Thoughts from Goldrock Capital

I think the graph is pretty self explanatory ...... and scary!!!

2012-01-24T06:12:00.000-05:00

The full article as originally published in the New York TImes appears here:

http://www.nytimes.com/2012/01/22/opinion/sunday/the-dangerous-notion-that-debt-doesnt-matter.html

The Infolinks Global Advertising Timeline Infographic

2011-12-29T07:12:00.001-05:00

A couple of days ago, Mashable published an Infographic that Infolinks (a Goldrock portfolio company) designed. It is a brief history/timeline of advertising and its evolution. Starting off in ancient Egypt, explaining the first print ad in an English prayer book, to the reason for the billboard concept - all the way to today’s methods of advertising on the internet, some of the biggest and most interesting landmarks are documented on this fun and creative timeline. Interestingly, the first keyword ad was “golf”!

Have yields stopped listening to economic releases? ......

2011-12-26T07:06:00.000-05:00

I came across this very interesting graph this morning. In normal times and circumstances (whatever that may mean), bond yields are heavily influenced by how weak or strong the economies prospects are perceived to be. In the graph, the white line is the Citi economic surprise index, which is an index that shows the deviation of actual economic releases in comparison to the expectations. Clearly, the index has had a very strong move up in the latter half of the year, as US economic releases have generally been stronger than expectations. In the past, the yield (the 10 year - orange in the graph) would have moved up in tandem, as a better than perceived economy would have led to a movement from the fixed income market (lower prices higher yield) into the equity market.
But times are far from normal. Markets are absolutely terrified of PIIGS defaults. Thus despite stronger news emanating from the US, the awful news out of Europe has seen the Treasuries retain an unprecedented demand for the "perceived" safe haven status.

Surely though in unveiling Operation Twist, whereby the Fed is aggressively buying long dated bonds (to keep the yields low) and selling shorter dated bonds, that has been the determinant in keeping lower yields? I'm not so sure. If for some reason, somehow, the market became convinced that Europe was turning the corner, and that there was light at the end of the tunnel, wouldn't the yields be expected to rocket higher, Fed or no Fed?

Yields are at all time lows- yields are pricing in the risk that the market may not exist in a recognisable form in the not too distant future, with fears of defaults and a collapse of the financial system.

The 12 Keys to Employee Retention

2011-12-13T02:18:00.002-05:00

Thanks to Jessica Ray of Openview for reminding us of the simple things that are key to creating the environment for a strong team.

In all the businesses we invest in it takes a huge effort from everyone at the company to create success. Fostering those efforts is not as complicated as one might think. Here are easy things to focus.

For the full blog and the 12 points please click through to Jessica's blog - http://blog.openviewpartners.com/the-12-keys-to-employee-retention/

If you have others, please add them in the comments!!

Israeli PE continues to grow

2011-12-12T04:44:00.001-05:00

The latest Israeli Public Equity Report published by the IVC and Gross, Kleinhendler has been published.

Some key points:

In the first three quarters of 2011, $1.98 billion was invested in 45Israeli private equity deals, an increase of 20 percent over in same period of2010
The average deal size was $44 million,
In Q3 the software sector accounted for 22 percent of the deals, mostlyreflecting the $307 million buyout of IT services provider Ness Technologies byCiti Venture Capital International and Riverwood Capital's $110 million buyoutof SintecMedia, an enterprise applications company.

http://www.iva.co.il/index.php?option=com_content&view=article&id=69&Itemid=86

Happy Birthday to Sage!

2011-12-08T01:59:00.007-05:00

Much has already been written about the fact that Sage has just reached the "grand" old age of 30.

I would like to focus on some of the drivers to success from a more personal perspective.

The backdrop to the founding of Sage by my Dad, Paul Muller, Graham Wylie and Phil Lever was the early days of Thatcher's rein, deeply depressing economic times, and continuing industrial unrest, with the printing industry being of specific relevance to my Dad. In the North East of England (Newcastle, where the company still has its HQ), there was a dramatic period of de-industrialisation, bringing unemployment and recession.

Specifically my Dad had been running Campbell Graphics, a smallish printing company, specialising in 3-colour magazines, a far cry from computers and hi-tech! Anyone who knows the printing business knows that it is mucky to say the least and somewhat un-glamourous.

I guess (other than marrying my Mum) the most momentous decision of my Dad's life was starting the process that lead to the founding of Sage, ie computerise some of the key elements within the printing process. Not the technology of printing, but the business of printing. For this he needed some outside brains, and by bringing a NASA boffin and computer undergrad (Paul and Graham) in as consultants, this could be solved.

Here is the key moment though: having solved it for his own company, he figured that there may be other David Goldman's who might find it useful. Thus it turned from an innovation into a business. Fortune favours the brave and this band of early eighties entrepreneurs found themselves selling the printing package in its entirety and investing the proceeds so that Graham could write a generic accounts package for small businesses.

Sage was born!!

Initially Sage Systems (as it was known at the time), sold systems (hint is in the name) which included the software and also relevant hardware (names from the museum such as Osborne, Apricot, Superbrain and others).

The next key decision was to withdraw from the hardware business and stick with software. For the un-initiated, margins for pure software vendors tend to be somewhat higher than hardware, not to mention the working capital requirements of building a hardware business from scratch.

Thus Sage Systems became Sagesoft!

This brings me onto one of the key fundamentals of the business in my Dad's eyes. It's all about the brand, not the technology, or in other words, Sage is just a marketing company that happens to sell software. The customer is the key, or perhaps the King, and keeping a very close ear to their requirements, problems, challenges etc is the key to understanding how to drive the business forward.

There were many other key milestones along the way; the realisation that Amstrad will change the world of computing for small businesses; creating and focusing on paid maintenance and software assurance; entering the business of bespoke stationery (ironic for Sage to have made so much money out of printing); first acquisition in the US and using it as a platform for multiple additional acquisitions (credit for this to Bernard Fisher, a non-exec at the time who pushed for this move), and of course these successes have continued since my Dad retired in 1997 and passed away in 1999.

I promised a more personal view and shall certainly make good!

During the early years of Sage the main driver for my Dad was to reach financial security for himself and family, a situation he had not experienced to that point. My Dad was no Marc Zuckerberg (in oh so many ways) and started Sage when he was already passed 40. Whilst never EVER complaining about it, my Dad grew up in difficult economic circumstances and worked hard for every penny he made in adult life. This is why reaching financial security was of such importance to him.

Having successfully floated the company in 1989, and reaching (for him) the crucial milestone of joining the ranks of the independently wealthy he set about the task of building Sage into a world beater with even more energy and ambition. I have often wondered why this is, and I have no scientific reasoning. Perhaps having "unburdened" himself of the need to reach financial security there was an unleashing of new energies which expressed itself in even greater ambition for the company, without the worry anymore of paying the domestic bills.

My Dad was very much a people's person. Frankly it didn't matter what type of person he met, be it Bill Gates or the caretaker. He treated everyone the same; polite, to the point, with respect, and with a unique brand of humility and humour. Success did not change my Dad. He believed that doing the right thing was also good business practice, and he did not have a different set of values for his personal and professional life. He loved to be surrounded by motivated, creative and young people, and indeed brought the average age of Sage up by a couple of decades! Even in the 80's technology was perceived as the domain of young people.

There was nothing my Dad liked more than to walk around the Sage offices and talk to as many employees as he could on an almost daily basis. Beyond the pleasure he took from shooting the breeze with the people he loved to work with, he also knew that their success was his success, and that businesses that want to grow and succeed can only do so if everyone feels part of the team. This was his way of showing it!

For somebody who could barely use a computer he did not do a half bad job building a software company. The irony is that had he been in love with technology he may not have had the success he did.

If I had to single out what I believe are the secrets of his and then Sage's success it would probably come down to two key elements:

Absolute dedication to the principle that the customer is King and that business must be driven by the desire to fulfill the needs of the market (rather than one's own fantasies). In the long run strong brands will prevail and to dominate a market requires continued investment in the brand
Absolute dedication to the idea that all companies (and especially tech companies) are only limited by the desire of the entire team to succeed and that leadership starts from the top. My Dad always made sure that everyone in the company felt part of the success, from Chairman to the guy shrink wrapping the software.

I am very proud to be the son of David Goldman and even to be associated indirectly with the success of Sage gives me continued pleasure. I also know that there are many extremely talented and dedicated people at the company who carry forward the basic ideas that my Dad laid as the foundations 30 years ago.

I wish Sage many happy returns (including investment returns!) and in particular that they claim their rightful position as a beacon of growth and innovation, both for the North East, but the UK in general. My Dad is a role model as an entrepreneur, and there is no reason why Sage cannot be a great role model as a company leading the way through the next thirty years!

Growth Capital vs. Venture Capital

2011-11-28T08:59:00.003-05:00

In 2006, when we began speaking about a growth capital fund in Israel, people had no idea what we meant. Invariably the response was, "Like a VC Fund, right?" Wrong.

What we, and other growth funds like us, target are:

Already successful businesses which can be made more successful;
Management teams building real businesses and focused on old fashioned things like profit and loss; and
Businesses for whom technology is a barrier to entry, not an way to create a new market.

Five years later the Israeli market now understands what we've been talking about. We see a steady stream of companies for whom growth capital is the right fit. And the VC-style companies tend to stay away.

The growth capital market is still in an expansion phase. But it isn't a huge market, and we don't expect it to become huge. VC will remain the predominant private funding market in Israel - and I expect that market to heal itself through a combination of reduced capital supply and a trend from consumer tech back to enterprise tech. But the growth market is a great niche market and an important addition to the private funding landscape in Israel.

Dodgy going ons in Italy!

2011-11-10T09:30:00.000-05:00

Very very interesting. Indeed. Something smells rather fishy here. Earlier today Italy sold €5 billion in 1 year Bills at an average yield of 6.087%, the highest since September 1997, and almost 3% higher compared to a month ago, when it prices at 3.570%. However, what really catches the eye, is the fact that just before the auction, the 1 year was trading at a huge 7.75%, almost 200 bps ABOVE the auction. Who is prepared to receive a 6.09% yield in a new auction when they can receive a juicy 7.75% in the secondary market? Unless someone (read ECB) had alternative interests in forcing the yield lower. Now that certainly would be interesting, as the ECB is prohibited by law from intervening in the primary, auction market.

Once the Euphoria wears off.....................

