(Reuters) - Hewlett-Packard Co ditched a plan to spin off its personal computers unit, a month after the ouster of CEO Leo Apotheker whose idea would have cost billions of dollars in expenses and lost business.
New Chief Executive Meg Whitman, who replaced Apotheker, had vowed a quick decision on an issue that was beginning to alienate its PC partners, investors and customers.
Whitman still has one unresolved item before her -- the future of WebOS software. Apotheker put the WebOS division in jeopardy after he killed the WebOS-based TouchPad tablet following poor sales.
HP is still mulling the software's future, including if it should build a new WebOS-based tablet, Whitman said in an interview.
Whitman said.
"The question now before us is what do we do with WebOS software and do we come back to market with WebOS devices. It obviously will not be the same device but it will be version 2.0."
The former California gubernatorial candidate said that she decided to retain the PC group as the "numbers were incredibly compelling."
Separating the PC unit would have cost the company $1.5 billion in one-time expenses and another $1 billion annually, it said.
The retention of the PC business marks the latest flip-flop in strategy as the company had said earlier that its preferred option was to spin out the business.
Gartner analyst Mark Fabi, adding that it also showed Whitman's decisiveness as CEO said.
"This is the most pragmatic decision and allows them to continue to leverage the end-to-end supply chain benefits. Clearly this was missing over the past year."
The world's largest technology company by revenue stunned investors when it announced in August that it was considering strategic alternatives for its Personal Systems Group (PSG) -- which includes PCs -- and would kill its new tablet computer as part of a major revamping away from the consumer market.
EXPENSIVE OPTION
The Palo Alto, California company has been struggling in the PC market -- a low-margin but high revenue business -- as niftier gadgets such as Apple Inc's iPad have lured consumers away.
Citing deep integration of the PC group in HP's supply chain and procurement, Whitman said the company was "stronger" with the unit.
The decision to review the PC business was part of Apotheker's sweeping strategy that was not welcomed by investors.
The former SAP CEO was fired last month after he angered investors with his over $10 billion purchase of British software company Autonomy and struggled to halt a 50 percent plunge in HP's share price.
The decision to announce HP's review of its PC business was questioned by many shareholders.
The series of events also undermined investor confidence in HP's board, which was criticized for hiring Apotheker and for going along with his strategy.
Forrester analyst Frank Gillett said.
"Hopefully this is a beginning of a set of events over the next year that demonstrates the board has a better grip on things. It didn't feel well thought out or well executed in August."
Separating the PC business would have meant about $1.5 billion in one-time expenses including establishing the infrastructure such as new systems for IT, support, sales and channel operations, a company spokesman said.
The elimination of joint opportunities -- such as branding and procurement -- would have cost HP over $1 billion annually, he said.
Some of the alternatives that HP previously considered included hiving off the business into a separate company through a spin-off or sale.
Shares of HP closed up 4.86 percent at $26.99 on the New York Stock Exchange on the back of a broad market rally.
COMMENTARY: In a blog post dated August 21, 2011, I reported Apotheker's announcement that it was thinking of spinning off its personal computer business unit. After thoroughly reviewing HP's financials, and specifically its personal computer business unit, I actually agreed with the board's decision to spinoff the PC unit.
I did some rough calculations what the personal computer business might be worth, and decided on a figure of somewhere between $18 to $20 billion. Shortly after the at announcement HP's stock lost nearly 20% its value in one day. This cost Apotheker his job, and I have a feeling that CEO Meg Whitman and Executive Chairman Ray Lane felt it was better to keep the unit than lose such a valuable brand and so many customers who appeared very troubled with the decision.
I am now curious to find out Whitman and Lane's strategy to recapture lost personal computer market share and increase profit margins. Incidentally, the latter ranks the lost among the major personal computer companies.
Courtesy of an article dated October 27, 2011 appearing in Reuters
Google acquired a whopping 57 companies of various assets through September, according to an SEC filing. With three months left to go in the year, anyone want to guess what else is on the radar?
Google (NASDAQ:GOOG) spent more than $1.4 billion to purchase 57 companies of various sizes and persuasions, blasting apart the company's previous record of 48 acquisitions from 2010.
The search engine provider revealed in a 10-Q filing with the SEC that it paid $941 million in cash for three deals that included:
ITA Software - A flight reservations software company for $676 million.
Zagat - A restaurant review guide in April for $151 million.
Daily Deals - An online daily deals service for $114 million in September.
Google paid another $502 million in the aggregate for 54 other smaller companies, according to Google.
On August 15, 2011, Google announced a bid to acquire Motorola Mobilityfor $12.5 billion, but that isn't likely to close until 2012, due to current regulatory scrutiny.
Google isn't done with M&A either. The company spent that much and picked up that many assets only through September, which means that it acquired more than 6 companies a month to date. With 3 months left in the new year, it's possible Google could tack another 10 or 15 purchases before 2012.
Why buy all of these companies and what's the grand plan? Most of the buys have been cloud-based players that bolster the company's local search, advertising, video and social services services.
Ultimately, Google is weaving a fresh tapestry of Web services and applications into its Google+ social network, which it hopes to make the center of the user experience.
ITA has been leveraged in Google Flight Search. Zagat will be used in Google Places for local business search.
Daily Deals, along with loyalty card provider Punch, coupon provider Zave Networksand daily deals aggregator DealMap will likely be used to fortify the Google Offers deals and Google Wallet mobile payment services.
Google's YouTube arm bought video producer Next New Networks, which is being used to help fashion new channels on YouTube, as well as Flick for social sentiment analysis and Green Parrot Picturesfor video processing.
COMMENTARY: Google's recent acquisition of Motorola Mobility was its largest by far, but let's look at the search giant's major acquisitions over the past 11 years. Here are the highlights of the major ones:
In total, Google has acquired 102 companies with Motorola Mobility being their biggest one to date. Google paid $12.5 billion for the company, but it still awaits regulatory approval.
Other big acquisitions include DoubleClick in 2007 ($3.1 billion), YouTube in 2006 ($1.65 billion), as well as buying a 5% stake in AOL in 2005 ($1 billion).
Of all the companies Google has bought, 74 were based in the United States, 6 in Canada, 5 in Germany, 4 in the UK, 2 in Australia, and 2 in Israel.
In 2001, they bought only two companies. In sharp contrast, last year that number peaked at 26 and this year, they have already acquired 18 different companies. That’s 44 companies in 20 months. Someone said recession?
Those were the highlights. And here’s the “big picture.”
Click Image To Enlarge
Courtesy of an article dated October 27, 2011 appearing in eWeek.com and an article dated September 3, 2011 appearing in IntoMobile
At the closed HP all hands meeting last week Meg Whitman and Ray Lane addressed the internal bay area employees.
The goal of the meeting was to publicly stand up in front of the team and lay out Meg Whitman’s plan. One surprise in the meeting was the revelation on the next CEO.
According to my sources inside the meeting, Ray Lane announced that HP’s next CEO will be hired from within.
In addition to that Meg Whitman got great reviews from the employees. In her talk she laid out her top 3 priorities.
Meg Whitman’s Top 3 Priorities
Evaluate the PSG spin off within the next 90 days around the criteria that best generates the most corporate and shareholder value.
Make the quarter. Meg was focused on communicating that the performance has to be there for HP for them to do anything else strategy.
Integrate Autonomy.
Meg said.
“No matter what Silicon Valley power blogger John Furrier says about how bad the Autonomy deal is …we have to do the Autonomy deal by UK law so we will make it work for our strategy.”
Ok she didn’t say that part about me, but that was her main point. What she did say was something along the lines of .. Autonomy is a done deal and cannnot be unwinded so HP will integrate it the best they can into operations. It will be a strategic and operational fit.
Role of CEO Selection – Succession Plan Failure
The question on how poorly the CEO selection and succession process played out was top of mind of the audience. Mainly around the current succession plan and if Meg Whitman was an interim or permanent CEO.
Ray stood by Meg as permanent CEO, but then said that she won’t be around forever. Ray Lane said that dropped the big bombshell …He said
“The next CEO will be hired from within HP.”
From that Ray and Meg went on to say that the overall priority regarding the employees was clear – develop talent internally. Going forward HP will put low priority or hold on search firms and outside hiring. Expect HP to bulk up on talent management. They acknowledged that HP has done a poor job of promoting from within. That inability to hire from within the ranks caused the majority of the companies problems.
How long will Meg last? We’ll see, but the message is clear on HP’s next CEO – it will come from inside the company.
