shortsightedness. But the problem often originates with investors, for many of whom a one-to-two-year time horizon is synonymous with eternity.
The flaws and challenges that have confined SRI to a niche strategy in the past reveal the key to expanding its influence going forward. To be meaningful, any analysis of a company’s practices must be painstaking and deep, and screening decisions must be made on objective criteria that others can assess for themselves. Investments must be made for the long term—several years at a minimum and preferably decades—because any incremental value created by sustainable policies (rather than by publication on a Calpers focus list) will likely take years to be realized. Investors should be active partners in a company’s development, sponsoring or supporting referenda or participating in discussions with management—or they should draft behind shareholders who are. And as in all intelligent investing, price must be taken into account. Even if a company’s practices are downright saintly, and even if the saintly practices may help the company deliver superior earnings—far from proven—you won’t benefit if the value of such practices was already reflected in the stock’s price when you bought it. (A Porsche is only a great deal when it is priced like a Volkswagen. Otherwise it’s just a great car—and priced like one.) Lastly, because companies and stocks that satisfy these criteria will likely be few and far between, you will have to live with the risks as well as the potential rewards of limiting your portfolio to a handful of stocks, instead of holding a diversified basket of hundreds.
One firm that embraces an enlightened SRI methodology is Generation Investment Management, founded by former Goldman Sachs partner David Blood, former Vice President Al Gore, and others. The firm’s portfolio is highly concentrated—30 to 50 companies—and the partners seek to make “sustainable” long-term investments, meaning investments in companies that pay careful attention to both human and environmental resources without sacrificing returns. Whether they can achieve this remains to be seen. As with the larger Dow Jones sustainability index, the firm’s focus is on environmental and ethical sustainability rather than on social responsibility, and thus it avoids some of the subjective hazards of negative screening—some.
Ever the evangelist, Gore has begun preaching the virtues of sustainable investing. He is fond of noting that our Keynesian accounting systems assume that the world’s resources, including human capital, are infinite. “We are operating the Earth like it is a business in liquidation,” he says. Gore argues that as the world’s citizens begin to see the light, markets will begin to disproportionately reward companies that behave responsibly. “Your employees, your colleagues, your board, your investors, your customers,” he said in an interview with The McKinsey Quarterly, “are all soon going to place a much higher value—and the markets will soon place a much higher value—on an assessment of how much you are a part of the solution to these issues.”
One implication of this argument—invest sustainably, and you’ll make a killing—is just dreaming. Even if the markets do soon “place a much higher value” on responsible companies, this won’t provide superior returns over the long term; rather, it will provide a pleasant short-term bump. Once stock prices have adjusted, the opportunity will evaporate. Investment decisions, moreover, will still be only one factor in changing corporate behavior. Regulatory practices and consumer buying choices will always play the most direct role in persuading companies to behave responsibly.
All this said, socially responsible investing certainly deserves to go mainstream. Capital-allocation decisions can help shape behavior. Even with different investors emphasizing different priorities, there is usually some common ground. And we need to stop insisting that SRI should be both socially and financially superior to traditional alternatives. It is unlikely to be both, and understanding the trade-offs it requires will have to become a part of how we lead our lives. Organic milk costs more than regular milk—and continues to fly off the shelves. Hybrid cars cost more than regular cars, and we continue to rave about them. For a variety of reasons—some well-founded, some not—we feel good about the trade-off. Specifically, we feel that we are doing the right thing.
A lifetime of investing in SRI funds might cost you a lot more than organic milk and hybrid cars. But as SRI investors become both cannier and more numerous, the sacrifice involved need not amount to the 5 percent you might have lost by boycotting Philip Morris. Perhaps, even if SRI returns are no higher than can be achieved through traditional investing—or even a bit less—the practice can be its own reward.
Henry Blodget, a former stock analyst, is the author of The Wall Street Self-Defense Manual: A Consumer’s Guide to Investing (2007).
From today's CNET. Another disappointing new product review.
Posted by Ronn Owens
September 17, 2007 7:59 AM PDT
After the incredible Motorola Z6 and the very good Motorola Z3, I must admit I wanted the Motorola Rizr Z8 more than any upcoming phone. But, wow - be careful what you wish for.
True, I may have set the bar too high. But this phone doesn't do it at all. The best feature is its ability to curve, making holding the phone and talking more comfortable. It is arguably the easiest to answer and most comfortable to use on a call.
