Wilbur Ross: Crazy Like a Fox

The boom times in America keep on rolling.

Everywhere, it would seem, but the Motor City. Michigan’s unemployment rate exceeds Mississippi’s, and with the automobile industry on the ropes a quick fix is unlikely.  Although Larry Page’s father was a professor at Michigan State University, and Larry spent his formative years there, the old economy trumps the Google economy in Michigan.

The state’s business leaders spent too many years locked in combat as the UAW and other unions battled management at the Big Three over unemployment, medical and retirement packages. And forget about a marketing orientation or connection with the ultimate consumers of automobiles. The bigwigs were too busy fighting over a shrinking pie.

And it is time for the state’s residents to take their medicine. They are on a collision course with Private Equity. Maybe Wilbur Ross and company are Michigan’s only hope.

Ross, 68, has made a fortune for investors and for himself by buying broken-down companies in distressed industries like steel and textiles, slimming them down, trimming them up and putting them back on sale.
“My wife accuses me of trying to reinvent the 19th century,” Ross says. The payoff from his bottom-fishing strategy smacks of the 19th century too -Rockefeller and Carnegie. Ross’s first fund has returned an average of 40 percent annually since it was started in 1997, and his next one, started in 2002, has doubled in value every year.

Ross has earned a reputation for farsightedness, smarts and diligence. Says Delphi CEO Steve Miller, who sold bankrupt Bethlehem Steel to Ross in 2003: “In negotiations, it was clear he knew all the details. He knew more about my company than I did.” Ross later packaged Bethlehem with some other steel companies and sold them for a $2.5 billion profit. Fortune

Wilbur is not crazy, nor is he the Motor City Madman. But Wilbur and the Private Equity gang might be the only hope to get the state rocking again.

Hanging on the wall of Wilbur Ross’s office high above Midtown Manhattan’s concrete canyons is a framed copy of a BusinessWeek cover story from 2003. The headline: “Is Wilbur Ross Crazy?” “That’s what everyone is still asking,” Ross quips with a thin smile.

His efforts are part of a high-stakes transformation of the American car industry, the business that for years defined the country’s economic muscle. The current bottom-feeding of Chrysler, the DaimlerChrysler unit so troubled that the board recently moved to drop the second half of its name, is only the most public. Private-equity firms, most notably Steve Feinberg’s Cerberus Capital Management, which is attempting to build a vertically integrated presence via such moves as its expected $1 billion acquisition of bankrupt parts maker Tower Automotive, are flooding so many billions into the auto industry — parts suppliers, rental-car agencies, retailers, financing arms — that former Merrill Lynch star auto analyst John A. Casesa terms the frenzy of activity the “recapitalization of Detroit.” Dealmakerdaily

Can Private Equity (and Wilbur Ross) Save Detroit?
Dealmaker (free sub req’d)

Michigan: Turn Out the Lights
May 31, 2007

Bankruptcy raider moves in on auto-parts
Fortune Magazine 12/04/06

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The content contained represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned

School Ties: Who do you know?

A recent study published by several researchers concludes that mutual fund managers invest more money in the stocks of companies that are run by friends and associates they met in college or graduate school.

These positions also tend to outperform other investments the fund managers make. Is it mere coincidence, or is there something shady going on. Inquiring minds want to know:

The authors of the study offer two possible explanations — one benign and one decidedly not. Fund managers may simply know more about their old classmates, including which ones are likely to make good executives. The alternate explanation is that those executives may be passing along inside information to the fund managers. NYT

These conclusion are based on what the Times author calls investigative economics, a process where researchers comb through data looking for unusual trading patterns to pursue. Hunts similar to these led regulators to pursue option backdating and after-hours mutual fund trading cases.

Scumbags beware. You know who you are. Soon others will too.

But the newfangled tools are not just for regulators to use in the prosecution of lazy white collar crims. Indeed, a new generation of analytics allow analysts to look for an edge that did not exist until recently.

For instance, Wall Street’s rumor mill has been buzzing over a possible Amazon/Netflix merger. I am usually quick to dismiss such banter, but perhaps it is not so far fetched after all.

Amazon.com (AMZN-NASDAQ) and Netflix Inc. (NFLX-NASDAQ) share several relationships, primarily through former employees and board affilliations.  For instance, Leslie Kilgore, a marketing executive at Netflix, performed similar duties at Amazon when employed there.

But there is more to the story...which you can check out here:

Amazon is well-connected into Netflix
NewsVisual

I don’t have a position in either company. But sometimes where there’s smoke, there is fire.

The Small World of Investing: Board Connections and Mutual Fund Returns
NBER Working Paper Series

Quantifying the Role of School Ties in Investing
New York Times (Sub req’d)
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The content contained in this blog represents the opinions of 1440Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned

Limelight Networks IPO prices above range

The eagerly anticipated IPO of Limelight Networks (LLNW-NASDAQ) priced last night at $15 per share through Goldman and Morgan Stanley.  The deal was upsized to 16 million shares and priced well above the original $10-$12 range.