Bottom line: This is the Meg and Ray show and I have no problem with that.
COMMENTARY: John Furrier, Founder, CEO, and Executive Editor, SiliconANGLE Network is entirely too easy when it comes to the appontment of Meg Whitman as HP's new CEO and Ray Lane's elevation to Executive Chairman. As I pointed out in my blog post September 23, 2011, The decision to hire a new CEO was too rushed and Meg Whitman is not the right person for the job. The latter is the general opinion of many Silicon Valley analysts. Meg Whitman has shown she can lead an internet company like eBay, but she lacks adequate experience to run a PC hardware and software bompany.
The fact that Meg Whitman was appointed to HP's board of directors and voted for the Autonomy deal and agreed with Leo Apotheker's strategy to spinoff the PC hardware division, but now needs three months to fully evaluate an HP spinoff tells me she is either not sure what to do, or was goaded into agreeing to go along with the spinoff by either Ray Lane or some of the other board members. Why would you vote for something, then say, "I need more time to evaluate it." That logic simply does not make sense to me.
If the HP board of directors had a change of heart after they went along with Leo Apotheker's stategy to acquire Autonomy and spinoff the PC divison, they should take part of the blame for okaying it in the first place. If you ask me, the decision to fire Leo was based strictly because HP shareholders were pissed that the company lost 20% of their market value in a single day. Shit happens, but they went along with Leo's decision, and they can't just do a 180 that hung Leo out-to-dry. Unfortunately, this is what happens in corporate America all of the time. If there was a mistake, it was Leo making a public statement that HP would spinoff the PC business. He should've just kept quiet, and if the board really wanted to go through with the spinoff, they should've backed Leo's decision.
In conclusion, I have a feeling that the HP board of directors is one of those boards that "waffles", they have no balls, will change their mind at the drop of a hat, and many of them don't have PC hardware experience. They may have high-tech and internet experience, but this counts for naught when it comes to pure play PC hardware, which is pretty much a commodity business with paper thin margins.
What really irks me is Ray Lane's comment that the next CEO will come within HP's ranks. Why not conduct a search of HP insiders ready to run the company after firing Leo Apotheker. HP is a huge company. Surely there is somebody qualified to run the company, someone who has hardward and software experience and understands the HP culture.
Courtesy of an article dated September 27, 2011 appearing in SiliconAngle
It has been a very long week for AOL. And it's about to get even longer.
Last Thursday, word leaked that one of its employees, TechCrunch founder Michael Arrington, was launching a venture capital fund that would include an $8 million commitment from AOL (AOL). Then came a more official versionvia the NY Times, which included positive quotes from both Arrington and AOL chief executive Tim Armstrong.
Shortly thereafter, however, a company spokesman -- apparently acting at the behest of AOL editorial boss Arianna Huffington -- said that Arrington had been fired. Another company spokeswoman clarified, saying that he was still in the employ of AOL, but in a non-editorial role that would prohibit Arrington from sourcing investment opportunities via TechCrunch.
Arrington mostly stayed out of the public fray until yesterday when he demanded that TechCrunch either be given full editorial independence or sold back to Arrington and other legacy shareholders (AOL had purchased the site last year).
But AOL is not giving TechCrunch its editorial independence. And it is not selling it back to Arrington.
Instead, Fortune has learned that AOL executives have decided to terminate Arrington. It is unclear how this will officially occur. Maybe a pink slip. Maybe Arrington submits a (public?) letter of resignation. Maybe Tim Armstrong simply gives Arrington a phone call, and he quickly dashes off a note to TechCrunch employees on his iPad.
In other words, the ending has been written but much of the final chapter remains blank. This includes the fate of CrunchFund, which still includes that pesky AOL commitment (which it technically could default on, but that would lead to all sorts of other problems).
It also is important to note that while I'm led to believe this decision is final, AOL has been so scattershot during this past week that any sort of reversal would not shock me (particularly since Arrington likely will be asking for the world, while Huffington will want to offer him a bowl of dust).
Earlier today, I wrote that the biggest loser in this affair was Arianna Huffington. But perhaps I judged too early. Huffington clearly erred here in okaying a project without fully understanding its public relations consequences, and then quickly backtracking without admitting to having done so. But, at the same time, Huffington now appears to be more influential at AOL than the company's CEO (both of them were aware of CrunchFund, but Armstrong was far more involved in its formation). And then there is Arrington, who has lost both his job and (likely) his TechCrunch platform. Oh, and AOL has a mess on its hands deciding if Arrington should or shouldn't participate in next week's TechCrunch Disrupt conference (assuming he's even willing to attend).
I reached out to both Arrington and an AOL spokeswoman for comment, but did not hear back from either of them.
COMMENTARY: I'm a big fan of TechCrunch, use the tech blogging service regularly, but back on September 30, 2011, when I learned that AOL had acquired TechCrunch, was a bit dumbfounded as to how it all came down. I was writing about some startup trends uncovered by TechCrunch Disrupt, but discovered that the AOL/TechCrunch deal was done live at Disrupt, so I added this development to a another blog post dated October 10, 2010. Here'as the video of that "happy" event.
It's my understanding that Arrington is not happy having to clear all editorial content for TechCrunch through Ariana Huffington, who is AOL editorial boss. I don't know the terms of the acquisition agreement or employment contract between AOL and TechCrunch/Arrington, but it is obvious that Arrington is not happy losing his editorial independence, and there maybe a personality rift as well.
The AOL/TechCrunch acquisition is another great example of a power struggle between two strong personalities. Arianna Huffington calls the shots on TechCrunch's editorial content. Michael Arrington says otherwise.
I think that as a TechCrunch fan, that it's only appropriate that Michael Arrington and Arianna Huffington should duke it out. The whole thing should be refereed by Tim Armstrong. Let's fly in Michael Buffer from Vegas. I want to hear, "Let's get ready to rummmblllll." or "Two men enter, one man leaves." My money is on Arianna Huffington. She can hold her own with anybody, if you've seen her guest appearances on Bill Maher, CNN, MSNBC, and Fox. Besides Michael Arrington is a real blowhard.
THEN:
TODAY:
Courtesy of an article dated September 7, 2011 appearing in CNN Money
Google's buying activity has seen an interesting spike in recent years, and what it's buying tells you a lot about U.S. innovation and Google's surprisingly conservative strategy.
The relentless, daily stream of Google news tends to hide one important fact about the company: They've been buying a lot of smaller companies, in their ever-evolving quest to dominate the online ad market and shore up their defenses against disruptive innovations or nagging patent lawsuits.
Here's an infographic illustrating that, created by Antonio Lupetti, the founder of Italian tech site Woorkup:
The main take-away, of course, is that Google has actually been quite strategic about its biggest purchases: These aren't big-ticket impulse buys, as you might expect given Google's wild-and-wacky image as loving innovation for innovation's sake. In each case, from Double-Click to Ad Mob to YouTube, the focus has been on shoring up its core advertising business. (Granted, the AOL "acquisition" is actually more of a strategic partnership, but never mind. That's still a lot of money.) The fact is that Google keeps its bets on crazy ideas small and well distributed, while it reserves its biggest cheese for (almost) sure things.
The one seeming outlier, of course, is YouTube. But that was a different sort of bet: It hinged on the idea that Google was a master of monetization, and would be able to bring its ad-words intelligence to online videos, which hadn't really ever had a working business model. After some rather large hiccups--including a stunning rate of cash burn--it seems to be working, even as YouTube expands into original content in hopes of creating a more robust set of offerings to advertisers that would rather not be too attached to Keyboard Cat and Chocolate Rain.
If you think about Google as one giant bellweather of the state of innovation in the U.S., then the fact that 74 of its 102 acquisitions were of U.S. companies is a very good sign indeed. It would probably be worrying if, for example, Google had to look overseas for the best companies to buy. That might mean that Silicon Valley, the greatest innovation engine known to man, was losing some of its mojo. But that clearly doesn't seem to be happening, to judge by these data.
But the last, most interesting part is actually at the end, and totally obfuscated by the confusing data representation. Look at the line showing the number of acquisitions that Google has conducted. The last two years have seen a very large spike in buying activity -- and 2011 isn't even done yet. It would be easy to read too much into that -- to interpret Google as being desperate for new avenues of growth, for example. But at the very least you can say that Google isn't letting its enormous pile of cash sit around, as it once seemed so content to do.
Here's the actual list of Google's major acquisitions between February 12, 2001 and August 15, 2011.
