Thursday, January 10, 2008

Was Warner Bought and Paid For?

Warner of the Time Warner empire (TWX) delivered what many believe to be the death blow when it was announced that starting this summer they will release DVD's in the Blu-ray format. Obviously very good news for Sony (SNE) and not so good news for Toshiba (TOSBX). OK so this is supposed to bring to an end the format confusion of the market place.

Matt Hartley reporting in the Report on Business in an article printed of today's date filed from Las Vegas reported that unnamed industry analysts were speculating that Warner had been offered huge amounts of cash. Toshiba it was rumoured offered $100 million. Sony offered $400 million; which seems like the better deal. The article did go on to say that Warner declined to comment on whether it was offered money to pick sides.

Why cannot Time Warner investors know if they have been able to leverage their commanding position in the DVD market. If this is a one time payment the $100 million represents 10% of the last quarterly reported income. If its substantially more cash then the investor should know even more.

Time Warner needs to come clean with its own investors and let them know if wealth has been created.

Wednesday, January 09, 2008

ITW Bakes Another One

Illinois Tool Works Inc. (ITW) announced the acquisition of the Baking Equipment Business Peerless Machinery Corp. The transaction is worthy of a press release. But no details have been announced. Price or terms.

So what is an investor to do with this tid bit of information. If ITW wants you to believe that their strategy of investing in wholesale food and baking equipment is financially attractive they need to put some cards on the table to back it up. The comment in the press release "The Peerless Group has grown into one of the most diverse suppliers serving the bread and roll, cake and snack and cookie and cracker markets." is inadequate.

At approximately the same time ITW announced that it will report five businesses that were divested in 2007 and 2006 or held for sale at the end of 2007 as discontinued operations. As a result, the operating results for these construction,
consumer packaging and automotive machinery and components businesses will be
reclassified as discontinued operations for both the fourth quarter and
full-year 2007, and related prior periods.

They continue to claim "The reclassification for discontinued operations has no impact on the Company's current forecasted net income per share or income from continuing operations per share for the fourth quarter of 2007."

But when management buys something they do not have to explain. ITW needs more clarity. When you boast 750 business units, approximately 55,000 employees over close to 50 countries you need to go the extra mile in explanations.

Tuesday, January 08, 2008

Avon Lady Joins Apple's Board

Andrea Jung of Avon (AVP) has been placed on the Apple (AAPL) board of directors. Some comment is being offered as to why this particular hook up was made. None of which I find particularly satisfying.

Yes she speaks Mandarin but can she really leverage whatever contacts she has in China from Avon to help Apple. The Chinese economy is huge and increasingly sophisticated. If Apple needed some good Chinese connections they would have reached out and appointed someone who organically operates in China.

Others point to her experience in design, fashion and connecting to women in critical demographics. Apple does not need board level expertise in fashion or design. No one is seriously complaining about Apple's design capabilities.

Avon is in a big turn around situation literally attempting to transform themselves into something new. Most if their growth seems to be outside of North America where they are reaching out to relatively unsophisticated consumers who do not have large amounts of choice. Apple competes and excels in an area with lots of choice and sophistication. In fact they set the tone for choice and sophistication.

Avon has just announced that the supposed cost cutting program will be taking a lot longer than originally anticipated. Cost cutting measures are expected to take another two to three years before they are fully realized. This is not a feather in Andrea Jung's cap.

The entire process of Board of Director recruitment is rather opaque and there does not seem to be much if any comment from Apple about the why and how come issues. When you look at sub committee appointments as shown on the Apple Corporate Governance web page Andrea Jung still does not have any responsibilities.

So basically we are waiting for the other shoe to drop. Given the responsibility that Directors have to investors, the way this appointment has been announced is disappointing.

Monday, January 07, 2008

Citigroup Dividend: Forget the Deathwatch

Citigroup (C) has attracted much controversy as to if they will skip or reduce the dividend. Citigroup shares trade at approximately a 7.60% yield. Normally that is a huge danger sign of more sad news coming very soon. Consider this:

The quarterly cash cost of the dividend is approximately $2.9 billion. Everyone is well aware of the dividend coverage ratio and how ugly it looks. But given the scale of the problems facing Citigroup, $2.9 billion every 90 days is not going to solve anything worth solving. A cut or outright skip will just slam the share value down some more and affect their ability to manage their capital base.

So this talk of a coming dividend reduction begs more questions than it actually solves. Financial institutions have some options that normal companies do not. Quite frankly if the large overseas investors and onshore political operators decide its worth more it will be worth more. They are not going to kick this one out of bed with a foolish dividend cut.

Sunday, January 06, 2008

New Years Comments Heidrick & Struggles Clear Winner

During the Seasonal Break (Christmas if you do not care for political correctness) I scanned some financial skeptic blog stats for the past year and this is my overall conclusion.

The largest amount of activity was clearly around LDK Solar Company Ltd.(LDK) Regardless of your feelings about the company I think we can all agree that there is controversy and polarized opinion swirling about. In terms of blog posts I only started to comment in the fall of 07. But the activity is easy to understand.

The second place winner is a headhunter called Heidrick & Struggles (HSII). I only wrote one post dated Feb 27, 2007 On an annual weighed basis HSII has been showing up on the radar very consistently only just being beaten out by LDK.

Heidrick & Struggles is not nearly as controversial as LDK. HSII market cap sits at just under $600 million. But hey everyone needs a well paying job and many large companies will consider using Heidrick & Struggles professional services. Their web site claims that the financial services practice is the largest part of the firm.

When you scan Heidrick & Struggles partner and associate bios there is a lot of private equity and hedge fund expertise. As financial services restructures the question becomes will Heidrick & Struggles be able to re-purpose the said expertise. Doors will be revolving and swinging both ways for the next year. The supply and demand dynamics for hot shot managers who can lose large amounts of capital in incredibly short periods of time does not look favourable.

The prognosis on Heidrick & Struggles may be out for a while. I would keep track of professional headcounts and number of offices as a proxy for financial health. The firm is pure intellectual capital (Big commissions) and some fancy office furniture. If the revenue stream is not there the laws of Darwin will apply soon.

The company also initiated a dividend program last Sep 07 at an annual rate of $0.52. The current yield is approximately 1.6%. the new dividend did little to improve the share valuation. Given the high operating costs of a successful search the firm is vulnerable. One last point. There are an awful lot of press releases coming out. Never a good sign.