IAC/Interactive's Match.com has agreed to buy ACAS portfolio company People Media in an $80 million all-cash deal. According to ACAS' May-filed 10-Q, its interests in People Media had a FAS-157-compliant "fair value" of $51.5 million, and ACAS' holdings in People Media had a cost basis of $42.1 million. This apparently-overnight increase in ACAS' value by $28.5m, a profit of about $37.9m, and a liquidity improvement of $80m isn't bad for ACAS' near-term survival.
This isn't the first recent sale at above the "fair value" ACAS must report to the SEC under FAS 157. ACAS' sale of Piper Aircraft was also well above its supposed "fair value". In fact, the People Media premium to "fair value" is even greater: over 55% in excess of "fair value". How "fair" is "fair value" if it doesn't give notice of likely realization upon sale? Valuation difficulties facing ACAS investors may be skewed in favor of longs.
American Capital's bottom line may also get a boost from the recent registrations of American Capital Agency to issue shares -- which at current market prices would be above AGNC's NAV, and which would increase the size of the funds managed by ACAS and therefore ACAS' monthly cash receipt of its management fee.
Wednesday, July 8, 2009
Google to Make General-Purpose OS
After introducing the Chrome browser and the Android mobile phone operating system, Google has announced it is next offering an operating system for general-purpose computing. Known as Chrome, the OS presumably leverages the APIs developed for browsers to run applications that leave users unconcerned what processing is done locally and what processing is done in the cloud.
My take: Google, by offering a whole productivity suite out of the box, can take share from the budget computer market as soon as it shows the thing works. The part of the computer shopping spectrum that includes Linux pre-installation will likely be a starting point for ChromeOS, but if the thing is reviewed as effective for general-purpose use by non-Unix geeks, the probability is that Google's cost-free OS will become a widely-available pre-install (for the benefit of commodity box makers' margins). This doesn't mean Google will steal MSFT's OS cash cow -- far from it. Google is as unlikely to sell OS licenses as it is unlikely to sell browser licenses.
Rather, it means that MSFT's cash cow stands in the crosshairs of a fee-for-service company that hasn't needed to sell a line of compiled code in its history -- and that's interesting in its own right.
UPDATE: CNN offers a look at the issue, and seems to agree the cloud and Google's general-purpose OS are an entry into Microsoft's turf, and not just a gimmick for folks who tinkered with desktop Linux.
My take: Google, by offering a whole productivity suite out of the box, can take share from the budget computer market as soon as it shows the thing works. The part of the computer shopping spectrum that includes Linux pre-installation will likely be a starting point for ChromeOS, but if the thing is reviewed as effective for general-purpose use by non-Unix geeks, the probability is that Google's cost-free OS will become a widely-available pre-install (for the benefit of commodity box makers' margins). This doesn't mean Google will steal MSFT's OS cash cow -- far from it. Google is as unlikely to sell OS licenses as it is unlikely to sell browser licenses.
Rather, it means that MSFT's cash cow stands in the crosshairs of a fee-for-service company that hasn't needed to sell a line of compiled code in its history -- and that's interesting in its own right.
UPDATE: CNN offers a look at the issue, and seems to agree the cloud and Google's general-purpose OS are an entry into Microsoft's turf, and not just a gimmick for folks who tinkered with desktop Linux.
Monday, July 6, 2009
GM is Dead; Long Live GM
You read it predicted here when GM's officers denied it. General Motors, whose entry into bankruptcy became too hard even for spokespeople to deny, now has a plan to exit bankruptcy.
Over the objections of some creditors, General Motors -- now renamed Motors Liquidation Co. -- will sell all its assets to an entity called "General Motors Co." This new General Motors Co. will be controlled by the U.S. government, which hopes to have an IPO in 2010.
I ask you: who in their right mind will buy shares of a U.S.-based automotive company whose predecessor hasn't made money in years and which is largely owned by the same union whose personnel practices prevented it from adopting quality control systems that long ago made its overseas competitors more capable and more efficient?
The fact that the U.S.-controlled buyer is doubtless capitalized with taxpayer money makes me wonder why we didn't do the bankruptcy last year, before "loaning" GM all those billions it promptly burned. The U.S. could have created a buyer and just not bothered to invite other owners, leaving creditors to fight over sales proceeds. At least the taxpayers could have gotten a fair price for their new muddy pig.
In its new incarnation, GM might be fairly light on debt, but unless it fundamentally changes the way it accomplishes objectives to bring it in line with post-Second-World-War management theory, there's little reason to believe GM will perform any better than it has in recent years.
GM is dead. Long live GM! (So long as our politicians can keep writing checks off our account.)
Over the objections of some creditors, General Motors -- now renamed Motors Liquidation Co. -- will sell all its assets to an entity called "General Motors Co." This new General Motors Co. will be controlled by the U.S. government, which hopes to have an IPO in 2010.
