Analytical Wealth

The Comedian Chris Rock once said: "just because you can do it doesn't mean it's a good idea, just because you can do it doesn't mean it should be done" . While Chris was just trying to tell a joke, what he said should be M & A rule #1, only it should be paraphrased to read:

"Just because Company A can purchase Company B doesn't mean they should even if you're able to articulate a good story on why the buyout will be successful, because the ability to execute a merger has nothing to do whether or not said merger will be successful. After all we don't want to engineer the next HP/Compaq or AOL/Time-Warner merger.

I.e. confront the reality of the situation instead of believing your own spin and following your ego.

I bring this up because whenever a buyout is proposed or actively sought as the solution for a struggling company's problems, the list of suitors is usually more based on who can afford the company instead of focusing on the companies that can successfully improve the fortunes of the acquired company. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Business Commentary on July 2, 2008 at 02:56 PM | Permalink | Comments (0) | TrackBacks (0)

Now that Blockbuster has walked away from Circuit City it's time for the speculation to begin over who should/can buy the company. The problem is that these discussions will probably revolve around who has the ability to buy CC, and then the analysts will more or less "invent" a scenario under which the marriage of the two companies makes sense. Mind you I'm not trying to insult said analysts or accuse them of subterfuge I just think they're starting from the wrong place, because instead of thinking in terms of who can afford to buy CC they should be thinking in terms of the solutions to CC's problems and then about companies that are capable of delivering those solutions.

When we look at CC we see a company whose product mix and pricing are very similar to a successful competitor (Best Buy), so it stands to reason that their problems undoubtedly revolve around customer service, the customer experience and branding. I.e. they need to solve the problem of customers simply not wanting to shop at their stores, and electing to shop at a similar competitor that offers a superior customer experience.

Starting with the above we realize that whoever buys Circuit City needs to be able to successfully rebrand the stores, and build a fashionable, hip and exciting customer experience that will draw customers away from Best Buy. A good example is the type of customer experience consumers receive when they go to an Apple Store where consumers will wait outside for hours in anticipation of visiting a new store, despite the lack of new products and the fact that said consumers typically already have the Apple products they want.

Turn the Circuit Brand into something with enough cachet and love from consumers that they'll wait in cold for a new store to open, and you'll have no problem saving the company. Even if you're not able to accomplish that, turn CC into a cool place to shop for electronics and consumers will come back.

Now that we've established what CC needs to do to save itself, the task of figuring out who should buy CC and/or whose purchase of CC will be successful becomes a lot easier. It has to be a retailer that can push CC up-market, a retailer that can reimage the brand and create cachet and excitement around shopping at Circuit City.

Needless to say that means that Wal-Mart and Sears need not apply because neither company has the ability to build a high-end brand, push a brand up-market, etc, Wal-Mart's failures at going up-market are well documented and Sears isn't exactly hip and exciting. More importantly people go to stores like Best Buy and Circuit City to buy products, receive services, etc, that are better than they can get at a store like Wal-Mart, Sears or Target, so mixing Wal-Mart with the former two retailers is a bad idea. A Circuit City in a Wal-Mart (or Sears) would just confirm people's misgivings about the CC brand.

I'd also disqualify Costco because its experience (while well suited to its business model) is very utilitarian and not synergistic with Circuit City either.

Target is an intriguing option because their relationships with top designers and ability to add hipness to a very un-hip business (discount retail), could be leveraged to build some stylish and fashionable stores. However they would need to see CC as a way to pursue customers that don't currently shop at Target for electronics, and as a way to provide additional services to their existing customer base. Think: a situation where the higher-end products are sold at CC, but someone who buys a laptop at Target is able to go to Circuit City for installation and support.

Apple is an off the wall option because they could definitely refashion the stores successfully, the question is whether or not they'd want to sell competitor's products and if it would be too much of a distraction. Of course the obvious flaw here is that if Apple wanted to build a more wideband consumer electronics business they could just expand the product mix at their current stores, so there is little reason for them to buy Circuit City.

