Posted on 01/30/2008 5:09:23 PM PST by Snickering Hound
Firestone. American Motors. Texaco. Pan Am. Worldcom. At one point or another these large American companies were at the top of their industries. Pan Am was the leading global airline for decades. All are gone. Some were sold off. Others went bankrupt. Who could have predicted it?
There are several iconic US companies that may well not exist at the end of 2008. Some may not even make it halfway through the year. Not all will go out of business. Some may simply be auctioned off in pieces. Others may be bought. These companies will not exist in their current forms as they are known to their shareholders and consumers now.
When a company ceases to exist as an independent entity, it is not necessarily bad for shareholders. Some may be worth more in parts. Often a bust-up or merger is what brings owners the most money.
Here are the big ones that probably won't make it.
Motorola (MOT) was the No.2 handset maker in the world a little more than two years ago. Its Razr took the wireless industry by storm. It did not follow that product up with another winner and its larger rival, Nokia (NOK) began to take up market share. Smaller competitors Samsung and Sony Ericsson came out with popular phones and Motorola was under siege. Carl Icahn took a stake and tried to get the company to improve its pay-out or sell-off some of its divisions. The board sent him away. Since then things have gotten worse. Motorola's share price was over $25 in late 2006. It is now below $12. The company's handset business may well be bought by Samsung and its enterprise telecom and home set-top business to companies could be acquired by Cisco (CSCO) and Nortel (NT). A tech-oriented private equity firm might also buy the set-top box unit. As an independent company, MOT has no future.
Sears Holdings (SHLD) is billionaire Eddie Lampert's experiment at merging big retailers Sears and K-Mart. Unfortunately both were in bad shape at the outset. Putting them together did not help either business. The company has a 52-week high of $195 and now trades at $103. Sears has now reported a string of bad earnings. Last week reports began to appear that Lampert may spin-off the company's real estate and break the firm into several operating units, each of which would have more operating autonomy. The CEO has been pushed out in favor of a "temp". That sounds like the prelude to an auction.
Citigroup (C) is almost certainly not out of the woods. A recent report in the Financial Times said that US financial company write-offs for the entire sector could total $300 billion this year. Fortune magazine has written that Citi has another $37 billion in CDOs on its balance sheet. It also has LBO loans which it cannot syndicate because of poor credit markets. Shares of JP Morgan (JPM) and Bank of America (BAC) have recovered a good deal from their sell-offs. Citi has not. Wall St. is worried that the level of risk in owning the shares is just too great. A close look at the bank shows that it has some valuable businesses which operate independent of the troubled part of the company. Citi's wealth management operation grew 27% last quarter. This division includes Smith Barney. The firm's international consumer revenue rose 45%. It is Citi's securities and banking operations which is dragging the company down. With a recession and more financial company write-offs coming, Citi will have to get smaller by selling one or two of its valuable businesses. The global wealth management business had $3.5 billion in revenue in Q4 and $523 million in net income. Citi's market cap is only $140 billion now. Its consumer units could be worth more than that on their own.
Ford (F) is trading about where it did when there were rumors that the company would go bankrupt. This car company has a market cap of $13 billion against annual sales of $173 billion. Ford lost another $2.8 billion in Q4 and is planning to cut another 13,000 jobs. It has a credit unit which made $775 million last year. Ford is already in the process of selling some small units including Jaguar and Rover. Volvo might be next. The company's share of the US market is down to about 15%. Even with cost cuts, its product line works against a recovery. The firm's pick-ups and SUVs have good margins, but high fuel prices have cut into sales. Ford's new fuel-efficient cars compete directly with companies that have much stronger balance sheet like Toyota (TM) and Honda (HMC). Ford is highly unlikely to stage a unit sales recovery in North America this year. If sales fall further, cuts won't make up the difference forever. The Ford family, which has de facto control of the company, will have to look at selling the car operations to a large Asian or European auto company. That would allow for a consolidation of production, product development, R&D, and marketing. Bottom line--billions of dollars in annual savings.
Yahoo! (YHOO) won't make it through the first half as a standalone. There has been speculation that the company might be sold to Microsoft (MSFT) in the press for months. It may take an outside investor coming in and buying a large stake to push the board's hand. Recent analysis from Wall St. shows that about half of the company's $28 billion market cap comes from the value its stake in Yahoo! Japan and China e-commerce company Alibaba. That leaves $14 billion for the core portal and search business which has a revenue run rate of about $6.8 billion a year. This has to be attractive to companies like Microsoft and News Corp (NWS). Weak Q4 2007 earnings and a shaky forecast for 2008 has hurt the shares more. The company has said it will lay-off several hundred people.
AMD (AMD) is the second largest provider of chips and processors for servers and PC's. Its larger rival, Intel (INTC), has over three-quarters of the market. A price war has hurt AMD's gross margins badly. The firm also bought graphic chip company ATI and now has over $5 billion in debt. Shares were over $40 less than two years ago and now trade at a little over $7. For AMD to hope to compete, it needs a larger owner with a wider global chip business and better balance sheet. Intel has close to $13 billion in cash and short-term investments and 20% operating income margins on nearly $40 billion in revenue. Where would AMD fit? Somewhere with chip R&D expertise, a broad line of semiconductors, and a mammoth global customer base. Look for Taiwan Semiconductor (TSM) or Samsung to court AMD's board.
