Feel the Excitement!

Ok, I can prove the 3G Apple iPhone is coming. Here’s how:

First, we look Google trends from 2006, leading up to the actual introduction of the iPhone…

And now, mentions of the “3G iPhone” over the past twelve months …

And, just to get a baseline, recent mentions are larger in magnitude (the huge red spike is obviously the actual iPhone introduction) …

See? What more does one need? The move up is even stronger than it was before the first iPhone was inntroduced.

Oh, and there’s plenty of other clues as well…

Amusing Financial Quoatation: Bear Stearns Shareholders

From the ever indispensable Steven Davidoff (on May 9th):

According to the latest filings with the Securities and Exchange Commission, JPMorgan now owns 49.43 percent of Bear Stearns, and so a “yes” vote to approve the combination is a virtual certainty.

I just can’t believe that 0.57 percent of Bear’s shareholders don’t vote yes for whatever reason, including just simple confusion. And the broker votes may even have the bravery to go JPMorgan’s way. Game over for Bear.

(Emphasis mine.)

Update: Some weirdness with the URL and title. Probably from editing in multiple places. Sorry.

The Discord in Similarity

here’s an interesting Alphaville post that ran recently that pointed to an article in the FT. From FT’s Alphaville:

Recently installed chief executives at Merrill Lynch and Citigroup are raiding the ranks of their former employers, Goldman Sachs and Morgan Stanley, as they seek to transform the culture and management of banks shaken by the credit crisis.

The article actually has a bit of a glaring error, Vikram didn’t raid Morgan Stanley for the people they mention (John Havens, Don Callahan, and Brian Leach), but rather they came with Old Lane (except for Callahan, who came over from Credit Suisse). Other than this, there are some differences that should be highlighted.

1. At Citi, the team was brought in and given jobs for which they were ill suited. These people had all run businesses, but none had been focused on or solely in the alternative asset management business. That’s why the Old Lane acquisition has been such a disaster in the context of adding to the alternative asset management platform. One need look no further than the man that was heavily involved in the deal:

But the point, [Lewis] Kaden told Fortune this past March, was not for Citi to secure a hedge fund business but rather to capture the talent of Pandit and his team. That was like acquiring Morgan Stanley’s trading establishment, Kaden said, without paying billions to do it.

So, now what do we find? Pandit running the whole of Citi, including a massive and mediocre consumer bank, a large investment bank, an alternative asset management business, and a huge brokerage firm. John Havens, who only ever ran equities at Morgan Stanley, now also has an investment bank, fixed income division, corporate banking, and alternative asset management business under him. I’m sure it’s all the same… Also, the Citi executives have made it a point to bring in Morgan Stanley people at every possible juncture, mainly through acquiring middling (or completely new and not yet open for business) firms staffed by ex-coworkers (although never promoting these acquired people to positions with more responsibility, making it look like they are merely being made rich with Citi money). I’ve documented a fair amount of them in this post. At Merrill, however, Thain is filling positions with people that held those same positions elsewhere. Thomas Montag is running a sales and trading operation after … wait for it … running a sales and trading operation. Noel Donohoe spent eleven years running risk management at Goldman and will now be … well … running risk management at Merrill. Much more symmetry.

2. At Merrill, John Thain is flattening the organizational structure. This is a point the FT piece makes. Mr. Montag, for example, will report to Mr. Thain–This takes a major business unit and un-layers it. It shortens lines of communications and allows one of the C.E.O.’s trusted deputies direct more authority than if a middle ma were involved. At Citi, Vikram Pandit is creating a more complex structure. Now there are regional reporting lines and product reporting lines, resulting in many senior executives with two bosses. When you have the potential for a very opportunistic but very time sensitive investment, and you have two bosses, how many people do you need to get on the phone to make a decision? How many people are pulled in? How conducive is all of this extra work to getting decisions made and promoting a centralization of authority to make and enforce those decisions? As a matter of fact, it’s acknowledged that regional decisions have to travel to the central authority. From the horse’s mouth:

“It’s going to take some time because we have to be diligent,” Pandit said to a questioner in Turkey who asked when decisions can be made without New York’s stamp of approval. Translation: Don’t hold your breath.

At least they know it’s a problem.