I ask you: who in their right mind will buy shares of a U.S.-based automotive company whose predecessor hasn't made money in years and which is largely owned by the same union whose personnel practices prevented it from adopting quality control systems that long ago made its overseas competitors more capable and more efficient?
The fact that the U.S.-controlled buyer is doubtless capitalized with taxpayer money makes me wonder why we didn't do the bankruptcy last year, before "loaning" GM all those billions it promptly burned. The U.S. could have created a buyer and just not bothered to invite other owners, leaving creditors to fight over sales proceeds. At least the taxpayers could have gotten a fair price for their new muddy pig.
In its new incarnation, GM might be fairly light on debt, but unless it fundamentally changes the way it accomplishes objectives to bring it in line with post-Second-World-War management theory, there's little reason to believe GM will perform any better than it has in recent years.
GM is dead. Long live GM! (So long as our politicians can keep writing checks off our account.)
Thursday, June 25, 2009
iPhone Javascript Speed: Very Good
Those who have felt compelled to read everything written at the Jaded Consumer will have already noticed that Google entered the browser wars with an interesting entry that offers its own home-built javascript engine even though it uses Apple's WebKit for rendering pages.
The news is that with Android (Google/Chrome) and iPhone (Apple/Safari) now commercially available as smartphone browser platforms, though on different hardware), Apple's entry seems to do much faster javascript work. Given the apparent speed advantage of Apple's Squirrelfish javascript engine over Google's V8 alternative, this should not be an enormous surprise.
The good news? Squirrelfish and V8 are both standards-based open-source projects whose competition and improvement will tend to erode dependence on proprietary platforms and their APIs.
The future looks brighter than it did fifteen years ago.
The news is that with Android (Google/Chrome) and iPhone (Apple/Safari) now commercially available as smartphone browser platforms, though on different hardware), Apple's entry seems to do much faster javascript work. Given the apparent speed advantage of Apple's Squirrelfish javascript engine over Google's V8 alternative, this should not be an enormous surprise.
The good news? Squirrelfish and V8 are both standards-based open-source projects whose competition and improvement will tend to erode dependence on proprietary platforms and their APIs.
The future looks brighter than it did fifteen years ago.
Saturday, June 20, 2009
Irate In Iran: The Election That Exposed The Emperor
I'll cut to the chase: it's now evident that the Emperor has no clothes.
Not the apparently falsely-elected Ahmadinejad -- the ideology behind his religious state. As Eloquently encapsulated by Fareed Zakaria in a CNN interview:
The fact that neighbors understand Iran as a fascist regime might not seem to help anything -- residents will still live in increasingly unvarnished oppression -- but it will likely impact Iran's capacity to recruit supporters with purely religious motivations. Dividing Islamists from the Iranian state will have a beneficial impact on the state of the propaganda battle being waged in the Middle East. When the word "martyrdom" takes on the connotation of self-sacrifice by pro-democracy advocates resisting the tyranny of dictators who fix elections with blatantly illegal vote fraud, we will have improved the language with which we discuss conflict in the Middle East.
Who knows: instead of Iraq importing Iranian enemies to undermine democracy and stability, Iran may start exporting freedom-loving Shia whose bitter experience with Iran's oppressive state leave them ardent supporters of a state committed to counting votes.
Not the apparently falsely-elected Ahmadinejad -- the ideology behind his religious state. As Eloquently encapsulated by Fareed Zakaria in a CNN interview:
Fareed Zakaria: One of the first things that strikes me is we are watching the fall of Islamic theocracy.The idea that the state does not act from divine authorization that is clear to the competent cleric undermines not the power of the state -- it has still got its guns, for example -- but it undermines the political philosophy and the religious justifications that have given the state its heretofore-unchallenged power. Now that it's obvious that political insiders are manipulating government for their own ends and not in keeping with divinely-ordained purpose, the legitimacy of the government and its activities will erode until the country is understood by all its neighbors and inhabitants as a naked police state -- or its inhabitants will succeed in reforming the government (I don't speculate as to whether this is largely by reform or mainly by violence; I simply see only two routes).
CNN: Do you mean you think the regime will fall?
Zakaria: No, I don't mean the Iranian regime will fall soon. It may -- I certainly hope it will -- but repressive regimes can stick around for a long time. I mean that this is the end of the ideology that lay at the basis of the Iranian regime.
The regime's founder, Ayatollah Ruhollah Khomeini, laid out his special interpretation of political Islam in a series of lectures in 1970. In this interpretation of Shia Islam, Islamic jurists had divinely ordained powers to rule as guardians of the society, supreme arbiters not only on matters of morality but politics as well. When Khomeini established the Islamic Republic of Iran, this idea was at its heart. Last week, that ideology suffered a fatal wound.