But as for everything else, forget it. The camera is just OK. Navigation is confusing. Music fairly good. Video fine, but can't touch the iPhone's definition. Texting? Keys are so solid that the over/under on carpal tunnel is thirty minutes.
Bottom line, nope. Too much to pay for a cool hinge. To quote the great philosopher Amy Winehouse, "I say no, no, no."
Wednesday, September 12, 2007
From the AP:
September 12, 2007: 04:33 PM EST
Sep. 12, 2007 (Thomson Financial delivered by Newstex) --
NEW YORK (AP) - Motorola (NYSE:MEU) (NYSE:MOT) rode high for a while on sales of its slim, stylish Razr phone.
When its competitive edge started to dull, the company set its hopes on the Q, a BlackBerry-like e-mail phone, which it initially thought would sell as well as the Razr.
Now, with Motorola's position as the world's No. 2 cell-phone maker in jeopardy, it has brought out a thoroughly reworked Razr, and jazzed up its Q with more music-oriented features.
Unfortunately for Motorola, neither of the new phones feels like a winner that's going to bolster the company's stock price, which is down 35 percent from its high of $26.30 set last year.
I tested samples of the MotoRazr2 and Moto Q music 9m for a few weeks, taking help from colleagues who were or are users of the original Razr, which was launched in 2004. Overall, we weren't seriously tempted with either of the new phones, though some improvements are noticeable.
We started out with one Razr2 from each of the three largest carriers: AT&T Inc. (NYSE:SBT) (NYSE:T) , Verizon (NYSE:VZC) (NYSE:VZ) Wireless (NYSE:VOD) and Sprint (NYSE:FON) Nextel Corp. AT&T charges $300 for the phone with a 2-year contract, the others charge $50 less.
The Razr2 is thinner than its ancestor, but slightly longer. One former Razr user said it felt 'too big,' but this is mostly an illusion. It's created by the Razr2's sturdy feel, which is reinforced by heavy-duty metal hinge and by its heft. It weighs 4.6 ounces, about an ounce more than the Razr, depending on the model.
Overall, it does feel slightly less pocketable than the Razr, and it's harder to flip it open elegantly with one hand.The other immediately noticeable difference is the large color LCD screen on the outside of the clamshell. At 2 inches diagonal, it's just slightly smaller than the inside screen. It's not exactly a touch screen, but it does have three touch-sensitive areas, with different functions depending on the carrier-specific model. For instance, the Sprint phone has buttons for the mobile TV, music player and camera functions.Sadly, the outside screen is a mostly wasted feature, though one of us liked it for controlling music. The touch-sensitive buttons are vexing to use, and poorly programmed. For instance, you can activate the 2-megapixel camera and take pictures, but only of yourself, because both the screen and the lens will be facing you. And then you can't get out of camera mode using the outside screen -- you have to open the phone and hit a button.
And what is it we like about clamshell phones anyway? That's right -- that we don't have to lock their keypads before slipping them in our pockets or bags. With the Razr2, you do have to lock the buttons on the outside screen (by pressing and holding a button), at least if you were playing music before closing up the phone. On several occasions, a closed phone started serenading our pockets before we figured this out.
The rest of the interface is clunky, but works. We didn't really take to the TV and music-downloading features that rely on the carriers' cellular broadband networks. The video clips are still small and jerky, and the music selections hard to navigate.The best part of the Razr2 may be CrystalTalk, a technology that improves incoming and outgoing sound quality in noisy areas like restaurants and trains. Another nice feature: you don't need to teach the phone to recognize specific phrases for voice-activated dialing -- just read out a phone number or say the name of a contact.The rated standby time for the Razr2 is 330 hours, or two weeks. That might be true under the best of circumstances -- in light use, we recharged the phones every four days. The Verizon Wireless model, however, wouldn't hold a charge for more than a few hours, so we got a replacement. It only held a charge for 24 hours. This is worrisome, but it appears to be a fluke -- neither Motorola nor Verizon said they had heard reports of power problems. Certainly, if a brand new phone acts like this, return it to the store.The Q9m is only available on Verizon, and costs $200, though there's an additional $50 mail-in rebate available. It has a very tough act to follow: Apple Inc.'s iPhone launched two months ago and, as far as I'm concerned, slapped the smart-phone category silly with its large screen and fantastic interface.
