Samsung walks away from Sandisk

Well, there you go. Same situation as Microsoft/Yahoo. A non-binding bid, a rebuff, a lousy quarter and a walk away. I said I thought Samsung would be hard pressed not to lower their bid. They decided instead to pull it all together. Sandisk management is gonna be in tro-uble!

Under $10 I'm interested... but consider that a non-binding interest.

Here's the letter from Samsung to Sandisk:

October 22, 2008

Board of Directors
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035

Attention: Dr. Eli Harari, Chairman and Chief Executive Officer
Mr. Irwin Federman, Vice Chairman and Lead Independent
Director

*T

-0-
*T

Dear Eli and Irwin:

After nearly six months of efforts to pursue a transaction with no
meaningful progress, we are withdrawing our proposal to acquire
SanDisk. I am disappointed that we have been unable to reach an
agreement on our proposal. I continue to believe that a combination
of our two companies would have created a superior global brand, an
unparalleled technology platform and the scale and resources to drive
convergence in the marketplace. Had we been able to execute on our
proposal, your shareholders would have received full, fair and
certain value for their shares and your employees and other
stakeholders would have benefited from a broader platform and a wider
range of opportunities.

Nevertheless, we have obligations to our own shareholders which
require that we take a disciplined approach, particularly with
respect to significant initiatives such as this. That disciplined
approach requires that we squarely face the growing uncertainties in
your business, which may continue to deteriorate in this difficult
economic environment and further impact your standalone value. Your
recently announced third quarter results serve only to illustrate
this risk. Your surprise announcements of a quarter billion dollar
operating loss, a hurried renegotiation of your relationship with
Toshiba and major job losses across your organization all point to a
considerable increase in your risk profile and a material
deterioration in value, both on a stand-alone basis as well as to
Samsung. As a result of these developments, we are no longer
interested in acquiring SanDisk at $26/share.

While I regret that we were unable to work together to achieve a
business combination that would have created new opportunities for
all of us, we wish you the best in meeting the challenges ahead.

Sincerely,

Yoon Woo Lee
Vice Chairman & CEO
Samsung Electronics Co., Ltd.

Hewlett Packard (HPQ) NPD data disturbing

Frankly, all the NPD data was pretty disturbing with the market showing a dramatic slowdown as 401k's and house prices imploded and the headlines were full of significant financial institution failures.
PC growth was 1.2% y/y on unit growth of 6.7% y/y. HP revenue declined 3.9% y/y on a 3% y/y unit increase. This compares to a trailing 3 month historical average of 31.6% y/y. That is an extremely sharp deceleration. Printers, both hardware and cartridge, also declined. This was the slowest showing HP has had in the last 2 years. Understandable, but not pretty. About a month ago when HP reported I suggested shorting it when they reiterated guidance and said they saw no slowdown. Their guidance remains very vulnerable to a downward revision.

 

 

Caterpillar. That's right. Caterpillar.

I don't often write about stocks outside of technology except when I'm ranting about the collapse of the financial system. Since this relates to CAT's financing operations, I figured I'd rant a little.

I recently went into the SEC database and did a keyword scan of a number of permutations of factoring receivables. This is a common industry practice in retail. It's also been a very common business for semiconductor capital equipment companies in the past. Factoring receivables is when you're owed a bunch of money and you sell the receivable to someone else at a discount to generate cash for operations. Instead of you waiting to get paid, the party that ultimately buys the receivable waits to get paid. My thought was if banks are having trouble borrowing from each other, trying to sell accounts receivable has to be almost impossible.

Caterpillar and Deere came up as pretty frequent and large factorers. As both companies are leveraged to the construction market and commodity prices through their farming units, they seem like they're very vulnerable to the current environment.

CAT says accounts past due over 30 days spiked from 2.5% to 3.6% in the current quarter. That could be the beginning of a big problem for them. If credit quality is deteriorating and they're reliant on markets widely perceived to be under significant pressure, credit rating downgrades can't be far behind and that could send their financing operations into a tailspin.

I'm short some CAT.

Texas Instruments (TXN) guides significantly lower

So about 6 months ago I was railing on Texas Instruments because of their distribution model -- my theory was when the cell phone market slowed down they wouldn't see it as quickly. I suggested multiple quarters of underperformance due to a slowing cell phone market. Last night, Texan guided Q4 numbers well below the street and sounded pretty darn awful. They probably miss for another couple of quarters -- they're a very slow boat and it takes a long time for industry corrections to work their way through their model.