CNN: How so?
Zakaria: When the Supreme Leader, Ayatollah Ali Khamenei, declared the election of Mahmoud Ahmadinejad a "divine assessment," he was indicating it was divinely sanctioned. But no one bought it. He was forced to accept the need for an inquiry into the election. The Guardian Council, Iran's supreme constitutional body, met with the candidates and promised to investigate and perhaps recount some votes. Khamenei has subsequently hardened his position but that is now irrelevant. Something very important has been laid bare in Iran today --- legitimacy does not flow from divine authority but from popular support.
The fact that neighbors understand Iran as a fascist regime might not seem to help anything -- residents will still live in increasingly unvarnished oppression -- but it will likely impact Iran's capacity to recruit supporters with purely religious motivations. Dividing Islamists from the Iranian state will have a beneficial impact on the state of the propaganda battle being waged in the Middle East. When the word "martyrdom" takes on the connotation of self-sacrifice by pro-democracy advocates resisting the tyranny of dictators who fix elections with blatantly illegal vote fraud, we will have improved the language with which we discuss conflict in the Middle East.
Who knows: instead of Iraq importing Iranian enemies to undermine democracy and stability, Iran may start exporting freedom-loving Shia whose bitter experience with Iran's oppressive state leave them ardent supporters of a state committed to counting votes.
Thursday, June 18, 2009
ACAS 1Q2009: What The Losses Mean
Yahoo Syndrome
I've commented before about "data" reported in summary form on free sites that fail to convey important information about the companies thus described, which seemingly causes uninformed people -- suffering from a delusion of informed-ness -- to make trades that appear irrational to people paying attention. Thus, partial-year dividends are assumed to reflect annual yields going forward, and historical yields and reported incomes may have little to do with solvency. ACAS is subject to Yahoo syndrome because SEC-reported profits, taxable profits, and cash flow are different animals -- and Yahoo reports only the FAS-157-compliant SEC-reported "income" is printed on Yahoo's financial site.
Wild Ride
It's been suggested in comments to the post on Piper's sale at a third above its FAS-157-compliant prior-quarter valuation that ACAS might be in the process of renegotiating its debt covenants with its banks, and that this is what's behind ACAS' >30% gain in a day. Well, let's face it: ACAS has been volatile as all get-out for a while now, with +/- 10% days being fairly common over the last months. Earlier today, I saw a quote of ACAS down well over 10%, and by the day's close ACAS had moved between 2.87 and 3.38 -- a range exceeding 50¢. On a stock trading near $3, this is crazy, no? Well, maybe not. It's the price action you see when there's not a broad concensus what the company is worth.
Wasn't broad mispricing of ACAS my basic reason it was worth buying? That its returns would exceed expectation because analysts weren't clued into what was right at the company? (Mind you, I wasn't clued into the company's exposure to market price chaos, especially in the bond market; I assumed foolishly that holding until maturity to get outstanding returns on debt was proof against exposure to market volatility ... but I was educated by ACAS' experience with its debt:equity ratio as its apparent equity shrank while its debt did what debt normally does when it's not subject to the same discounting as the equity.) My personal education -- and ACAS' -- that a long-term view doesn't insulate one from short-term volatility when leverage and external markets are involved was certainly painful -- but doesn't prove any thesis against the quality of ACAS' underwriting, diversity, or profitability.
ACAS: Worth It?
To understand whether ACAS is really sound near $3 (at least in the long term, assuming ACAS isn't crushed by a liquidity crisis before "long term" can arrive), one needs to know whether ACAS' investments are doing what ACAS expected them to do when ACAS entered them -- in short, whether ACAS was right about their long-term capacity for return when it bought the investments (when they were valued much higher than now).
1Q2009 Overview
From the end of 2008 to the end of 1Q2009, ACAS reduced debt by $51m and derivitive liabilities by $120m, while reducing "other" liabilities by $22m -- in all, reducing liabilities from $4.755B to $4.557B, a net improvement of $198m. Due to debt covenant breaches (following FAS-157-compliant reporting of the liquidation value of ACAS' intended-to-be-held-till-maturity debt portfolio), the "current" debt is substantial -- but ACAS reduced it from $2.512B to $2.419B during the quarter. ACAS reduced these liabilities even as its income fell.
Comparing ACAS' 1Q2009 to its 1Q2008, interest and dividend income fell from $258m to $179m, a reduction of $79m; asset management and other fee income decreased from $34m to $16m during the period, a decrease of $18m. In all, income decreased by $97m to $195m. Operating expenses shrank by $11m from $142m to $131m. Exluding the effect of ACAS' realized losses on exits from investments, ACAS had an income of $64m, plus a gain of $12m on the extinguishment of outstanding debt (presumably bought below par from owners who lost faith in its value), for an income of $76m.