3. Merrill’s talent and past leaders were harvested long before John Thain arrived. John Thain even brought back a popular Merrill figure, Jeffrey Kronthal, to help rebuild after Stan O’Neil churned many senior positions. Citi, on the other hand, had all but the most senior executives intact and has taken almost no one from their internal bench and promoted them during Mr. Pandit’s reign. Michael Klein was moved into a new role after threatening to resign (surprising that the C.E.O. would bend to the will of a subordinate who is known for being hard to deal with, but I’m not making the decision). When Tom Maheras and Randy Barker left, Maheras’ old job was filled (and then later demoted) and no one else was named (instead, they reorganized fixed income and equities entirely). The consumer bank, however? The top people are still there (with Ms. Dial augmenting the lineup). Indeed the only people that seems to have changed in senior management are the ones that were between Vikram and the C.E.O. spot (and his subordinates following him up the chain).

4. John Thain was hand picked for the top spot at Merrill and part of the job is being able to hire your direct reports and other key personnel. Indeed it was well documented in the financial press that there were many suitors for the C.E.O. spot at “Mother Merrill” and Thain was selected out of a field of candidates. Vikram, on the other hand, as I stated just above, fell into a power vacuum. It was even reported that most qualified contenders decided they didn’t want to be considered for the job. Clearly this is much less of a mandate to fill the ranks as one sees. There are the egos of the people that were passed over to consider as well as various internal problems that arise from such a sudden shift in power.

It seems pretty clear that once one looks deeper than the surface, there are some subtle but pervasive differences in how the two executives are choosing to fill the ranks at their new firms. These differences will make a massive difference in things like morale, talent retention, and tearing down internal silos. I guess we’ll have to see how all this plays out…

Answering a Question

I was looking at something related to energy in the V.C. space today, and someone asked me, “What is your interest in energy?”

My answer was as follows:

One primary interest is the next generation of fuels and technologies to power our every day needs. As climate change and environmental issues come to the forefront it is going to be very lucrative for companies to begin advancing what are now fringe energy sources and making them more efficient. My personal belief is that startups will provide the greatest way for innovators to monetize their insights and large energy companies are more focused on stretching their current energy generation methods, rather than pioneering new ones.

Now, naturally, your first thought might be of some sort of gagging noise. Fair enough. But the insight that I had during this stream of consciousness moment was that perhaps this is why disruptive technologies come from unexpected places. If I’m a large energy company, like Exxon, why would I ever want to find, let alone release, a new method of extracting energy from oil that’s 10x more efficient or a new way of turning other fuel sources into viable alternatives for automobiles? I wouldn’t. Also, startups produce these things because people who discover these innovations don’t want to pass them up a corporate food chain and hope they get a 10% bump in their bonus or salary, they want to be at the forefront of making the hundreds of millions of dollars from these discoveries. Entrepreneurial spirit indeed…

As Promised, Housekeeping

Okay, soon I’ll stop pestering people and go back to my much less frequent posting schedule. First, though, a few housekeeping details. I changed the look and feel of the site, so you’ll notice that immediately if you visit the actual site. Also, I decided to utilize FeedBurner for my RSS feed. The address is http://feeds.feedburner.com/DearJohnThain or use this link. I won’t (and can’t) get rid of the original feed, so, if you’re against changing, feel free to keep using that one. Another benefit is that getting posts by email is now an option.

I got the icon for the RSS feed from here, so if you like it then head over there.

Blogroll Please!

In what can only be described as an affront to the graph-like nature of the Web (web-like?) Joe Wiesenthal at the Stalwart has decided to eliminate his blogroll. Now, I don’t know about you, dear readers, but I am extremely interested in what people are reading. Now, is a static list on a sidebar the way to go? Nope. So, if Joe doesn’t update his blogroll often, then best not to have it there. But, why can’t someone create a smart blogroll? Link it to my feed reader. Get statistics on what I’m reading, and generate it regularly from that. How about what I’m sharing with others or starring (for Google Reader people, like myself)? Or, maybe have the blogroll full of blogs being linked to. All of these would keep the blogroll updated and help discover new content. Oh, but linking to actual posts isn’t really what I’m thinking of… always seems to be a letdown when you try following someone else’s del.icio.us links or individual posts they are reading.

Maybe a WordPress plugin? Anyone? On WordPress.com, perhaps? Hello? Please?

Meta-Blogging

Well, it’s been a while since I’ve posted something, although not for lack of thinking about posts. I will say, I’m a bit annoyed at myself–because I’m so behind on my feed reading I see things that are interesting and have a thought about them, but it’s too late! I have some interesting posts in the works, though, but time seems to always slip away.

