Websense Makes Big Promises

Websense (NasdaqGS:WBSN) announced their offer to acquire Surfcontrol (LSE:SRF) at a substantial premium. The press release quotes Gene Hodges CEO of Websense as saying that with new operational efficiencies they hope to bring operating margins back to traditional levels that Websense had been accustomed to. This means that their will be some slash and burn within the mothership as duplicated functions are eliminated. Standard talk to justify an acquisition.

At the same time they are claiming that existing customers of Surfcontrol will have the best of all worlds. Read this quote from Gene Hodges:

We plan to introduce a customer satisfaction and retention program and pledge to support SurfControl's layered software Web security solutions at least through 2010. We also plan to enhance these products with data from the merged research databases of the two companies. We also plan to renew existing SurfControl subscriptions at competitive levels, similar to their historical prices. Channel partners are expected to benefit from the opportunity to offer a broader set of solutions to their customers, backed by the threat research capabilities and financial strength of Websense."

What does competitive levels and historical prices mean? How will this return Websense margins to historical levels? Management feels the deal will be dilutive for one quarter and then accretive. Sounds like they have locked themselves into some problems which will come home to roost very soon.

The dead giveaway in this press release is when management from source inserts an editors summary in bold block letters hoping that overworked deadline challenged editors do not delve into the full text and start asking some questions.

I am not saying its a bad deal. I am saying that Gene Hodges made some very big promises that may be very hard to keep. Good Luck to Websense.

Citigroup's Japanese Poker Game

Citigroup (NYSE:C) probably will win the majority of shares of Nikko Cordial. Officially nothing will be said until Friday. Japanese companies are willing sellers. Japanese index funds will not tender until the stock is delisted. Several fund companies are holding out for more wanting to maximize their shareholder value.

Citigroup will attempt to maximize their own shareholder values. The latest card to be played as reported by Bloomberg is that Orbis Investment Management Ltd., Nikko's second-largest investor, and Harris Associates LP have offered their shares for sale at 1,900 yen, indicating they won't accept Citigroup's bid.

As of 9:30 a.m. today, such sell orders had been entered for 277 million Nikko shares on the Tokyo exchange, or 28.3 percent of the total. Real world share prices have dropped below the offer price.

Funds may want to play hard ball with Citigroup but they also have a fiduciary obligation to their own investors. The headlines of today will not play out into favourable valuations in tomorrows account statement. Third party temper tantrums aside Citigroup has time on their side. The Japanese psyche may appreciate the more slow and methodical approach in the end.

You can post whatever ask you want but when there is only one bid you have no more cards worth playing. Non accepting funds risk the problem of making public mistakes and losing face with their own investors.

Scripps Stumbles Along

EW Scripps (NYSE:SPP) announced slightly better than expected results. The print side is just terrible which is not news. The online side is suffering from investment as management attempts to spend their way digital profits. Nothing really new.

The question becomes why even bother with this stock. The management dilemma of converting an old line newspaper business that probably fell asleep into a profitable electronic media company is well documented. Call me when you figure it out.

They will continue to fight legacy costs in print as local advertising stalwarts such as classifieds dry up. What would be truly impressive would be a large and fast execution to get to the necessary endpoint. A death of a thousand cuts will continue to distract.

That having been said there is nothing to suggest that the electronic products will continue to clunk along. I suspect that the company will always need to invest to maintain the product offering which therefor will always drag down profits and cash flows.

What we need is the law of unintended consequences to kick in and take this stock in a new direction.

Pepsi's Losing Fizz

Pepsi (NYSE:PBG) released Q1 numbers earlier today. Mondays drop in the final hours of trading was a little suspicious. The results indicate that while the company claims net revenue per case grew 4%, Gross Profit only rose 2% when comparing results to last years comparable Q1. Operating profit actually dropped slightly.

Marketing results vary dramatically from region to region. Growth in the US is almost non existent.

The most telling sign is the reduction in cash position. Operations generated very little new cash. Significant short term borrowings are being utilized to fund dividends and share buy backs. Net profit is down significantly.

Diluted EPS is down by two cents despite Pepsi buying back 10 million shares to achieve a short term magic trick which would disguise inadequate EPS trends.

Bad news Disappointing news Hmmm just maybe we should be watching Pepsi which trades near its 52 week low. There are still a great many fundamental issues which Pepsi Bottling is falling short on. Need to see some signs of significant and durable fixes before we stop laughing at management.

Google's Blind Spot

Google (NasdaqGS:GOOG)reported numbers which are hard to complain about. Their market prescence still causes many to worry despite an improbably small revenue base when compared to many other businesses. Google needed to report excellent numbers as they race to fill in the valuation gap between market share price and the reality of their earnings per share. As they execute many conclude that they have a pact with the devil and need to be reigned in.

Following the DoubleClick announcement there is a growing chorus from consumer groups and technology companies to investigate. As Google grows stronger outside of the US, particularly in the UK and Europe, other regulators and politicians will start their own investigations. A curse of a thousand flies may yet descend onto Google.

Google's blind spot will be the political regulatory environment. They have not had to deal inside the Washington Beltway or the political equivalents in other countries. They do not understand the lobby system and public pressure. They probably are not significant players in political fund raising in the US or other countries for that matter. The undisputed kings of search neglected to search the problem. They have stayed too long within the spin bubble of their own success. Clinical evaluation indicates self absorption with narcissistic tendencies.

Sitting on top of huge piles of cash will attract political attention. The Board needs to focus on the regulatory and hire the right politically savvy staff in a really big hurry. (Problem in the upcoming election season). Current senior officers have no perspective on managing this problem.

Google will almost certainly have substantial restrictions placed on them as a result of their recent acquisitions. This will slow them down. Perhaps it may cause a confusion as Googlers grapple with an externally imposed reality. This will allow the previously vanquished such as Yahoo (NasdaqGS:YHOO) and Microsoft (NasdaqGS:MSFT)several windows of opportunity to retrench and plan their come backs.