COMMENTARY: It's incredible just how active Google has been in acquiring companies. I thought the $3.1 billion that they paid for DoubleClick was way too much. I covered Google's $12.5 billion acquisition of Motorola Mobility in a blog post dated August 15, 2011, and it now appears to have been strictly to acquire Motorola's intellectual propoerty as a defensive strategy to defend itself against various lawsuits involving patent infringements. Motorola Mobility's revenues have been relatively flat over the last three years, and it ranks No 6 among mobile phone manufacturer's with a 4.08% share of the smartphone market. Google will now compete against its Android phone partners in the smartphone business, a move that might backfire. It really has its work cut out to fix Motorola's business model and financial performance. But, first the deal needs to be approved by the FTC, and if it is not approved, Google will end up paying Motorola a penalty of $2.5 billion.
Courtesy of an article dated August 25, 2011 appearing in Fast Company Design
Investors abandoned Hewlett-Packard Co. after its plan to get out of the personal-computer business left serious questions about the technology company's strategy.
H-P shares plunged 20% Friday to $23.60, erasing about $12 billion in market value, and leaving the stock near six-year lows.
Hewlett-Packard's business and management moves can't seem to please its shareholders, MarketWatch's Dan Gallagher reports on the Markets Hub. Despite steps to try to streamline its business, shares were pushed lower a day after reporting it was spinning off its personal computer business.
It capped a tumultuous week for the tech industry, which began with Google Inc.'s surprise $12.5 billion purchase of Motorola's cellphone business, as Silicon Valley giants react to the shift away from computers toward smaller mobile devices.
H-P shocked investors Thursday when it said it is looking to sell or spin off its PC business, the world's largest. It also agreed to pay more than $10 billion for British software maker Autonomy Corp.
H-P's moves in large part reverse a controversial $25 billion deal it sealed nearly a decade ago to acquire PC rival Compaq Computer Corp. At the time, H-P ran into significant opposition from investors and even some objection from its own board.
Much has changed at the company since then—it has switched CEOs two times, and the current board is loyal to new chief Leo Apotheker—but it must again tame rebellious investors.
Pat Becker Jr., a fund manager at Becker Capital Management in Portland, Ore., said.
"They're damaging the business they're trying to sell."
Becker Capital Management held about 1.2 million H-P shares as of June. He thinks H-P may have bungled its chance of getting a good price for its PC unit by disclosing its new strategy too early.
Mr. Becker said he's concerned H-P plans to let the PC division operate as a lame-duck arm for a year or more while it completes a spin off. H-P felt it had to announce the plan as soon as the board approved it to comply with Securities and Exchange Commission disclosure rules, according to two people briefed on the matter.
H-P will decide on a course of action soon, but completing a spinout could take as long as 12 months, people familiar with the matter said. The new company, dubbed "Spin Co." within H-P, would need to assemble a board of directors and the tax implications of a separate entity would need to be worked out. In an interview Thursday, Mr. Apotheker said a spinoff could have tax benefits.
PC growth and profit margins were below all of H-P's other businesses, and getting rid of that business will let H-P focus on high-margin software and services, said Basu Mullick, a managing director at Neuberger Berman LLC, H-P's 25th largest shareholder. But he questioned the abrupt way Mr. Apotheker announced the new strategy. He said.
"Their communication definitely is not right, the way that they're handling it. Obviously don't talk about it before you do it."
Another worry driving the sell-off: the Autonomy deal's price tag. H-P is paying an 80% premium for the British firm. It is paying more than $10 billion for a company with only about $1 billion in annual revenue.
Mr. Mullick, who said he was speaking personally and not for his firm, said he supports the plan to get out of PCs, but dislikes the Autonomy acquisition. He said.
"It seems to me a destruction of shareholder value. Leo has not delivered yet and he wants us to trust him with making an expensive acquisition."
Mr. Apotheker spent much of Friday talking to investors about the decision, as did finance chief Cathie Lesjak. Other executives have been explaining the move to customers, employees and retailers. Mr. Apotheker plans to travel to New York Monday to meet investors in person, and will hold meetings in London on Wednesday, said Bill Wohl, H-P's head of communications.
H-P is getting out of the PC business because it can't afford to invest in the consumer devices the unit made while also building out its portfolio of products for businesses, Mr. Apotheker said Thursday.
One problem the company faces is that splitting the PC arm away from the rest of H-P will likely make the PC division a less attractive business than when it was attached to H-P, said analysts, investors and tech-industry executives.
Many of the PCs H-P sold went to corporate customers who bought the computers as part of big bundles that included tech services and server systems, said Rob Cihra, an analyst with Caris & Co. On the consumer side, Mr. Cihra said, H-P got favorable deals with retailers because it also sells printers and ink through them. Without those ties, he said, the separate PC company may have a tougher time competing with low-cost vendors like Taiwan's Acer Inc.
Another difficulty has to do with component pricing: H-P gets bulk discounts on microchips and other items because of the scale afforded by its combined server and PC purchases. Without being tied to a larger company, the new company "may face higher component prices," said Bijan Dastmalchi, whose company, Symphony Consulting, advises tech companies on their supply chains and purchasing. As a result, he said, the PC division may be most attractive to a buyer already in the computer industry.
An H-P spokeswoman said the company may consider options to allow the spun-off PC maker to continue bulk purchases and collaborative marketing with H-P.
H-P's overhaul plan crystallized in recent days, said people familiar with the matter. The company had long discussed getting out of the PC business, but only started discussing it in earnest in the spring of this year, these people said, when it hired advisors to review the company's businesses.
In recent months, said a person familiar with the matter, Mr. Apotheker and other board members have been concerned that H-P shares "traded at a discount." They attributed this in part to confusion by investors about H-P's identity: Was it a consumer-focused PC maker or a vendor of corporate software?
Still, as recently as early spring, Mr. Apotheker was inclined to keep the PC business, said people familiar with the matter. But PC price declines and the newfound popularity of tablet PCs—an area where H-P failed to compete with Apple Inc.'s iPad—made it clear that staying in the PC business would push H-P "in a commodity direction," said a person involved in the discussions.
The board decided to get out of the PC industry, and members felt a spinoff would be "the easy move" to make, said a person familiar with the matter. The company could also sell the PC unit to a private equity firm or another tech company. The challenge, said two people briefed on the matter, is that H-P executives felt they had to announce the decision right away to comply with SEC rules, even though the announcement may make it harder to sell the unit.
In addition to being concerned about what a potential spinoff could mean for their jobs, some employees Friday criticized Mr. Apotheker's decision to kill H-P's tablet effort, which was based on software called webOS acquired last year when H-P bought Palm Inc. H-P introduced its first webOS tablet less than two months ago. "It takes the wind out of your sails when you throw in the towel after only 49 days," one H-P employee said.
COMMENTARY: In a previous blog post dated August 20, 2011, I shared my views on HP's sudden and unexpected decision to dump their new TouchPad tablet computer. In spite of the fact that the TouchPad received excellent reviews, and HP provided the TouchPad launch with a huge marketing push, the new tablet could not overcome several problems:
HP entered the tablet market dead last among major computer brands
The TouchPad had only 8,000 apps compared to Apple 150,000 for the iPad.
HP was having problems convincing developers to develop more apps for the TouchPad's WebOS which came with the acquisition of Palm in 2010.
The handwriting was on the wall when HP began discounting the TouchPad from $499 to $399 in early August, but this apparently didn't do much to increase sales, so the company pulled the plug and cut its losses. A sorry ending, but I agreed with the decision.
HP executives and members of its Board of Directors apparently had apparently discussed the possibility of spinning off the PC business prior to the release of the TouchPad, but held off until the sales results for the TouchPad came in. Truth be told, HP has experienced a steady decline in PC market share and profitability in the PC side of the business since 2009. The bad news of the TouchPad was the final nail in the coffin. Let's look at some numbers.
HP's global PC market share peaked at 19.3% at the end of 2009, but by the end of the 2010 it's market share had dropped to 17.9%. HP's PC market rebounded to 18.9% in the 1st quarter ending March 31, 2011, but declined to 18.1% in the second quarter ending June 30, 2011. HP has lost most of its market share to Toshiba, Acer and Lenova, and probably Apple.