Still, it’s an interesting idea.

Aside from Target I think the company's best hope is a private equity company, with the intelligence and resources to seek out the designers, branding experts, etc, who can rebuild the brand and create a top of the line customer experience.

At the end of the day whoever buys Circuit City needs to understand that the key to success is rebuilding the brand and creating a better customer experience, anyone who buys the company just because they can afford it with the hope of just adding it to their existing operations is doomed for failure. Unfortunately (especially when I look at some other recent deals) the winds will probably blow towards the biggest checkbook, so I don't have much hope for a deal being executed that actually delivers on its promise, 3, 5, 7 years down the road.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Retail on July 2, 2008 at 02:50 PM | Permalink | Comments (0) | TrackBacks (0)

Today Blockbuster did the right thing by walking away from the train wreck that is Circuit City, after all what does sense does it make sense to invest in a failing business when your own company is struggling to make money.

(From the Financial Times) "SAN FRANCISCO, July 1 - Blockbuster Inc on Tuesday abandoned its offer to buy electronics retailer Circuit City Stores Inc, after weeks of investor speculation that the deal was falling apart.

Shares of the video rental chain jumped 15 per cent on Wednesday in reaction to the news. Circuit City’s shares opened 16 per cent lower, after declining nearly 12 per cent at Tuesday’s close.

Blockbuster’s Chief Executive Jim Keyes cited ”market conditions” as a reason for withdrawing the offer, valued at up to $1.3bn, and said the deal was not in the best interests of its shareholders.

Blockbuster in April disclosed that it had offered to buy Circuit City in February for $6 to $8 a share, or up to $1.3bn.

Circuit City issued a statement soon after, saying its previously announced exploration of strategic alternatives is ”active and ongoing,” and that the process is independent of Blockbuster’s participation.

...investor Mark Wattles -- whose firm, Wattles Capital Management, has gained seats on Circuit City’s board -- told Reuters last month the company had received buyout interest from several bidders other than Blockbuster.

Circuit City’s Chief Executive Philip Schoonover said in a statement the retailer is ”diligently working with the parties involved in the process.” The board has not set a deadline for completing its review, he said.

Blockbuster’s Keyes said his company, which is in the middle of turnaround efforts, continues to believe in the ”strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand.”

Needless to say I'm 100% behind Blockbuster's decision, because I've always thought that if Blockbuster wants to combine content & electronic devices it should either built that business from scratch and/or via buying small regional retailers. From a cost and effort perspective either option is probably a lot more efficient than buying a failing business, then turning it around and integrating it into your core operations; especially when your core business is in need of it a turnaround of its own.

But there is a big problem facing Blockbuster and its plan to integrate content and hardware: it's nothing new or innovative, and they face several competitors that are already quite successful at selling media and electronic devices.  When consumers want to buy media and/or electronic devices they typically think of retailers like Best Buy, Target or Wal-Mart, they're generally not going to Blockbuster. As a result Blockbuster has to rise up against competitors that are already beating it at the media content game, and begin competing with them in a new and unfamiliar arena at the same time.

All that being said it's still going to be easier for Blockbuster to do this on its own or with the help of small (but profitable) partners, then it would be to try and compete against the likes of Best Buy with a competitor (Circuit City) that Best Buy has already vanquished.

As for Circuit City I say it's just a matter of time before the current management team is either fired, the company collapses, and/or the buyout offers comes from a company that just intends to liquidate the retailer A' La CompUSA. When a company is unable to make money despite selling a nearly identical (and similarly priced) product line as its competitors, and management continues to talk as if things are getting better despite evidence to the contrary, it's safe to say that the company's days are numbered.

At this point there is really nothing else to say on the subject.

