Stephen’s Posterous

Rosetta Opens Door for Select Stocks by Lynn Cowan, WSJ.com

The strong debut of Rosetta Stone last week likely heralds a turning point for the IPO market in the U.S. with some caveats.

"The atmosphere is more positive now than just a couple weeks ago about the prospects" for more initial public offerings, says Scott Cutler, head of the listings department in the Americas at NYSE Euronext, parent of the New York Stock Exchange, which listed the Rosetta Stone IPO. "I think we'll look back on this week several months from now and say these were good data points that really helped lay a foundation."

Rosetta Stone, a language-software company, rose nearly 40% April 16, 2009. It is the latest in a four-deal winning streak in 2009 and the best performer in 12 months. Its reception by investors eclipsed a more subdued reaction April 15, to online college Bridgepoint Education, which rose 6% on the NYSE after reducing its selling price.

Both Rosetta and Bridgepoint continued making gains after their debuts, closing Friday up 57% and 14% from their IPO prices, respectively.

Bankers and analysts say Rosetta Stone's deal won't create a deluge of new IPOs on the U.S. market but will instead pave the way for select new stocks that meet certain requirements: those that are in defensive sectors and with unusually high revenue and profit growth.

"Consumer staples, health care, education" are some sectors that could see a pickup in filings and pricings, says Morningstar equity analyst Bill Buhr. "Let's say maybe that May duplicates April. I don't think we're going to see an onslaught."

Right now, there aren't any IPOs scheduled to come public on the horizon, says Scott Sweet, managing director of research firm IPOBoutique.com. But the string of three successful deals in the first half of April 2009, the month kicked off with Changyou.com gaining 25% on the Nasdaq Stock Market, will "open up a window, and IPOs that have met the recent criteria of those that have worked will likely come out."

Under the best conditions, it will take longer, some say until year's end, for the pace to pick up in a meaningful way.

"If overall market conditions continue to improve, and if there are better signs the economy is actually bottoming, the IPO market will begin to open up to a broader group of potential issuers," says Jeffrey Bunzel, head of equity capital markets in the Americas for Credit Suisse.

Source.

US lawmakers have turned protectionism on its head. They seem hell-bent on cutting American bankers down to size. A punishing bonus tax on a large swathe of those working on Wall Street was approved by the House of Representatives on March 19, 2009. That follows an earlier pay cap on the banking elite.

The latest measure would impose a 90% tax on some bonuses. That draconian rate would apply to employees who earned more than $250,000, from companies which took more than $5bn of government rescue money from the Troubled Asset Relief Programme. The tax would be retroactive to December 31, 2008, and would remain in effect until the company paid back the funds.

Even if that proposed tax, or a milder version under consideration in the Senate, doesn’t get signed into law, the best bankers at the likes of Goldman Sachs, Citigroup and JPMorgan Chase probably won’t be waiting to find out.

The anti-protectionism works two ways. It will increase the inbound flow of applicants to foreign-owned banks unaffected by the legislation, and give the employees of those same institutions fewer places to flee. Inside Manhattan, Barclays, Credit Suisse, Deutsche Bank and Nomura must be among those rubbing their hands with glee. As yet, these ambitious firms have dodged the restraints of state ownership.

But London might be an even greater beneficiary of Washington’s outrage. Alistair Darling, the UK Chancellor of the Exchequer, said the UK would not follow the US with a blanket cap on banker pay. The Conservative party plans to campaign on a pledge to raise the tax rate on top earners, but to 45%. In comparison to what’s rolling through the US Congress, that rate sounds appealing.

American citizens won’t be able to escape any new tax by moving, since they have to pay US taxes wherever they live. Non-Americans, even at the affected firms, probably wouldn’t be subject to the proposed 90% surtax.

Still, with London house prices down, and no “Keep Out” signs for foreigners, think Tarp-related visa restrictions in the US, many of those who can choose their continents might soon be thinking the City is something of a safe haven with better job opportunities. As long as the UK doesn’t wind up succumbing to mob rule too.

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In “Atlas Shrugged,” Ayn Rand wrote, “There is no such thing as a contradiction. If you think you are faced with a contradiction, check your premises and you’ll find that one of them is wrong.”

The world of private equity is finding that nearly every one of its premises is, if not wrong, then certainly challenged. The closed debt markets have made it nigh impossible for private equity firms to find financing, a cutting blow, since financing, or leverage, is the core of how they pay for companies.