2011-10-30T06:50:00.002-04:00

Some initial thoughts from last weeks European party:

50% proposed haircut that the headlines were full of, actually closer to 16%. Why? Greek debt approximately EUR 350b. Of which approx. EUR 150b held by Greek and European central bank, which is not subject to any restructuring. Leaving us with about EUR 200b. Greek banks and pension funds own about EUR 85b. This is contentious and debatable, but if they take a 50% haircut, they will essentially be bust. Hence, they may well be absolved too. That leaves EUR 115b that will "voluntarily" take the haircut. 50% of which, is EUR 57.5b, or 16%.
The initial reaction was euphoria, with PIGS bonds falling drastically. But once the euphoria wore off, Spanish and Italian bonds made a quick u turn, and are back to the levels they were trading at pre-announcement, dangerously close to the 6% level where other countries have required help. Why? Because EFSF doesn’t take a default off the table. It delays the time until default, by rolling maturities, but all it really does is shift who takes the loss. And Italy and Spain are too big for ANYONE to take the loss.
The EFSF is leveraging EUR 440b 4 or 5 times, just 3 weeks after Merkel promised the Germans that it would not be leveraged. The leverage would use the EFSF AAA credit rating to enhance new debt and set up Special Purpose Investment vehicles to obtain the leverage. I.e. more of the problems of the 2007/08 credit crises.
How does the leverage work? EFSF is like an empty box filled with promises of money- many of them from the very people who are most likely to need to borrow that same money. So should they need to borrow the money. They won't be able to fulfill their promise, so there will be less money for them to borrow. And then they've decided to leverage these empty promises of nothing.
Who is going to buy into the new leveraged EFSF fund? Sarkozy seemed to imply if China WANTED to contribute, then Europe would probably be open to allowing them. However, Chinese Prime Minister said "Countries must put their own houses in order". A member of the Chinese central bank went on to say "It is in China's long term and intrinsic interest to help Europe because they are our biggest trading partner, but the chief concern is how to explain this decision to the Chinese people. The last thing China wants is to throw away the country's wealth and be seen as source of dumb money". China is extremely likely to invest in the EFSF, but on terms that are favorable to China.
This was no solution. It’s a plaster for a long term problem. Don’t forget that at the last stress test, Europe's strongest bank was Dexia ……
Also, the fact that these private investors were forced to take a voluntary haircut to the tune of 50%, does not create a credit event. I can't imagine the big banks who hold CDS's will take that lightly.
And further, who is going to want to buy sovereign bonds now? At least beforehand, I can buy protections in the form of CDS's. Now that CDS's have been deemed worthless, why should I buy these EFSF bonds? Who is going to buy these bonds? Someone has to, otherwise Europe will blow up. And best case scenario, is that there are buyers, but too few of them, hence an - oversupply, a low price, rising yields ...... problem sounds familiar?

BusinessWeek: Israel Punches Above Weight as GDP Beats Developed World

2011-09-25T04:40:00.000-04:00

Normally, we have our own proprietary articles, but I thought this time it is worth it to just post the following BusinessWeek article:
http://news.businessweek.com/article.asp?documentKey=1376-LRW4M01A1I4J01-2QDQJL3HHA3827O7MR2OENNQ8E

Sept. 22 (Bloomberg) -- Never mind the collapse in confidence in Europe, the Palestinian proposal for United Nations recognition and heightened tensions with neighboring Egypt and longtime ally Turkey. The Israeli economy just keeps growing faster than the rest of the developed world.

The International Monetary Fund this week raised its forecast for the country and cut its estimate for the global economy on the impact of the European debt crisis. Israel's gross domestic product will expand 4.8 percent this year, according to the Washington-based lender. That's up from an April forecast of 3.8 percent and triple the pace for the average of the 34 advanced economies.

Citigroup Inc. said on Sept. 18 it would establish a new Israeli research center and Standard & Poor's a week earlier raised the country's credit rating. It cited the discovery of two gas fields off the coast of Israel that hold an estimated 25 trillion cubic feet of the fuel. Mellanox Technologies Ltd., the 12-year-old Israeli adapter maker part-owned by Oracle Corp., says sales will grow 80 percent in the third quarter.

“The Israeli economy is very vibrant,” Finance Minister Yuval Steinitz said in a Sept. 20 interview with Bloomberg Television. “We enjoy very low unemployment and nice economic growth and this is mainly because we managed to develop very advanced high tech industries and very strong exports.”

Technology Capital

The stock market in Israel, whose population of 7.8 million is similar to Switzerland's, was upgraded to developed-market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted into the Paris-based Organization for Economic Cooperation and Development. The country has about 60 companies traded on the Nasdaq Stock Market, the most of any nation outside North America after China and is also home to the largest number of startup companies per capita in the world.

Israel ranks third in terms of projected growth this year among MSCI's list of 24 developed economies, after 6 percent for Hong Kong and 5.3 percent for Singapore, according to the IMF.

“Israel's exports are high-added value exports like informatics and technology,” said Jean-Dominique Butikofer, a fund manager who helps oversee about $1 billion of emerging- market debt at Union Bancaire Privee in Zurich, including quasi- sovereign Israeli bonds. “They're not exporting Gucci bags. If there's a slowdown, these are the kind of assets that are good to have.”

Talent Pool

Venture-capital backed Israeli technology companies raised $364 million in the second quarter of this year, a 77 percent jump from the $206 million raised in the year-earlier period, according to PricewaterhouseCoopers LLP Moneytree report. Seventy-six companies raised funding in the three-month period, compared with only 60 last year, the report said.

“One reason that the economy continues to do well is the component of innovation and ability to adapt to a changing environment,” Citigroup Israel Managing Director Ralph Shaaya said in explaining the New York-based bank's decision to locate a research center in Israel. ‘There is a rich pool of talent in the high tech sector. The propensity for innovation is high.”

For Mellanox, orders are persisting even as global growth falters.

“In these situations people tend to look for products that do more with less,” Chief Executive Officer Eyal Waldman said in an interview on Aug. 29. “We still see the orders going in so we don't feel the macro waves coming.”

Shares of Mellanox have jumped about 28 percent in Tel Aviv trading this year, compared with a 21 percent drop on the benchmark TA-25 index. In New York, shares gained about 23 percent, compared with a drop of about 4 percent in the Nasdaq composite index.

Political and Economic

The good times may not last. After withstanding a Palestinian uprising in 2000 that frightened away tourists and deterred foreign investment and a credit crisis in 2008, Israel now faces troubles both political and economic.

Palestinian Authority President Mahmoud Abbas plans as early as tomorrow to ask the Security Council to recommend that Palestine become the world body's 194th member. The U.S. has threatened to veto any resolution in the Security Council.

Bank of Israel Governor Stanley Fischer, whose actions in 2008 helped the economy recover from the global financial crisis, this week voiced concern about the possible effects a prolonged global slump and geopolitical friction could have in coming months. His worry was reflected in the IMF forecast for 2012, which predicts a slowing to 3.6 percent.

Lowest Jobless Rate

Israel has emerged from economic turmoil before. In 2000, as peace with the Palestinians looked possible following the 1993 Oslo accords and the Israeli technology industry took off, growth was at 9.1 percent. Then, in December, the second intifada, or Palestinian uprising, broke out, just as the technology bubble burst on world stock markets. In 2001, Israel contracted by 0.1 percent and in 2002, by 0.6 percent.

By 2004, growth had returned to 5.1 percent; it reached 5.7 percent in 2006. Israel's unemployment rate declined to 5.5 percent in the second quarter of this year, the lowest level since at least 1985.

Still, next year's IMF outlook of 1.8 percent growth for the U.S. and 1.1 percent growth for the euro area, Israel's two main markets, is likely to moderate demand for the country's exports, one of the main growth engines of the $217 billion economy. The Palestinian statehood bid could give the new entity more legal clout or raise nationalism pressure should the Security Council vote to reject it.

Turkey Expulsion

Israel is also facing security threats as the so-called Arab Spring creates turmoil in its Middle Eastern neighbors. In Egypt, the pipeline that carries gas to Israel has been bombed four times since the January uprising against former President Hosni Mubarak. A cross-border attack by terrorists who came from the Sinai peninsula killed eight people near the resort city of Eilat in August.

Turkey, one of Israel's largest regional trading partners, expelled the Israeli ambassador and halted defense purchases after Israel refused to apologize for a commando raid last year on a Turkish vessel attempting to breach the blockade of the Hamas-controlled Gaza Strip that left nine dead.

Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, are at 190, the highest level in more than two years, according to data provider CMA. It is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The shekel has weakened more than 5 percent this year, headed for its biggest annual drop against the dollar since 2005 when it fell 6.1 percent.

Investment Grade

“We weren't Switzerland to begin with,” said Yaniv Pagot, chief strategist for the Ayalon Group, a holding company with interests in insurance, the capital market, and real estate. “We've had the Lebanon War, the Cast Lead military operation in the Gaza Strip, and the economy has dealt with temporary situations. If the situation lasts longer, if it becomes permanent, that could have an impact.”

The economy may already be feeling the bite. Exports, excluding ships, aircrafts, and diamonds, declined for the fourth month out of five in August to their lowest since January, according to seasonally adjusted figures.

This didn't deter Standard & Poor's from raising Israel's credit rating earlier this month to A+, its fifth-highest investment-grade rating, just a few weeks after cutting the U.S. and before cutting Italy. S&P cited the two gas fields, Tamar and Leviathan, off its Mediterranean coast.

“You have a situation where the global economy is clearly running into a roadblock and having a tough time while the Israeli economy is going to bend but it isn't going to break,” said Daniel Hewitt, senior emerging-market economist at Barclays Capital in London. “We think Israel can maintain positive growth. Israel has a strong economy with a strong base.”

--With assistance from Louis Meixler and Jonathan Ferziger in Tel Aviv and Tal Barak Harif in New York. Editors: Anne Swardson, Andrew J. Barden

Its party time!!!

2011-08-30T05:20:00.001-04:00

Since I last blogged, the market has been "mildly interesting", to put it mildly!!!

Last weeks rally was the first positive week in a month, and it continued yesterday with an impressive party in stocks all round. And yes, a rally was to have been expected, coming from horrendously oversold levels, at least in the short term, though its very interesting to see the relative winners and losers. And I'm not talking about the reward for lending money to various sovereign Governments around the world based on the risk you are taking on. Whether it’s the mouthwatering 44% on offer for lending to Greece, which has one foot in the grave. Or the 0.0000 miniscule number that you'd be getting for lending to the Japanese with its 200+% debt/GDP. Or to Europe, which arguably may or may not be around in its current states for much longer. Granted, the European balance sheet may look slightly more enticing now that the ECB have moved on from buying the worthless Greek debt to the dubious Spanish and Italian debt!!! Or the US with its $14 trillion and rising deficit? At some point, we'll learn the hard way that "safety" promised by the Governments, is a nonstarter.

Anyway. I'm not talking about all that- that’s the subject of a different post! Back to todays post! It was interesting to see the relative winners and losers. Despite the oversold conditions, and an expected rally, the outlook is not all that rosy. Turbulence continued in Libya, violence worsened in Syria, Israel/Arab tensions, hurricane in the US, plus the eagerly awaited Bernanke speech at Jackson hole (whose remarks were initially perceived as negative, but then markets recovered to finish strongly higher). With hindsight, come September, its possible that the post Bernanke rally was based on "hope". This time last year, when Bernanke spoke, he PLEDGED QE to combat deflationary pressures. This time around, he spoke about fiscal policy and gave his usual "range of tools that could be deployed", but there was very little talk about monetary policy per se. Nevertheless, markets rallied, on what? Hope? There was also the small matter of the first revision to Q2 GDP, which dropped from a preliminary 1.3% to a meager 1%.

