Tag Archives: Wall Street Journal

The IRS Debacle

IRS building on Constitution Avenue in Washing...

IRS building on Constitution Avenue in Washington, D.C.. (Photo credit: Wikipedia)

Light is now shining on the IRS’s practice of slow-rolling applications for tax-exempt status by groups perceived as anti-government, and more specifically, anti-Democrat.  In the run-up to the 2012 election, cries of foul are everywhere.  Even the President is getting in on the action, as the Wall Street Journal points out this morning, “President Obama fired acting IRS Commissioner Steven Miller on Wednesday, two days after claiming it was an “independent” agency. That was certainly a rapid re-education.

Heads should roll.  When our Government uses its bureaucratic powers to single out groups it views as dissenters, it smacks of abuse and perversion of power.  Especially when we are talking about a tax authority, which has the undeniably strong powers to garnish wages, seize property and so on.  According to early reports from the Treasury Inspector General of Tax Administration, the IRS did indeed use its bureaucratic powers to single out groups, “the political cases took the IRS some 574 days on average to process compared to 238 days for other nonprofit applications.”   This is unfair and to have it occurring in the run up to a tight Presidential election heightens the cynicism and suspicion of my reaction.  Certainly the IRS never took 574 days to tell me that it thinks I owe them more money on my taxes… It will be interesting to watch this continuing investigation.  Transparency is needed here, and I’ll be watching closely this process.

It is also interesting to watch the spin machines getting rolling.  In particular, I’m now reading editorials seeking to blame groups like the Koch brothers and court decisions like the US Supreme Court’s Citizen’s United decision.  The transparency of the blame shifting is breath-taking. It’s like a child trying to blame the dog for eating all the cookies.  Sure, perhaps big spenders on both sides of politics–the Koch brothers or George Soros–need greater restrictions placed on them.  Yes, reasonable people can disagree about the wisdom of the USSC in Citizen’s United.  And of course, the IRS does need to take reasonable steps to verify that groups seeking tax-free status actually qualify.  But none of that justifies the approach the IRS took here.

The IRS abused its power.  And as an agent of the executive branch, it’s important to investigate how this occurred and whether others in the executive branch were in on it.  It’s that simple.  All the other stuff, campaign finance reform and dealing with Citizens United, all that’s work the Congress is and has been welcome to take up for years.

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The Fast-Changing Landscape

Image representing iPad as depicted in CrunchBase

In tech, we talk a lot about how fast things change, how dynamic things are.  As an investor in mobile, I think and talk about this all the time.  I sound like a booster, sometimes even to myself.  I try to balance that, I really do.

This week, though, wow, if you ever thought that the landscape was settling and the picture was coming into focus, did that ever get thrown out of the window.

Intel saw a 27% year-over-year drop in earnings as the PC market continues to shrink.  Chipmaker Qualcomm, which is riding the mobile wave, overtook Intel in market cap: unbelievable.  Also highlighting the headwinds in the PC market, Michael Dell is reportedly looking to take the company he started in his dorm room private.  Hard to imagine giants like Intel and Dell facing such a changed landscape.

At the same time, it’s not like new markets are standing still.  Sharp is reporting that its ramping down production of the full-sized iPad as the demand for the iPad Mini is so much stronger.  Gee, that was quick!  Has the iPad Mini even been out for 6 months yet?

And finally, it’s exciting to see that someone other than Apple is starting to see consumer hype and love in the mobile market, with the WSJ is reporting that the upcoming Galaxy IVS from Samsung is seeing “iPhone like hype.”  I’m not hating on Apple here, I just think its great for everyone when there’s strong competition, which Samsung appears to e bringing.

However stifled innovation may seem today, it sure seems like the market is pretty dynamic.

 

 

 

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Comparing M&A at Oracle v HP

Image representing Hewlett-Packard as depicted...

There is an interesting article in today’s WSJ, Hurdling HP: Oracle Shows Way in M&A, which describes Oracle and HP’s different fortunes in M&A.  Oracle has seen its free cash flow and market cap increase dramatically since going on a greater than $40 billion acquisition spree over the last 5 years.  The Wall Street Journal credits ORCL’s price discipline and its expertise at doing company integrations for its success.   HPQ, on the other hand, has had woeful results in acquisitions: Compaq, Palm, EDS, and now Autonomy.

When HP first announced its $8.8 billion dollar write down of Autonomy and asserted it had been defrauded and duped, my read of the news suggested that HP had some legitimate gripes.   Categorizing hardware as marketing spend?  Sounded as though there may have been some hinky business going on.