The Q9m does have three things on the iPhone:
-- A good hardware QWERTY keyboard, probably the best I've seen on a smart phone. The buttons are rubberized and gentle on the fingertips.
-- Access to Verizon's broadband network, with makes for faster e-mail retrieval than AT&T's poky Edge network from AT&T.
-- Since it has Windows software, it's easier to get work e-mail on it. I was, however, not able to test this.
So as an e-mail device, the Q9m is serviceable, but the main reason Motorola and Verizon updated the original Q -- which came out just last year -- is to make it more of a music player. It has access to Verizon's Vcast music store, and there's a choice of two different top menus, one of which is more music-oriented.
I would much rather have had one top menu that worked really well. The Q9m lacks a touch screen and instead relies on a side-mounted BlackBerry-style scrollwheel. Combined with the sluggish Windows Mobile software, this makes the phone just too slow, clunky, and confusing.
Important features are hidden and screen space is wasted.The best I can say about the Q9m is that if I was issued one for work, it wouldn't be much of a burden. But after the iPhone, everyone really needs to work a lot harder to impress with a smart phone.
As for the Razr2, if you're like most people and want a phone mostly to talk on, it's not a bad choice, though it may be hard to justify paying $200 to $300 more than you would for an original Razr.
Associated Press Writers Joe Altman, Barbara Ortutay, Dan Scheraga and Seth Sutel contributed to this report.
Tuesday, September 11, 2007
The Motorola Financial Analyst Meeting held last Friday in New York lasted 4.5 hours. Most of the comments from management offered few new details of what's to come in the months ahead. It was a lot of "we'll try harder" and "stay tuned." Most of the questions from analysts during the Q&A session afterwards were polite and very granular.
I thought the best question was the last one from Michael Regan, the analyst from Janus Capital:
"What's changed now versus what you told us 2 years ago?"
It really cut through all the painstaking (over-)explanations we heard. The Motorola Senior Leadership Team went to great lengths to say how things are really different now. More people within the company understand Days Sales Outstanding. Employees' attitudes are different. Therefore, results are going to be different. Greg Brown, the COO and new Director, also answered that Motorola's leadership had changed between now and two years ago. Well, in part it has, but Brown, CEO, Ed Zander, and CFO, Tom Meredith were all there before of course -- as was Stu Reed, the new head of Mobile Devices (in a different role).
Still, the big problem facing Motorola (and it was even more evident after the meeting on Friday) is what hasn't changed, rather than what has.
CEO Zander only spoke for a half hour on Friday -- less than half the time he allocated for his generals running the 3 company divisions. His introductory remarks and later answers in the Q&A tended to ramble and state the obvious (e.g., "We have to just have flawless execution"). They conveyed the troubling sense that the division heads had a better sense of the businesses than him.
Our "Plan B" Group for Motorola has criticized Zander previously for his over-simplifing or not articulating the company's strategy, as well as heavily using pet phrases like "Seamless Mobility" (he tried to clarify this phrase on Friday by saying "some of you might prefer to call it 'Broadband Internet'" - but that wasn't really that helpful). There was nothing in his Friday comments to dissaude us from the view that he is not comfortable sharing strategy. At one point, he stated that "profitable marketshare is our strategy."
This is a perfect illustration of Zander's biggest flaw as CEO -- and a key reason for why Motorola is undergoing its current pains. Zander is a short-term, tactical thinker. He responds instinctually, likes to joke (he introduced Reed to the analysts by imploring them to "take it easy on him") and schmooze. He appears to delegate the details of setting plans and executing them to his staff -- without necessarily a firm grasp on what is happening. When he arrived at Motorola and found a hot product with RAZR, he lurched to run with it. He trumpeted and supported growing market share. Now that the company has been humbled in the last year with low sales, he is promoting the pursuit of profits. Lurching is not leading.
As an investor, I was looking for a sense of vision and precisely how this company will win. Instead, we heard a lot of market segmentation and power of positive thinking.
Most focus during the morning meeting centered on new head of Mobile Devices, Stu Reed. It was an uneventful debut. After his hour-long careful discourse, investors were assaulted with "wave after wave" of repetitions of his theme that this was a company that had learned from its mistakes. It was a monotonous "drumbeat" of a speech, with an undeniable "cadence," describing how MDB would never again follow the siren song of a "one hit wonder."
