Friday, August 31, 2007

McGraw Hill Rearranges The Deck Chairs

McGraw Hill (MHP) announced that the president of its Standard and Poor division has fallen or has been pushed onto her sword and has left the company. The New York Times reported that Kathleen Corbet, president of the credit rating company Standard & Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages.

She will be replaced by Deven Sharma, executive vice president for investment services and global sales. Ms. Corbet is leaving to spend more time with her family and her exit is not related to the current credit-market turmoil, a McGraw-Hill spokesman, Steven Weiss, said.

Why do companies even bother to say stuff like that. S&P laid out a lot of credit ratings which did not hold and they have some serious problems. Politicians are raising concerns, regulators scratch their heads and investors have lost money.

The credit rating system is broken and just replacing one top officer is not enough. Mr. Sharma will report to Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies. He will now have a more global focus. But if the product is broken taking it globally will not help. The global gambit will only raise the problem up to higher levels.

New Credit Ratings are issued at one point in time. Just before investors are about to buy. Once you are in, revised credit ratings are more of a rear view mirror issue. Credit Ratings are available to anyone who cares to read them and therefore do not offer any advantage to any one investor group. So while there is justified criticism that the ratings were not downgraded in a timely fashion, the downgrade would not have been actionable. Once the risk has been repriced you are still in the same boat. Its the boat you no longer like if the truth be known.

The credit rating system did not protect the market from Enron and it certainly did not protect the market from sub prime slime. The credit rating system is inadvertently entrenched by regulatory requirement that requires investments to be within certain investment rating grades. The business is then automatically driven into a few rating agencies.

The market needs to do its own homework more frequently. Billions have been lost on so called investment grade or better credit. McGraw Hill cannot cover the tab so do not even bother to sue for negligence.

Most of the problems are with the so called exotic structured issues. Financial engineering is collapsing in onto itself. My suggestion is to adopt a higher level of caveat emptor and return to the basics. Blocking and tackling if you follow football. When you forget those skills you get creamed.

Thursday, August 30, 2007

H&R Speeds Towards a Brick Wall

H&R (HRB) just today announced some difficult news. They indicated that the Q1 loss ballooned as it struggled with its mortgage lending arm and said it is trying to renegotiate the sale of the unit. Really!

If you have been following the tone and nuance of their recent press releases you would start to become suspicious. First they announce that they will amputate their problem and sell the offending mortgage unit with the sub prime blemish to Cerberus. The deal is to close later this year and is subject to certain closing conditions.

They later announce a dividend (see my post June 7, 2007) designed to bribe dividend seeking investors to stay with the stock. The timing of the dividend in my mind was suspect as it was to be of record and paid roughly during the closing time frames. They then announce poor operating results several weeks after announcing the dividend. Always a cart in front of the horse scenario.

Now a week before the annual general meeting where we will have credible shareholder activists attempting to secure board seats they announce yet again poor results. This time they let it be known that they are attempting to renegotiate the sale terms with Cerberus.

Why would Cerberus change the deal? Only if they receive an advantage. One of the conditions H&R wants waived is the condition to have any mortgage commitments for sixty days forward to be fully funded. This signals H&R is struggling very hard. All that Cerberus needs do is wait for the deal to fall apart and then laugh.

If Home Depot had to cut the price and guarantee debt on the sale of their problem wholesale division H&R can easily be looking at different terms. The gun pointed to H&R's head is larger caliber. Unfortunately H&R chambered bullets in many cases.

H&R probably saw this one coming and was starting to twist in the wind. We need new management.

Tuesday, August 28, 2007

Google Needs A New CFO

Google (GOOG) suddenly finds itself needing a new CFO. What do we make of this very sudden move? Usually key positions such as this have some succession planning behind it. Sounds like maybe Google did not do planning. Which is only another sign of immaturity in this mega cap company. In any event this is not a huge buy signal.

Did he leave when his net worth was incredibly large and there was no longer a financial need to work. Probably. Google has had one of the best rides in the history of capitalism. Google's almost impossible challenge will be to continue to meet incredibly difficult expectations. Better to leave the driving to someone else.