A lot of ongoing weakness is suggested by semiconductor valuations at this point but the group tends to trade on direction of orders. Orders are still headed lower in the space. The multiples can keep bleeding.

Sandisk tonight

Their quarter is going to be an absolute disaster. Pricing was worse than they guided. Product gross margins were expected to be around zero – that sounds like wishful thinking. Selling part of their fab investment to Toshiba for a billion dollars smells like they envision a protracted recovery and need to show people they have cash to survive it. I like them divesting those assets because I think they make the company impossible to value – the Toshiba JV is most of their cost of goods and its an off balance sheet item. It's extremely investor unfriendly.

The wildcard here is Samsung, which has sent a letter to the board saying they want to acquire the company for $26. Sandisk rejected them cold the first time around. I wonder, though, if the quarter is as bad as I think it is, and if the chart really does trade to $9 like it says it will… will they be able to justify not trying to take the offer?

I think the offer shouldn't be there in its prior form – and selling the fabs probably cemented a lower bid. Samsung is in the power seat here, much the way Microsoft is with Yahoo. Sandisk, by rejecting the bid, has told shareholders they can do better themselves – but the quarter will likely indicate otherwise. There should be a lot of shareholder pressure to consider Samsung's offer. And Sandisk is going to be in a tough spot trying to tell investors why they won't pursue it.

The stock is interesting under $10 after a blowup. That may be very wishful thinking. I think for the stock to work you need Samsung alive and I think they'd be really silly not to bid much lower. I think it's going to take a very strong stomach to hold it after this number. I don't own it.

 

 

 

 

Buffett says buy America.

Warren Buffett wrote an op-ed piece in the NY Times today. Perhaps you've heard of him. He's a rich, famous, smart dude.

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

This is good advice. These are not typical times.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent.

Absolutely correct. The decline bottomed at 41 from a peak of 385 over 3 years. It was a 90% decline. The Dow topped at 14000 a year ago and is presently 9000. If he's saying this is the same thing there could be a lot more to go on the downside.

I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.

I hear you, dude. Me neither. You're right, they'll be up before people believe it. But it just seems early.

Now here's something that wasn't in his op-ed piece, from the Berkshire Hathaway 10K:

The estimated fair value of equity index and credit default derivative contracts at December 31, 2007 was approximately $6.4 billion, an increase of approximately $3.1 billion from December 31, 2006. The increase was primarily due to new contracts entered into during the year for which Berkshire received premiums of approximately $2.9 billion. As of December 31, 2007, Berkshire’s maximum exposure under these contracts was approximately $40 billion, an increase of approximately $16 billion from December 31, 2006.

Though it doesn't say it very clearly, these are put contracts Berkshire has sold to collect premium (and presumably buy indexes at some undisclosed price).

This from the last 10Q:

At June 30, 2008, the estimated fair value of these contracts was $5,845 million and the weighted average volatility was approximately 23%. The impact on fair value from changes to volatility is summarized below. The values of contracts in an actual exchange are affected by market conditions and perceptions of the buyers and sellers. Actual values in an exchange may differ significantly from the values produced by any mathematical model. Dollars are in millions.

Hypothetical change in volatility (percentage points) Hypothetical fair value

Increase 2 percentage points
$ 6,408

Increase 4 percentage points
6,969

Decrease 2 percentage points
5,281

Decrease 4 percentage points
4,719

I'm not sure what kind of mark they have on volatility but my indicator says it's through the roof. It'll be interesting to see what they have to say about these when they report.

I'm not saying his advice is right or wrong. I think the op-ed piece is intended to help build confidence in the markets. And it may work -- its the most read piece on the site today. And yes, like he says, he's buying America -- $40 billion or so worth of it if his puts come to fruition.

Google 3Q:2008 results

Google missed consensus revenues by a little bit. TAC ratio was constant vs last quarter. The tax rate was 24% which was a little light relative to some models and bolstered profitability. The real surprise came on the cost front, where Google really put the clamp down on expenses. They indicated it was likely temporary and that they intend to continue to spend.

A few months ago, I highlighted an article in the NY Times about Google jacking up prices on day care and Brin objecting to some of the perks employees were provided. This did indicate a change in the way Google was approaching their costs. I also think it indicates they're seeing some writing on the wall in terms of profitability going forward. They're not going to have the same kind of heady growth indefinitely. Social networks have been disappointing relative to their hopes. Youtube has had to backtrack on promises of no ads in the content because they couldn't figure out another way to monetize it. Things have not gone exactly as planned.