However, the market more or less ignored all this, and rallied. And what rallied the hardest? Small cap growth. At least if you're going to party/rally, a rational market would presumably rally in the "safer" asset classes? Small Cap growth, the antithesis of a flight to safety, was up 6.7% for the week, whereas the large cap growth, the epitome of a flight to safety (within the equity space), was the worst performer at 4%. Further, the Utilities and health care stocks, the "boring defensives", performed almost as badly (relatively speaking), whereas the Industrials, the cyclicals, outperformed. However, it is also imperative to point out that the rally was noteworthy for its lack of leadership- the leaders are thinly traded. Additionally, unlike last year when QE2 sparked a massive move out of bonds and into equities with a huge rise in yield as investors sold bonds, this time round, the 10 year hardly moved. And generally, the bonds lead the equity market, and a sub 1% yield on the 5 year speaks volumes for the signal for the economic outlook.

Going back to the GDP report, as well as the downward revision, there is also the statistic that the real GDP year over year change has now fallen to 1.5%. And as can be seen from the following chart, courtesy of Bloomberg, since 1948, each time the real y/y change in GDP has fallen below 2%, the economy has subsequently entered into a recession.

In an uncertain, volatile environment, the one certainty, is that we are in for an interesting, volatile ride!!!

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Is Sage a Listed Private Equity Firm?

2011-08-22T03:15:00.006-04:00

I was wondering what the implication was for Sage having being beaten by Bain to the MYOB deal. MYOB (for those unfamiliar) is the equivalent of Sage in Australia.

Accepted wisdom among Sage watchers is that they are a very disciplined buyer and therefore tend not to get into bidding wars with private equity firms.

We have seen examples of this previously when they missed out on Visma (acquired by KKR from Hg Capital et al), and TeamSystems (acquired by Hg Capital, sold by Bain).

The problem with my opening axiomatic comparison between Sage and PE as buyers, is that in my experience the opposite is generally the case. We normally expect that strategic acquirers (Sage, Cisco, Oracle, SAP etc) tend to be able to justify a higher price than PE firms (Hg, Bain, KKR etc).

The reasons for this are fairly simple and boil down to the ability of strategic acquirers, particularly if they are global companies, to gain significant strategic synergy, rather than the pure financial synergy and financial engineering that you would expect from the private equity firms. These synergies might include consolidation of sales, products, core technology which cannot be achieved by a pure financial acquirer.

Perhaps then we need to rethink the category that we place Sage into. They are clearly a global player in the SME software market with important share in all of the key markets (excluding Asia). However when we look under the bonnet what we find is that the federated nature of the set-up gives it some of the characteristics of a more "financial" player. Without going into detail it is clear that relative to other global tech players Sage is really a collection of leading domestic businesses. There is little or no genuine global product range (Sage ERP X3 is a recent attempt) and certainly no integrated global sales and marketing operation.

I want to make clear that this is by no means a criticism. This federated view of the world has long been a pillar of the Sage strategy, mainly resulting from an early realisation that in the realm of small business accounts and business software, local knowledge, tax and regulation is absolutely crucial and has lead to a strategy of acquiring local market leaders and implanting to the extent possible the Sage model of high recurring revenues. The main synergy arising is based on the success of increasing the percentage of acquired customers to long term maintenance contracts, somewhat different to the story you will see when an IBM, Oracle or SAP carries out an acquisition.

On the flip side this is also the main reason why Sage has only on a very limited basis made "technology" acquisitions. Again in the IBM/Oracle/SAP world acquiring technology is done on the basis of the leverage they can achieve by taking a proven technology and using the global sales distribution to greatly accelerate the growth in the acquired company. On the basis that Sage does not have a globally managed sales and marketing operation, there is little point in paying inflated prices for technology, as they have almost no way of leveraging the acquired technology. Given that a high percentage of these acquisitions do NOT yield the expected strategic returns, it follows that this is not necessarily a bad thing for Sage and its shareholders.

There is some chatter in the financial markets that Sage's institutional shareholders showed cool interest in the MYOB deal, notwithstanding that management had not had a chance to present the pro's and con's. If true, then this in itself is a little disappointing and suggests that the company and the new management leading it have some work to do to establish confidence in their ability to execute the type of deal that MYOB offered. (Some 21st century investor relations might help!)

If we are to follow the thesis that Sage is a private equity firm, then I would suggest that they do what the great PE investors do, which is to sell assets as well as acquire them (well over 100 since the IPO in 1989). I am sure that there are a couple of operating companies that could be identified for sale without wishing to state the obvious and this would go some way to showing that Sage understands that value creation can be achieved by realising assets as well as acquiring them.

There are few companies in the UK tech environment that have managed the type of success that Sage has!! Their discipline has been a great asset and although it means that they will miss out on deals like MYOB, it also means that they have almost never disappointed their shareholders.

The press has quoted numbers for Bain's MYOB offer as 13.5x EV/EBITDA on a trailing basis. Sage currently trades in London at less than 8x EV/EBITDA. What can Sage do to garner something close to that valuation. Holding companies typically trade at a discount. Perhaps Sage needs to find a way to break this image that it has gained over the years.

How then does the group management leverage this asset going forward to keep it growing in the absence of financially attractive acquisitions? Answers on a postcard!

Congratulations to Goldrock Israel Growth on IDIT

2011-08-02T05:14:00.000-04:00

Goldrock Israel Growth - our vintage 2009 growth equity fund in Israel - recently experienced its first exit with the sale of IDIT Technologies to Sapiens (Nasdaq: SPNS). Press article on the closing below:

Sapiens Closes Merger with FIS, IDIT

By Anthony O'Donnell

July 21, 2011

Sapiens International Corp. (Rehovot, Israel) has signed a definitive agreement to merge with Cardiff U.K. life and pensions core system provider FIS Software and Beit Dagan, Israel-based IDIT Technologies, a provider of property/casualty insurance solutions. The deal brings Sapiens' global customer base to over 70 and will result in revenues reaching $100 million in 2012 -- double the company's 2010 revenue -- asserts Sapiens CEO Roni Al-Dor.

The deal brings Sapiens into the ranks of very few vendors with established core systems across the life/annuities/pensions, property/casualty and reinsurance sectors and brings important synergies to the component companies, according to industry analysts.

FIS brings Sapiens what the vendor calls a comprehensive, enterprise-level solution for life, pension and annuity, with a global client base across the U.K., Europe, Asia Pacific and North America. IDIT offers a full suite of solutions, constituting a single, end-to-end component-based, integrated solution for the P&C insurance market, with a focus on Europe, the U.K., Australia and the rest of the Asia Pacific region.

"Sapiens' move shows that it is serious about building a portfolio of insurance core systems offerings, both for the U.S. and internationally, across life and P&C," comments Matthew Josefowitz, principal of New York-based research and advisory firm Novarica. "Sapiens' success following the [2010] acquisition of Harcase, which has good momentum based on a recent implementation [of the vendor's RapidSure solution] at Philadelphia Insurance Companies [Bala Cynwyd, Pa.], indicates that it should be able to leverage these new acquisitions well."

The proof will be in the pudding, as integration of acquired companies can bring unforeseen complexities, notes another industry observer who declines to comment on the record. In a statement Sapiens has characterized the deal as promising that the company will "become a major global insurance solutions provider." The company has struggled in the past to succeed in the insurance software market but is on a comeback trajectory. Sapiens has turned around from operational loss and significant debt to three years of profitability and a positive cash flow.

Sapiens' merger with FIS and IDIT will bring a very positive result to the organization as it is now constituted, says Donald Light, a San Francisco-based senior analyst with Celent (Boston). Light characterizes the deal as positioning Sapiens for significant presence and growth.

"We see IDIT as a very strong solution in the European and Middle Eastern markets, and Sapiens has been taking some good steps forward to gain traction in the North American market with the acquisition of Harcase and its RapidSure [P&C] solution," Light comments. "The larger revenue base will play very well in the North American market."

"From a North American insurance company point of view, an important issue is whether a vendor is going to be around in five or ten years," Light adds. "This new organization will have a very positive answer to those types of questions."

Regarding the question of whether Sapiens would introduce IDIT to North America or whether RapidSure would be the foundation of the vendor's P&C policy administration efforts in that region, Light commented, "That's a big road map question that they need to resolve and communicate."

Sapiens CEO Roni Al-Dor clarified the matter:

"RapidSure is the P&C product we will continue to offer for the NA market," Al-Dor says. "It has been well accepted and has a growing customer base. We will now be able to further enhance it with billing and claims that we will bring from IDIT and adjust to the NA market. For life and pensions, we will continue to further develop and enhance the FIS suite as it has been gaining market awareness and acceptance."

Its time to learn from our mistakes ...... or is it?!!!

2011-07-25T03:36:00.002-04:00

It seems to me that the credit rating agencies are try to "learn" from their past mistakes and spice up their tarnished public image …. But that they are barking up the wrong tree. Do you recall the notices from the rating agencies warning investors not to invest in the Fannies and Freddies of this world? No, neither do I. And these entities were assigned triple A status being backed by the full faith of Uncle Sam. How about the repeated warnings about Mortgage Backed Securities? Or the bonds of Lehman or AIG? Or sovereign debt of bankrupt countries?

So now lets learn from our mistakes. And repeatedly warn that the US faces a downgrade due to its debt ceiling fiasco. However, in attempting to being extra vigilant and super duper cautious, they clarified their warning of a downgrade by saying that their concerns would be lessened if the US reached some deal on the debt ceiling, or better yet, eliminated its self imposed debt limit altogether.

The US should have had a downgrade on their sheer quantities of debt a long time ago, and they should be lowered again if the ceiling is raised. The ceiling is there for a reason. To remove it altogether, is adding to the problem, rather than solving it. It is like adding wood rather than water to a burning hut. It should not lessen Moody's concerns, it should add to them.

The last 15 years have seen a bloated economy take on increasing amount of debt, live far beyond their means, all due to interest rates way below market level. Banks have been expanding the money supply based on accounting gimmicks, worsening the problem. We don't need the credit agencies coming to tell us that they would have lower concerns if the debt ceiling would be eliminated altogether. I cant see how that would solve any problem.

Sssshhhhh - did we just have good housing data?

2011-07-20T10:05:00.004-04:00

With the markets currently wholly dictated to by to-ings and fro-ings on several debt issues around the globe, its largely gone un-noticed that the weekly/macro data is still ongoing and can give us some clues as to what is going on with the economy.

Yesterday's release included the Building Permits and Construction starts data in the US. As a reminder, the building permits is a monthly data that shows the annualized number of permits for new construction projects issued by the Government. Housing Starts is also released monthly, and shows the annualized number of new homes that began construction in the given month. Yesterday, the June data was released. Housing permits: 624,000 and housing starts 629,000.

So why is that good news?

The graph above shows the housing permits and starts over the last 10 years. The 2006 peak, 2009 trough decline of 1.5 million was of epic proportions, in the sense that it was the 3rd worst decline on a population adjusted basis in the last 85 years. However, we have seemingly been bouncing along the bottom since then. At the peak, the housing sector was a major source of growth for the economy; the decline since then has contributed in no small part to the weak growth and high unemployment. However, with the passing of time, slowly but surely it is no longer a drag on the economy. Its not much of a growth booster either, but at least its not a drag. We have been bouncing along the bottom, sort of in neutral territory. .