Sources:

The Financial Times: "Blockbuster abandons Circuit City acquisition" -- July 1, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Retail on July 2, 2008 at 08:12 AM | Permalink | Comments (0) | TrackBacks (0)

Wachovia effectively threw in the towel today with respect to making a return on their purchase of Golden West when they decided to stop offering option-ARMs. When you consider the fact that Countrywide has even larger numbers of exotic mortgages on its balance sheet not to mention being a major subprime player, you have to wonder if Countrywide will become Bank of America's Golden West.

Don't get me wrong I understand the value in acquiring a mortgage lending network as large as Countrywide's, and Bank of America did need to act in order to protect its investment in the company. However it’s going to take a significant investment well in excess of the acquisition price to clean up Countrywide, and I have to wonder if it would’ve been cheaper for BAC to eat their investment, buy pieces of the company via bankruptcy auctions and/or build their own lending network to replace the void left by CFC. Looking at the likely banking environment over the next 2-4 years, I wonder if it’s even smart to take on a rehab project like Countrywide.

Consider just some of the issues Countrywide has faced over the past year or so:

• The CEO Angelo Mozilo declared a bottom in the housing market late last spring, and we all know how off that prediction was.
• The company went on a hiring and acquisition binge last summer only to turn around and sack many of those same people barely a month later.
• After having a disastrous Q3 of last year that included $1.2 billion in losses and negative revenue of $50 million, Mozilo declares that the company will be profitable in Q4 .
• The suspicious stock sales and CFC’s very suspect balance sheet .

Now if the above were the only bad things going on/wrong with Countrywide the company would look like a bad investment, instead the above barely scratches the surface of a train wreck of a company. At the end of the day CFC has shown itself to be out of touch with reality, woefully mismanaged and not particularly truthful with investors. I may not be a big time banking executive so maybe BAC knows something I don’t, but CFC isn’t exactly the type of company I want to put MY hard earned money into.

Better yet if Bank of America hadn't already invested two billion dollars into CFC back in August, would they have even tried to buy the company, would anyone for that matter? Only time will tell if BAC’s gamble will work out, but if I were an investor in BAC I would be more than just a little nervous right now. Between the lawsuits and balance sheet issues BAC is going to be cleaning up the mess left behind by Mozilo and company well into the next decade.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Banking on July 1, 2008 at 03:05 PM | Permalink | Comments (0) | TrackBacks (0)

Almost a year ago I noted that you would be able to determine the banks that would recover the fastest from the mortgage crisis by identifying the ones that are ending their exotic loan programs, because it would indicate which banks actually learned their lesson around offering toxic mortgages. I.e. the banks that are still offering exotic loans haven't learned a thing, and are just going to get into more trouble in the future.

This brings me to today's news that Wachovia has "just" decided to stop offering option ARMs , despite the fact that mortgage crisis is well over a year old and we're coming upon the one year anniversary of the credit crunch.

(From the WSJ) "In a reversal, Wachovia Corp. said Monday it would stop making option adjustable-rate mortgages, which were why the bank bought Golden West Financial Corp. but is now stuck with more than $120 billion of the rapidly souring loans.

Wachovia also said it will let option-ARM borrowers escape prepayment penalties, but loan balances likely have swelled too big for many of these borrowers to refinance.

The changes effectively mean the dismantling of the core product of Golden West, the Oakland, Calif., thrift Wachovia bought for $25 billion two years ago. Option ARMs give customers multiple payment choices, including a minimum payment that may not be enough to cover the interest due. Borrowers who elect the minimum payment on a regular basis can see their loan balance grow.

For months, Wachovia had been dramatically curtailing its origination of option-ARM loans, so the moves weren't entirely unexpected. But the changes were still a blow at Wachovia, based in Charlotte, N.C., which has seen its shares fall 70% in the past year.