However, ACAS realized a loss of $131m on investments in the quarter. This is different from the unrealized changes in value that create such confusion about ACAS' fortunes; it's also a substantially smaller number than the $492m unrealized decreases in FAS-157-compliant values (down from an unrealized decrease of $997m the prior year's first quarter). In short, during the first quarter of 2009, it looks like ACAS experienced a taxable loss of $55m ($76m income, less $131 realized losses), or a tax loss of 26.6¢ per share, while reducing liabilities by $198m. One might conclude that, following the quarter, investors should feel something like $143m better off. However, this would ignore the hard-to-quantify impact of reported unrealized losses which, for reasons discussed on this site before, are going to be very hard to pin down due to the apparent disconnect between how the government requires these values to be calculated and the way these transactions are priced when ACAS actually exits a position. Due to FAS 157, ACAS reported a per-share loss of $2.65 (down from $4.16 in the prior year's quarter). Recent exits range from within 2% of prior-quarter valuations to a third above that level, so even the current validity of the reported NAV is in question, much less the validity of the reported NAV as a predictor of the current value of eventual performance.
Speaking of Taxation
Outside a tax-deferred account, the case for holding ACAS has become painful: ACAS will "pay" a dividend to remain compliant with the BDC Act, so that owners can be taxed instead of ACAS, which will eliminate the double-taxation ordinarily associated with receipt of dividends -- but since ACAS will "pay" 90% of that dividend in stock instead of in cash, owners will be in effect taxed on a stock split. Those who hold ACAS in tax-deferred accounts will be able to avoid this nuisance.
Also, this year's owners will be soaked with last year's tax bill, but they won't be able to enjoy the losses of recent quarters. This is because although ACAS' BDC status allows it to pass tax obligations uphill to owners through dividends, deemed dividends, and so-called dividends that are in fact stock splits, there is no mechanism by which owners can benefit from tax benefits that might accrue by virtue of ACAS' losses: ACAS isn't a partnership, and no K-1 losses will flow uphill to owners. The tax-deferred account is looking better and better, eh?
The Future
Whether ACAS has a future depends on whether it can keep creditors at bay long enough for the quality of ACAS' due diligence to manifest in the form of returning portfolio performance. ACAS reported an "interest coverage" (EBITDA divided by cash interest expense) of 2.2x. This non-GAAP measure, not appearing on Yahoo's summaries, reflects capacity to keep creditors paid off. ACAS' debt covenant breaches have hiked ACAS' interest rates (in addition to bringing billions of its debt current), so this 2.2x metric will worsen even if earnings are maintained. Assuming ACAS' earnings don't deteriorate more than, say, another 50%, ACAS should be able to weather the storm. Decreases in earnings impact interest coverage: 1Q2008 showed ACAS with interest coverage of 3.5x, so the 2.2x that looks good now is a serious deterioration of an important metric. Whether ACAS' debtors can pay ACAS will impact ACAS' power to pay its own creditors.
Earnings doesn't pay interest as it comes due, or repay principal at the expiration of notes and bonds. Cash pays this stuff. ACAS' cash has diminished seriously in the last year, which is unsurprising considering the liquidity crisis that brought ACAS and the rest of the financial world to the present state in which we find them. Just because ACAS has an accounting profit doesn't mean ACAS is solvent. $82m of unsecured private debt, still on the books at the end of 1Q2009, will become due in September. There are supposedly rumors about ACAS negotiating a solution to ACAS' debt issues, but you can't eat rumors.
ACAS' debt ratings deterioration has driven up the interest rate ACAS must pay on publicly-traded debt to 8.6%, and no acceleration actions have been taken by holders of either public or private debt. 8.6% isn't terribly bad, but increases in ACAS' interest rates shrink the spread between what ACAS is owed and what ACAS must pay, and thus shrink its earnings. Shrinking earnings isn't something ACAS really needs.
What 2Q2009 shows us about ACAS' NOI will be very instructive to shareholders regarding ACAS' capacity to function with increased interest expense.
Upshot
As illustrated by this kind of news, ACAS can still close deals. To the extent ACAS can exit deals, ACAS can raise funds to deal with its upcoming bond expiration. Exiting deals at current valuations might not seem exciting to those who bought when NAV was north of $30/sh, but given that NAV is now several times the trading price, it seems exits even at current prices offer tremendous stock price upside. The question is, how much of the exits will be in cash and how much will be in some kind of debt that holds its own future valuation and performance risks.