Then there are the increasing tensions with limited partners, the pensions and endowments that put money into PE. And let’s not even discuss the debate over how private equity partners should be taxed, a hot-button issue in which Washington lawmakers have portrayed private equity investors as rich, greedy, and due for a tax comeuppance.

Deal Journal interviewed Nicole Arnaboldi, Chairman of Credit Suisse Group’s DLJ Merchant Banking Partners, for a look at how the private-equity world has changed.

Deal Journal: One of the biggest changes in private equity is how relationships with lenders have become more combative. What do private-equity firms need to know about banks?

Nicole Arnaboldi: I think a lot of PE firms are going to be in discussions with banks over covenant issues, restructurings and so forth. A lot of private-equity firms may not have the relevant expertise to enter into those negotiations properly. You’ll see great growth in private-equity firms calling on restructuring expertise.

Deal Journal: What can restructuring experts bring to the discussion?

Arnaboldi: Restructuring firms can bring expertise in what banks are doing in comparable situations. They can say what banks have done and what they will do. They can also be the intermediary where the lender and the PE firm have a lot of, let’s say, water under the bridge in terms of the previous relationship.

It’s effective to have a restructuring firm as a parallel intermediary on the private-equity side to the loan workout or restructuring groups that the banks may have if the debt defaults.

Deal Journal: How are private-equity firms picking the right price for their assets, whether they are trying to buy or sell?

Arnaboldi: The pricing of assets and the valuation issues are big. There is some controversy over mark-to-market accounting as well. We’re seeing unbelievable variances in where people are carrying assets and where sale prices are.

One example is a hedge fund that bought a bank loan for 10 cents on the dollar in the secondary market, and shortly afterward another firm bought the same security at 45 cents on the dollar, and other holders hold it at 100 cents on the dollar. That’s three different prices for the same loan. So what’s the mark-to-market value on that?

Deal Journal: How are private-equity firms valuing the companies they have invested in? Are they just figuring out what values they would hold in a liquidation?

Arnaboldi: With the accounting rule FAS 157, there have been a lot of discussions around this topic, how do you apply it when we’re in a distressed market and there are few transactions? It’s difficult particularly if you, as the PE holder, are not selling any assets.

The concept of fair value is what a willing seller and a fair buyer would pay, and the PE firms right now are not choosing to sell because of market conditions, so the market value is difficult because there are a few willing buyers but no willing sellers, there are only distressed sellers. There is a lot of discrepancy in the accounting world.

We have autonomous reviewers in our firm, outside reviewers, and of course we have the [Federal Reserve] and other regulators. We have done a good job of having a well articulated process and applying it. The real challenge for investors is when they read their statements, they don’t know what the fair value is. It’s not bad faith on the part of any private-equity manager; it’s just a difficult exercise.

Deal Journal: Private-equity firms are struggling with a lot of failing or troubled companies. What leeway do they have to put more money in them?

Arnaboldi: That will be one of the biggest issues for some of the private-equity funds, because they didn’t anticipate the capital needs of their companies. There are two ways they can address it: one is to raise a subsequent fund, but it’s a difficult fund-raising environment and it opens up the problem of cross-fund investments.

The second option is to open up an existing fund [for instance, one that was started in a previous year] to get new capital in that fund. The general partner [managers of private equity funds] may be motivated by performance fees to invest fresh capital in companies that are deeply impaired. Performance fees are a percentage of the fund’s investment gains.

Putting fresh capital into that situation, the expanded fund, is something limited partners should look at with a cautious eye. If you’re an LP and you have an investment have a fund that’s deeply underwater, is that putting good money after bad?

[Please see article, Secondary Firms Get Creative, which discusses how firms are bringing back the Structured Transaction.]

Deal Journal: What advice do you have for pension funds and endowments that devote retiree and alumni money to private equity?

Arnaboldi: On one level, be cautious about the current market environment in making new commitments, but remember the best opportunities come when times are bad.

Source.

A monopoly is a license to print money, but one day the printing may stop.

That reversal hasn't yet come to Microsoft, whose 90%-plus share of the personal computer software market has made it a cash machine. The stock, though, is acting as if the day of reckoning isn't far off. In the past 12 months, Microsoft stock is down 42%, comfortably underperforming the 25% or so declines at other blue chip tech names such as Apple, IBM and Oracle.

Microsoft shares are trading around 9.6 times consensus fiscal 2009 earnings, a little below IBM, at about 10, and well under the others.