For years, the "Pick-a-Payment" option ARM was the core offering of Golden West's World Savings unit. But the company saw its market share slip as competitors such as Countrywide Financial Corp. and Washington Mutual Inc. aggressively marketed these loans to a wide variety of borrowers. In 2006, Golden West was the third-largest originator of option ARMs, with $31 billion of these loans, according to Inside Mortgage Finance. At the end of the first quarter, the company held $121 billion of Pick-a-Payment loans on its books.

But option-ARM originations have dwindled as the number of problem loans has climbed. Option ARMs accounted for just $4 billion of mortgage originations, or less than 1% of total loan volume, in the first quarter, says Inside Mortgage Finance. In 2006, their peak year, originations totaled $255 billion."

IF that doesn't spell: "Uh, we don't know why our mortgage investments went south and are bloody clueless" I don't know what does. Merely curtailing a toxic mortgage doesn't solve problem it just lessens the impact, and Wachovia should've been focused on a complete evisceration of the problem. Wachovia should've admitted that their Golden West Financial investment was a bust last year and ended its option ARM originations then, instead of continuing the practice and making things worse.

Finally the key metric on option ARMs to focus on this: "More than 18% of the option ARMs originated in 2005 and 2006 are already at least 60 days past due, says Barclays Capital, which looked at loans that were packaged into securities. The vast majority of these borrowers have yet to see their monthly payments recast so they begin making payments of principal and full interest, at which point payments can increase by 60% or more."

In other words the problem is about to get markedly worse because most option borrowers haven't hit the point where they won't be able to make their payments, and due to the nature of an option ARM very few of these borrowers are going to be able to refinance without a severe capital infusion or principle forgiveness.

Sources:

The Wall St. Journal: "Wachovia to Discontinue Option-ARMs" -- Valerie Bauerlein and Ruth Simon, July 1, 2008

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Banking on July 1, 2008 at 01:00 PM | Permalink | Comments (0) | TrackBacks (0)

If any of you living in the vicinity of Bard College are into Ballet (or even Classical music) you might want be interested in checking out a performance of Prokofiev's Romeo & Juliet that will be running at the school from July 4th through July 9th. When Prokofiev composed the original work he was forced by the Soviet's to modify it and was none too happy with the results, the Bard college performance will be the first time the Ballet will be performed per Prokofiev's original vision.

I've actually never seen the ballet performed in any form but have been listening to the music for years, I won't be able to make it out to NY for the performance but am hoping to be able to see it elsewhere in the future. It also goes without saying that if/when a recording of the score is released (hopefully on SACD ) I'll spend some time listening to it and scrutinizing it for the differences.

Posted to: Randomization on July 1, 2008 at 11:54 AM | Permalink | Comments (0) | TrackBacks (0)

May's automotive sales report came out today with most of the major manufacturers showing large YoY drops in sales, with the exception of Honda who reported a slight gain. The media (of course) fixated on the fact that GM managed to hang on to its "sales crown", a fact that is hardly relevant since GM is leaking money like a sieve and isn't generating profits from the cars it sells. In fact the report is barely relevant since sales volume in terms of the number of cars sold isn't directly related to profits, GM could've shown a 15% YoY gain and Honda could've shown a 15% drop and the latter still would've generated significantly more PROFITS over that time period.

Profit per car sold and overall profits should be the metrics used to measure car company sales performance, better to sell 2M cars and make a profit than to sell 8M cars and lose money.

For some reason the news was credited as helping to lift the Dow a bit, an idea that doesn't make sense to me as investors shouldn't be cheering GM  for leaking money like a slightly smaller sieve/smaller than expected sieve. I never understood celebration of better than expected bad results when the overall trend/situation, etc, hasn't changed in the slightest.  Better than expected results should only be celebrated for positive results and situations where it indicates that a company's decline is slowing and they're on the path to recovery,  when you consider the big picture (aside from a few bright spots) GM doesn't exactly fit into the latter category. This is not to say that investors didn't in fact react positively to the news from GM, I'm just questioning the celebration of better than expected poor results that don't really change anything.