Sprint (S) should never have merged with NexTel, but it is a little too late for that to be fixed now. It traded above $23 about a year ago and recently fell to close to $8. While AT&T (T) and Verizon (VZ) post enviable wireless numbers, Sprint struggles to keep current subscribers. Sprint is cutting bodies but Wall St. has no confidence that fewer people and these modest savings will turn around the company. Its issues of being an independent wireless company with angry customers are simply too great. SK Telecom, a big Korean operator, has already come to Sprint with a proposed investment. The board did not listen. But, the company's shares were not at $10 then. SK may well be back. The other potential buyer often mentioned is Comcast (CMCSA). After years of beating on the big US phone companies, Comcast is now up against their fiber-to-the-home broadband and TV products. And, it is losing customers to them. What Comcast does not have is a wireless service to offer consumers and businesses as part of a "bundle" of services. At $6 or $7 Sprint could look very attractive.
Qwest (Q) is the last of the Baby Bells standing from the break-up of the old AT&T. It is the dominant phone company in 14 states. Its shares have fallen from a 52-week high of $10.45 to just below $6. Qwest has two problems which it cannot solve. The first is that it has no real wireless operations. That is what is driving the market valuation of rivals AT&T (T) and Verizon (VZ). Qwest also does not have the balance sheet to upgrade all of its infrastructure to fiber like Verizon is doing. AT&T has started the fiber build-out process. There are rumors that it will get into the TV business by buying one of the satellite TV companies. Either way, Qwest does not have the balance sheet to run fiber across its service area. Qwest does have a very valuable customer and geographic base. Watch for Verizon to get in touch with Qwest's board. The larger company could use Qwest's customer base to push its wireless services in bundles. It could also build out fiber into Qwest's region if the return-on-investment for the current project is good.
My Dad had done of those too. Bought it brand new in 1949. First car I ever rode in. I was brought home from the hospital in it after my birth in 1950.
I worked the middle and back-end factory in Chandler. It was something else. (I enjoyed it alot). To bad it never had a chance.
Income is no longer aggressively taxed thanks to the great Ronald Reagan, who taught us that when you subsidize something, you get more of it and when you tax something, you get less of it. It's a simple truth.
You refer to extreme wealth as "vanity wealth." I disagree. Some of us have bigger goals than simply "getting by" eating three squares a day. Some of us want to ensure a better future for our children and grandchildren by giving them every advantage that comes with wealth: the best schools, the best health care, the opportunity to travel, the works...
The aborigine with a bone through his nose would probably consider the average impoverished American's standard of living unreasonably high. Why should we lower our expectations to match those who have achieved less? Seems it should work the other way around.
Such a tax system wouldn't encourage people to do jacksquat except aim lower in life. It would also feed the beast of big government, taking money out of the pockets of one group of citizens to give handouts to another. As far as this nonsense about people being more beneficial to society because they're poorer... whatever, chief. You're free at any time to give all your money away and become the next Mother Teresa. Just don't try to tell me how much money I need!
I’ve never seen your posts before but your spirit is good.
Thanks for the kind words and thank you for your service. Hope we cross paths more frequently, FRiend.
How exactly does one say thanks and oh sh*t all at once? Thanks for the lesson.
Who are MBI, and ABK? I thought municipal bonds were paid for by taxes!? Who are these mysterious companies? What do they manufacture?
Correct on your first question.
Your second question:
First reason: So they can issue debt at lower interest levels, which means that they’re able to issue more debt for less taxation. Taxpayers are not an infinite well of funds - at some point, they revolt and the pace of public construction slows to a crawl. That will happen faster should the issuers be forced into the general market rate structure.
Second reason: not all muni bonds are “G-O” bonds — ie, bonds that are obligations on the political entity’s general fund. Some bonds are issued by school districts, or power districts, or are special project bonds. There’s all sorts of muni bonds out there, and some of them would require detailed investigation by investors before they’d bother buying the bonds.
In today’s market, with so much competition for investor money, anything that requires detailed, local investigation is likely to be very hard to sell the first time, and very close to illiquid in the secondary markets.
So to address these two points, bond insurance was born.
The "standard" for this type of debt issuance is based upon certain assumptions that embody "the way things work". In this case, the issuing entity is a university; and while they can raise tuition fees etc; there are limits to what they can do. I have no idea what GU is attempting to do with this debt, and indeed, it may be a rollover of existing debt. (this would be really bad!) Maybe they want to build or refurb a couple of buildings or acquire some land and build some new bldgs. Don't know. Per Google, the student population at Georgetown U. is 14148. At the point where they would have to raise tuition to double that of Harvard to service the debt as a result of having to pay higher rates on the coupon...that ain't gonna fly.