That may create an opportunity for investors near term. Microsoft still generates plentiful free cash flow, 5 billion this year, estimates Credit Suisse, andd sits on net cash of nearly $19 billion. So even though earnings are expected to dip this year, the dividend, which offers a 3% yield, is super safe. That can't be said for many other companies.

What's more, the stock may get a boost ahead of the release over the next nine months of Microsoft's latest operating system, Windows 7. The reality that Microsoft's operating system monopoly is gradually slipping away will, of course, continue to weigh on the stock, but it's easy to overstate the immediacy of the competitive threats facing the company.

Microsoft has lost market share, including to Apple, but only by a percentage point or so. Google's free applications software may one day be a viable alternative to Microsoft Office, but it isn't yet. Smartphones will eventually erode demand for laptops, hurting Microsoft, whose Windows Mobile has only 12.4% market share, according to Gartner. Again, this could take years to play out.

A more serious threat may be the expected shift among businesses to use shared computer services run in a cloud, paying for the service rather than for PC software. Microsoft wants to be a major player in cloud computing. It has the deep pockets necessary to invest in the data centers required, as do rivals including Google and IBM. But IDC projects cloud will account for only 9% of business software and infrastructure spending by 2012.

The experience of other industries undergoing structural shifts, such as broadcast TV's loss of market share to cable networks, is that the secular changes take a long time to seriously undermine a business model.

Admittedly, to protect its market share in the meantime, Microsoft likely will have to cut prices, hurting operating margins that now reach 70% in some products. Already, it gets only half its usual price for Windows on low-cost laptops called netbooks. That will hurt profitability.

Microsoft has plenty of ways to cut costs, however, including cutting investment in some areas. Microsoft's online business lost about $1 billion in the first half of fiscal 2009, despite massive investment in recent years to build a presence in the search market dominated by Google.

This isn't to say Microsoft should hunker down and be run for cash. Microsoft has successfully built a server business in recent years. But new business successes have to be huge to make a meaningful contribution to a company generating $20 billion-plus of annual operating profit.

It needs to pick its investment spots carefully for its $9.5 billion in annual research and development spending and be willing to change tack when businesses, such as search, fail to gain traction.

This sort of retreat isn't likely to happen under the current management, which is likely to keep swinging for the fences. A more disciplined approach to costs and investment likely won't happen without some outside pressure. But with Bill Gates' stake gradually declining, it's now down to 8.5%, that day will come eventually.

Source.

Germany’s richest woman and heir to the BMW car empire has been spared an embarrassing court appearance after her playboy lover admitted to defrauding her of millions of euros and attempting blackmail with intimate footage of their encounters.

Helg Sgarbi, a Swiss former investment banker, confessed in a Munich court on Monday to having defrauded Susanne Klatten, a member of the reclusive Quandt dynasty, and three other wealthy women of more than €9m ($11.3m). He was sentenced to six years in prison.

The case has made headlines in Germany ever since Mrs Klatten went to police to expose Mr Sgarbi, 44, after he demanded €49m to prevent a secretly recorded video of their tryst being leaked to the press, colleagues and her husband. Mrs Klatten told Financial Times Deutschland in November 2008 that she had decided to call in police “in a moment of clarity”.

“You are now the victim and you must fight back,” she said. By the time police were called Mrs Klattten had already handed Mr Sgarbi a cardboard box containing more than €7m in bundled €500 notes to help him pay-off a fictitious Mafioso whose child he claimed to have injured in a traffic accident.

Prosecutors alleged that Mr Sgarbi, who worked for Credit Suisse in the 1990s and speaks six languages, seduced a string of married women “with high criminal energy” in luxury spa hotels across Austria and Switzerland. After defrauding these women of millions of euros he is suspected of channelling some of the funds to an accomplice, who is under house arrest in Italy and is alleged to have connections to an obscure cult.

Police investigators described Mr Sgarbi as a smooth operator who knew exactly how to win the trust of the women he seduced. He told them he was a "special Swiss representative in crisis zones", which enabled him to flit between the women at short notice and with very little explanation. Mrs Klatten, a member of the Quandt clan who is worth £9.25bn according to the Forbes rich list, was allegedly his biggest conquest.

They met at an exclusive health resort in Innsbruck in July 2007, allegedly beginning an affair in the south of France the following month, and later meeting in a Holiday Inn in Munich for an encounter which either Sgarbi or an accomplice is believed to have filmed.  Source.

Mr Sgarbi did not reveal the whereabouts of the missing funds or the video tape on Monday but told the court he “deeply regretted” the events and wished to apologise to the women involved. Mrs Klatten is the world’s 55th richest person, with a fortune of $13.2bn, according to Forbes magazine.