Goldman’s merchant banking arm injected $130 million in Limelight in July of 2006 and gained several board seats, no doubt anticipating an opportunity to take on a bigger role, and in the process wrest control from founder and then CEO Bill Rinehart, who was barred from serving as an officer or director of a public company for five years by the SEC.  Rinehart was formerly VP of Sales at former Nasdaq high-flyer Critical Path, which used a bit of creative accounting to meet its quarterly numbers. Ironically, Critical Path’s was a pioneer in providing enterprise email services. 

By most accounts Rinehart positioned Limelight for success before turning over the CEO reins to Jerry Lunsford, the former CEO of WebSideStory. And don’t cry for Rinehart, he is selling approximately 500k shares in the IPO and his remaining 3 million share stake in the company should be enough for him to retire comfortably on.

Of course Goldman makes the easy money here, as both investors and underwriters. Almost too easy, considering they have only been on board a year now.

I don’t know if Limelight can put a hurt on rival Akamai, or shrug off the legal issue with Akamai and MIT. But I do know that in America, the rich get richer.

This story should be fun to keep tabs on going forward, given the rapidly growing end markets and competitive landscape.

Limelight Networks is a leading provider of high-performance content delivery network services. We digitally deliver content for traditional and emerging media companies, or content providers, including businesses operating in the television, music, radio, newspaper, magazine, movie, videogame and software industries. Using Limelight’s content delivery network, or CDN, content providers are able to provide their end-users with a high-quality media experience for rich media content, including video, music, games, software and social media.

As consumer demand for media content over the Internet has increased, and as enabling technologies such as broadband access to the Internet have proliferated, consumption of rich media content has become increasingly important to Internet end-users and therefore to the content providers that serve them. eMarketer estimates that at the end of 2006, nearly 60% of all Internet users regularly watched videos online, and approximately 80% are expected to do so by the end of 2010. We developed our services and architected our network specifically to meet the unique demands content providers face in delivering rich media content to large audiences of demanding Internet end-users. Our comprehensive solution delivers content providers a high-quality, highly scalable, highly reliable offering at a low cost. As of May 2007, approximately 800 customers are using Limelight Networks to deliver the high-quality media experiences that their consumers seek online.
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Mr. Rinehart is engaged in international business development activities on our behalf, and he does not presently serve as one of our officers or directors. Prior to co-founding Limelight, Mr. Rinehart served in a number of executive-level sales positions at Critical Path, Inc., a provider of Internet messaging products and services, from 1998 to 2000. In 2002, the SEC alleged that during a portion of the time Mr. Rinehart was associated with Critical Path, Mr. Rinehart participated in a fraudulent scheme to inflate Critical Path’s revenue and earnings. Mr. Rinehart and the SEC entered into a settlement under which Mr. Rinehart neither admitted nor denied the allegations and agreed to be fined, was enjoined from future violations of certain U.S. securities laws, and was prohibited from serving as an officer or director of a public company through August 2007.

Limelight Networks S-1

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in LLNW

The Dutch Touch

Do you work for a European bank in New York?

Our condolences.

Do you work for a Dutch bank in New York?

Well then you are really F*#!ked

The bidding war for ABN AMRO brings back fond memories...of a deal gone awry. In the late 90’s both ABN AMRO and ING, the other Dutch bank, acquired broker-dealers in NYC. Timing is everything...they were late to the party and overpaid to boot.

ING folded their tent quickly...selling off their broker-dealer operations to ABN.

Believe it or not, they overpaid again. The integration was a nightmare and the stock market was uncooperative as the bubble continued to unwind.

And by the spring of 2002 the Fat Lady was singing.

In late March, ABN AMRO pulled the plug and fired about 550 pros in U.S. domestic equities, M&A and other areas. About 250 jobs were cut on the equities side alone, the largest cuts occurring in New York. ABN AMRO’s management board made the decision in light of business conditions. “The board obviously decided it was not profitable,” according to one person familiar with the situation. The sales, trading and research business unit in the U.S. was said to have lost some $100 million last year. But what makes this tragic story memorable—what separates it from the run of the mill variety published by groveling industry rags—was the negative attention that the cutbacks stirred on Wall Street. The horrible press was exacerbated when one Wall Street sage, David Faber, reported on CNBC that the traders at ABN had gone on “strike.” However, it wasn’t that dramatic a story, one ABN official privately told me. “I don’t know this guy David Faber but nobody went on strike.”

Faber was right...they essentially went on strike. We had called the sales-trader covering our account and he told us to call someone else, ie. another firm, to do our trade. He refused the order. Maybe we had interrupted his lunch.

Nevertheless, the rumors and the negative reports continued unabated for days. One Wall Street confidante told of how one trader at ABN AMRO had a sandwich flung at him by another trader (an angry trader, to boot) on the trading floor in New York. His crime was picking up the phone to take a client’s call. Traders Magazine

I don’t give a damn who buys ABN AMRO. But I do wish them luck.

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