Remembering though that being that the data is a monthly reading, it is quite "noisy". If we were to zoom in to the housing permits since the end of 2008, but averaging the monthly reading to give a quarterly reading to smooth out the noise, we would get the following graph:

We can see that after an improvement of 125,000 between the beginning of 2009 and the beginning of 2010, most of that gain (100,000) was subsequently given back in the following year. Analyzing post world war 2 housing recessions, it is fair to state that it takes about a year to a year and a half for the full effect of a housing decline to ripple its way through the rest of the economy. With the most recent decline ending in June 2010, it is also fair to say that we may well be close in time for that decline to have been fully felt. With yesterdays, strong readings, the Q2 2011 housing permits and starts, will average over 600,000 (the above graph as taken from the Fed's website ends Q1 2011). That would make it the best quarter for over a year.

True, it may be a one off wonder. However, the difference with the 2009 advance, is that this one is without the artificial stimulation of a housing credit stimulus.

Yields on a one way journey

2011-07-03T09:45:00.006-04:00

I have noted in previous posts that with the end of QE, the only way to go in terms of yields is up. The Fed was by far and away the dominant buyer of Tresuries, and in the absence of a different buyer to step up and take their place, price would undlubtedly fall (and yields rise).

Thats taking a look on the demand side. What about on the supply side? Since 16th May, total US debt has been flat at $14.345 billion, due to the restriction of the debt ceiling. Presumably, after much political fighting, the debt ceiling will be raised once more. At which time, the Treasury will not only issue as much debt as before, but massively more in the short term to catchup with the ongoing run rate. Ie it will need to plug a gap of over 2 months of accrued Tresaury issuance, and also to refund the retirement accounts it has been borrowing from to buy some more time.

SO we are looking at rising yields due to a decrease in demand, and a pretty hefty increase in supply.

We started seeing that last week, with the move in the 5 year the largest move in percentage points ...... EVER!!!

Perhaps the (temporary) rescue of Greece should convert the PIGS into PISA? I wonder who the A stands for ...... answers on a postcard!!!

Why now?

2011-06-26T14:16:00.002-04:00

There has got to be more to last weeks move by the IEA to release an additional 60 million barrels of oil than meets the eye. At the time of the announcement, WTI crude oil was sitting at about $95 – approximately 20% beneath its recent peak. A very big price adjustment had already been made. Had oil been trading at $120, it would be more understandable. Its only the 3rd time ever the IEA has tapped into their reserves: the first time was during the Gulf War, next was after hurricane Katrina, and now a third time. Why?

· One of the reasons given, is the production loss due to Libya. This doesn’t make much sense, as the story is a good couple of months old. Why act now? And in any event, currently the production lost due to Libya has been offset by the loss of demand from Japan post tsunami.
· Another proposed reason, is to clampdown on the speculative longs. Again, this is unlikely, as there were far more speculative longs a number of weeks ago when the price was $20 higher, and there was no “imminent” correction. Plus, any speculative longs out there must have nerves of steel, as the recent macro data is painting a picture of a world in which China, the US, Europe and Japan are all slowing down.
· It’s unlikely too that the reason is to stimulate the economy, be it the US, China or Europe. The 60 million barrels would last for about 16 hours of global consumption- hardly enough to make any sort of impact on global supply and lasting impact on price. Indeed, you will probably find China licking their lips in glee, at the ability to buy up every single one of those barrels for their own reserves.
· The IEA’s strategic reserves are specifically held for “emergency situations”. The IEA has no choice but to replenish the released reserves at some future time. I.e. additional price pressure at some future point.

In my mind, the release of the oil should be considered the equivalent of a global coordinated rate cut. In the long run, oil is an inflationary headwind but the elevated prices at the moment is more of a consumption tax and price shock. Last week’s events may merely be temporary) but I think they will serve a psychological purpose. However, the timing of the announcement, despite being odd as to the necessity, is also a little bit on the short sighted side. As reported 2 weeks ago http://goldrockthoughts.blogspot.com/2011/06/crude-to-march-higher.html
OPEC had their worst ever meeting, and there is already evidence of a strong rift within the OPEC camp. Since that meeting, Saudia Arabia have seemingly been cast into the sidelines, and OPEC themselves do not seem to consider the Saudi’s as a part of OPEC.

Where’s the evidence? OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA's move, and will provide a platform for OPEC members to express their disquiet over the stocks' release. However, OPEC's biggest player, Saudi Arabia, won't be present. There has to be at least the potential for the remaining OPEC countries to counteract the IEA’s move and cut output to offset the increased supply. A war in which OPEC cuts production and IEA offsets that with the release of strategic reserves, is not a situation that the global economy would like to get into right now. (Besides for China of course, who would happily build up its own strategic reserves).

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Greece

2011-06-20T09:26:00.003-04:00

One of our avid readers (hi Mum!) pointed out how we have failed to comment on the main story currently hitting all the headlines …. that of Greece. That is correct- probably the main reason is due to the fact that the news flowing out of Greece, is so fast, that I would have undoubtedly got to the end of my blogging, by which point I would have had to write a whole new posting due to an updated newsflash! Often, the latest revelation is a full 180° from the previous newsflash, and that is no doubt significantly contributing to the increasing volatility we have been privy to, with investors being whipsawed from one side to the other! Risk on, risk off, threat of contagion, restructurings, haircuts ….. isn’t life exciting! The other reason for not writing about Greece, is that I would undoubtedly have to disclose that my main ECONOMICS tutor was Greek, and what does that say about my knowledge of economics/finance?!!! Truth is, he was also my Football Manager ……. And he was a darn sight better at football than at Economics!!!

What is clear, is that Greece has run out of money, again, and needs some form of bailout/restructuring. So far, Europe, the ECB, IMF and everyone else has responded to the problem by throwing more money at Greece, allowing them to "buy time". Nobody has used the downright rude and ugly term of "insolvent", with "liquidity" being the preferred terminology. Lenders have been willing to lend more money, because the problem is one of liquidity. They have been willing to lend more money to banks and Governments. And Greece for their part, have not once admitted the need for default or restructuring, and so the banking sectors have not been forced to write down any more debt and/or need to raise more capital. A win win for everyone.

This would have bought some more time. Time is a fantastic healer. However, the issue was not one of liquidity, rather one of insolvency-debt problems are unlikely to be solved by taking on more debt. As a minimum, investors will require a credible plan for the economy to return to solvency to become willing to fund the banks and public debt of the troubled economy in question. This does not seem to be the case though, with the general Greek population revolting (in the other sense of the word), then one has to wonder where that credible solvency plan is going to come from. What is clear though, is that of those included around the negotiating table, nobody but nobody is "allowing" Greece to simply default. A solution will seemingly be found to prevent Greece from "legally" defaulting- even if it means some quick changes to EU law, account rules or ECB operation guidelines.

Whats the big deal with a Greek default? Why are they working so hard to prevent it? The Eurozone debt crises, is not especially extraordinary- it is merely another credit cycle, whereby debt extends beyong the capacity of consumers and economies. Debt then contracts as uncollectable debt gets written down, and bad debt is purged from the system. Throwing more money at Greece is merely extending and prolonging the problem?

Although a default is a default, and from a value point of view it doesn’t make any difference whether it is the debt of Greece, Portugal, Azerbaijan or the US that is written down, from an economic point of view, it certainly makes a difference. If Greece are thrown another lifeline, both Ireland and Portugal will operate under the assumption that in the future, they will also get another bailout should they need it. Markets know that, and hence speculation will continue on the "Who's next path", and cause investors to demand additional premiums, causing yields to rise. Eventually, the larger economies will be targeted too. How do I know you wont default either Spain? And that will cause even more serious problems, as who is left to bailout the larger and more important economies?

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

A contrarian view ......

2011-06-19T06:26:00.004-04:00

Interestingly, after my last blog entry http://goldrockthoughts.blogspot.com/2011/06/taking-look-at-bigger-picture.html I saw that the 10 day smooth moving average for the put/call ratio was at its highest it has been since March 2009 when the S&P put in its 666 low.

As a reminder, the put to call ratio is a popular contrarian indicator based upon the trading volumes of put options compared to call options. The ratio attempts to gauge the prevailing level of bullishness or bearishness in the market. Obviously, there is always a buyer for every seller, otherwise the market wouldn’t clear. On days when the major averages perform strongly, the number of calls bought typically far outweighs the number of puts, so the ratio tends to be small. On days of market weakness, fear prevails and the number of puts purchased is typically much higher. The daily put/call graph is highly erratic, however, a moving average that smoothes out the data is an excellent contrarian tool that can help you avoid getting caught up in the prevailing market sentiment.

A 1 day rise in the indicator is typically a sign that investors are temporarily seeking protection against a market decline, an extreme high in the moving average reveals a more comprehensive sentiment build-up. The put/call ratio hit its highest level in the last 2 and a half years, higher than this time last year when the market first plunged on Greece, and higher than March 2009 when the market hit the 666 low.

I always like mentioning the other side of the coin too, and so yes, this is a favored contrarian tool, never before has the put/call ratio been at such extreme levels DESPITE the multi-trillion safety net in the form of central banks, and just 2 weeks prior to the end of the Fed stimulus program. Contrarian tools are a good bet against conventional wisdom. However, with Greece/Europe on the verge of bankruptcy, perhaps conventional wisdom (continued declines in the markets) will prevail after all!!!

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Taking a look at the bigger picture ,,,,,,,

2011-06-15T09:22:00.008-04:00

I thought I’d take advantage of a quiet day in the office and catch up with some blogging ……. There’s not many people who can openly say that without fear of their employer giving them “the boot”- not only do I not have that fear, but I know I have my employer’s blessing ….. wow! I’d like to take a step back and see where we are. Not that one should only reflect on quieter days, but its certainly a good opportunity to do just that!

With the US markets currently down some 8% from the recent peak, with the Nasdaq in negative territory for the year and many other markets either share a similar fate or are fast approaching, there is certainly a lot of fear out there. What do we do now? Do we buy? Sell and wait for more certainty before getting back in? Wait and see? The first question that needs to be addressed is what sort of an investor am I? Many investors are currently wondering why they are not traders. The last decade has seen the markets go absolutely nowhere with a huge amount of volatility. Buy and hold has not worked in the main. One must remember though, that:

1. yes, your neighbor may have sold at the top, but if they didn’t get back in, then they are not necessarily better off.
2. You have many neighbors, many more of whom would have bought at the top ….
3. and it’s only the successful ones that will be shouting their stories!

Generally, trying to mix the trader and investor approaches does not work. If you would like some blend of the 2, you should allocate part of your money to each method as the rules and psychology are completely different. The trader MUST NOT care about fundamental values- his timeframe is far too short. The investor has to trade on fundamentals, without getting caught up by the emotive side. Indeed, the investor will typically be buying the stocks that are hated by the market in general and traders in particular.

The Markets have had a very negative tone over the last few weeks. This was to be expected. In Q1:
· Cyclical indicators reached historically high levels, and was tracking well above its normal level for the stage of recovery we were at.
· Consumer confidence was dented by a whole host of problems.
· High commodity prices were denting the consumers and putting corporate margins under pressure, but the weak consumer meant that companies were unable to fully pass on the costs.
· Wage costs are rising sharply in Emerging Markets.
· Productivity growth is unlikely to be strong due to the lack of investment over the last 3 years.
· Forecasts, which on the whole had been based on continued positive margin expansion was already at the highest since 1956, despite a tepid economy and surging input costs.
· Emerging Market Central banks have started on the monetary tightening route.