But there are definitely bright spots in the auto industry as there are  cars that are selling faster than they can be manufactured so here is a look at a list of the most wanted cars in the U.S, you can get the summary article here and view a slideshow of the cars here .  Most of the cars on the list are a reflection of consumer demand for cheap and fuel efficient cars with a few noted exceptions in the luxury car arena.;  the only one on my own personal short list (I'm car shopping right now) is the Audi A5/S5 as it’s a beautiful car that's undoubtedly a lot of fun to drive.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Posted to: Auto Industry on July 1, 2008 at 11:36 AM | Permalink | Comments (0) | TrackBacks (0)

It’s no secret that I’m no fan of GM’s mismanagement of the Saab brand, but I have to admit they “might” be on the path to turning things around with the latest iteration of the 9-3 Sedan. I was walking through Ballard yesterday (a hipster neighborhood of Seattle, they granted me a one day pass for the day), and passed by Carter Saab and was surprised by the styling of the new 9-3.

The 9-3 comes in a couple of variants most notably a 280 HP, AWD model that appears to be the bona-fide sport sedan many Saab fans have been waiting for. The dealership didn’t have the 280 HP model available so I was only able to test drive a 4-cyclinder 210 HP model, the model came with practically every feature except for Navigation and had a sticker price of around $35k.

In the past I’ve test driven Saab’s before and have been rather disappointed with the whole experience, it’s not that they’re bad cars per se it’s that you can easily purchase something better for a lot less and the cars in its actual price range are usually a lot better. So when I went on the test drive I wasn’t expecting much and was pleasantly surprised when I found myself thoroughly enjoying driving the car. Around on town and on some twisty roads the car handled like an actual sport sedan (for once), and despite being FWD it didn’t have that “heavy nose” feeling like a FWD Audi or the Infinity “G” cars.

Last weekend I was running errands in a 9-3 hatchback (the trunk of my BMW is tiny) and found myself sorely missing my BMW the entire time, if I were in this car last weekend I would’ve just driven it and enjoyed it for what it was: not my BMW but a lot of fun just the same .

Despite the improvements to the driving experience the interior still needs a lot of work before it’s up to the standard of its German competitors, however I’d rate its interior as better than the Infiniti G37 Sedan and Coupe whose interiors scream “Nissan ”.

Overall the car reminded me of a high achieving mainstream car or something I would probably buy over an Acura TSX or Volvo S40, and while it’s not truly competitive against the Germans or Lexus it’s definitely a step in the right direction. Furthermore if the reviews of the 280 AWD variant are correct, then it’s possible that driving dynamics wise (at least) the car may indeed get to join “the big boys” of the sport sedan world especially if Saab upgrades the car’s suspension.

Now if Saab would make a “Viggen” variant of the AWD 9-3 Aero, they would really be on to something.

Sources: all images courtesy of Edmunds.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Posted to: Auto Industry on June 30, 2008 at 10:26 AM | Permalink | Comments (0) | TrackBacks (0)

Note: this is sort of a “remix” coming out of my Seeking Alpha submission of the previous post on the Ford Mondeo only with a focus on how to tell when Ford finally “gets it”, and starts to display signals that it is beginning to understand how to better compete in its home market. I.e. the usual some old stuff, some new, probably still worth reading.  

One thing I really like about traveling to Europe is looking at the subtle differences between cars that sold in Europe and in the U.S., in addition to checking out the cars that are only sold in Europe. Last time I was there I saw a fairly sporty looking car that I assumed was either a VW or a European brand that isn’t sold here; in the end the make didn’t matter because it was something that I definitely wanted to test drive. As it turns out the car is produced by a company whose products this happy Audi and BMW driver would never consider: Ford.