But the more I reflect on it, the more skeptical I become.  Autonomy had a real audit firm behind it, posting real numbers. I’d expect that it submitted to a detailed and lengthy diligence process, as $10.3 billion is still a huge check to write.

And the next problem of course is that the Autonomy writedown comes after a horror show of past acquisitions–Palm, Compaq, EDS–all decretive to long-term shareholder value.

At a certain level, irrespective of whether Autonomy defrauded HP, the damage is basically done.  To an extent, the new management team needs to establish that there is a new boss in town at HP.  They’ve been in a hole and they are going to stop digging.  But what the HP-Autonomy episode shows, and the side-by-side comparison with Oracle is very telling, is that HP has been a circus for a while.  It would be good, for all of our sakes, if the madness stopped.  Here’s to hope.

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Happy Thanksgiving

Happy thanksgiving all.  A favorite American holiday, Thanksgiving is a  an opportunity to watch football, eat turkey and reflect on our circumstances, what we’re thankful for.

Every year, I look forward to re-reading The Desolate Wilderness, published every day before Thanksgiving by the Wall Street Journal.  If you’ve never read it, I’d encourage you to read it.  It’s a great account of the first settlers/pilgrims and their journey from Holland to the New World, and the crazy foreignness of what they experience here.

This section in particular always impacts me:

Being now passed the vast ocean, and a sea of troubles before them in expectations, they had now no friends to welcome them, no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour; and for the season it was winter, and they that know the winters of the country know them to be sharp and violent, subject to cruel and fierce storms, dangerous to travel to known places, much more to search unknown coasts.

Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew.

Whenever I read this, I find it bolsters me.  Be not afraid is the message I take.  No matter what challenges one finds in front of him or her, they likely pale in comparison to this account.  Showing up on the banks of New England, with literally nothing established.   Truly, the ultimate startup.
Be not afraid.  Have a Happy Thanksgiving!
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Lessons from the Facebook IPO

The most anticipated tech IPO since Google’s offering a decade ago, Facebook‘s going public was today called “A Perfect Storm” by the Wall Street Journal’s AllThingsD, pushing further the narrative that Facebook’s IPO was a failure.  There is plenty to support the storyline– NASDAQ faced serious technical glitches to being able to fulfill all the activity, underwriters were reducing Facebook revenue forecasts during the roadshow, and two key banks on the IPO, Goldman and JP Morgan were helping hedge fund clients short Facebook stock (the horror!). Listening to the radio out here in Silicon Valley, the narrative has been that the IPO has been a disaster, in particular for the retail investor who fought to buy shares at the IPO and were expecting Facebook to surge in the first day of trading.

I see things differently.

Facebook acted in a particularly rational and concrete manner, and I think if anything should be applauded for its approach.  Notably, it priced its shares high at offering.  Recall that the preset range was between $28-35 per share according to a Wall Street Journal article from May 3, 2012, several days before Facebook began trading.  When it came time to pricing the IPO, Facebook chose $38–22% above the mid-point of the range, and well above the $35 high-end.  Facebook signaled very clearly with this pricing, that it was uninterested in providing early IPO investors with the opportunity to get a “quick pop” at the opening of trading.  Investors should never buy a product at any price, and those who didn’t re-calibrate their expectations as the prices got solidified should be looking in the mirror, as opposed to blaming Facebook.  In fact, there is no law guaranteeing that hot IPOs sizzle in upward price appreciation, and there shouldn’t be.

So why did Facebook set its price so high, when it could have been so easy to set it lower, get a pop and silence all this noise?  I think two factors came into play.  First, Facebook likely didn’t want to leave money on the table.  Setting its IPO price high would yield Facebook as much cash for its balance sheet (and for pre-public investors) as possible.  Second, Facebook likely reasoned that it didn’t want to attract investors looking for quick, short-term gains, but rather wanted investors focused on the long-term.  Certainly this approach has been consistent with how Mark Zuckerberg has built and driven his company–with a clear focus on  delayed gratification and for the longer-term.  Given that that’s been Facebook’s approach over time, its totally logical that its approach towards offering its stock to the public would similarly be optimized towards longer-term focused investors.  So the unsaid message from Facebook to its public investors with this pricing approach is this: “If you want to be an early investor in Facebook’s public stock, you had better be ready to hang on for a while.”

I applaud this approach for a few reasons.  First, when selling its shares to the public, a firm should get as much capital as it can for its balance sheet.  That is the key purpose and reason for the IPO in the first place.  Second, this approach addresses one of the key problems with today’s investment environment, namely its ultra-short-term focus.  From my perspective, Facebook’s behavior is spot on.