And we haven’t even begun to talk about outside factors, such as the end to QE2 and Fed induced liquidity, or the sovereign debt problems that have plagued us for 18 months and show no signs of letting up, or geopolitical tension in the Middle East/Africa, or natural disasters/tsunamis and their repercussions on global demand/supply, or a housing market is bobbing along at the very bottom, with 1 in 4 Americans in negative equity with potentially much more downside, or even the still weak labor market.

There is no doubt about it, the economy is definitely cooling off, as it was this time last year. However, now it is different. Last year, Mr Bernanke through the market a lifeline with a new round of liquidity expansion. Last week however, he delivered an even more sobering outlook, but this time without the lifeline (just yet anyway- I mentioned here http://goldrockthoughts.blogspot.com/2011/06/what-goes-up-must-come-down.html that the stock market, and Fed, and just about everyone in between is seemingly caught in a catch 22 situation: QE3 is seemingly being priced in by stocks ...... however for QE3 to actually happen, stocks would have to fall approximately 15-20% from their current elevated levels!!! I feel that QE3 was the main factor in propping up the market to such an elevated level, if there is no hint from the next Fed meeting (next week) as to the onset of QE3, we may be in for an interesting market- which of course would give the Fed the ammo needed for QE3!!!

Another interesting observation is that whilst the economists have been cutting their numbers, the equity analysts have yet to follow suit. If they do, then suddenly market valuations are not as compelling as they seemed.

All this sounds very bearish, and one can well understand the want/need to take some money off the table and wait and see. Weakness in the economic data was expected. In addition, the supply chain disruptions from Japan and consumer cutbacks from higher oil, was also expected, with consensus opinion that the tepid recovery will continue after these aberrations. There is always the worry though that the economic weakness is the sign of something much worse. This currently seems quite an extreme view, as even the cautious camp are predicting a slower rate of growth rather than an outright recession.

There are some real doom and gloomers too, who want to extrapolate to another lost decade plus. For me, the last decade was an exception. It started where demand and sales had been brought forward over fears of Y2k. This was an exceptional and unprecedented boom, which was only intensified by the onset of the internet. The decade ended with a financial crises of unprecedented proportions. We started with an atypical peak, and ended with an atypical trough.

For the investors out there, I would take advantage of the fear. Though I would imagine that there is still some more downside, I feel like the slowing economy story is fairly reflected in prices. Over the course of a business cycle, stocks are undervalued and trading below historic norms. Yes, China, and other Emerging countries are tightening, but this is a positive. They have already been appropriately tightening for a year now, and seem to be successfully navigating growth with manageable inflation. Incremental Emerging Market consumer spending eclipsed US consumer spending several years ago, with the Emerging Market consumer to drive global growth for years to come. And there are already indications that even those who have been hardest hit by the Japanese earthquake are almost operating close to full production.

Over the past few months, I have been saying how the market is not exciting, the risk reward is not compelling. The markets are now at their most compelling, valuation wise. Despite expecting some more down side, I would begin to close underweights and for the investors to build positions. The markets themselves seem quite healthy, in the sense of strong balance sheets, leverage as low as it has been for the last 20 years, banks more willing to lend, buisness climate indicators still close to their highs. By all means trade the fear, trade the exuberance. But don’t get caught up in it yourself. Stick to your system- if everything is within normal ranges, then there is no reason for alarm. And also be wary of the news. The news is about problems and potential disasters. If it’s the talk of the town, then it is already reflected in market prices. Look for the unexpected, or if something unusual is happening.

Happy Investing/trading!!!

For the record, S&P 500 currently at 1267!

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

More Serious disclaimer:

The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Thank you Stanley!!

2011-06-12T06:18:00.002-04:00

I note that Stanley Fischer has put himself forward as a candidate for the top-job at the IMF.

As opposed to some of the Israeli papers who consider this to be almost treasonable, that he leave the job in the middle of the second term, I would like to wish him the best of luck!!

What an honour it would be if the next IMF head came direct from the Bank of Israel.

By the way, it ought not need saying, but he has done a great job as Governor and I thank him for that!!

Let's be a little gracious to our public servants (at least on the odd occasion when they do they job right!!)

Debt. Debt & more debt

2011-06-12T05:35:00.004-04:00

The total amount of mortgage debt peaked in 2008 at $14.6 trillion, whilst the total amount of consumer debt, comprising of autoloans, credit card and student debt, peaked at $2.6 trillion during the same year. Today, mortgage debt outstanding stands at $13.8 trillion, while consumer debt stands at $2.4 trillion. WOHOO- the consumer has been delevaeraging ..... over the last 3 years outstanding consumer debt has fallen buy $1 trillion. If the story ended there, that would be great. However, that would require us to ignore the "trivial" fact that the banks have written off significantly more than $1 trillion in non performing loans.

The lower the debt/GDP ratio, the more powerful and stable the gains in GDP growth, as the growth in GDP can increasingly be financed within your own means, without resorting to outside debt. Not all debt is bad, but increasingly relying on it certainly is. Purchasing on debt is very much "short term gain for long term pain", both on the micro and macro level. Once the purchase has been made, and the loan taken out, the investor/purchaser has a short term benefit (as does the economy); however he has subjugated himself to a monthly installment for a (typically) depreciating asset.

The irony is, that the longer the scenrio plays out, and the more frequently people live out of their means, the more debt is taken on, and the more leveraged one becomes. Leverage increases as the the level of poorness increases in tandem. The following graph from the St Louis's Fed shows that the phenomena is not merely one unique to the individual consumer, it is true on a national level too:

Deleveraging is a painful process. It is a long, and slow drawn out process. But with the Fed adding an debt to the tune of an additional $7 trillion to the nation's budget sheet since 2008, the problem is not going anytime soon. And with interest rates at all time lows, and can only go up from here, how is the debt to be serviced?

Gordon Gekko is not all bad!

2011-06-12T04:14:00.004-04:00

I read Sophie Shulman's article this morning in Calcalist. I would have to say that it was not impressed. On the other hand Michael Eisenberg's blog put a smile on my face. He wrote earlier this week in response to Ze'ev Holtzman's somewhat unfortunate comments on the Israeli VC industry .

There is much discussion about the state of the VC market in Israel and whether it is "good" or "bad." In addition there is much popular debate about the concentration within the Israeli market of too many assets and businesses controlled by a small number of "tycoons."

I personally feel incredibly excited about the developments within the Israeli market, both on a wider level and also from my own personal perspective as an innovation driven investor.

Shulman complains that Gordon Gekko, the infamous corporate raider characterized in the two "Wall Street" films, is coming to town, with the obvious negative implication that this implies. The fact that major global financial investors in the form of their private equity arms are making investments in Israel is a real sign that the market here is growing and maturing. The fact that top investors, many mentioned by Michael, like Silver Lake, Bessemer, Battery, Greylock and others are building teams or dedicating resource to the Israeli economy is a GREAT sign that what we have what to offer the global markets is attractive to the highest quality investors globally.

As I have mentioned elsewhere the domestic Israeli VC industry will have to grow up and understand they are not competing with their peers in Tel Aviv and Herzliya, but their global peers at the best firms on the planet. I see this as a completely optimistic development rather than the opposite.

Their are several obvious implications:

at a micro level, the Israeli economy is maturing, but will need to continue to aggressively innovate with technology and upgrade its people to continue to be attractive to both strategic and financial investors as the 21st century develops
the local institutional funders (VC funds, PE funds, public investors etc) will need to adapt their business models as the local and global trends move dynamically. Competing for capital on a global scale is challenging and only the best will survive.
Recycling of human and financial capital is a healthy process, crucial in enabling the economy to build and rebuild in the most efficient way possible. The continued entry of leading global investors will accelerate this process and should be greeted with open arms!
Finally Apax, Citi, Permira, Francisco, Bessemer, Battery et al entering the Israeli market will keep the "usual suspects" (Dankner, Teshuva, Arison, Ofer etc) honest by increasing the financial competition for attractive Israeli assets.

We should be shouting from the rooftops about Israel as a great destination for the world's capital, at the same time as investing time, thought and money into readying ourselves for the challenges ahead. The financial community MUST mature alongside real industry, in order to provide relevant and financially efficient solutions for company building. It's not rocket science, but does require us to stop with the constant self-criticism, and replace it with a dynamic and realistic assessment of what is required to move forward.

Happy hunting!!

Crude to march higher?

2011-06-09T05:12:00.001-04:00

•Opec had “one of its worst meetings ….. ever” in the words of the Saudi Oil Minister. The cartel agreed to disagree on the state of the market after the Saudi’s failed to convince the others to raise production to meet the higher prices. The Saudi’s had proposed raising production by 1.5 million barrels/day.
•Prices jumped as a result, which is not surprising, but its unlikely to lead to a sustained push higher (just yet). Its more likely to be a short-lived move:
1.Demand is slowing, and the market is already marginally oversupplied.
2.Saudia Arabia essentially holds “a put option” and are now free to increase production if prices do rise too fast, without worrying that OPEC will be on top of them.
3.The IEA (International Energy Agency) has a formidable stockpile and has officially said it is prepared to supply additional barrels if needed.I wouldn’t jump into crude just yet …..

-------------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

Could there finally be a ray of sunshine within Construction?

2011-06-07T03:54:00.003-04:00

Although payroll job growth is pretty poor considering the tremendous amount of slack in the economy, with unemployment at 9.1%, job growth is significantly better year to date than 2010.

2010 Jan - May nonfarm payrolls: 304,000
2011 Jan - May nonfarm payrolls: 783,000
2010 total nonfarm payrolls: 955,000

Unbelievably, one of the reasons for the improvement in 2011 is due to ....... CONSTRUCTION!!!

For the first time since 2005, residential construction employment will probably be positive in 2011. Just eliminating the drag will help. Also residential investment will probably make a positive contribution to GDP growth for the first time since 2005.

------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

So what is QE?

2011-06-05T09:47:00.004-04:00

Many are under the impression that with the end of the Fed's Treasury purchases, the Fed will not be pumping more money into the economy and that constitutes a monetary "tightening". I believe that this way of thinking is incorrect. As interest rates were lowered, monetary conditions could adequately be described as "loosening". As the Fed continued to keep the interest rate at a very low level, the policy could aptly be described as a continued easy monetary policy.

However, it is at this point that the Fed embarked on their quantitative easing policy. The traditional rate cutting had already taken its course, and then the Fed started pumping the additional liquidity. Hence the cessation of the Treasury purchases by the Fed, would not be described as the end of easy money. Interest rates are at historic lows, and monetary tightening will not begin until the Fed starts unloading its balance sheet.

Another misconception is as to the way QE helps the economy. Fed buys treasuries, the extra money finds its way into the economy. Yes? NO. The Fed purchases Treasuries from a dealer, whose ability to then make other purchases allowing the additional money to finds its way into the economy has practically no bearing on the extra "money" from the Fed. If the dealer wished to purchase additional oil futures, or stock futures, he could do so with very little margin. The transaction from the Fed has no effect.