To the extent ACAS can negotiate a deal with its creditors to re-arrange its debt covenants (e.g., to offer some metric other than FAS-157-compliant valuations -- maybe interest coverage, or percent performing, or the like as an alternative), ACAS may be in a position to improve its solvency and drive stock price back toward NAV. And NAV itself will presumably improve as the economy, and the valuation of ACAS' portfolio, turns around. If ACAS' underwriting was as good as I have been betting all along, ACAS will do very well on its NAV recovery and its capacity to generate income regardless what happens to its share price.
I've commented before about "data" reported in summary form on free sites that fail to convey important information about the companies thus described, which seemingly causes uninformed people -- suffering from a delusion of informed-ness -- to make trades that appear irrational to people paying attention. Thus, partial-year dividends are assumed to reflect annual yields going forward, and historical yields and reported incomes may have little to do with solvency. ACAS is subject to Yahoo syndrome because SEC-reported profits, taxable profits, and cash flow are different animals -- and Yahoo reports only the FAS-157-compliant SEC-reported "income" is printed on Yahoo's financial site.
Wild Ride
It's been suggested in comments to the post on Piper's sale at a third above its FAS-157-compliant prior-quarter valuation that ACAS might be in the process of renegotiating its debt covenants with its banks, and that this is what's behind ACAS' >30% gain in a day. Well, let's face it: ACAS has been volatile as all get-out for a while now, with +/- 10% days being fairly common over the last months. Earlier today, I saw a quote of ACAS down well over 10%, and by the day's close ACAS had moved between 2.87 and 3.38 -- a range exceeding 50¢. On a stock trading near $3, this is crazy, no? Well, maybe not. It's the price action you see when there's not a broad concensus what the company is worth.
Wasn't broad mispricing of ACAS my basic reason it was worth buying? That its returns would exceed expectation because analysts weren't clued into what was right at the company? (Mind you, I wasn't clued into the company's exposure to market price chaos, especially in the bond market; I assumed foolishly that holding until maturity to get outstanding returns on debt was proof against exposure to market volatility ... but I was educated by ACAS' experience with its debt:equity ratio as its apparent equity shrank while its debt did what debt normally does when it's not subject to the same discounting as the equity.) My personal education -- and ACAS' -- that a long-term view doesn't insulate one from short-term volatility when leverage and external markets are involved was certainly painful -- but doesn't prove any thesis against the quality of ACAS' underwriting, diversity, or profitability.
ACAS: Worth It?
To understand whether ACAS is really sound near $3 (at least in the long term, assuming ACAS isn't crushed by a liquidity crisis before "long term" can arrive), one needs to know whether ACAS' investments are doing what ACAS expected them to do when ACAS entered them -- in short, whether ACAS was right about their long-term capacity for return when it bought the investments (when they were valued much higher than now).
1Q2009 Overview
From the end of 2008 to the end of 1Q2009, ACAS reduced debt by $51m and derivitive liabilities by $120m, while reducing "other" liabilities by $22m -- in all, reducing liabilities from $4.755B to $4.557B, a net improvement of $198m. Due to debt covenant breaches (following FAS-157-compliant reporting of the liquidation value of ACAS' intended-to-be-held-till-maturity debt portfolio), the "current" debt is substantial -- but ACAS reduced it from $2.512B to $2.419B during the quarter. ACAS reduced these liabilities even as its income fell.
Comparing ACAS' 1Q2009 to its 1Q2008, interest and dividend income fell from $258m to $179m, a reduction of $79m; asset management and other fee income decreased from $34m to $16m during the period, a decrease of $18m. In all, income decreased by $97m to $195m. Operating expenses shrank by $11m from $142m to $131m. Exluding the effect of ACAS' realized losses on exits from investments, ACAS had an income of $64m, plus a gain of $12m on the extinguishment of outstanding debt (presumably bought below par from owners who lost faith in its value), for an income of $76m.
However, ACAS realized a loss of $131m on investments in the quarter. This is different from the unrealized changes in value that create such confusion about ACAS' fortunes; it's also a substantially smaller number than the $492m unrealized decreases in FAS-157-compliant values (down from an unrealized decrease of $997m the prior year's first quarter). In short, during the first quarter of 2009, it looks like ACAS experienced a taxable loss of $55m ($76m income, less $131 realized losses), or a tax loss of 26.6¢ per share, while reducing liabilities by $198m. One might conclude that, following the quarter, investors should feel something like $143m better off. However, this would ignore the hard-to-quantify impact of reported unrealized losses which, for reasons discussed on this site before, are going to be very hard to pin down due to the apparent disconnect between how the government requires these values to be calculated and the way these transactions are priced when ACAS actually exits a position. Due to FAS 157, ACAS reported a per-share loss of $2.65 (down from $4.16 in the prior year's quarter). Recent exits range from within 2% of prior-quarter valuations to a third above that level, so even the current validity of the reported NAV is in question, much less the validity of the reported NAV as a predictor of the current value of eventual performance.