In any event, I’m three months into this grand experiment (more or less). So, probably a good time to evaluate how things are going. Here are my observations…

1. At least I know what I want to be. My goal when writing a blog wasn’t to state what was going on for that day. Plenty of blogs out there cover what’s going on as it’s going on or after it’s gone on… and better then I could have. Why add another? Do people really care what happened in the U.S. stock market or fixed income market? I wouldn’t read it, so I don’t write it. instead my inspirations were blogs like Going Private, Information Arbitrage, Accrued Interest, Jeff Matthews, and Steven Davidoff. Go peruse their sites. I’ll wait. Ok, back? They have some things in common… they write well, they have experience that breeds original thoughts and analysis, and they post relatively infrequently. Other great blogs are an excellent source for ideas and thoughts–blogs like Crossing Wall Street, Market Movers, The Stalwart, and Deal Journal. This is how I envisioned my flow, and it’s going that way.

2. Finding time to post is hard. When you’re striving to do what I’m hoping to do, it’s difficult to dig into something and be both good and frequent enough. Everyone is different, but my flow is usually as I’m reading something I have an idea for a post and I enter into Remember the Milk. I then search for other information, research the topic, and collect a body of links that help to makeup the progression of my thoughts that appear throughout the post I intend to write. Composing the post usually takes one to two hours and has about five hours of total work put into it. As all this is going on, the landscape changes, things come to light, posts become irrelevant. I was especially proud of my Bear Stearns posts and my Citi post. They were well thought out and topical, but they were hard to come up with enough material to post on.

3. Defining success is necessary to figure out if you are succeeding. Ok, don’t tell anyone I said this, but the one thing I admired about Yaser Anwar was his laundry list of citations from established news sources. So, when Portfolio linked to me, I was ecstatic (and they continue to be one of the main drivers of traffic to me). When the WSJ’s Deal Journal linked to me, I was also ecstatic. I could claim I was cited by both publications. However, in thinking about it, why is their affirmation of my ideas more or less valid than other bloggers? More to the point, why aren’t I more interested in readers expressing some kind of approval or appreciation? As comments and emails started coming in (not in great numbers, I’m not very popular on a relative basis) that become a more intense focus. I saw page views start to jump around and that was awesome. This blog just hit 4,100 hits. Is that good? I have no idea. Sure, when you look at Barry Ritholtz, who has around 100,000 feed subscribers, or Michael Arrington’s Techcrunch, which has nearly 1,000,000 feed subscribers it seems tiny. So, at the end of the day, what have I determined about measuring my success as a blogger and the success of my blog? Not much. I have figured out that the nebulous goal I will set for myself is to be respected, provide valuable content, and not to become a grubber for links or traffic.

4. The blogging community is very responsive. When I write a post, I ensure that I email bloggers that I read and think would be interested. When I started the blog I sent emails, with some repeated langauge, but tailored for each blogger announcing my blog and what I hoped to do with it. You know what? Not a single one responded. Not one. Take a moment, let it soak in. None. So why is this particular section about how responsive the blogging community is? Well, I did get links. Established bloggers linked to me and started using my posts in their posts. I might not have gotten an email back but I became part of the ecosystem. And, when sending a quick note to various bloggers on specific posts, I got responses. That was great. IM’ing with various bloggers and sharing thoughts was great. The lesson I learned was that, simply put, bloggers DO read their email, they will read the site, and they don’t always respond in the way you think. Oh, and do your best to comment and trackback. It’s important.

5. Don’t be afraid to change it up. If you read The Stalwart, you’ll see, essentially, the exact opposite of Information Arbitrage or Going Private. That site, specifically most recent posts, could be easily distributed via Twitter, wheres IA and GP posts could be chapters in a textbook (Accrued Interest is in that category too). Is one better than the other? Nope. The shorter posts are great for thoughts and other brief things, tend to be read (I bet) with higher frequency, and are quick to write. Shorter posts, however can’t convey many of the complex topics I hope to write about. Longer posts are more time consuming, most likely read less frequently, and can be packed with more information. I tend to use longer posts, and have not used shorter posts. This is something I regret. I have thought about posting, once a week, what I call the “Post Pipeline”–the ideas I have for posts and a sentence or two about them. I’ll probably do this at some point, it’s a good compromise, although I am much more open to shorter posts now. Probably will see some more of that here soon.

Well, these are some of my thoughts and some self-feedback (is that valid?). This has been an idea of mine to write for a while, but a two part series on financial blogging was the catalyst. Please, please, dear readers (I’m not even sure a plural is appropriate… OK, I’m kidding) email me and tell me what you want to hear about. Give me post ideas! I’m game. Let’s go.

One last thing, I’m extremely frustrated with my inability to find a good WordPress.com theme… expect the look and feel of the site to change. It’s so hard to find a theme that is visually appealing, has clear links for RSS feeds, and all the other anatomy of a good blog.

UPDATE: Okay … Barry Ritholtz has around 17,000 subscribers… misread the number. I left the original (w/error) in the post.