For the fiscal year ending October 31, 2011, HP generated total revenues of $126.033 billion. HP's computer systems group (PC's) generated revenues of $40.741 billion or 32.32% of that total, a 15% increase from the prior fiscal year. However, out of HP's seven business groups, the computer systems group contributed only $2.032 billion in operating profits or 5.0% of the total ($14.4 billion). Between fiscal year 2010 and 2009, HP's computer systems group operating profits grew by only 3/10th's of one percent.
For the 1st quarter ending January 31, 2011, HP generated total revenues of $32.3 billion. HP's computer systems group generated revenues of $10.449 billion or 32% of the total, but were revenues were down 1% from the same quarter 2010. The group's operating profits were only $672 million or 6.4% of the company's total operating profits.
For the 2nd quarter ending April 30, 2011, HP generated total revenues of $31.632 billion. HP's computer systems group generated revenues of $9.415 billion or 29% of the total, but revenues were down 5% from the same quarter 2010. The group's operating profits were only $533 million or 5.7% of the company's total operating profits.
For the 3rd quarter ending July 31, 2011,HP generated total revenues of $31.189 billion. HP's computer systems group generated revenues of $9.592 billion or 31% of the total, but revenues were down 3% from the same quarter 2010. The group's operating profits were only $567 million or 5.9 of the company's total operating profits.
HP has been the victim of a slow recovery from the Great Recession, consumer frugality and a very crowded PC market characterized by a lack of product differentiation, product commodization and competition based solely on price. Apple has first-mover advantages in the tablet segment with the iPad, and it has been next to impossible to unseat them.
HP has always prided itself on the quality of its products and generally high profit margins, but the intense competion in the PC market has significantly grinded down its PC profit margins where they don't contribute much to the bottom line, although HP still leads in overall global PC market share.
Although HP's stockholders are not very happy with HP's decision to spinoff the PC business, it's really a no-brainer when you review the numbers as I just have. It's now a question of how much can they fetch for the PC business and who is willing to acquire a business with very low profit margins in a highly competitive marketplace.
It's fun trying to determine a valuation for the HP's PC business, but I am willing to give it a shot.
Price Based On Earnings - Dell's market cap ($26.4 billion) is presently 10 times Dell's earnings ($2.635 billion). HP's PC business generated earnings of $2 billion for the fiscal year ending October 31, 2010, and is on track to do $2.4 billion for the fiscal year ending October 31, 2011. At a multiple of 10 times earnings, HP's PC business would be worth $24 billion.
Price Based on Revenues - HP's PC business generated revenues of $40.741 billion for the fiscal year ending October 31, 2010, and is on track to do about $39.5 billion for the fiscal year ending October 31, 2011. Dell's generated revenues of $61.5 billion for the fiscal year ending January 31, 2011. HP's PC business revenues are two-thirds those of Dell, so if you valued HP's PC business at two-thirds $40 billion, this works out to a valuation of $26.6 billion. This is pretty close to HP's PC business valuation of $24 billion based on revenues.
If you took an average of the above valuations, this works out to about $25 billion. However, I don't think the PC business is worth that high a premium, so I am guessing more along the lines of $18 to $20 billion. Let's see if there are any takers at that price range.
In summary, HP's key executives and board of directors are making the right decision spinning off the PC business. If HP is lucky enough to get $25 billion for the PC business, this will more than offset what they paid for Autonomy ($10 billion).
Technology businesses are based on developing valuable IP, controlling industry standards, attaining first-mover advantages and developing disruptive technologies. The PC market is fully matured with no differentiation, and economies of scale for a company like HP have hit the critical inflection point where there are no real advantages. It's time to sell the PC business and as quickly as possible.
Google Inc. agreed to acquire Motorola Mobility Holdings Inc. for about $12.5 billion in cash, giving the developer of the Android mobile operating system its own handset maker and some key patent protection.
The deal would help Google compete more directly with Apple Inc., while stepping up the pressure on Research in Motion Ltd. and Nokia Corp. Google also gets access to Motorola's patent trove at a time of increasing demand for intellectual property involving mobile devices.
Meanwhile, the acquisition makes rivals out of some Google partners that license its Android operating system, raising questions about the way Google will operate that business.
Motorola Mobility shares soared 59% to $38.80 premarket, approaching the offer price of $40 a share, which is a 63% premium to its Friday close. Google shares were down 2.8% to $547.80.
Google expects to complete the transaction by early 2012, and it has been approved by the boards of both companies. The deal has a reverse breakup fee of $2.5 billion in cash, according to a person familiar with the matter. The hefty amount may indicate some nervousness about the deal's regulatory prospects as Google has raised antitrust concerns with the Department of Justice.
Google, which owns the fast-growing Android operating system used in millions of mobile phones, has a thin portfolio of wireless and telecommunications patents.
It recently lost the bidding for Nortel Networks Corp.'s patent trove to a consortium of tech heavyweights such as Apple Inc. and Microsoft Corp. Meanwhile, Google and Microsoft have engaged in a war of words over their recent maneuvers in intellectual property auctions, underlining the heated tone of the market for such assets.
Evercore Partners analyst Alkesh Shah said.
"The big thing it plugs for Google is: Google's patent portfolio is only a few thousand, and they have been the target of a significant amount of patent litigation. Motorola's patent portfolio provides a very strong defense against all this litigation."
Google will run Motorola Mobility as a separate business that will remain a licensee of Android. It was not clear how the deal will affect Google's relationship with other Android partners, specifically HTC Corp., LG Electronics Inc. and Samsung Electronics Co. In its press release, Google said things wouldn't be different.
Andy Rubin, Google's senior vice president of mobile at Google said.
"Our vision for Android is unchanged, and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
Others, though were more skeptical. Morgan Keegan analyst Tavis McCourt said on CNBC.
"I think this is their early attempt to replicate Apple's business model."
Increased sales of devices running the free Android software have given Taiwan's HTC and South Korea's Samsung a shot in the arm after losing market share to Apple's iPhone handset. All three manufacturers, including LG, have said this year they will be boosting the output of Android-based devices.
Samsung and LG declined to provide an immediate comment; HTC said it will make a statement shortly.
Meanwhile, Google had preliminary acquisition discussions with wireless technology developer and licenser InterDigital Inc. after missing out on Nortel. InterDigital shares slid 23% to $58.60 in premarket trading.
Most of the Motorola's revenue comes from smartphones, and the company has been working to diversify its customer base to defend against the potential loss of Deutsche Telekom AG's T-Mobile USA, a key customer.
Activist investor Carl Icahn, who is the company's largest shareholder, had been pushing for Motorola to sell its patents, a move he has argued could raise billions of dollars.
In a statement Monday, Mr. Icahn said,
"This is a great outcome for ALL shareholders of Motorola Mobility, especially in light of today's markets. In the past three years we have fought long and hard to separate Motorola Mobility from Motorola Solutions, as well as bring Sanjay Jha, as co-CEO."
Some analysts had said the deal could hobble Motorola, which relies on intellectual property to compete.
The smartphone and set-top-box company split with Motorola Solutions Inc., which is focused on business and networking operations, at the beginning of the year. The separation made Motorola Mobility nimbler and more focused on its core operations, but it faces a highly competitive smartphone market, including a persistent threat from Apple's iPhone.
Last month, Motorola reported a 28% rise in second-quarter revenue, thanks to strong tablet sales, but the device maker provided weak guidance for the current quarter because of delays in launching speedier 4G devices.
Meanwhile, Google's second-quarter earnings rose 36% on record revenue as the Internet giant experienced strength in its core search business and gained traction with its newer operations.
COMMENTARY: I have to admit that Google's acquisition of Motorola Mobility is a total surprise. This leads me to ask a number of questions or raise some important issues:
Why would Google acquire Motorola Mobility, when that company is losing market share (see below chart) to both Samsung and HTC, and its Xoom tablet is not doing very well either? Motorola Mobility only sold 4.4 million smartphones during Q2 2011, or 4.08% of the total smartphones sold, and only represents 9.4% of the total Android market. Motorola Mobility has sold only about 100,000 Xoom tablets to date. Google paid nearly 2.42 times Motorola Mobility's book value per share after eliminating the $3 billion in cash on Motorola Mobility's balance sheet This acquisition does not exactly light my fire. or even make sense from a strictly financial standpoint.
Why would Google jeopardize its relationships with its Android ecosystem of mobile phone makers HTC and Samsung, by competing directly against them in the smartphone hardware business?
Are Motorola Mobility's patents worth paying such a high multiple on the basis of book value per share? Motorola Mobility's patents only have a book value of $177 million on the balance sheet. Is there that much underlying hidden value in those patents? Does acquiring Motorola Mobility's patents provide some form of protection against the Oracle patent infringement lawsuit and Linux General Public License violation claim? Google says YES, but in what way will those patents protect its Android partners?