Google may now learn a few things about itself. The new candidate will need to meet the insane requirements of Wall Street. The new applicants will want to ask some very interesting questions which may surprise the two founders. The new applicants will already have their own street cred and will not need the job. The company has grown very quickly and there are almost always lumps under the carpet that will be discovered. Google will have to think their way through some fundamental issues.

If the executive search goes on for too long eyebrows will be raised. The risk is more for the account of Larry Page and Sergey Brin if the new candidate does not work out for whatever reason. Besides which recruiter will get this plum assignment.

Many feel that Google is not yet seasoned by fire. They have not yet dealt with a serious crisis or problem. So far everything has been breaking their way. So what kind of CFO do you hire and what signal does that give to the market.

Or is the fact that Google is caught with their pants down and needs to find a CFO in a hurry the first of many problems that may come their way.

Home Depot Financial Glaucoma

Home Depot (HD) continues to twist in the wind. The only joy in the executive suite is the firm knowledge that Nardelli's fingerprints are still on most of the files. I am sure that this has been forensically isolated to protect the current incumbents.

Home Depot has had to drop the price significantly and start to guarantee some of the debt. Bankers are on the hook and are liable to pay failure fees and face subsequent litigation. Lenders, now sober, are concerned about cash flow because they have just relearned how to read financial statements. Its a bizarre circle shoot of obligations driving even more bizarre behaviours.

Home Depot is suffering from a bad case of Financial Glaucoma. Yes the wholesale division is a major disappointment. Yes it has Nardelli's finger prints all over it. The strategy to amputate the entity was always similar to a wolf gnawing off its leg once its been caught in the trap.

It is also true that market conditions have changed dramatically. No one will argue that fact. The wholesale division is a major operating problem within a very tough and declining housing/construction market. Everyone is focused on a financial engineering solution hence the Financial Glaucoma.

Businesses are supposed to have some long term perspective. No one is talking about how to fix the problems. Everyone wants to drop the hot potato.

Home Depot this is what a real business with a focus on operating would do. Let the financial engineering nonsense lapse and let the participants run away. They will secretly love you. Announce that you will retain the division but write the asset value down and take the hit. Write the values down hard and big. Everyone assumes that the division is a dog so there will not be too much surprise. A very low asset value will set up the value play on the other side.

Take the hit now when you can still point to Nardelli and tough market conditions. Rethink (abandon) you stock buy back program which this sale would supposedly help finance. Concentrate on running the business. Home Depot used to be really good. Return to your roots.

We need courage, leadership and vision in the executive suite. Another namby pamby financial engineering move that needs to close before the next namby pamby engineering move can move into play will not win investor confidence. Operating a company properly by recognizing problems and then fixing them properly will create serious long term shareholder support, confidence and respect.

But then again that requires the financial glaucoma to be corrected. Eventually someone will fix it. This team or the next is the real question.

Sunday, August 26, 2007

Xinhua Finance Media Needs More Disclosure

Xinhua Finance Media(XFML) issued a very breezy press release announcing the acquisition of a 70% interest in Small World Television ("Small World"). The transaction closed August 23. XFMedia made a cash payment of US$ 5 million and will issue 546,248 Class A common shares within five days from closing date (equivalent to 273,124 American Depository Shares).

The problem I have is that absolutely no financial information has been provided. Will earnings be accretive and if so when? Any cost cutting opportunities? Nothing an investor can really sink their teeth into.

The press release gushes about the transaction and how it will strengthen and enhance everything. Its almost like extra vitamins in my cereal. Its sort of good but really how much better is my life going to be.

Small World started in 2004 and they now sell out or jump ship for $5 million. Not exactly the big score. Did they need more capital? Was there some kind of problem. If the earnings will not be seriously accretive than why bother. In this case the faux joy that all are expressing is just a little bit overdone and one becomes suspicious.

For those of you who may not know Xinhua Finance Media is a partially owned subsidiary of Xinhua Finance Limited ("XFL"; TSE Mothers: 9399; OTC ADRs: XHFNY). They bill themselves as China's premier financial information and media company.

These guys are more than capable of providing substantive financial information. Its supposed to be a core competency. The omission which was clearly intended has too much smoke screen in it. Investors will find it hard to come to grips with.