Reed went out of his way to criticize the division's past leadership. Before Reed, according to him, Motorola's Mobile Business had the "audacity" to believe it knew what the customers wanted; now, it knows better to ask them. They are going to spend internally much better now ("We are done with the years of 'double spend,'" he said at one point -- referring to spending on the same features in different parts of the company.) They're also going to be more profitable by no longer "riding a hot horse for too long." Presumably, all these are shots at Ron Garriques - the former head of MDB. Yet, from February until his July appointment (according to the Q2 earnings call), MDB was co-headed by Zander, Brown, and Meredith (supported by Ray Roman and Terry Vega). By taking shots at Garriques, Reed was indirectly pointing the finger back at his CEO, COO, and CFO. "What's changed now versus what you told us 2 years ago?"
There were several positives from Friday's meeting. Multi-sourcing silicon, having a software strategy, and the draw downs of inventory are all positive for Mobile Devices. Tom Meredith does have a good grasp for this business and the focus he's brought to it with cash conversion is encouraging.
However, Friday's Analyst meeting was heavy on dissecting the "profit pools" (meaning the market segments) Motorola will compete in, commiting to assiduous R&D spending, and pledging to keep a clamp on costs. How will they raise revenues though and be successful in their markets? Wait and see.
In our opinion, changes at the top and at the board-level are still sorely needed for this company to more quickly move ahead. To really demonstrate to the Street and all investors that things have changed this time, Motorola needs to change its top leadership -- not in wholesale fashion, but certainly at the top. A new leader -- wisely chosen -- would truly bring new life and energy to this company to build on the early signs of progress.
HP didn't have to clean house when it shifted out Carly Fiorina and introduced Mark Hurd as CEO. I suspect the same thing would happen here. What Mark Hurd has clearly demonstrated is that a new CEO -- with the right focus, strategic vision, and operational discipline -- can take a company written off for dead and bring it back to the top of an industry. It can happen again here at Motorola, but not with Ed Zander. It's time for change.
Monday, September 10, 2007
From the Australian Financial Review, August 29, 2007:
By Renai LeMay
CommSec general manager Matt Comyn is in no doubt as to just how comfortable some of his retail customers are with technology.
"I think there was one guy that had about 11 computer monitors, varying sizes, from huge TV-style screens to normal 17-21 inch, and also live-streaming CNBC, Bloomberg," he said.
"It was a full-blown trading room for one person."
Comyn tells stories of home-based investors that have multiple redundant internet connections to make sure they're online 24x7, and of customers demanding speeds in the hundredths of seconds for an online broker to get an order onto the market.
The executive and others in the finance industry are watching with fascination as small investors bring more and more technology to bear in an effort to stay ahead of the pack. It's not just the traditional charting and technical analysis desktop applications such as MetaStock that have been used for more than a decade.
Investors are quickly supplementing these tools with a new wave of technologies that are much more flexible and interactive.
For example, mobile phone carrier Hutchison is experiencing rapidly growing use of the finance channel on its third-generation (3G) mobile network.
The service allows investors to track their share portfolios, get quotes, create performance charts and keep on top of currency movements, all from their mobile phone. In 2006, the company's Australian customers used the service about 4 million times, up from 1.4 million in 2005.
Comyn and his counterpart at Australia and New Zealand Banking Group's online broker E*Trade, managing director John Daley, say there has never been enough local demand for a full mobile-trading platform, although both brokers are keeping an eye on the situation.
Part of the problem is mobile phones have never had big enough screens to accommodate the quantities of data that investors need to make decisions.
But mobile phones with large screens and full web-browser capabilities, such as Apple's iPhone, which launched in late June, could change this situation, especially when coupled with Australia's new 3G networks that provide faster data speeds than they did just a few years ago.
Large financial institutions such as Bank of America have already created customised websites for the iPhone and it isn't too difficult to imagine local banks and online brokers following suit when the device launches in Australia some time in 2008.
There's also an international precedent. In early technology-adopting countries such as Japan, millions of traders already make mobile trades daily through major online brokers, even including the Japanese arm of E*Trade (not owned by ANZ). Other countries have been slow to follow, but the Hutchison example shows there is a growing level of interest.