What it does do is it increases the monetary base, and through the money creation effect, this has the ability to add new money through additional bank lending. With the current reserve requirement 10%, $600 billion has the potential to add $6 trillion in new money. However, either because the banks have been so pre-occupied in repairing their own balance sheets, or the public has not been willing to take on bank loans due to the vulnerability of the economy, the banks have not been lending the extra potential money into the economy.

What goes up ....... must come down!

2011-06-02T03:01:00.004-04:00

Not been the best few days in terms of economic data coming out of the States:

Consumer Confidence: pretty much non existant! Consumer confidence is now lower than at any point in recent history, including all of the previous disasters, financial crises and tragedies, including the 87 crash, the collapse of Lehman Brothers and 9/11. And dont forget the re-election campaign kicks off in earnest, with the USA full of unhappy and unconfident people! QE3 anyone?!!!

ADP Non farm employment: a downward revised figure of 177k for April was followed by a puny 38k for May, on expectations of 178k. A deceleration in employment, while disappointing, is not entirely surprising. In the first quarter, GDP grew at only a 1.8% rate and only about 2¼% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.

ISM Manufacturing: Lowest reading since September 2009, the first reading below 60 in 2011. Granted, 60 is the level at which the ISM typically peaks, but the worry is the sheer slide towards a reading of 50, below which is in contraction mode once more.

Downgrades: As expected, the "experts" are downgrading their view of the economy, with Goldman Sachs, Morgan Stanley as well as JP Morgan (TWICE IN ONE WEEK!) all downgrading the US economy.

Bank Stress Tests: Then we've had the news that the 2nd round of stress tests for European banks has been delayed because of "errors" and "unrealistic assumptions". How comforting! Especially since the whole point of the Stress test round 2 was to instill confidence in the European banks!!!

The stock market, and Fed, and just about everyone in between is seemingly caught in a catch 22 situation: QE3 is seemingly being priced in by stocks ...... however for QE3 to actually happen, stocks would have to fall approximately 15-20% from their current elevated levels!!!

-------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

The export corporate profit inverse relationship

2011-05-31T15:54:00.003-04:00

With corporate profits continuing their ongoing surge- currently at the highest since the 1950's, it is interesting to note the inverse correlation with next exports & services from the US. Perish the thought should this correlation hold true if they stop partying over creating "rescue packages" for the Eurozone. The Dollar would rise due to the frailty of the Eurozone, leaving US exports on a long journey south ......

Foreign holdings of US Treasuries declines by 2nd largest amount EVER

2011-05-30T02:46:00.003-04:00

The US balance sheet hit a new record last week, a mere $2.779 trillion. Most worryingly is that the Treasury securities held in custodial accounts at the Fed, which is considered to be the best representation of real time foreign holdings of US treasuries, fell by the largest amount in 4 years, the 2nd largest decline in history. It was topped only by the decline of the week ending 15th August 2007, which is when the world was ending!

-------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

US to default?

2011-05-27T01:41:00.004-04:00

With the world and their Mother watching the European sovereign debt drama unfold with abated breath, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt. Risk of a U.S. default can be seen in the credit default swap (CDS) market. 1 year U.S. CDS has risen from 23 to 37 or by 60% in the last six trading days (see chart).

The orange line is the US CDS premia, yellow is Japan and pink is the UK.

In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. Whereas there is normally minimal trade in the US CDS market, the norm is a handful of trades (sometimes as low as one), last week saw investors placing 135 trades in U.S. CDS’s. Just to compare, there were 360 CDS trades on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy. A US default would not be “catastrophic” it would likely lead to a very sharp fall in the U.S. dollar, (especially versus the hard currency, collateral and monetary asset that is gold), sharp fall in U.S. bonds and sharply higher interest rates. This has the potential to create another systemic crisis involving sovereign nations and banks globally and could lead to a deep recession. Indeed, it would not be unfathomable to suggest that the S&P “warning” of US debt was a mere warning precisely because it was the US in question. Anyone else would have resulted in a downgrade of 3 notches at least!-----------------------------------------------------------------------------------------------------------------
LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

US GDP revision & implications for growth

2011-05-27T01:19:00.002-04:00

The US GDP non-revision for Q1 of 1.8% (expectations of a rise to 2.1%) would not mean anything if you merely read the headline. However, an investigation of the composition reveals a slower trajectory growth.

· Surprising Downward Revision to PCE, Points to Weaker Aggregate Demand- the most disappointing revision was the PCE, which was revised down from 2.7% to 2.2%. The revision was spread across the board- durables, non durables and services. Consumption spending is a core component of GDP, and the consumer is seemingly EVEN weaker than thought.
· Upward Revision to Inventories Points to Lower Inventory Building Ahead:- the stronger inventory build is likely at the expense of coming quarters, in particular Q2.
· Net GDP Revision Points to a Slower Trajectory of Growth than Apparent Earlier

The Fed’s current 2011 growth forecast of 3.1%- 3.3% will undoubtedly be forecasted down at some stage – not only was Q1 GDP growth NOT revised up as expected, the composition indicates that Q2 will be weaker than anticipated.

-----------------------------------------------------------------------------------------------------------------
LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!

Israel - not only about tech, its about quality innovation

2011-05-25T15:42:00.002-04:00

Congratulations to SodaStream for a fantastic performance the past 12 months and continuing success. But now you have officially made it!

You are praised and picked by Cramer!

Professor Stanley Fischer on Israel & The World Economy

2010-12-06T11:14:00.001-05:00

Below are notes from a friend of a friend from the meeting with Professor Stanley Fischer on Israel & The World Economy on December 2, 2010

Voted Central Banker of the year.
Traditionally he gives economic update this time each year.
Israel got through global crisis relatively well. Countries which didn’t have financial crisis got through the global slow down much better than those that did have financial crisis.
No Israeli banks had any substantial financial problems.
Israeli economy outlook. Key questions to ask are; what are interest rates (NY & London) doing in countries they have key business and export relationships with and what are growth rates.
2011 advanced economies growth expectation below 2010 modestly and for 2012 slightly better.
OECD looks for 8% growth in trade 2011 & 2012, they are consensus, no opinion on their accuracy just a useful reference point.
70% of Israel’s exports are to Europe & US, export nearly half of their GDP.
Largest level of unemployment going into recession at 5.9% and then unemployment went to 8% versus their fear it would hit 9%.
Having more foreign reserves is better than having too few reserves. Countries with higher reserve levels did better than countries with lower reserve levels. He increased reserve levels from $22 bil (which was too low) up to $70 bil (which is high for a country with a GDP of $210 bil) but where he wants it to be. It was funded with borrowings at a cost of 2%, higher than the rates it earns on its dollars assets but is the position he wants to have. He makes huge “investment bets”. Deliberately underweighted US dollar then massively overweighted it.
Government cut spending from 51% of GDP down to 42% of GDP. Needed to address structural problems by changing its budget. Cut social services and entitlements. Went into recession with a budget that wouldn’t permit increased spending without commensurate expense reductions.
Gross public debt was 100% of GDP in 2003 and as of this year is now below 80%.
Israeli’s FX policy is to intervene in the market in the case of fluctuations in the exchange rate that do not match fundamental underlying economic forces.
“Macro-prudential measures” hasn’t reached popular vernacular as a phrase yet, but will. Revisions made on an institution by institution basis without sufficient awareness of systemic consequences. Moves seem prudent on a stand alone basis often are not.
Australia housing prices up 250% in this decade. Israel recently, after having been flat, up 40%. The textbook response to a crisis is to reduce interest rates. It has consequences and the result is cheaper R/E affordability and as a result housing price inflation. Major crisis are often tied to excess leverage and speculation.
Israel is not smarter than other countries. Israeli banks went bust 25 years ago and had to be bailed out. We were determined not to repeat that mistake. However, the cumulative memory is about 25 years so I hope they don’t repeat that mistake now. Throughout the crisis the Israeli bank examiner made the banks continuously increase bank capital. They focused on Basil III and bank capital is presently up to14%.
They spend 7 ½ % of GDP on defense spending, almost double the level of the US.
Less worried than others about QE2. Doesn’t think every country can set their exchange rates versus the dollar. Sees this as perfectly rational in a world where interest rates are zero. Prefers the policy to be whatever drives US economic growth, that is the key variable. There is a problem with capital flows into EM countries, no countries want to use currency controls, funds chasing growth but currency appreciation is a normal part of the adjustment process.
By not pegging the Israelis shekel (currency) to the dollar he preserves fiscal flexibility.
He thinks many hedge funds act in concert. Their attacks on sovereign debt, CDS and other asset classes should be eliminated. He doesn’t mind people, even internet kids making hundreds of millions of dollars personally. Thinks personal financial reward should be tied to real economic growth and job creation.
In 1980 he sold all of Israel’s gold at $800/oz. Gold hasn’t yet doubled since then, so it was a good sale, he doesn’t own any and it has underperformed his other capital allocation decisions.

The Battle between local and "global" advertising: back story of Google & Groupon

2010-12-06T03:52:00.009-05:00

There is has been a challenge since the beginning of the advertising industry - how to enable small, local businesses to advertise to its potential customers in a focused and cost effective way. With traditional advertising media - TV, radio & billboard - the media creation and "real estate" costs combine to a prohibitive expense for local businesses, where potential sales are a fraction of products that sell on a larger scale. Take for example a local restaurant versus a restaurant chain. A local restaurant can only rely on word of mouth and repeat customers for marketing; perhaps some flyers or cheap, local newspaper ads. But TV, radio & billboard is out of the question. The ROI is never feasible.

Not only is cost a key concern on successful local advertising, but business model as well. I remember in my former position, I was with a venture fund that invested in a digital signage company that developed a unique technology that was suitable for the digital billboard market, during the time when large format LED signs were about $1m a piece. One of the main ideas was to enable changing static images - so the billboard owner could sell time slots like TV & radio into the billboard market. It was a difficult implementation, mainly due to business model. And today, local businesses still do not have a cost effective billboard media solution. In theory, digital signage could provide a billboard solution to local businesses, but in practice it has yet to be implemented, largely due to a lack of an acceptable business model of the billboard owners.

Enter the internet. As with a number of industries, the Internet turned advertising on its head. Already during 2005 and 2006, when local internet advertising on the web was strong, many industry experts realized a unique trend - local internet advertising was dramatically more valuable and thus more expensive for the advertiser. A cost per click (CPC) for a local business was (and is) significantly higher than for a Coca Cola ad, for example, on CNN. Of course, a key issue is the number of potential clicks and the Web sites that are relevant for the local advertisers. So CNN is a large publisher with millions of unique visitors. Therefore, statistically, the site will experience a significant amount of clicks - more than a local city newspaper Web site, for example. So Coca Cola will pay a lot more on the advertising in absolute terms, but a lot less on the CPC. Additionally, the Internet can track real performance and ROI, as opposed to TV, radio and billboard.

Web sites like Yelp provide local search for specific city markets. They provide an optimal platform for local businesses to address their core audience – the local consumers. The site adds in social tools, consumer reviews, and walla – a super valuable search and CPC for businesses that have historically had difficulty advertising. The irony is that the local businesses cannot afford high quality advertising...but on the internet they pay much more than the big advertisers per click.