Speaking of Taxation
Outside a tax-deferred account, the case for holding ACAS has become painful: ACAS will "pay" a dividend to remain compliant with the BDC Act, so that owners can be taxed instead of ACAS, which will eliminate the double-taxation ordinarily associated with receipt of dividends -- but since ACAS will "pay" 90% of that dividend in stock instead of in cash, owners will be in effect taxed on a stock split. Those who hold ACAS in tax-deferred accounts will be able to avoid this nuisance.
Also, this year's owners will be soaked with last year's tax bill, but they won't be able to enjoy the losses of recent quarters. This is because although ACAS' BDC status allows it to pass tax obligations uphill to owners through dividends, deemed dividends, and so-called dividends that are in fact stock splits, there is no mechanism by which owners can benefit from tax benefits that might accrue by virtue of ACAS' losses: ACAS isn't a partnership, and no K-1 losses will flow uphill to owners. The tax-deferred account is looking better and better, eh?
The Future
Whether ACAS has a future depends on whether it can keep creditors at bay long enough for the quality of ACAS' due diligence to manifest in the form of returning portfolio performance. ACAS reported an "interest coverage" (EBITDA divided by cash interest expense) of 2.2x. This non-GAAP measure, not appearing on Yahoo's summaries, reflects capacity to keep creditors paid off. ACAS' debt covenant breaches have hiked ACAS' interest rates (in addition to bringing billions of its debt current), so this 2.2x metric will worsen even if earnings are maintained. Assuming ACAS' earnings don't deteriorate more than, say, another 50%, ACAS should be able to weather the storm. Decreases in earnings impact interest coverage: 1Q2008 showed ACAS with interest coverage of 3.5x, so the 2.2x that looks good now is a serious deterioration of an important metric. Whether ACAS' debtors can pay ACAS will impact ACAS' power to pay its own creditors.
Earnings doesn't pay interest as it comes due, or repay principal at the expiration of notes and bonds. Cash pays this stuff. ACAS' cash has diminished seriously in the last year, which is unsurprising considering the liquidity crisis that brought ACAS and the rest of the financial world to the present state in which we find them. Just because ACAS has an accounting profit doesn't mean ACAS is solvent. $82m of unsecured private debt, still on the books at the end of 1Q2009, will become due in September. There are supposedly rumors about ACAS negotiating a solution to ACAS' debt issues, but you can't eat rumors.
ACAS' debt ratings deterioration has driven up the interest rate ACAS must pay on publicly-traded debt to 8.6%, and no acceleration actions have been taken by holders of either public or private debt. 8.6% isn't terribly bad, but increases in ACAS' interest rates shrink the spread between what ACAS is owed and what ACAS must pay, and thus shrink its earnings. Shrinking earnings isn't something ACAS really needs.
What 2Q2009 shows us about ACAS' NOI will be very instructive to shareholders regarding ACAS' capacity to function with increased interest expense.
Upshot
As illustrated by this kind of news, ACAS can still close deals. To the extent ACAS can exit deals, ACAS can raise funds to deal with its upcoming bond expiration. Exiting deals at current valuations might not seem exciting to those who bought when NAV was north of $30/sh, but given that NAV is now several times the trading price, it seems exits even at current prices offer tremendous stock price upside. The question is, how much of the exits will be in cash and how much will be in some kind of debt that holds its own future valuation and performance risks.
To the extent ACAS can negotiate a deal with its creditors to re-arrange its debt covenants (e.g., to offer some metric other than FAS-157-compliant valuations -- maybe interest coverage, or percent performing, or the like as an alternative), ACAS may be in a position to improve its solvency and drive stock price back toward NAV. And NAV itself will presumably improve as the economy, and the valuation of ACAS' portfolio, turns around. If ACAS' underwriting was as good as I have been betting all along, ACAS will do very well on its NAV recovery and its capacity to generate income regardless what happens to its share price.
Wednesday, June 17, 2009
iPhone 3G v iPhone 3GS: Evolution or Revolution?
Walt Mossberg's seemingly tepid praise ("Or Just Get OS 3.0") leads to the question whether Apple must shock the world with every product release in order to succeed, or can do a good business by diligently keeping its buttons polished. To address that question, let's first go back in time a year and look at the 3G iPhone which is now joined by the relatively upscale 3GS.
From where I stand as an iPhone 1.0 user (8GB model), the iPhone 3G was not a must-have product.
Apple's 3G was the same processor, but a faster network connection, and I didn't jump because my beef with my phone was not AT&T's Edge speeds but the phone's anemic processor -- I got skips during scrolling and resizing, and unexpected pauses while apps are loading or changing, etc. And the camera was a disappointment: everything's blurry, because the effective shutter speed is so slow. Low light? Good luck. I couldn't use it to replace my iPod because I simply have far too much music to fit in anything like 8GB, and even with cut-down playlists I get messages about my phone filling and have to throw out voicemail.