Confessions of an Internet Denizen (An open letter to Google.)

Dear Google,

I think you’re super. You have some incredible applications that you provide for free and that I enjoy very much. You’re not evil. You even love clouds, just like me! We’ve built up enough of a relationship where we can be honest with each other, right? Well, here goes…. I’m not really searching for anything. Yep, it’s true. Let me explain.

When I go to you, Google, I’m not really looking for something. Nope, it’s a myth. At least, I’m not looking in the same sense I’m looking for that missing sock or where I ate dinner that one night–I’m looking for the answer to my question. Certainly it’s been a long enough time that you can stop telling me which pages are most relevant to me, and actually just answer my question. The true power of processing billions web pages should be that you can learn from their content, not just retrieve links in short order.

Think about this, Google, “Why do people go to Wikipedia?” Well, people go there  because they have a singularity of purpose. It’s simple. There is a fact they are “looking up”… very different. When I want to know, “How do I get Windows to stop spitting out a certain error message?” I don’t want to see every instance of someone else asking the same question. Google, I think you should strive to become, not a hub, but an authority.

Perhaps this explains why Yahoo! Answers is so successful. The “money line” even is right in the post I just linked to:

According to [a] Harris survey … 81 percent [of respondents said] that they would look to the Internet for answers if the service was free and 77 percent saying that they would look to the Internet if they knew they would receive instantaneous responses.

See Google? Web 2.0 has focused on turning the Web, one of the front-lines of the internet, into a more social experience. Technology took interactivity to new heights and allowed usable applications to be Web-based. Collaboration and a new experience colored the past five or so years. Web 3.0 is already on the horizon. Taking free-form web content and giving it some kind of structure to make processing easier is the next stage.

Ok, now, I know what you’re thinking, Google. You’re thinking, “Ha! And kill my ad business? If I tell people what they want to know then why would they ever click on a link someone pays to put there?” Well, Google, good point. However, you’re thinking about this all wrong. First, you can still put ads on a site that delivers more specific information (also see Yahoo! Answers). Second, think in two dimensions! If your market share takes a massive leap (by both grabbing a larger percentage of searches and by increasing the usefulness, and thus overall volume, of searches), which an innovative and technically difficult product like I’m describing will certainly facilitate, then you will clearly be able to monetize more traffic.

Google, the natural course of innovation has been showed to you by the ebb and flow of what has taken hold on the Web. Now, all the pieces are aligned. The next step is using the Web as a huge knowledge base. Everyone else is focused on revenue and advertising dollars as the drivers to innovation for search engines. Once the next product comes online, the next evolution in how people use the Web, the competition, still trying to figure out how to perfect the old concept will be left in the dust. Just a thought.

Sincerely,

Dear John Thain

Debt? Equity? Let’s Not be Nitpicky … Invested Capital!

Here’s an interesting trend: lots of investment banks and buyout firms buying debt from their own and others’ acquisitions (and, obviously, the most recent headline, something that sounds familiar). With recent developments it seems like some roadblocks have been removed to actually getting banks to sell these loans. However, one has to wonder what kinds of issues this will raise down the road… If, for example, Chrysler, TXU, or First data run into problems, how will things be different with the financial sponsor (P.E. firms) in the debt? (Although, for P.E. firms and investment banks that invest through funds that raise third party money, it’s obviously a requirement to have information barriers in place to prevent conflicts and all kinds of other illegal and improper behavior.)

Well, how about some current events to help answer the question? As one could read here Apollo’s portfolio company, Linens ‘n Things, is expected to file for protection under Chapter 11 of the United States Bankruptcy Code.  From the New York Post (as much as it pains me use this publication as a source…):

Apollo Management, which took the retailer private in 2005 for $1.3 billion, is weighing the idea of a potential “prepackaged” bankruptcy, sources said.

In such a plan, Apollo and creditors would settle on a restructuring plan before a Chapter 11 filing is made.

The speculation comes as the cash-strapped chain faces a clampdown on its $700 million revolving line of credit from GE Capital, sources said. While GE hasn’t cut off the flow altogether, sources said payments to vendors that supply sheets, towels, curtains and kitchenware have become more selective.

That, in turn, has prompted several of the largest suppliers to stop shipping merchandise during the past few weeks, sources said.

About half of the largest 25 vendors have halted deliveries because of late or insufficient payments, according to one source familiar with the matter.