Some Australian online brokers have already extended their email alerts functionality to deliver price changes or corporate announcement alerts by SMS to clients' phones - for a price.
The old technical analysis applications are also rapidly giving way to internet equivalents. Sites such as stockscan.com.au don't even require investors to be in front of their computer to monitor the market for trading conditions and stocks that meet their criteria.
John Christian, who runs stockscan.com.au from Brisbane, said his site operated on a "set and forget" mentality. Users can simply input their scanning criteria and walk away. The service will automatically email them when companies match their settings.
Mr Christian said the system solved the problem of human error - investors missing out on opportunities because they forgot to run scans of the market or were away from their computer.
Another local example is ShareFilter.com, while internationally Yahoo! Finance provides free technical analysis functionality.
Other sites such as locally-developed NewsAlerts.com.au (launched last year) take the pain out of monitoring news about listed companies.
NewsAlerts is a free service, where users input a list of stock tickers they are interested in. The service instantly emails them every time that company makes an announcement on the Australian Stock Exchange, or is mentioned in a press article.
It's similar to some of the features found on broking sites such as E*Trade, but is free due to an ad-supported model.
Another, more mainstream service that can deliver email alerts based on keywords is Google News, which aggregates news from publishers all around the world.
While a lot of online services still require a per-use or subscription fee, many basic services are increasingly available free.
Online stock-charting packages are going this way. Offerings such as Google Finance, Yahoo! Finance and BigCharts.com lead the way in providing basic charting functionality.
Mr Comyn said although it cost online brokers a lot to develop and offer tools such as charting applications, they were increasingly being provided as a value-added service rather than for a fee.
"If you look at a free charting package, five years ago you'd get some basic indicators," he said. "Now you can plot multiple stocks; you've probably got 30 or 50 different charting indicators. And all that sort of thing is free."
The way investors communicate with each other is also changing due to technology. Tech-savvy shareholders have long been familiar with online discussion forums such as HotCopper, Sharescene and Topstocks.com.au. But now social networking tools such as Facebook and MySpace are gathering converts.
"We're puzzled," said a cohort of small Yahoo! shareholders who have organised themselves via an international "group" on Facebook. "In the last three years, Google's shareholders have seen their holdings rise 333 per cent. Yahoo!'s shareholders have seen their holdings drop 8 per cent."
The group, which claims to collectively own $US60 million ($75.2 million) in Yahoo! stock, is using Facebook and other Web 2.0-style technologies such as blogs, wikis and YouTube to push Yahoo!'s management into changing its strategy.
The mastermind behind the push is Eric Jackson, the chief executive of Jackson Leadership Systems, a US-based strategy and governance firm. Dr Jackson told The Australian Financial Review he had used online social networking tools for shareholder pushes against companies such as Yahoo! and Motorola because the medium was cheap and effective.
"I spent something like $US2500 on the Yahoo! campaign and probably zero in hard costs for the Motorola campaign so far," he said. "Yet, the internet allows anyone to put their ideas out there and sink or swim."
In Australia, local telecommunications companies have long known that many of their shareholders use social forums such as Whirlpool.net.au to discuss their services and share prices. The forum has earned itself a nickname among Australia's telco community: Whingepool.
But such is the power of the crowd that the management of telecommunications carriers such as iiNet and Internode regularly read and contribute to Whirlpool. It's not a rare event to find iiNet chief executive Michael Malone online, or Internode managing director Simon Hackett.
Online brokers are reluctant to integrate social networking tools into their systems, due to the problem of identifying participants who may have self-serving aims in posting comments. For example, bulletin boards such as HotCopper are renown in Australia for anonymous posts by traders trying to ramp up stock prices.
"From our perspective, it's something that we're thinking about, but I don't think we've really worked out that model," Mr Comyn said. "We haven't seen any real leadership in financial services on social computing more broadly but it's something we're thinking about."
One of the next big technologies to affect investors may be the advent of online video. Technology companies such as Telstra have started putting streaming video of their annual meetings online and others are expected to follow. Online brokers expect to start adding video feeds into their existing pools of research available to investors.
One thing is sure about the future of technology in investing. Not even the experts can really know what the future will look like, even in the next few years.
"It's very hard to know, " Mr Daley said when asked what his site will look like in the future. "I can tell you that the site of the future will be more sophisticated and at the same time easier to use, but exactly how, it's quite hard to know."