Google actually tried to buy Yelp a year ago for about $500m and failed. Since Google is mainly in the business of broad, global advertising, Yelp is quite complementary. And since they are still a separate company from Google, Yelp, without a doubt takes away business from Google. And the business model is the same. Local businesses buy attractive, performance tracking CPCs.

Most recently, Google tried to get into local business thinking once again via the attempt to acquire Groupon for a whopping $6 BILLION. Google failed on this acquisition as well. Groupon has a very cool business for locals. It offers on Groupon (coupon) per day per local market in which it operates. Deep discounts have always been a successful advertising approach. And this is exactly what Groupon is doing. Groupon is essentially offering local businesses the ability to drive consumers to buy their products; initially for cheap. There are already an estimated 500 Groupon like services on the web across the globe, since it is naturally a local service. Groupon is 4 to 5 times the size of the next competitor, so Google wants the market leader.

It seems that Google was late twice on the local ad front and missed out on both Yelp and Groupon.

The bottom line on the analysis here is that the internet can provide measurable performance driven advertising. Coupled with contextual tools – where the site understands the users’ location and current interests – local advertisers have a very valuable medium. And what Groupon has proven, is that local advertisers need a local, ROI driven audience coupled with a creative business model.

As a final comment / question, I view Yelp as a super valuable asset and the property should essentially be one large, global internet property. Groupon, on the other hand, can easily be a service offered by hundreds of local web properties across the globe. I am not sure if there is an intrinsic value in having one large global Groupon. So if Groupon goes on the M&A hunt, I don’t believe that the company’s value will increase more than any acquisition price. So I think that it may be good for Google that Groupon turned them down. If I was Google, I would go after Yelp once again. What do you think?

Leviev to Float in Poland

2010-11-10T02:26:00.003-05:00

I do not normally discuss matters that relate to real estate. I am not going to depart from this custom here, even though the company in question is in the real estate business.

Lev Leviev has several public companies trading on different international stock exchanges, and also owns private companies. This in of itself is innocent enough.

What complicates matters (for me at least) is the fact that there is overlap between these various entities, and with particular reference to his private company interests, which are of course not transparent to the shareholders in the public companies.

Sadly, I am not the naive guy I once was! This leads me to the possibly cynical, but at best skeptical position, whereby I do not have full trust in managers/owners of businesses who have one business for the shareholders and a separate private business for themselves. Unfortunately there can be slips leading to a serious conflict of interest between someone like Leviev and the shareholders in his various public entities.

I add to the above fact that Africa Israel, his main public company, listed in Israel, is still very much in the overhang period following one of the largest debt restructuring stories in Israel's history.

It only partially surprises me that he plans to IPO one of his vehicles on the Polish stock exchange.

I would strongly urge Caveat Emptor (buyer beware) - aligning management, controlling and passive shareholders interests is one of the best ways of avoiding the types of mess that we have seen unfold during the recent financial and real estate meltdown!

Private Equity - Is the sector waking up?

2010-09-12T08:51:00.003-04:00

http://blogs.forbes.com/streettalk/2010/01/11/time-to-invest-in-private-equity/

PNMsoft is Cool!

2010-04-21T07:14:00.005-04:00

Congrats to our buddies at PNMsoft who have been selected as a "Cool Vendor" by Gartner.

They received this accolade for work that they have been doing assisting BPO's improve their efficiency working with their customers.

In general Gartner commented on the trend that they see of agile and flexible BPM vendors who can create and deliver solutions with tangible gains in a rapid timeframe to their customers in a way the legacy and "heavier" products cannot manage.

It's a Fine Line!

2010-04-21T06:57:00.004-04:00

Many have already commented on the decision made by Brian Davis , the British golfer who lost the Verizon Heritage by drawing attention to illegally touching some reeds during his back swing. Apparently this is in contravention of the rules, and having "owned up" lost strokes and as result could not win the event.

How easy would it have been from Mr Davis to have simply ignored the infringement and gone on to challenge on he final green for the tournament. It is indeed a fine line between doing the right thing or not.

We all have in our daily lives, whether it is family and personal or business and professional, occasions when we have the choice to make between the right or moral thing to do and avoiding the choice. Often we persuade ourselves that it is no big deal, just a white lie, or as I have often heard a victim-less crime!

In this age of cynicism and the ends seemingly always justifying the means there ought to be an award from Brian Davis, and not just from within the context of sports (although there are many in sports who could take a lesson.)

Perhaps the most impressive part of the episode is the matter of fact way that Davis dealt with the decision. For him this was the obvious and natural way to behave. He did not make calculations about what benefit he might make in PR or other terms.

I would like to add my voice to those who have shown their admiration and encourage all those that we are in business with (including ourselves) to take this as an example of how to re-build confidence in society and one another!

I need not tell you who will be getting my vote for Sports Personality of the Year in the coming year!

Its the P&L, stupid!

2010-03-17T10:43:00.004-04:00

I hope that nobody gets offended by this blog! If they do I apologise in advance!

I picked this tweet up which was written by a very respected VC partner and recommended by another very respected VC partner.

I thought - great, I will get some insight from some people who have been in this business longer than me with great track record. What you will find if you read the article is a very basic look at the elements that make up a company's profit & loss account.

I, of course, accept that this is a very important part of any business. The surprising part about the article was the implied assumption that the readers are not very well versed in the various parts of the P&L.

There has been much debate recently about the VC industry and the its business model. I think that also what needs to be debated is the type of mind-set that VC's have created amongst management of the companies that they back.

At Goldrock, we have recently seen a number of companies that have made the initial sales breakthrough reaching several million $'s in sales. However in too many cases this has been at the expense of too much equity capital that has been invested over the previous years, leaving the company in what I call "cap-table trap"!

If managers are used to going back to their VC "sugar daddy" every year for more equity money then they have little or no incentive to worry about basic things like receivables and payables (for the un-initiated, the money a company is owed or owes its trading partners).

In the long term all of us on the investing side need to pay attention to the capital efficiency of our investing models, whether it is at the sharp end of the VC world or the less dramatic world of growth investing or private equity. If we do not, our LP's will not find the justification for supporting this type of investing.

The debate on the VC/PE model must continues, but must also drive everyone on the gravy train to be honest about the way they are achieving returns and the true risks taken in order to make them.

10 years ago today...

2010-03-08T04:33:00.002-05:00

Thanks to Richard Holway who picked up on the fact that today is the 10th anniversary of the UK tech market peak, and that NASDAQ will follow shortly afterwards! Please see his article to see the last ten years of tech stock market performance in perspective - "10 Years Ago Today...."

Fragmenting the Mobile Device App Store Concept

2010-03-05T04:37:00.000-05:00

This was a major theme throughout the event. The iPhone app store is viewed as the runaway leader in application downloads and sales. Frankly, I believe it is a definition issue, since more than 70% of paid applications are games. If that is true, than the operators have historically had a decent business prior to the iPhone. But off-deck activities, iPhone kills.

Android expectations

Operators view the Android as a real opportunity for them to get in the game of off-deck app stores. The rapid growth thus far of Android and the clear expectations of further dominance have the operators scrambling to put together an android offering for subscribers to try and get a cut out of the business. Growth is clear, since devices are being launched with android and more than 20 million will be in the market in 2010 alone. Google still has not created commitments with operators, but I believe they will, since it is either that or expecting users to create new billing relationships directly with Google. That will be a major barrier for paid content. But they are trying to create their own silo – like apple, with a focus on cloud computing (PC / mobile crossing) and trying to create a more PC like experience with android (flash, etc.). This may be their approach – and may mimic the PC market – where all Google content and services are free and the revenue is from advertising. Google just acquired Admob from $750m to manage the mobile ad business for them. The mobile ad market is a challenging concept, and they know it. So it seems they are keeping their options open.

WAC

To battle Apple, the world’s largest mobile operators have joined forces to launch an open international applications platform. The so-called ‘Wholesale Applications Community’ (WAC) will include the following operators: America Movil, AT&T, Bharti Airtel, China Unicom, Deutsche Telekom, KT, mobilkom Austria, MTN Group, NTT Docomo, Orange, Orascom Telecom, Telecom Italia, Telefonica, Telenor, TeliaSonera, SingTel, SK Telecom, Sprint, VimpelCom, WIND, Vodafone, China Mobile, SoftBank and Verizon Wireless. The group serves a combined 3 billion mobile customers across the globe. LG, Samsung and Sony Ericsson pledged support. The idea is to allow app developers to only need to develop for one standard environment, and not require development per device support. In addition, the operators want a cut of the app market and strengthen their brand. Not sure if it is going to work. Frankly, most people I spoke with (including people from operators on the above list) basically laughed at it. Operators generally demand consensus on industry decisions. So to assume 24 operators can all agree on anything is a bit of a joke.

Ericsson

Ericsson, which is the world's largest mobile infrastructure supplier, has launched a white label app store as a service to mobile operators. The company claims it is already in discussions with a number of operators regarding them using the new service, known as ‘eStore.’ eStore was targeted for use on any device, not just a select few and to create rev share deals for the operators and for Ericsson. Important to note, they are NOT part of the WAC initiative, so unclear where they will fit it, or if the Ericsson + WAC + iPhone + android + RIM + Windows + OVI + Samsung +++++ will actually help or hinder the market fragmentation and confusion.

Samsung

Samsung is hedging itself all over. 10 millio android devices for 2010, 5 million Bada devices, they will launch Windows devices at the end of the year, they are supporting the WAC initiative, etc. The only real definitive issue that they have said was that they are no longer launching Symbian devices. This basically means to me that they are concerned about device sales and not content sales. They may very well emerge as the premier smartphone brand with devices addressing all types of users in all types of markets. In addition, they are backing (my theory of) the mobile operators’ interest to create a very fragmented market to minimize the iPhone control over the market.

Nokia OVI (sucks)

There big announcement – they launched OVI maps. There biggest download category is personalization themes. As my daughter would say, “that is sooooooooo 2002!” They are a few years behind the industry. OVI will also serve the new MeeGo OS, but OVI is thus far a dismal failure. Nokia is still the largest and best feature phone company in the world, but they are clearly lagging in the smartphone industry, which is the main driver to data services. (I saw many Europeans with either an iPhone or Blackberry (or both!) and a Nokia for talking – 3 devices J).

Shopping mall approach (Telstra and others)

There was murmuring about operators acting like malls, while OS and device companies will provide the stores within the malls. Only Telstra from Australia ans some Far Eastern operators viewed it as a real option. I believe that it is somewhat compelling, as long as the mall will enable the app developers to have one development requirement, and the mall will prepare the content per store with standards (similar to WAC). The truth is WAC may morph into a mall.

The New View on Mobile Device Operating Systems

2010-03-05T04:35:00.001-05:00

Historically, the device design was viewed as the most important element for the consumer. Colors, buttons, curves, screen size, flip, sliders, etc. They then focused much effort on identifying the objective consumer interest. First, they focused on creating small devices, then thin devices – which were much more successful (i.e. the MOTO RAZR and others). This has been the story, until less than 2 years ago.