How much value does Motorola Mobility's research and development bring to Google? A case can be made that Motorola Mobility now provides Google its own mobile R&D team that Google can utilize to develop future generations of mobile products.
Could the Motorola Mobility acquisition signal a gradual phase-out of the Android OS and emergence of Chromium OS for mobile given its ongoing lawsuit with Oracle over JAVA and potential problems with Linux General Public License violation claim?
Could the Motorola Mobility acquisition signal a closing of Android OS similar to Apple's OS5? In a blog post dated March 31, 2011, I commented on a Fast Company article in which it heard that Google was planning on closing Android to provide more synergy between mobile devices among its partners.
As I comment on Google's acquisition of Motorola Mobility, I can't help noticing that Google's stock price dropped by -6.54 points since the Monday opening. Motorola Mobility's stock ended +13.65 points. The Google stock price drop is not major, but a net of those who liked versus those who did not like the acquisition. This certainly did not create additional shareholder value based on its stock price.
Several analysts felt the Motorola Mobility acquisition would hurt relations with its Android phone partners, but the news of the Motorola Mobility acquisition was surprisingly viewed as overwhelmingly positive by Google's Android phone partners:
HTC Corp. said Google's acquisition of Motorola Mobility Holdings Inc. (MMI) will be
"Positive for the Android ecosystem and the smartphone maker is supportive of the deal".
Bert Nordberg, President & CEO, Sony Ericsson:
"I welcome Google's commitment to defending Android and its partners."
Jong-Seok Park, President & CEO, LG:
"We welcome Google's commitment to defending Android and its partners."
J.K. Shin, President, Samsung, Mobile Communications Division:
"We welcome today's news, which demonstrates Google's deep commitment to defending Android, its partners, and the ecosystem."
It will also be interesting to see how cell phone carriers will react. Google's Android platform is available across a wide variety of carriers (AT&T, Verizon and Sprint). Apple was able to have a large amount of control in the iPhone because they owned the hardware. The company was able to require certain characteristics of cell networks before allowing other carriers to carry the iPhone line. Google could now wield some power that they once did not have.
In spite of the skepticism, Google executives are very upbeat about the Motorola Mobility acquisition.
Larry Page, CEO of Google, said,
"Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."
Sanjay Jha, CEO of Motorola Mobility, said,
"This transaction offers significant value for Motorola Mobility's stockholders and provides compelling new opportunities for our employees, customers, and partners around the world. We have shared a productive partnership with Google to advance the Android platform, and now through this combination we will be able to do even more to innovate and deliver outstanding mobility solutions across our mobile devices and home businesses."
Andy Rubin, Senior Vice President of Mobile at Google, said,
"We expect that this combination will enable us to break new ground for the Android ecosystem. However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
In the midst of the Motorola Mobility acquisition, Google faces some dark clouds including a major software patent infringement lawsuit, an FTC investigation over its search business practices and a potential violation of the Linux General Public License.
Oracle Patent Infringement Lawsuit - Oracle sued Google in August 2010, alleging that Android infringes on patents and copyrights associated with Oracle's Java software, which is also used in mobile devices. Oracle wants to know the full value of the Android ecosystem so it can ask a court for it in its suit over Java.
FTC Anti-Trust Investigation - The FTC has expanded its investigation into Google's business practices to include its use of Android against competitors. Google has denied that it engages in unfair competitive practices.
Linux General Public License Violation - Google's policies regarding Android may have put its licensees into violation with the General Public License, the license behind Linux. Android is a Linux. This may be the most serious threat according to Florian Mueller, who has been following the issue at his blog FossPatents, The loss of a distribution license to Linux can only be redeemed by getting new licenses from every kernel contributor, he writes, meaning there are now thousands of company that could legally shake down Android device makers, and app developers, for money.
Motorola Mobility's financial performance and smartphone market shares do not look particularly strong:
Revenues remain relatively flat over the past three quarters.
Earnings-per-share have declined over the last two quarters.
Operating margins are in the red the last two quarters.
Cash flows from operations have deterioated over the last four straight quarters.
Motorola Mobility's home business is carrying the company.
Motorola Mobility's share of the global mobile phone market was only 2.4% for Q2 2011, down from 2.5% in Q2 2010.
Motorola Mobility's ranked No 6 with a 4.08% share of the global smartphone market with 4.4 million units sold during Q2 2011.
The only identificable positive I could find is that Motorola Mobility has $3 billion in cash and equivalents at the end of 2010.
Motorola is also the defendent in three separate patent infringement lawsuits filed by Microsoft, Nokia and Research in Motion over mobile phone technology. In June 2010, Motorola finally settled with Research in Motion. The mobile devices is rife with patent infringement lawsuits and counter-suits. There are so many of them that you cannot keep track of all of them. It's hillarious. The Guardian (UK) prepared the following graphic showing who is suing who in the mobile business.
Motorola Mobility has 15 different mobile phone models. That would average out to 293,000 per model based on the 4.4 million units sold in Q2 2011. Those numbers suck, don't you think. This is a situation very similar to RIM Blackberry. That's too damn many phones, increasing its manufacturing, inventory and warehousing costs.
In conclusion, the only positive besides the cash are Motorola Mobility's 17,000 patents. However, a lot will hinge on the quality of those patents. We keep hearing that the patents acquired provides protection for Google's Android ecosystem partners and that could make sense since there are several patent infringement lawsuits involving all of them (see below). According to several analysts, those patents could be used like currency to settle Google's patent infringement lawsuits with Oracle and Microsoft.
Motorola Mobility has sold between 100,000 to 125,000 Xoom tablet computers since its launch, and forecasts 500,000 for the year. I find that difficult to believe. This pales in comparison to the 23 million iPads Apple has sold through Q2 2011. Apple now commands a 94% market share of total worldwide tablets sold. Anybody that tells me that Google bought Xoom for its potential is smoking something. Xoom is just not ready for prime time.
It's also possible that Google could spinoff Motorola Mobility's home business segment, which generates about 30% of total revenues and is profitable. It could fetch at least $3-$4 billion depending on the patents.
The more I look at this acquisition, the more confused I become. But, it's fun speculating, isn't it?
Marking the end of a social era, ad network Specific Media on Wednesday announced the acquisition of Myspace. And in a strange twist, music star-cum-actor Justin Timberlake is also taking an undisclosed ownership stake in the company, and is expected to play a key role in re-imagining the MySpace brand.
While financial terms of the deal were not disclosed, multiple reports put it at about $35 million -- far less than the $580 million News Corp. paid for the then-high-flying site back in 2005.
The Rise and Fall of MySpace
The sale of MySpace to ad networkSpecific Media for just $35 million marks a new low for the struggling social network.News Corp had paid $580 million for MySpace in 2006 and some had valued the company in the billions. Just last month News Corp had hoped to get as much as $100 million for the company. A company that once topped 1000 employees will likely be reduced to about 200. Here is a graphic look at the rise and fall of MySpace:
Twitter is the SNS that has experienced the most recent growth in new members. On the other hand, a very small number of people have joined MySpace in the past year. Fewer than 3% of all MySpace users joined within the past 6-months, 10% joined within the past year. Over 75% of MySpace users joining the site two or more years ago. In comparison, nearly 60% of Twitter users, 39% of Facebook users, and 36% of LinkedIn users joined within the past year.
Facebook is the nearly universal social networking site and it has the highest share of users’ daily visits, while MySpace and LinkedIn are occasional destinations.
Facebook is, by far, the most popular SNS. Of those who use a SNS, almost all use Facebook (92%). Facebook is followed in popularity by MySpace (29%), LinkedIn (18%), Twitter (13%), and other social network services (10%).
There is notable variation in the frequency of use of SNS. Facebook and Twitter are used much more frequently by their users than LinkedIn and MySpace. Some 52% of Facebook users and 33% of Twitter users engage with the platform daily, while only 7% of MySpace users and 6% of LinkedIn users do the same. By comparison, 62% of MySpace users, 40% of Twitter users, and 44% of LinkedIn users engage with their SNS less than once per month. Only 6% of Facebook users use this platform less than once per month.
The following "time lapse" infographic shows how rapidly Facebook overtook MySpace between 2004 and 2010.
Per the sale, News Corp. is taking a minority equity stake in Specific Media.