3GS (remember the Apple GS, anyone? Maybe this is a little joke by insiders.) offers users access to faster networks just as its predecessor did, but also improves the processor speed, graphics subsystem, storage capacity (by a factor of up to 4!), camera ... and adds video, voice control, compass (what's GPS and continuously-updated maps without turn-by-turn directions?) ... 3GS is a compelling upgrade for initial iPhone users where the 3G was not. Maybe for 3G users in the US -- who enjoy GPS and can live without the compass, and who don't use the camera much or demand that it photograph moving children, and who won't notice the network improvements because AT&T hasn't supported them yet -- the 3GS isn't a must-upgrade proposition. However, for original buyers -- especially buyers whose initial 2-year contracts are just expiring -- the move from iPhone to the new GS seems a sure thing.
Now, let's look at what this means.
Apple's 3G phone is still being offered for sale -- for $99 (in the US, with a contract). This is beginning to look rather like the MacBook v MacBook Pro: if you want an Apple system, you can get in on the ground floor, or you can pay more for perks. What are those perks? Faster processors, better graphics subsystems, improved batteries, and up to quadruple the memory seems a similar recipe in both cases, notebook or phone; however, where the notebook offers perks like a backlit keyboard, the phone offers a compass (for turn-by-turn directions and enhanced gaming controls) and an improved camera that supports video (and presumably behavior as a scanner, รก la Delicious Monster). For about twice the money (more, if you max it), you can upgrade to a slicker model (again, notebook or phone). Apple hasn't done badly in notebooks, and Apple's test of this kind of product lineup in phones is far from pointless. If there's no demand for the lower-end model, it can die just like the 4GB iPhone. (Remember that model? And what people paid for it? And how long it lasted?)
Recently, Apple rolled out upgraded specs on new MacBooks. There was no big event (the Pro upgrade and its new 8GB RAM ceiling made the WWDC stage, but the non-pro MacBook upgrade got no such fanfare), there was no claim it was the cat's meow -- it was just an update. This didn't make the new MacBooks a bad deal; it just kept them competitive. Apple's changes in that upgrade might have been nice, but they were by no means a revolution. Yet, without this kind of steady improvement, where would an electronics gadget company be in a few years? Exacly: dead. Unexciting evolutionary improvements are an expected, normal, necessary part of competing in this space. The fact that compasses are cool and that 32GB makes the iPhone a much more serious music player are nice perks -- but the fact that Apple is working to keep the environment on the phone attractive to users and developers is something I think should be recognized as the real revolution.
Apple didn't set out to make its phone all things to all people, it set out to create a carefully cultivated garden and allowed outsiders to plant in the garden only after great protest about the restrictions Apple imposed on users (web-only development? only Apple-vended applications?). Apple is trying to prevent the phone from becoming a virus farm, or from suffering from horribly-behaved applications that can't be killed in the background because they spawn processes users can't see because they have no UI -- and the price at the moment is a lack of background applications (unless they are from Apple) and a single app vendor in Cupertino. Oddly, people have seemingly forgiven Apple for its draconian control over the system, and now content themselves with inquiry into whether background applications are a feature worth the price. Apple's desire to control the platform in order to control the quality of the user experience seems to have lost its ardent haters as the platform has done well in the market.
Apple has been rolling out desktop and notebook computers for years, and few of them have (in comparison to their immediate predecessors) represented a real revolution in computing technology. Apple's distinguishing feature has generally been where the rubber meets the road -- not under the hood, but at the interface between the user and the machine. The GUI, for example. For developers, the Cocoa API. Cultivated simplicity is an Apple virtue, as it is the result of Apple's work to prevent the interface from becoming cluttered with unnecessary and confusing options and the like. Less is more, in some ways.
An evolutionary product refresh coupled with a substantial price break on existing models is the kind of movement that offers Apple both the claim to good movement forward, and the claim to more affordable products with a larger base of increasingly diverse users. Not all these guys will buy medical management applications. But those that don't may be heavily inclined to try out the games ...
In short, Apple's new release isn't a revolution (except maybe for the price of a machine in the class of an iPhone), but this is not a bad thing. Carefully evolving what will likely become Apple's most important platform is something too important for inviring the chaos of revolution at every incarnation. Slow and steady wins the race.
UPDATE: NYT's Pogue blesses the GS: "The new iPhone doesn’t just catch up to its rivals — it vaults a year ahead of them."
From where I stand as an iPhone 1.0 user (8GB model), the iPhone 3G was not a must-have product.