(emphasis mine)

Now, this an interesting situation. Imagine “and creditors” reads “and Apollo’s debt fund” (or some other P.E. fund’s debt fund) or “and the institutions that depend on Apollo for fee revenue” (investment banks) … I wonder how things would be different. Anyone who works in finance, at some point, has seen a customer or other client of the firm go high up the food chain to make a “relationship call.” Certainly there are examples of very public outcomes that are both positive and negative for many “relationships.” But, honestly, isn’t a “top of the house” decision, when supportable, going to be in the favor of the house, versus the part of the house that has the upper hand in negotiating? The part about, “when supportable” is key, obviously. Why would Leon Black’s creditors accept his plan? As a matter of fact, if the company is going to default, then why would he even come out with a plan? Most likely because his plan doesn’t wipe out the equity holders. And why accept said plan? Because it’s probably unclear what the company is worth if it defaults (to the creditors). And, to be honest, can’t one almost always find a reason to go with a decision supported by numbers and projections instead of a protracted legal battle?

It’s instructive, also, to look at the entire process. P.E. firms were purchasing companies and financing those purchases with cheap debt that banks committed to providing. Some of these transactions, however, took over a year to close, like Harrah’s, for example. Now, with the credit crisis having gotten into full swing, the P.E. firms are relying on these below market debt commitments to generate their returns. Having seen this process from the inside, this isn’t really the intention. Have we seen any lowered purchase prices? Not really. Have we seen M.A.E. clauses engaged? Certainly a few, but mainly focused on business conditions and operating results (at least as reported and stated publicly), not related to financing. So what does this mean when a company is bought using debt, funded at 100 cents on the dollar, that is trading at 80 cents on the dollar? Twenty percent of th debt value is a wealth transfer from the financing institutions’ shareholders. Now, in ties of market turmoil, this kind of thing happens, but it’s certainly odd that some P.E. funds can wind up owning the entire capital structure (in different pockets or capital pools, most likely) of a company at a cost basis less than the purchase price. If a firm owns 100% of a company and paid greater than ten percent less than the buyout price that just sounds amiss soehow…

Now, also, think about this: If banks couldn’t even negotiate materially more favorable economics on these deals, and even refused to litigate or pursue valid avenues of breaking financing commitments, then how are they going to react when they own the debt o these same deals and these P.E. firms call them asking for amended terms? I wonder….

Visit Craigslist Much? Well, Now it’ll be $5!

Henry Blodget seems to be getting a lot of flack over his valuation of Craiglist. Honestly, he engages in some logical conjecture, but it’s so assumption-laden as to be useless for too much. Let’s see what he says:

Let’s assume that, instead of charging for job ads in only 11 cities, Craigslist charged for all job ads (currently 2 million a month). Let’s assume that it also charged for another 5 million of the 30 million ads on the site each month. Let’s assume that Craigslist users were so horrified by the outrage of being charged even a de minimus listing fee that two thirds of these listers stormed off in a huff so that the 7 million of paid listings dropped to, say, 2.5 million a month. And let’s assume that Craigslist charged its standard $25 job listing fee for all of them.

(emphasis mine)

See the pitfall there? Further handwaving is done for actual valuations, but do you really think that a site like Craigslist would still be, even similiar, to its original spirit and size if you changed it from a 99% free site to a pay site? I don’t. It changes the character of the community overall.

Well, Equity Private doesn’t either. Her thoughts (from a comment she left, after I “kind of” prodded her):

You also have forgotten what CL _IS_. It’s a community in the spirit of file sharing. It has a very anti-capitalist flair. (They hate me there, no one will even buy me a drink anymore). Just look at “missed connections” section if you like. That’s about as French Existentialist as one gets. Charging to read that section but making it free to write for would STILL piss off the mournful contributors enough to cause a mass exodus. (This is a pity, because subscription revenue for the section might actually be worth something). Strip that stuff away and you’ve just got online classifieds. That’s a bust of a business for anyone else who’s tried it.

This is an awesome example of why logical numbers an seemingly severe assmuptions are a slippery slope. EP also mentions Napster. Online community? Check. From free to paid? Check. Completely failed? Check. Now, the impetus for that change was different, but still, not an unrealistic comparable. What falls out of all this? Well, EP delivers the death blow:

[Your valuation] implies a perpetual growth rate in the business of around 14.625%. (And I haven’t accounted at all for the amount of reinvestment required to maintain that growth rate- but it’s really silly to bother, it’s just not sustainable- eventually it is going to fall to about the risk-free rate… 3.5% right now if we use the 10 year treasury).

14.625% implies the already-huge CL would double in 5 years and be three times as large in 10 years! Really? I’ll take the under. Excel is dangerous sometimes…

Oh, and I suppose this is a good a time as any to bring this to people’s attention. Fascinating!