What does Specific Media want with the fallen social network?
"Myspace is a recognized leader."
Said Tim Vanderhook, Specific Media CEO -- but a leader in what he did not clarify.
What's more, Vanderhook added,
"There are many synergies between our companies, as we are both focused on enhancing digital media experiences by fueling connections with relevance and interest."
Timberlake stated.
"There's a need for a place where fans can go to interact with their favorite entertainers, listen to music, watch videos, share and discover cool stuff and just connect. Myspace has the potential to be that place."
Founded in 1999 by brothers Tim, Chris and Russell Vanderhook, Specific Media bills itself as a "global interactive media company."
In what now can now be seen as a sign of things to come, the company recently appointed Jim Knopf to a newly created position of entertainment industry lead.
With Myspace, Specific is also getting Myspace Music, which offers a catalogue of freely streamable audio and video content to users.
According to Compete.com, Myspace drew 30.79 million unique visitors last month, which represented a 54.47% drop year-over-year.
Myspace CEO Mike Jones on Wednesday said he would step down from his post immediately, but would likely work with News Corp. and its new parent company in an advisory role for a short time.
In a memo to staff, Jones also announced pending layoffs as part of the sale. "In conjunction with the deal, we are conducting a series of restructuring initiatives, including a significant reduction in our workforce."
Already a shadow of its former self, Myspace was reportedly planning to lay off nearly 40% of its remaining staff -- or about 150 employees -- this week. First reported by Gawker, the news was later confirmed by TechCrunch.
Apparent for some time, News Corp.'s desire to unload Myspace recently became palpable. News Corp. COO Chase Carey told analysts in early February.
"With a new structure in place, now is the right time to consider strategic options for this business."
Carey's comments came on News Corp.'s latest earnings report, which included a $275 million writedown for its digital media business, which was said to have stemmed largely from Myspace.
Late in February, News Corp. brought in Allen & Co. to help unload Myspace, and was reported to have received "early interest" from about 20 parties -- the majority of which were private equity and venture capital firms.
Largely perceived as an effort to gussy up the company, Myspace laid off 47% of its staff -- or 500 people -- in January.
Myspace has not been the only digital asset that News Corp. has sought to unload. In early May, the media conglomerate decided to spin off IGN.com. Unlike Myspace, however, IGN is anything but a sinking ship. Indeed, IGN expects to earn more than $10 million this year on revenues of around $100 million.
COMMENTARY: It's so sad that MySpace is just a shell of what it was. I feel for the remaining MySpace employees. I just hope that Specific Media and Justin Timberlake can turn the this "sinking boat" around. Oh, I forgot to mention. I am still a MySpace member.
Courtesy of an article dated June 29, 2011 appearing in MediaPost Publications Online Media Dailyand an article dated June 30, 2011 appearing in HypeBot.comand an article dated June 16, 2011 appearing in PEW Internet
'A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?
No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.
One of the world's most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government's ability to pay for its future obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.
"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.
Widely credited with orchestrating Mr. Soros's successful shorting of the British pound in 1992, Mr. Druckenmiller also built his own fund, Duquesne Capital, into a $12 billion titan. He announced plans last year to close the fund and now reports, "I have no clients." He is still managing his own money, which Forbes magazine recently estimated at $2.5 billion.
Whatever the correct figure is, it would be significantly larger if Mr. Druckenmiller hadn't given away so much of his wealth. The online magazine Slate reported last year that Mr. Druckenmiller and his wife gave away more money in 2009—over $700 million—than anyone else in the country. Over the last two decades, he has been the largest benefactor of the Harlem Children's Zone, a community service organization featured in the movie, "Waiting for 'Superman.'"
Mary Kissel of the editorial board previews congressional action on the debt limit.
It's hard to think of someone with more expertise in the currency and government-debt markets, but Mr. Druckenmiller's view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a "severe and long-lasting impact" if the debt limit is not raised immediately. The letter compared the resulting chaos to the failure of Fannie Mae and Freddie Mac and warned of a run on money-market funds. This week more than 60 trade associations, representing virtually all of American big business, forecast "a massive spike in borrowing costs."
On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of "a catastrophic economic impact" and said, "Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover."
In a Monday speech at the New York Economic Club, Mr. Boehner fired back, saying that "It's true that allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process."
So the moment couldn't be better to consult Mr. Druckenmiller, who almost never gives interviews but is willing to speak up now because he thinks that fears about using the debt-limit as a bargaining chip for spending cuts are overblown—and misunderstand the bond market. "The Treasury borrowing committee letter speaks about catastrophic financial crises, comparing it to Fannie and Freddie. That's not what we're talking about here," he says.
He contemplates the possibilities for bond investors if a drawn-out negotiation in Washington creates a short-term problem in servicing the debt but ultimately reduces spending:
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one."
Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out—"because I'll guarantee you people like me will buy it immediately."
Now suppose, Mr. Druckenmiller adds, that he's wrong. If the market implodes on day two of the technical default, Mr. Obama and Congress would be motivated to finally come to agreement. But he doesn't expect such market chaos. "My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform—that we wouldn't even have to find out about a meltdown because it wouldn't happen. And I have some history on my side here."
And the scars to prove it. In 1995, Bill Clinton was threatening to veto budget cuts advanced by the Republican House. In return, congressional leaders threatened not to increase the federal debt ceiling. Back then, before Americans knew what a real government spending crisis was, the debt stood at less than $5 trillion. (It has nearly tripled since then and is poised to race some $10 trillion higher in the next decade.)
Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years.
"Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," says Mr. Druckenmiller. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."
Mr. Druckenmiller notes that from the time he started saying that markets would welcome a technical default in exchange for fundamental reform, in September 1995, "the bond market rallied throughout the period of the so-called train wreck . . . and, by the way, continued to rally. Interest rates went down the whole time, past the government-shutdown deadline, and really interest rates never went back up again until the Republicans caved and . . . supposedly the catastrophic problem was solved."
He adds, "I owned [Treasury] bonds and Rubin accused me and Soros of being short them, and that this was some sort of conspiracy. We made a fortune being long bonds during the whole fight. We were advocating a default and we were long bonds. That's kind of putting your money where your mouth is. By the way, I'm long them today."
Mr. Druckenmiller is puzzled that so many financial commentators see the possible failure to raise the debt ceiling as more serious than the possibility that the government will accumulate too much debt. "I'm just flabbergasted that we're getting all this commentary about catastrophic consequences, including from the chairman of the Federal Reserve, about this situation but none of these guys bothered to write letters or whatever about the real situation which is we're piling up trillions of dollars of debt."
He's particularly puzzled that Mr. Geithner and others keep arguing that spending shouldn't be cut, and yet the White House has ruled out reform of future entitlement liabilities—the one spending category Mr. Druckenmiller says you can cut without any near-term impact on the economy.
One reason Mr. Druckenmiller says he spoke up in 1995 was his recognition that the first baby boomers would turn 65 in 2010, so taxpayers would soon have to start supporting a much larger population of retirees. "Well," he says today, "the last time I checked, it's 2011. We don't have another 16 years this time. We're there. I don't know whether the markets give us three years or four years or five years, but we're there. We're not going to be having this conversation in 16 years. We're either going to solve it or we're going to find ourselves being Greece somewhere down the road."
Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government's financial future can't really be that bad. "Complete nonsense," Mr. Druckenmiller responds. "It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week."
Warming to the topic, he asks, "When do you generally get action from governments? When their bond market blows up." But that isn't happening now, he says, because the Fed is "aiding and abetting" the politicians' "reckless behavior."
And they could get even more reckless. Mr. Druckenmiller acknowledged by 1996 that the Republican budget shutdown strategy had failed, and he agrees today that the worst outcome would be a technical default that still doesn't muster enough pressure to force the Beltway to change its spending habits. This possibility "scares the hell out of me because I don't know whether Obama would cave. I tell you one thing, if [Obama officials] believe what they're saying, they'll cave. If they believe this is Armageddon and this is worse than Lehman and this is the greatest catastrophe ever, they'll cave."
But what if Mr. Obama hangs tough, Republicans cave, and there is no spending reform between now and the 2012 elections? Would Mr. Druckenmiller sell his Treasurys? "Everything else being equal, that would be a big sell factor, not a buy factor. One of the reasons I bought the Treasurys a ways back was I thought [House Budget Chairman Paul] Ryan was serious. I mean I heard some serious things that I hadn't heard in a long time." When President Obama responded to Mr. Ryan with a harsh partisan attack instead of a serious policy proposal, "that made me feel not as good about my Treasurys as the day before. But I'm still long them," he says.