Thursday, September 06, 2007
Sphere: Related Content
Tomorrow, on Friday, September 7th, Motorola CEO Ed Zander and CFO Tom Meredith will hold court in New York for a Financial Analysts meeting.
Unfortunately, I will be in Orlando on business and cannot attend the meeting in person. However, I wanted to submit my question in advance via YouTube. I believe all Fortune 500 CEOs should allows for YouTube questions from shareholders at these kinds of events in the future. If our future President has to answer his/her constituents before election via this medium, why shouldn't our CEOs in which we own a share of stock?
I am a Motorola shareholder who owns 180 shares in the company. I also represent -- through the "Plan B" group I have started -- 130 additional shareholders in the company. Together, we own 600,000 Motorola shares. We are upset with the recent performance of the company.
Although we have created and formally sent Motorola's non-executive directors a "Plan B" for how to turn around Motorola and asked for a face-to-face meeting to discuss the merits of our plan, the board has refused such a discussion. Douglas A. Warner III, the chair of Motorola's Governance and Nominating Committee and one of the non-executive directors, wrote to me on August 13th stating that "[w]e are actively engaged, and we have been and will continue to be proactive in implementing changes that we believe will enhance value for all Motorola stockholders." We respectfully would say that we are frustrated by the results of their current efforts to be engaged.
We appreciate Mr. Meredith's comments at Wednesday's Citigroup meeting with investors in which he ackowledged the company had made "mistakes" and that the two rounds of layoffs are "a symbol of management failure." Yet, we are puzzled why the board and management team have not been held accountable for their self-acknowledged failure. Why should the rank-and-file Motorolans bear the brunt of management's failure?
Here is my video question for Mr. Zander....
From a Bloomberg article today by Ville Heiskanen.
As you know, I've been reaching out to MOT shareholders since launching the "Plan B" campagin in July. MTB was one of several companies who I contacted who had divested their shares before I reached them. The 2nd last sentence below referring to Brad Williams is telling and shared among many in the institutional investor community: "Williams says he won't buy Motorola stock unless he sees a recovery, or a change in CEOs that signals revitalized design and marketing efforts."
Sept. 6 (Bloomberg) -- Motorola Inc.'s Razr 2 mobile phone, a new, more expensive version of its three-year-old best seller, may not be enough for Chief Executive Officer Ed Zander to revive profits.
Motorola, the biggest U.S. mobile-phone maker, began selling the $250 Razr 2 last month. While the new device has a bigger screen and more storage for songs, it lacks features such as the touch screen found in Apple Inc.'s iPhone.
The Razr 2, based on the handset that analysts say accounts for a third of Motorola's phone sales, will fail to win buyers because they can get the original for free with a service contract, said Brad Williams, who helps manage $13 billion as MTB Investment Advisors in Baltimore.
``You put it on the table next to the old Razr, and you don't really see what you're paying the extra $250 for,'' Williams said. ``You put an iPhone on the table, and everyone sees immediately it's an iPhone.'' MTB sold its stake in Motorola last quarter and holds Apple shares.
Zander, 60, may discuss early results for the Razr 2 tomorrow when he meets with analysts and investors in New York. Shareholders including Carl Icahn have called for the CEO to step down if sales and profit margins don't recover by year-end.
Fading popularity of the original Razr contributed to a 19 percent drop in sales in the three months ended June 30 and Motorola's second straight quarterly loss. The company said when it reported the results that the unprofitable handset business would improve in the second half.
Spokeswoman Jennifer Erickson declined to say how many new Razrs Motorola expects to sell. The Schaumburg, Illinois-based company says it sold more than 100 million of the original units.
Motorola shares have declined 16 percent this year, while Cupertino, California-based Apple has soared 61 percent and world market leader Nokia Oyj added 57 percent. Motorola fell 1 cent to $17.19 on the New York Stock Exchange yesterday.
When the half-inch-thick Razr came out in 2004, it cost $499 with a service contract. Motorola started chopping the price when rivals such as Espoo, Finland-based Nokia caught up with the sleek design and won customers with new models.
Price cuts came too quickly and ``ruined'' the Razr brand, said Al Ries, chairman of Ries & Ries, an Atlanta-based marketing strategy firm.