The car is the new Ford Mondeo a car designed by Ford Europe and based on a platform designed by Volvo, a platform it doesn’t share with Ford’s Fusion and other mid-sized vehicles for the American market. In fact both cars were more or less developed independently with the Mondeo never being designed with the U.S. market in mind. While it would undoubtedly be expensive to modify the car for the U.S. market, those costs are undoubtedly lower than that of separately developing the Fusion on a different platform.

The car has been a top seller in Britain and Germany, and recently won family car of the year from the British TV show “Top Gear ”. In fact the car easily competes with cars like the VW Passat and Honda Accord, and is considered a benchmark in its class, something that Ford Midsized cars in America can only dream of. Simply put: Ford of Europe designs Ford’s best car and yet the company made no plans to sell this car in its most important market, during a time when SUV sales were fading the car desperately needs something to compete with the likes of Honda, Nissan and Toyota.

After all when Car and Driver claims: “the '08 Mondeo drives better than its forebears and we would judge it to be superior to any other front-wheel-drive sedan from a mainstream manufacturer. This is not to say it is a dynamic peer of the heralded BMW 3-series, but the Mondeo largely succeeds at capturing the feel, solidity, and refinement of more expensive luxury sedans ”. It doesn’t take a rocket scientist to figure that Ford of America should scrap its mid-sized car designs and let Ford of Europe do the heavy lifting, whilst the Americans focus on making sure the car meets American specifications with regards to safety, emissions, etc.

Continue reading "The Future of Ford's Mid-Sized Car Business" »

Posted to: Auto Industry on June 29, 2008 at 11:39 PM | Permalink | Comments (0) | TrackBacks (0)

Yes, I am on an energy kick these days…

Here is an article from the WSJ discussing the “Peak Oil” debate between two former executives at Saudi Aramco AKA the world’s most powerful oil company. The argument isn’t especially complex, one person is arguing that we’ve hit peak oil already (Sadad Al Husseini) and the other arguing that there is plenty of oil yet to be found (Nansen Saleri).

(From the WSJ) “ Sadad al-Husseini and Nansen Saleri raced up the ranks at Saudi Aramco, the world's most powerful oil company, working together for years to squeeze more crude from Saudi Arabia's massive fields. Today, the two men have staked out opposite sides of a momentous industry debate.

Mr. Husseini, Aramco's second-in-command until 2004, says the world faces a brute reality of depleting resources and ever rising prices. Mr. Saleri, until recently the company's oil-reservoir manager, insists that with enough ingenuity and investment, plenty more oil can be found.

With oil prices having doubled over the past year, political leaders, Wall Street investors, commuters, airlines and car makers are all scrambling to divine where prices will head next. The disparity of opinion between two of the most knowledgeable men in the industry shows how much fog hangs over the most basic question of all -- whether oil can be unearthed any faster than it currently is.

At the moment, Mr. Husseini's pessimistic view is clearly ascendant. Even before this year's surge in oil prices, there were gloomy industry predictions that world oil output would soon hit a ceiling. U.S. benchmark crude hit a record high on Thursday, propelled by Libyan threats of possible supply cuts, closing at $139.64 a barrel, up more than threefold since 2004.

But Mr. Saleri isn't alone in dismissing the gloom as misplaced. Optimists, from Exxon Mobil Corp. to the U.S. Energy Department, argue that high prices propel companies to innovate and invest more. As supplies rebound, prices will fall from today's levels.”

Personally I don’t see the point in expending a lot of energy into the Peak Oil debate, because oil is a finite resource and it’s not a question of “if” it’s a question of “when”. Unless someone can somehow prove that the world’s supplies of oil are replenishing themselves it’s fatuous to argue against peak oil, because oil is a finite resource that will indeed run out at some point. The real question is: are we going to continue to argue over why oil prices are so high and/or when/if peak oil will happen, or are we going to be some serious effort behind changing or habits and developing alternatives?

To go along with the article here is a graphic showing oil production levels over the past 28 years, and another showing the rise in demand over that same time period.