In the case of the Nevada utility, often their rates are capped by state regulators or some other restrictions may apply. Again, I don't know the particulars other than the amount, $115 million.
As you suggest, in the case of cities or counties, perhaps increased borrowing costs can be met by raising taxes or fees. Wonderful.
Both of these examples are nothing but macro versions of a would-be homeowner having to pay a higher rate of interest on a home loan because their credit isn't so great.
These things are happening against a backdrop where Treasuries currently pay a coupon in the high 2's, IOW, 2.x%. And, of course, the higher borrowing costs cut into the availability of funds for whatever the projects were. And, the company/university had to pay Lehman their multi-million dollar cut in exchange for accomplishing essentially nothing. Oh yes, do not think that Lehman will go unpaid.
So you start following the concentric circles of effects beyond these particular examples: The entities get less money for their projects; the stock of the utility will probably fall, reflecting a decrease in shareholder equity; Maybe the util has to reduce its dividend, so folks dependent upon that divvy get less money. And, their stock falls in value.
Then, realize that these were issues that just "didn't fly". We're not talking about any actual defaults.....yet.
Also, this bond insurance is not like an annual premium; it's paid all upfront. So, it's not like you had a fire ins policy with State Farm and they went belly up but your house didn't burn down. Well, you were going to pay out that premium anyway, so next year you just pay it to Allstate. Big deal. Nope, ALL bonds insured with those cos suddenly lose market value because the insurers lost their AAA rating. Now, ALL of them will have to pay higher rates OR go buy default insurance anew, and, it surely will not be as cheap as it was, AND the money they all spent, all 114,500 of them is GONE.
And WE STILL HAVEN'T HAD ANY DEFAULTS YET.
Oh yeah, now we get to loads of bond mutual funds or some pension funds. Well, many of those funds cannot hold uninsured bonds BY THEIR CHARTERS, or perhaps they cannot hold non-AAA bonds per their charters. So, guess what? The funds now have to SELL those degraded bonds BUT THERE IS NO MARKET now! They will HAVE to sell into an entirely illiquid market. Well, OK. But now, whatever price (actually discount) is established by those forced sales means that EVERY BOND, everywhere, gets discounted by that amount, or more, in the moment of reckoning this entire universe has been dreading, the dreaded "mark to market (M2M)".
Well, OK, when E-trade was forced to sell off their mort portfolio, that was one of the few M2M episodes to date. Know what their port sold for? Months ago when this situation wasn't anything near this bad? You really want to know? Eleven cents on the dollar! And E-Trade's portfolio was NOT subprime dirt, it was at worst Alt-A as I understand it, and had good amounts of "A" paper in it. I've seen CDO tranches where the contents were total puke material, I'm talking 98% LTV neg-am loans on homes that have already fallen 15%. Need I say more?
Oh, and did I mention that WE STILL HAVEN'T HAD ANY DEFAULTS YET? So what do you think starts to happen when we start seeing a few defaults?
The point of all this is, the effects of this, touching virtually every town, every sewer district, every fire district, every county, in this, just round one, are literally unimaginable. It is a cascading contraction in credit availability that is really jaw dropping once you ponder the ripple effects.
Ahh, but the investor in me says that these are the same bonds merely sans the insurance and paying higher interest rates.
And the insurance is not on my loss, rather on the issuers basis price for the bond. The fundamental liquidity hasn’t changed,only the investment terms have.
As I recall, a class of those bonds are tax exempt?
Ahh, okay so even though these two auctions were relatively minor, the ripple effect is that every Muni bond everywhere has just been downgraded as an investment vehicle?
I ask for a few reason Attention Surplus Disorder, namely the Chrysler bonds (different thing I know) in the late 70’s had dropped to seriously low levels of value, a 1,000 bond may have went for 700 or so, yet the people who gambled/invested cleaned up.
Thanks for such a detailed reply though, I do think the “list” at the thread starter was off base on more then a few companies. I also think more then 1 or 2 of those companies are prime buyout targets as well.
BTW I watch Kramer, would never invest in the manner he suggests, High Maintenance, risky obscure companies, if you blink you could lose your shirt...but he is entertaning though
It’s all due to the Unions, and their unrealisstic demands, in Fords case, we have seen it coming for years. Unions, Ugh.
It’s all due to the Unions, and their unrealisstic demands, in Fords case, we have seen it coming for years. Unions, Ugh.
It’s all due to the Unions, and their unrealisstic demands, in Fords case, we have seen it coming for years. Unions, Ugh.
Firestone disappeared a long time ago. Motorola and Cisco are Chinese now. Citigroup is Saudi. Let them go. They do no service to America anymore, except they are a burden to American citizens and taxpayers who must bail them out.
Sears is just K-Mart with a fancy new name. Won’t trade with them... but they are really popular with our undocumented citizens from what I can see locally...
In many cases, yes. But you have to be in a position to take advantage of it - just showing up and doing what you're told isn't going to cut it anymore. Some of it will require some investment in retraining but if you're not lazy that can be done.
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