Although she has always tried to avoid the public gaze, Ms Klatten’s savvy as an investor recently has seen her draw more attention than any of her siblings. Alongside her 12.6 per cent BMW stake, for years she held 50.1 per cent of Altana, a German chemicals and drugs company. In 2006 Ms Klatten seized the opportunity offered by buoyant stock markets to push Altana into selling its underweight drugs unit for €4.5 bn.

Ms Klatten received €2.3bn as a special dividend in spring 2007, a cash pile that she decided not to re-invest immediately given first signs of an economic downturn. She waited almost a year to put €300m into Nordex, a German wind-turbine maker, and launched a €910m offer for the 49.9 per cent of Altana she did not own in late 2008, the company’s share price having halved in the previous year of economic woes.

Source.

We are cutting our estimates for Coca-Cola (ticker: KO) for 2009. Our earnings-per-share estimate cuts today to $3.11 for 2009 puts us at the lowest level of the sell side range of estimates after a few weeks of drifting and spreading forecasts.

We have now gleaned a better read from the early trading statements of other beverage companies such as SABMiller [a bottler of Coca-Cola products] and spoken with other emerging-market beverage companies, leading us to cut numbers across every almost geography.

But this cut seems largely priced in. Having met with investors in the U.K. and U.S. the past week, much of the buy side already seemed to be embracing an EPS range of $3.00-$3.10 for 2009. European investors, in particular, seem to have particularly low expectations of Coke, in line with our cut. This puts Coca-Cola shares just below the 14 times price-to-earnings range where the stock historically traded at for a couple of years coming out of the 1987 market crash.

Operationally, we expect flattish volume growth and earnings before interest and taxes, below long-term guidance. Latin American sentiment has continued eroding. India and the Philippines present different challenges as these are company-owned bottling operations. Central and Eastern European GDP results have continued to drift in January. We are not clear on the impact of a new Japan bottling model. Eurasia is eroding and the China juice deal looks expensive, with longer-term benefit.

Still a Neutral rating, but with a lower price target. With a lot of potential bad operating issues cited above apparently priced in, the one worry we still have is whether there is more downside to our numbers from currency pressures in some of the emerging markets where Coke does not hedge. Our new price target is of $47 (from $55) and assumes no forward multiple expansion. Source.

With further evidence from our latest proprietary pricing survey that food inflation is waning and as small-business optimism declines further, we have taken the opportunity to revise downward our fiscal 2009 comparable-store sales and earnings expectations as well as our target price for Costco.

The relationship between Costco's sales and the National Federation of Independent Business Small Business Optimism Index has traditionally been very strong.

Small businesses account for 25% of Costco's member base, but we estimate they could account for closer to 40% of total sales. The Small Business Optimism Index declined to 85.2 (1986 = 100) in December, its second-lowest level in the history of the survey (the index fell to 80.1 in 1980). This suggests that small-business spending at Costco and other warehouse clubs could remain under pressure in coming months.

Waning inflation should pressure sales growth. Our latest pricing survey in the supermarket, drugstore and mass-merchant sector indicated that food inflation decelerated from 7.4% to 7.1% in Dallas and 10.7% to 8.3% in Chicago. Our Food and Agribusiness Analyst expects consumer food-price inflation to decline from the current 6% level to 0% by the end of 2009 as the producer-price index reaches negative territory with falling commodities.

We estimate that about 50% of Costco's fiscal 2008 sales were in food, greater than all other mass merchants except for BJ's Wholesale Club (BJ). As such, we expect waning food inflation could have outsize pressure on Costco's sales growth in 2009.

We are reducing our fiscal 2009 earnings-per-share estimate from $2.99 to $2.90, based primarily on a lower comparable-store-sales estimate (from minus-1.5% to minus-2.5%). We expect gasoline deflation to have a negative 250 basis-point impact and foreign currency to have a minus-330 basis-point impact on Costco's fiscal 2009 comparable-store sales. In addition, we lowered our gross-margin estimate from 10.85% to 10.82% of sales in fiscal 2009 and increased slightly our interest income estimate.

We are reducing our target price to $52 from $61. Our new target price is based on an 18 times price-to-earnings multiple on our fiscal 2009 EPS estimate of $2.90. While our target multiple falls at the low end of Costco's historical multiple range, it represents a greater premium to the current market multiple than Costco's historical average. Source.