Mr. Druckenmiller says he's "a registered independent" but says he admires New Jersey Gov. Chris Christie for the way he has explained that the state has to reform its benefit plans if it is going to be able to take care of retired government workers. He argues that the same case needs to be made nationally. "We don't have a choice between Paul Ryan's plan and the current plan, because the current plan is a mirage. . . . That money is not going to be there."
Given Mr. Druckenmiller's track record, officials at the Fed and Treasury may not have a choice, either. They may finally have to try to explain why technical default is a crisis, but runaway spending is not.
COMMENTARY: I agree with Mr. Druckenmiller that Washington has to get its house in order, but I just don't like his plan to get things in order--namely massive reductions in entitlement programs, which lay the blame for our economic ills solely on the back of the our senior citizens, who helped build America, and paid into their social security and medicare.
We also need to stop picking on unions, too. Unions is what built the middle class, and is paying most of the taxes in our country. I can see it from Mr. Druckenmiller's position, his stock investments will increase in value, if those companies don't to pay union scale. They make more money, and his stock values goes up, and he can pay more dividends to his rich clients. Oh, Mr. Druckenmiller, I hear your cries of despair.
The problem is Mr. Druckenmiller himself. He is the biggest part of the problem. He amased at $2.5 billion fortune, made his investors even richer, lives happily with his wife Fiona down in the Hamptons in a mansion with neighbors George Soros, John Pauslon, Ricky Sandler, Howard Stern, David Koch, Martha Stewart, some of the richest Americans, many of them gotten even wealthier through loopholes in the U.S. tax code, Bush tax cuts, shrewed investments with hedge funds like Duquesne. I just looked at the companies in his hedge fund portfolio, and every single one of them has imported at least 60% of their jobs overseas.
Washington also needs to drastically change its foreign policy. That's the root cause of a lot of our international problems. We need to stop being the policemen of the world, stop supporting crooked governments, and having wars without financing them. That defense budget is now quickly approaching $900 billion. In another couple of years it will be $1 trillion, and I don't see any end in sight. Mr. Druckenmiller has done pretty well investing, in you guessed it, defense stocks.
Does Mr. Druckenmiller care about the environment. Nope, I don't think so. If you look at Duquesne Capital's portfolio you will find he has invested well over $1 billion in over a dozen oil companies. And we sure know how well big oil has done, don't we? Those punks made $40 billion in profit just in the 1st quarter 2011, and they lobbied Congress to keep paying them entitlements.
Does Mr. Druckenmiller care about the uninsured? Probably not very much. If you look at his portfolio he has invested in dozens of medical and health insurance companies. You see, they make a lot of money, while increasing their premiums year after year, and denying benefits to people like you and me Mr. Druckenmiller, Fiona and the family don't have to worry about medical insurance. Their doctor flies in from Manhattan.
The wealthiest Americans have never had it so good, and pay the lowest taxes in modern times beginning with the Reagan administration tax cuts. Mr. Druckenmiller and his rich friends need to stop his bitching and start paying. Under Clinton, we had a $230 billion federal surplus, there was full employment, nearly 20 million jobs were created here at home, and every industry sector was booming, including the stock market, Mr Druckenmiller. The rich were not complaining then. In fact, America has more billionaires and millionaires than any other country, and the list is increasing every day. There has never been an income inequality between the richest Americans and working stiffs since the Depression. Mr. Druckenmiller has done pretty damn good I would say.
Dear Mr. Druckenmiller, I read your Duquesne Capital Management retirement letter to your investors, and it brought tears to my eyes, to see you go after ten wonderful years of ever increasing profits. I hope you don't mind if I share it with my readers. Have a great retirement, okay?
NEW YORK—Raj Rajaratnam, a billionaire hedge-fund impresario who built his fortune in the relentless cultivation of corporate contacts, was convicted Wednesday on all 14 counts of securities fraud and conspiracy against him in the biggest insider-trading case ever, likely accelerating an unprecedented wave of prosecutions rocking Wall Street.
The verdict by the 12-member jury, following 12 days of deliberation, capped a blockbuster trial that began in early March and featured 45 wiretaps showing how the founder of Galleon Group trafficked in insider tips provided by a web of contacts at the top tier of American business. DealBook compiled a very impressive list of The Galleon Trial Transcripts of Wiretaps.
It was the first insider-trading prosecution to use methods that had been mainly reserved for organized-crime, drug and terrorism cases.
Some jurors said the wiretaps of Mr. Rajaratnam were the deciding factor. Carmen Gomez, a 55-year-old educator speaking outside her home in the Bronx, said that "it was a very difficult decision," but the recordings showed Mr. Rajaratnam used "confidential information" and bought "stocks based on that."
Mr. Rajaratnam, 53 years old, grew up in Sri Lanka, the son of a sewing-machine company manager. He liked to tell people that his first name meant "king" in Hindi, and, coupled with his last name, that made him "king of kings." Educated in England and the U.S., he began his Wall Street career as a semiconductor analyst before launching Galleon in 1996. He built it into a $7 billion fund at its peak, ferreting out bits of information from technology executives and others, while pushing his analysts and traders to do the same.
He also developed a reputation for pranks. One April Fool's Day, employees arrived at Galleon's morning meeting to find a dwarf whom Mr. Rajaratnam introduced as an analyst hired to cover "small-cap" stocks.
The widely followed trial exposed the behind-the-scenes dealings of a once-prestigious hedge fund that gained access to highly sensitive information about, among other companies, Goldman Sachs Group Inc. at the height of the financial crisis.
The government placed at $63.8 million the amount in illegal profits and avoided losses that Galleon realized through the scheme. Mr. Rajaratnam's lawyer plans an appeal.
The verdict marks one of the highest-profile convictions of a corporate figure since those in the last decade of Bernard Ebbers and Jeffrey Skilling, former top executives at WorldCom and Enron, respectively.
The conviction also represents a signature moment in a government push to bring insider-trading cases that is expected to rev up now that the strategy of using wiretaps against traders has proved a resounding success for prosecutors.
Less than five hours after the verdict, a defendant pleaded guilty in another sprawling insider-trading investigation, the "expert-network" probe, in which the U.S. is pursuing allegations of hedge-fund traders receiving illicit tips about companies from consultants.
Manosha Karunatilaka, a former account manager at Taiwan Semiconductor Manufacturing Co., pleaded guilty to conspiracy to commit securities and wire fraud.
Federal prosecutors in Manhattan had alleged that he shared nonpublic information about his company with clients of expert-network firm Primary Global Research LLC, Mountain View, Calif.
Never before have there been so many major, unrelated insider-trading cases brought by authorities. In the past 18 months alone, the U.S. has criminally charged 47 hedge-fund managers and others with insider trading; 36 now have been convicted or pleaded guilty.
Mr. Rajaratnam showed no emotion as the verdict was read. U.S. District Judge Richard Holwell put Mr. Rajaratnam on home detention with electronic monitoring pending sentencing, which is scheduled for noon on July 29.
The counts Mr. Rajaratnam was convicted of carry a total of up to 205 years in prison time, but under federal sentencing guidelines, he is likely to receive 15 ½ to 19 ½ years, according to prosecutors.
Each of the nine counts of securities fraud on which he was convicted carries a possible sentence of 20 years in prison, and each of the five counts of conspiracy to commit fraud carries a possible five-year sentence.
The judge rejected the prosecutors' request to have Mr. Rajaratnam imprisoned immediately. Mr. Rajaratnam has posted a $100 million bond secured by $20 million in cash or property.
Assistant U.S. Attorney Jonathan Streeter had argued that the defendant might flee because he faces a long sentence, has tens of millions of dollars invested overseas and has strong ties to his home country of Sri Lanka.
In a statement, Manhattan U.S. Attorney Preet Bharara said: "Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market. It cheats the ordinary investor.… We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught."
Outside court, lead defense attorney John Dowd spoke of his next step in the legal process, an appeal of the verdict. "The case started out with 37 stocks and is down to 14," he said. "The score is 23-to-14 in favor of the defense. We'll see you in the Second Circuit."
Mr. Dowd said Mr. Rajaratnam would appeal the judge's decision to let government wiretaps be played at the trial, calling it "a very substantial issue" on which he would seek to overturn the verdict.
Mr. Dowd later cursed at a CNBC reporter and made a rude gesture that was caught on tape and aired extensively through the day.