Those who should be excoriated are NASDAQ, retail brokerages who f*cked up trades for their retail clients, and retail investors who expected to make money on the initial pop.

NASDAQ has long positioned itself as the tech-centric exchange for stocks.  Not anymore.  The incompetent exchange is more like it, 30M shares were excuted imporperly, the largest problem the exchange has experienced.  This would be like being the wedding planner for the Royal Wedding in the UK and basically screwing the whole thing up.  This was something NASDAQ had to nail, and it didn’t.  It will be interesting to see how they recover here.  To fail this badly in this high profile an IPO is amazing.  In a world where the next Facebook will have its choice of exchanges, expect NASDAQ to be playing catch-up.

The New York Times has an interesting article about how retail brokerages like Scottrade, Charles Schwab, and Fidelity have basically universally declined to take direct responsibility for losses their retail investors suffered owing to the NASDAQ’s screw up.  Further, as retail investors are not members of Nasdaq, they can’t file complaints, whereas large institutions can.   Instead, the retail investor whow as screwed by NASDAQ’s incompetence has a totally fugly remediation process that I can only imagine involving lots of automated phone trees with cut rate brokerages like Scottrade or Fidelty.  “Dial 3 if you’d like to talk to someone about your trade… current wait times are unusually high, we expect someone to be with you in approximately 95 minutes.”   Yuck.

So retail brokerages who won’t stand behind their retail customers and who offer crumby service deserve to be called out.  Definitely.  But there is also some accountability that retail investors have to take here.  They should not come into an IPO expecting to see a quick pop.  That’s lotto thinking, its not stock investing.  It exposes you for a sucker and your foolishness deserves to be repaid with you losing your money.  When you buy a share, you are buying a share from someone ready to sell.  You need to ask yourself if you’ve really thought carefully enough about the trade you’re making, as its likely that the person or computer on the other end has dedicated a lot more brainpower to what they’re doing.  If you’re ready to put your money into the market or into Facebook, you’d better understand that its a long-term game, you really shouldn’t be doing this with an eye towards what happens today, this week, this month, or frankly this year.  To do so is foolish.

This tough love message is especially important now.  With all that we have been through in the last 10 years–DotCom Crash, WorldCon, Enron, the banking crisis, Bernie Madoff, the housing crisis–we should have learned that you’ve got to be mindful when you invest.

To see how quickly these lessons were forgotten, and how quickly the mirage of a sure thing of Facebook’s IPO took hold of the psyche, is cautionary indeed.  Fools and their money.

Disclosure: I have no investment position in Facebook.  I plan to be a long-term buyer, but frankly plan to wait a little longer, as I think the price is still too high.  I expect it to drift down over coming months, and will hope to pick some up.

 

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WTF! CFO Loses Job for Facebook & Twitter posts

From today’s WSJ, Gene Morphis, CFO of Francesca Holdings was let go because of his use of Twitter and Facebook to make company related posts.  The posts don’t appear to disclose anything all that juicy, else I’d expect the WSJ and other business journalists would be decrying the insider secrets that the CFO was exposing, pulling the business equivalent of ‘the Weiner.’

Some of Mr. Morphis’ offending posts: “Cramming for earnings call like a final. I thought I had outgrown that…” or “Earnings released. Conference call completed. How do you like me now Mr. Shorty?”

I think that this firing — for cause — is exactly the wrong step for this corporation and indeed for Corporate America writ large.  Facebook and Twitter open up society and connections, indeed they are freeing up information and societies.  Given the corporate scandals and failures that have rocked the US over the last decade–WorldCom, Enron, Madoff, Bear Stearns, Lehman, etc–the business community should be pursuing more openness, not less.  

Indeed, we want and need more transparency from Corporate America, not less.  These tools provide opportunities to do this.  Having  Mr. Morphis getting into a habit of sharing his genuine and open musings across social media drives this transparency, albeit in a small, focused way.  But I do wonder whether these tools and a CFO’s participation in these communities would serve as a deterrent to corporate scandals.  Of course, there’s no evidence here, but I’d wonder.  It drives the CFO to communicate more, generally a good thing.  It also gives more information to investors, even if non-material, also a good thing.  More communication, I would think, should have a slightly positive benefit towards deterring malfeasance or at a minimum exposing incompentence slightly more quickly.  Both good things.

Having a CFO share perspective on non-material, non-insider information through these channels should not be a fireable offense.  It should be applauded.

I’m saddened to see Mr. Morphis go.

 

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