``The Razr is cheap,'' said Ries, a co-author of ``The Origin of Brands.'' ``You can't make it expensive by calling it Razr 2.''
AT&T Inc., the biggest U.S. phone company, sells the Razr 2 for $300. Verizon Wireless and Sprint Nextel Corp. offer it for $250. Two millimeters thinner than the original, it sports a two-megapixel camera for higher-resolution photos.
``I just don't see it as being a high-volume model at this point,'' said Lawrence Harris, an analyst at Oppenheimer & Co. in New York who is ranked highest in accuracy among communications-equipment analysts by StarMine Corp. He has a ``neutral'' rating on Motorola stock.
The iPhone went on sale June 29 for as much as $599. It combined Apple's best-selling iPod music player with a Web- browsing phone. The iPhone's touch screen and lack of keyboard make the Razr 2 look dated already, MTB's Williams said.
Apple yesterday raised more hurdles for the Razr 2 by slicing the price of the top iPhone by $200 to $399.
Williams says he won't buy Motorola stock unless he sees a recovery, or a change in CEOs that signals revitalized design and marketing efforts. ``They need significant change in the product road map,'' he said. ``Zander is under a lot of pressure.''
From yesterday's Agoracom blog:
If you are a small-cap CEO that still believes “the internet isn’t important” (and there are still many out there who believe it) than you better fall into one of the following categories to back it up:
1. I’m Stronger than Motorola
2. I’m Stronger than Yahoo
3. Um, I’ve changed my mind and now understand the power of online investors
Why? Take a close read of the following article from the Wall Street Journal - A New Thorn In Motorola’s Side
The article can best be summarized as follows:
Eric Jackson owns just 130 shares of Motorola stock, but the activist investor and blogger has got big plans for the ailing mobile phone company.
Jackson launched an online campaign called “A ‘Plan B’ for Motorola,” urging the replacement of Ed Zander as CEO and chairman immediately — as well as four of 10 other board members, among other initiatives. He also posted videos on YouTube and put up a Web page where shareholders can “pledge” their shares to support his plan.
It would be easy to ignore Jackson, if he hadn’t helped balloon an investor revolt at Yahoo ahead of last month’s resignation of former CEO Terry Semel. Jackson owned just 96 Yahoo shares, but his barrage of blog posts and online videos quickly got him attention. He launched the campaign in January, agitating for the ouster Semel and some board members. About 100 Yahoo shareholders pledged roughly two million shares on youchoose.net to support him (representing about 0.2% of Yahoo outstanding shares).
Jackson is among a new breed of investors who are savvy about the grass-roots power of the Internet and use it to make activism no longer a game reserved only for wealthy financiers.
What made Jackson’s initiatives possible is the advent of Web 2.0, which provides investors with an ability to connect, collaborate and even revolt in ways that were never before possible.
What does this mean for small-cap and micro-cap CEO’s?
Online investors have almost as much power as you do when it comes to the future of your company. Unhappy investors are no longer relegated to the vacuum of “harsh” e-mail and letters to express their discontent. Today, investors can rally in short order via video, blogs and online forums to challenge you at your next AGM, oust you from your position or even elect their own slate of directors.
In fact, not only is this possible, I’ll go as far as predict it will actually happen in the next 12-24 months as investors make Web 2.0 a part of their daily investing lives. I’m the biggest proponent of great small-cap and micro-companies but we all know there are still many companies out there deserving of being the first target of an online shareholder revolt - and I’ll be the first to applaud it.
Good and responsible companies need not worry. Bad companies should be weary.
Wednesday, September 05, 2007
Tom Meredith -- in somewhat of a warm-up for his meeting Friday morning with Financial Analysts -- spoke at Citi's Technology Conference today with many investors.
Although some analysts have tried to call the bottom for Motorola in the last few days and made an upgrade on the company, Motorola is still lagging Nokia for the last 5 days - to say nothing of the last year.
On the same day that Meredith chose to make his remarks, Apple announced an expanded version of its iPod and a cut in price for the iPhone.
Here are some observations on Meredith's remarks:
- He seemed annoyed that Home and Networking only got 2 questions at the start of the session, and then was forced to focus on Mobile Devices. However, what do you expect, when you've chosen to divest other businesses and are left with a divisions that accounts for more than 50% of your revenue and has been reeling for 12 months?