Surprisingly, with finance and automobiles making up such a large portion of online ad budgets, they saw no visible reduction in business. I wonder, though, how much business in those verticals has slowed since the end of the quarter. The psychology out there is that consumers will not spend because of fear – shouldn't that suggest lower ad budgets heading into the holidays? What's the point in a lot of advertising if its not driving sales? Recently, the head of GM's ad budget said they would be cutting back on online advertising in absolute dollars for the first time ever. If asset prices are falling everywhere, I would think keyword rates are going to fall also. That would erode Google's profitability at its core.

They're very clever guys. They saw the need to cut back on spending before it blew them up in the quarter! That's really good stuff. I doubt they can continue to pull rabbits out of their hat if the core business keeps slowing… and it should with consumers so scared.

Intel 3Q:2008 results

Revenues came in relatively close to consensus at 10.2 billion – the street was ~10.3 billion. Gross margins were slightly better at 59%. They guided to 10.1 - 10.9 billion for Q4, which puts the midpoint at 10.5 billion – the street is at ~10.77 billion. Gross margin guidance is also in line at 59% +/- 2%. Atom processors, the ones that go in those mini-notebooks that are starting to crop up everywhere, sold very well. Selling prices on those are lower than the company average and will skew the mix lower going forward as they are the fastest growing product in the line presently.

Sequential revenue guidance for the fourth quarter is the lowest it's been in many years – typically Intel expects a big sales bump going into the holidays. Not this year, huh. The company said they're cautious about the economy. Join the club.

The stock is up a little. I have to say, the outlook was better than I feared it would be based on the present abnormally slow supply chain build – maybe others like myself were expecting worse. I expect the pop is temporary. I have said before that I think Intel is a low growth company and the premium multiple it receives is somewhat unjustified. I think fair value in the stock is $12 - $20. We are in the mid-range of that band (though we are actually in it which is a refreshing change) and the company is lobbing out revenue forecasts that may still be too aggressive. I expect as the economy continues to slow and multiple reality sets in the stock will slide lower.

Fifty percent retracement in the S&P

In 1929, the Dow Jones dropped from 380ish to slightly under 200, a 48% drop. It then rallied to 300 over the next 4 months, which was a 50% move off the bottom. Two years later the Dow Jones stood at 40, down 90% from the high reached in 1929.

In 2008, the S&P 500 future dropped from 1260 to 840, a 33% drop over a 4 week period. It then rallied back 50% to 1050. The Nasdaq 100 future dropped from 1790 to 1200. It then rallied back 50% to 1490. And here we are.

 

Treasury investing in bank stocks, FDIC insuring damn near everything

The government, in their efforts to save our flawed banking system and spur lending activities, has opted to perpetuate existing conditions by injecting more capital into major banks. The bailout plan continues to disproportionately benefit a select few companies chosen by administration preference behind closed doors. The assumption in place must be that the banks are more market savvy than the Treasury and will put the capital to better use than the TARP fund would.

It seems a bit underhanded that the Treasury just two weeks ago was in front of congress saying they needed to create this fund to buy securities. Paulson and Bernanke were grilled about the culpability of the banks. Democrats raged about executive compensation caps. They told congress if the package wasn't approved immediately we would fail. What seemed like an afterthought attachment that they might buy shares in banks has now become the centerpiece of their strategy.

That said, this is probably a better plan than burying the securities. It would be very hard for the TARP to determine what they owned and how to deal with it – thus far the banks have not been able to do that and they bought the stuff in the first place.

The troubling aspect of this strategy is that it does nothing to correct the conditions that got these banks into dire straits. In fact, it seems to validate their over-levered balance sheets. If the plan comes with stipulations that the banks should not have risky investments, what are they to do with the risky investments already on the balance sheet? Those investments are no less risky and now probably fail an acid test for new investment. How will the dangerous paper go away if they're only allowed to own good paper?

The FDIC has decided to insure everything in sight, raising insurance on accounts to infinity and protecting new preferred securities for banks to pass between one another that will be issued in conjunction with this plan. They will also be offering counter-party insurance.

I understand the plan but I don't understand how it fixes the infrastructure problems. Once again, it prolongs any kind of true realization of the issues. The hangover is extended.