The government gave the defense notice of evidence relating to 37 stocks, but it decided to go forward with charges on a smaller subset, said a spokeswoman for the Manhattan U.S. attorney's office.
The jury of eight women and four men informed the judge it had reached a verdict around 10:15 a.m. "I, Robert Jirmnson, Foreman notify the court that the Jury has come to a unanimous decision (Verdict)," they said in a note to the judge, which added: "Please, we do not want to meet with press."
Less than 40 minutes later, the jurors came into the packed courtroom in Manhattan's Foley Square, the scene of numerous high-profile cases over many decades, carrying an envelope with the verdict.
Mr. Rajaratnam sat stiffly in a dark suit. It was the first time in the two months of the trial that he had been seated at the table with his lawyers rather than in a chair in the back of the courtroom well.
Once the jury foreman confirmed they had reached a verdict, the judge's deputy read the results.
As the deputy, William Donald, announced 14 times that the defendant was guilty, Mr. Rajaratnam looked straight at him without flinching.
When the Mr. Donald polled the jury to see if it was indeed their verdict, the last juror, 55-year-old Relesta James of Manhattan, loudly answered: "Yes."
Judge Holwell instructed jurors not to discuss the verdict and released them, and then court security officers escorted them away. Juror Leila Gorman Gonzalez, swiping a subway card to get on a train a block from the courthouse, said of the verdict: "There was just a lot of evidence."
A turning point in the trial came when prosecutors played a tape showing that Mr. Rajaratnam received information about an expected quarterly loss at Goldman Sachs—its first as a public company—from a Goldman board member, Rajat Gupta.
In the call, Mr. Rajaratnam told a contact: "I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50."
The trial featured appearances from such high-powered financiers as Goldman Chief Executive Lloyd Blankfein, who testified for the government about the highly confidential nature of the information relayed to Mr. Rajaratnam.
Mr. Blankfein told jurors Mr. Gupta had violated his duties as a board member by sharing confidential information about Goldman with Mr. Rajaratnam.
Mr. Gupta hasn't been charged criminally; he now is fighting civil allegations by federal regulators that he passed along inside information to Mr. Rajaratnam. He has denied any wrongdoing through his lawyer.
Defense lawyers had argued that Mr. Rajaratnam made money using legitimate research. Mr. Dowd, Mr. Rajaratnam's chief attorney, attempted to mar the credibility of the government's witnesses who testified in support of its case.
Phillip Wedo, a 35-year-old unemployed alternate juror who heard the evidence but didn't participate in deliberations, said he wanted Mr. Rajaratnam to testify and "explain what we heard on the tapes."
Mr. Rajaratnam had told people close to him he wanted to take the stand in his own defense. The defense hasn't explained why he didn't.
The government had been pursuing Mr. Rajaratnam for possible insider trading since 2007, but it wasn't until prosecutors gained court permission to wiretap his phones in 2008 that the case against him started to come together.
Testimony by former McKinsey & Co. consultant Anil Kumar—who earlier had pleaded guilty in the case—was critical.
Mr. Kumar's four days on the stand provided the cornerstone of the government's case, including testimony from the consultant that he was paid $500,000 a year by Mr. Rajaratnam through an offshore account to an account in his housekeeper's name in exchange for insider tips.
Prosecutors also presented allegations of a cover-up of trading activities during the trial.
In a recording of a phone call intercepted by the government that was played during the trial, Mr. Rajaratnam told two employees to create an email trail that would create an impression a stock purchase wasn't based on an insider tip.
"We just have a email trail, right, that, uh … I brought it up," he told the employees after filling them in on a tip provided by Mr. Kumar.
Later, Mr. Rajaratnam told hedge-fund trader Danielle Chiesi—who has pleaded guilty to insider-trading charges—to cover her tracks by darting in and out of a stock to avoid an appearance of trading on an inside tip.
"What I would do is, I would buy a million shares and sell 500,000," Mr. Rajaratnam advised her. "If you want to buy 500, I would buy a million and sell on Friday 500,000, you know?" he said in one call.
COMMENTARY: I like nice endings don't you? I profiled Raj Rjaratnam in a blog update dated March 23, 2011 and thought he would be found guilty, but I never imagined that he would be found guilty on all 14 counts brought against him. Now that's what I call fucking guilty. The jurors claim there was a "lot of evidence". Yeah, I bet there must've been a lot of tape on this scumbag and his conspirators.
How does a guy from Sri Lanka, a very poor nation if there ever was, rise to the top of the finance world, then out of pure greed squander everything? This is his bio thanks to the kind folks at Wikipedia:
Rajaratnam was born in Colombo, Sri Lanka. According to the newspaper The Island he attended S. Thomas College, Mount Lavinia, though other sources say he attended S. Thomas' Preparatory School, Kollupitiya. He moved to England to study engineering at the University of Sussex. He earned an M.B.A. from the prestigious Wharton School of Business of the University of Pennsylvannia in 1983. He is married with three children and maintains residences in Connecticut, New York, and Florida.
According to Forbes magazine, Rajaratnam is a Tamil self-made billionaire hedge fund manager. He was the 236th richest American in 2009, with an estimated net worth of $1.8 billion. He was the 262nd richest American in 2008, with an estimated net worth of $1.5 billion. As of 2009 he was the richest Sri Lankan-born individual in the world.
Rajaratnam started his career as a lending officer at the Chase Manhattan Bank where he made loans to high-tech companies. He joined the investment banking boutique Needham & Co. as an analyst in 1985, where his focus was on the electronics industry. He became the head of research in 1987 and the president in 1991, at the age of 34. At the company’s behest, he started a hedge fund — the Needham Emerging Growth Partnership — in March 1992, which he later bought and renamed 'Galleon'.
His hedge fund was valued at $3.7 billion in 2009, down from a peak of $7 billion in 2008. According to a 2009 investor letter his $1.2 billion Diversified Fund has a net annualized return of 22.3%. Rajaratnam has been featured among the elite US money managers in a book called The New Investment Superstars. Initially invested in technology stocks and healthcare companies, he says his best ideas come from frequent visits with companies and conversations with executives who invest in his fund.
After his arrest, Galleon received requests from investors for the withdrawal of $1.3 billion, causing the fund to close down. In a letter dated October 21, 2009 Mr. Rajaratnam informed his employees and investors that he intended to wind down all the hedge funds of the Galleon Group. Investors received their entire money back in January 2010, plus profits.
In November 2009, Rajaratnam pledged to donate $1 million to help with the rehabilitation of the LTTE combatants. He has donated generously to clear land mines in the war-affected areas in Sri Lanka. He recalled his visits to the mine-impacted areas of Sri Lanka and underscored the humanitarian toll that mines have taken. Recalling his encounter with a young child in Kilinochchi who had lost both legs to a landmine, Rajaratnam stated that this particular image that is etched in his memory “made it an easy decision to write the check.” He helped Sri Lankans recover after the 2004 Tsunami. Mr. Rajaratnam was also a contributor to various causes that promoted development in the Indian subcontinent and programs that benefited lower-income South Asian youth in the New York area.
According to the Federal Election Commission, Rajaratnam has made over $118,000 in political contributions in the past five years. He has also contributed to the Democratic National Committee and various campaigns on behalf of Barack Obama, Hilalry Rodham Clinton, Charles Schmuer, and Robert Menndez.
Unlike Bernie Maddof, who ran a very successful ponzi scheme, and lost or swindled his investor's out of an estimated $65 billion, Raj Rajaratnam's investors got all their money back. Bernie got 150 years in prison, and is serving his sentence at the Federal Correctional Complex in Butner, N.C. Hopefully, justice will be served and the King of King's will get a similar sentence.
Many of these big name white collar criminals attended some of the top universities like Harvard School of Business, Wharton School of Business, Sloan School of Business, Stanford and other prestigious universities. You have to be pretty smart, at the top of your game, to get into these schools, so you would think they would be show better judgement and set an example. Somehow I see a pattern developing here, don't you?
I am glad that the Justice Department is finally getting tough on white collar crimals and using wiretaps and surveillance to get the goods on these white collar criminals. This is just chapter one, and there are literally dozens of accomplices who have been convicted or coming forward as witnesses.
In some states you can go to state prison for 10 years just for selling a few ounces of marijuana, but white collar crime criminals get 5 to 7 years, they serve half, and are released for good conduct. Many of them end up in country club, medium security prisons where they serve time with other white collar criminals. That's not hard time.
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