- He seemed to work hard at emphasizing that Mobile Devices will now become "boringly consistent" from here on out. This is good positioning, considering that Motorola is lacking a group of exciting mobile products now and in the near future.
- "We may introduce touch-screens in the US." Even a CFO can learn to drop some product feature names which carry a little sizzle to try and excite investors.
- Meredith conveys more authenticity than Zander about recognizing mistakes were made in the past. "It was our mistake. We know we were wrong and we admit it." He's clearly trying to do his part to get the bad news behind the company. If only acknowledging past mistakes could give the company a clean slate moving forward. Unfortunately, the turnaround will require much more than simply this.
- Nervous laughter in response to the question about whether the board had had a vote of non-confidence for Ed Zander.
- Motorola's Weighted Average Cost of Capital is 11 - 13%. "We need to exceed that Weighted Average Cost of Capital." Absolutely.
- Appeared to suggest there would be more job cuts announced on Friday.
- Why were there so few questions? It appeared to be a full house? Why are so many so investors detached from Motorola.
- "Whenever a company lays off people, morale takes a hit. It's a symbol of management failure." How can a board member recognize that there have been management failures and yet no one in management has been held to account for this failure. The rank-and-file have had to take the hit for this failure so far. It's a symbolic problem for the company.
- He suggested that Motorolans needed to "lead, follow, or get the hell out of the way" -- sounded a little ominous.
We will see what comes of Friday's discussion.Sphere: Related Content
Tuesday, September 04, 2007
Last weekend, the Times ran an interview with Carl Icahn, in which the legendary investor commented on how the credit crisis will affect activist investors. (According to Icahn, 'saber-rattling' won't be enough in this environment.) Today, another similar article appeared in the Journal by Gregory Zuckerman.
In this one, Zuckerman noted "activist angst" and stated that such funds could be "left in the dust" as they can no longer just advocate "pressuring companies to sell out, pay juicy dividends and buy back shares".
As someone who practices activist investing -- albeit as an individual using the Internet, rather than a hedge fund -- I couldn't be happier about these developments. Flip through Ken Squire's 13D update in Barron's every week for the past couple of years and you will find most investors prescribing the Holy Trinity of Mainstream Activism: Get Sold, Pay a Dividend, and Buy back Shares. This is not long-term unlocking of value; this is Activism By Numbers. And, hopefully, a credit tightening will flush these investors with a simplistic approach out of the market.
To be a successful activist in this market, you will have to understand the operations of the company and its industry. You will have to know how to help a company execute a turnaround. You will have to carefully study the composition of the board and management team and the strategy they have developed (or not developed, as the case may be). You will also have to build a coalition of other like-minded and frustrated investors.
The Journal article recognizes this. "Activists with turnaround expertise may be the only ones who thrive in the new hedge-fund world." Dan Loeb at Third Point is mentioned as an example of an activist battling on in this manner. Icahn will continue, of course.
I will continue to push for positive changes at Motorola and Yahoo! Yahoo!'s stock has rebounded substantially today on a positive Bear Stearns' report suggesting its take-out value is $50 per share. Motorola is up with the broader market today and -- interestingly -- UBS mentions it as a likely activist target in the next 12 months.
We will soon see who can perform as an activist in good and bad markets.
I found a blog posting over the weekend mentioning Microsoft as an activist target. The author pleads that a significant MSFT shareholder with a "spine" kick-start an activist campaign. He asked why I had not become involved, as well as Capital Research and others.
First off, I'm flattered that he'd suggest I get involved. I'm happy to chat with him or anyone else, if they want to suggest companies in which value could be unlocked.
However, I'd encourage him/her or anyone else to look inside before looking to others for help. You do not need to be an activist hedge fund to run an activist campaign -- although having one support you helps. You need to make your case for change. If it's compelling, others will support you -- why wouldn't they, if it will benefit them as a shareholder. Capital Research and other large institutions are made up of individuals. You just need to find the ones who care about Microsoft or any other company.
I haven't looked in detail at Microsoft, but I would like to launch a blitzkrieg of new activist campaigns in the coming weeks against worthy targets. I would appreciate any suggestions of readers' top picks for companies -- large and small -- who could benefit from some agitated investors wanting to push for some needed changes. Please email or comment your suggestions. Thanks.