Apple's 3G was the same processor, but a faster network connection, and I didn't jump because my beef with my phone was not AT&T's Edge speeds but the phone's anemic processor -- I got skips during scrolling and resizing, and unexpected pauses while apps are loading or changing, etc. And the camera was a disappointment: everything's blurry, because the effective shutter speed is so slow. Low light? Good luck. I couldn't use it to replace my iPod because I simply have far too much music to fit in anything like 8GB, and even with cut-down playlists I get messages about my phone filling and have to throw out voicemail.
3GS (remember the Apple GS, anyone? Maybe this is a little joke by insiders.) offers users access to faster networks just as its predecessor did, but also improves the processor speed, graphics subsystem, storage capacity (by a factor of up to 4!), camera ... and adds video, voice control, compass (what's GPS and continuously-updated maps without turn-by-turn directions?) ... 3GS is a compelling upgrade for initial iPhone users where the 3G was not. Maybe for 3G users in the US -- who enjoy GPS and can live without the compass, and who don't use the camera much or demand that it photograph moving children, and who won't notice the network improvements because AT&T hasn't supported them yet -- the 3GS isn't a must-upgrade proposition. However, for original buyers -- especially buyers whose initial 2-year contracts are just expiring -- the move from iPhone to the new GS seems a sure thing.
Now, let's look at what this means.
Apple's 3G phone is still being offered for sale -- for $99 (in the US, with a contract). This is beginning to look rather like the MacBook v MacBook Pro: if you want an Apple system, you can get in on the ground floor, or you can pay more for perks. What are those perks? Faster processors, better graphics subsystems, improved batteries, and up to quadruple the memory seems a similar recipe in both cases, notebook or phone; however, where the notebook offers perks like a backlit keyboard, the phone offers a compass (for turn-by-turn directions and enhanced gaming controls) and an improved camera that supports video (and presumably behavior as a scanner, รก la Delicious Monster). For about twice the money (more, if you max it), you can upgrade to a slicker model (again, notebook or phone). Apple hasn't done badly in notebooks, and Apple's test of this kind of product lineup in phones is far from pointless. If there's no demand for the lower-end model, it can die just like the 4GB iPhone. (Remember that model? And what people paid for it? And how long it lasted?)
Recently, Apple rolled out upgraded specs on new MacBooks. There was no big event (the Pro upgrade and its new 8GB RAM ceiling made the WWDC stage, but the non-pro MacBook upgrade got no such fanfare), there was no claim it was the cat's meow -- it was just an update. This didn't make the new MacBooks a bad deal; it just kept them competitive. Apple's changes in that upgrade might have been nice, but they were by no means a revolution. Yet, without this kind of steady improvement, where would an electronics gadget company be in a few years? Exacly: dead. Unexciting evolutionary improvements are an expected, normal, necessary part of competing in this space. The fact that compasses are cool and that 32GB makes the iPhone a much more serious music player are nice perks -- but the fact that Apple is working to keep the environment on the phone attractive to users and developers is something I think should be recognized as the real revolution.
Apple didn't set out to make its phone all things to all people, it set out to create a carefully cultivated garden and allowed outsiders to plant in the garden only after great protest about the restrictions Apple imposed on users (web-only development? only Apple-vended applications?). Apple is trying to prevent the phone from becoming a virus farm, or from suffering from horribly-behaved applications that can't be killed in the background because they spawn processes users can't see because they have no UI -- and the price at the moment is a lack of background applications (unless they are from Apple) and a single app vendor in Cupertino. Oddly, people have seemingly forgiven Apple for its draconian control over the system, and now content themselves with inquiry into whether background applications are a feature worth the price. Apple's desire to control the platform in order to control the quality of the user experience seems to have lost its ardent haters as the platform has done well in the market.
Apple has been rolling out desktop and notebook computers for years, and few of them have (in comparison to their immediate predecessors) represented a real revolution in computing technology. Apple's distinguishing feature has generally been where the rubber meets the road -- not under the hood, but at the interface between the user and the machine. The GUI, for example. For developers, the Cocoa API. Cultivated simplicity is an Apple virtue, as it is the result of Apple's work to prevent the interface from becoming cluttered with unnecessary and confusing options and the like. Less is more, in some ways.
An evolutionary product refresh coupled with a substantial price break on existing models is the kind of movement that offers Apple both the claim to good movement forward, and the claim to more affordable products with a larger base of increasingly diverse users. Not all these guys will buy medical management applications. But those that don't may be heavily inclined to try out the games ...
In short, Apple's new release isn't a revolution (except maybe for the price of a machine in the class of an iPhone), but this is not a bad thing. Carefully evolving what will likely become Apple's most important platform is something too important for inviring the chaos of revolution at every incarnation. Slow and steady wins the race.
UPDATE: NYT's Pogue blesses the GS: "The new iPhone doesn’t just catch up to its rivals — it vaults a year ahead of them."
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