Today, with the dominance of BlackBerry in business and iPhone in consumer markets, the industry has realized that operating systems are as important, if not more important, than device design; and using ODMs or in-house teams from device companies to develop smartphone OSs is no longer an option.

iPhone Fears

iPhone came onto the scene a year and a half ago. They are now the most sold single device in the market (40m+). I noticed 4 interesting things about the iPhone at the event that brought me to the conclusion that there is a major fear in the industry:

Operator complaints – speaking to a couple of operators and hearing some sessions, there were generally 3 reactions to iPhone:

1) Some operators felt that iPhone was literally stealing from their infrastructure and customers to make a lot of money without paying a toll.

2) Some operators felt that with direct or indirect coercion, the operator had no choice but to offer the iPhone to their subscribers.

3) Some operators already view themselves as a network pipe and view the iPhone as a way to drastically increase data services and to just focus on gaining more data traffic.

Developer complaints – I heard a number of application developers complaining about the iPhone walled garden, no flash, VoIP being blocked, etc – but they are all focusing on the iPhone even though they have a choice. Everyone has to play by Apple’s rules.

Apple didn’t show up. My conclusion here was that Apple views themselves as an industry killer. Really a different industry. And GSM is for the operator centric market. Just like they turned the music industry on its head, they are now turning the mobile data services market on its head. Operators receive about 30% cut from data services on their network; with iPhone, they get zero. Google is trying to do the same, so far no success, and most content downloaded for android is free, since there is no consumer billing relationship with Google. And Google announced they are willing to work with the operators, but not yet.

Everyone is trying to copy / create valid iPhone competition – from 3 directions: (1) devices to look like the iPhone, (2) OS to act like the iPhone, (3) app stores to provide content like the iPhone.

Android Craze

There was a lot of talk, and I believe hope, from the mobile carriers that Android will emerge as the savior. The OS can compete with the intuitiveness of the iPhone. It is also open for developers – has flash, VoIP, multiple device deals, etc. And Google has no billing relationship and is hinting that they will do the data services with operators. Statistics are showing that over the next 12+ months, the only viable competition to the iPhone in the app market is Android. It is growing fast and there is an expectation of about 20m+ more Android devices sold in 2010.

Samsung Bada

Samsung announced a new iPhone OS competition – Bada – that will be on their first Bada device – Wave. Based on the amount of billboards, videos and talking – they have high hopes for this operating system. Samsung also already has their own app market and they will merge the two.

MSFT Windows Mobile 7

With much skepticism, all listened in anticipation about Windows Mobile 7. Surprisingly, it generated much interest from device manufacturers and there are at least 8 companies (Samsung, LG, Sony Ericsson, HTC, HP, Dell, Toshiba and Garmin Asus) that will run windows X-mas 2010. I spoke with a guy that saw the demo at GSM and he told me that it was fantastic…but too bad it wasn’t launched in 2007; and they may have missed the market. From others that I was talking with (most app companies), they felt it will be easier to develop for MSFT than it is today and it will go up against RIM more than iPhone and Android. I tend to agree, as a MSFT user. That Windows can be a great business tool, with seamless Outlook and Office use. Operators as well have signed on: AT&T, Orange, T-Mobile, Telefonica, Sprint Nextel, Vodafone, SFR, Verizon Wireless, Telstra and Telecom Italia. Microsoft said it will work particularly closely with AT&T and Orange.

Nokia & Intel’s MeeGo

Nokia and Intel are to merge their respective Linux initiatives to form a new platform designed for high-end mobile. Known as 'MeeGo,' the platform will combine Nokia’s Maemo and Intel’s Moblin. Nokia said that they expect 20% of their devices to rum MeeGo by 2011.

This begs the question…what about Symbian?

Nokia & Symbian was nowhere to be found

Nokia had no booth. No new devices launched. No news from Symbian. Device companies did not announce any new Symbian devices. Dying quickly jumped to dead. I believe that Symbian will be reserved for the feature phone market, but no longer labeled a smartphone OS. Nokia is still the largest device manufacturer in the world with tons of cash, but they do not seem to be making any real smart moves in the smartphone market.

My conclusion from the OS part of the GSM event is that there is INTENTIONAL massive fragmentation expected, with iPhone to be the largest single device seller. But the fragmentation will cause complexity for services and operators that need to deal with all – for example gaming, advertising, etc. This fragmentation will be intentional, potentially modeling the laptop market. Windows is still over 80% of the market, but apple is the largest single seller of laptops worldwide. The mobile operators may be hoping that the iPhone may be the single most selling smartphone device in the market – but be only about 10-20% - therefore leaving 80%+ of the market needing applications, services, billing, and strong operating systems.

Tough times...but let's put things in perspective

2010-03-03T02:53:00.002-05:00

The western world is definitely feeling some economic hard times...and it may very well be here for a while. But I wanted to put things into perspective by using some common English sayings and their respective sources, mainly from about a few hundred years ago (got this from an email forward):

1) In the olden days, the floor was dirt. Only the wealthy had something other than dirt. Hence the saying, "Dirt poor."

2) In the olden days, they used to use urine to tan animal skins, so families used to all pee in a pot and then once a day it was taken and sold to the tannery. If you had to do this to survive you were "Piss Poor"

3) But worse than that were the really poor folk who couldn't even afford to buy a pot. They "didn't have a pot to piss in" and were the lowest of the low.

Is this where our society is headed? Perhaps we all have to live within our means, and then we won't get there - where society used to be in the middle ages. I believe that the main issue is that the developed economies have largely "outsourced" production to emerging economies and have kept "spending" in-house - as the source of most of the economic base. We need to bring back production on developed country's shores. How? Not via government taxation, protectionism and other forms of government control (which is much scarier than the recession), but through individual responsibility. We should all live within our means.

Any ideas?

GSM Review: Mobile Carrier Confusion

2010-02-23T08:01:00.004-05:00

I recently attended the GSMA Mobile World Congress in Barcelona, Spain. According the Wikipedia, GSMA is the combination of the world's largest exhibition for the mobile industry and a congress featuring prominent Chief Executives representing mobile operators, (handset) vendors and content owners from across the world.

This year’s GSMA event was much larger than the 2009. There was a large turnout and more upbeat and excitement. If I could sum up the conference in one take-away – it was Mobile Carrier Confusion – mainly stemming from the iPhone phenomena. The iPhone put a big stick in the spokes of the industry, and the carriers are now trying to get back on track.

This conclusion is based on a few general observations from the event:

1) Device manufacturers and mobile carriers have both finally realized that mobile device operating systems are as important, if not more important, that device design. Neither is sure how to tackle this issue.

2) After years of apathy around mobile applications, both device manufacturers and mobile carriers are placing major emphasis and resources around application stores. Neither is sure how to tackle this issue.

3) Mobile carriers are not sure how or why to invest in new, multi-billion dollar 4^th generation networks, while more emerging markets are still evaluating 3G infrastructure.

4) Mobile carriers are having trouble formulating a growth story for the next 10 years.

I will post 4 blogs on the above 4 issues.

Trade Wars: The Empire Strikes Back

2010-01-18T12:53:00.003-05:00

Returning from NY and SF a few weeks ago, the word "fragile" kept ringing in my ears. I met with some very bright people on those shores of America. When I asked them about the economy, their chief concerns were that this recovery may not last, that the stock market rally was too broad, that employment (despite the trillions) was still stuck, and that the overall economic situation was, well, fragile. But where, I asked myself, were the fault lines? Where could all of the progress of the last 6 months unravel?

Enter Paul Krugman (Darth Vader theme music, please). The accomplished and respected economist (Nobel prize and all) is now giving America the justification it requires to embark on a protectionist crusade. Krugman in his recent New York Time op-ed column says this: "...there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply."

Krugman is righly upset with the Chinese for their unwillingness to allow an appreciation of the Yuan against the Dollar (this policy makes Chinese goods artificially cheap, and thus hampering US production and the recovery of the US economy). He thinks that protectionism is the appropriate weapon for America to fight back . With Chinese domestic demand weak relative to their production capacity, a real serious trade war, hints Krugman, would be a huge blow to the Chinese economy. In a vieled threat Krugman says "I’d urge China’s government to reconsider its stubbornness". Whether it is protectionism he is advocating, or only the threat of protectionism, it hardly matters. The genie is out of the bottle.

Terrific. So now we have the world's most widely read economist giving the Obama Administration a green light to raise protectionist barriers. Not that the US was waiting for Krugman's blessing, barriers have been slowly appearing, but it always helps to have the guru on your side.

In its attempt to fix the unintended consequences of the Internet bubble, the Federal Reserve helped create the credit bubble. Now to fix the unintended consequences of the credit bubble the US Government is flirting with trade protectionism. And the question is, what will be the unintended consequences this time round?

Open markets have been good for standards of living in the West and in the East. We eat better, sleep warmer, live longer. For much of this we have to thank the free movement of goods and services between markets. Protectionism takes us back in the opposite direction and should be viewed with extreme skepticism and worry.

Exit Krugman, enter Eric Schmidt. Google's announcement last week of a potential exit from China must be seen in this context. I don't fault Google's reasoning. But I do worry about its symbolic value.

Google is not just any company. It is an American icon. It is symbolic of American progress, brilliance and freedom. Like America, Google dominates the world. Plenty of companies do business in China, but Google's business is the very lifeblood of the economy - information.

The withdrawal of Google from China is akin to the withdrawal of an ambassador. It signals a severing of ties between the US and China, and the next step in the trade wars. May the Force be with us.

What is common to Israel, Australia and Norway?

2009-12-29T08:53:00.004-05:00

Stanley Fischer raised interest rates in Israel for the second time in relatively quick succession today. After the 0.25% rise, they now stand at 1.25%.

The only other countries that have managed to raise rates are Norway and Australia. Unlike Israel, Australia and Norway are resource rich countries and have seen increased economic activity based on the slowly emerging global pick up in demand, which has been reflected in commodity prices recently.

Most of you will know the famous joke about biblical Moses that he took the wrong turn after the exodus from Egypt bringing the Children of Israel to Israel, rather than the oil rich countries surrounding. As a result, Israel is sadly not rich in physical resources.

We must then ask the question why Israel is feeling the need to increase rates well ahead of the major developed economies.

The most obvious reason for this is the improving state of the domestic economy and what Mr Fischer is seeing which is rising asset prices (equities, bonds and real estate). It's clear that he does not want to squander the advantage created for Israel by avoiding the meltdown that has become so prevalent in other economies, and protect Israel from future asset bubbles.

All of this sounds like good news, and indeed reflects a generally positive outlook for the Israel economy etc.

There are of course some downsides to this. The main effect of increasing interest rates will inevitably be a further strengthening of the shekel against the dollar and probably also Sterling and the Euro. At a time when the exporters (predominantly technology based companies) are trying to restore growth into overseas markets this will come as a blow, increasing relative cost of the workforce at home, and reducing competitiveness abroad.

This is the reality of life and my advice to managers within our portfolio and others that we speak to is to adjust, as we do not see a weaker shekel over the near or medium term.

This means bringing productivity in line with the prevailing power of the shekel to protect Israel's competitiveness as an exporter.

Whilst the unions and some industrialists may complain and call for government intervention (In other words money and subsidies) this is a nice problem to have and we should be thankful that we are not caught in the trap of zero interest rates, with little or no prospect of real economic growth.

Valuation Fundamentals

2009-12-23T05:43:00.003-05:00

I have had the feeling for quite some time that there has been over-shooting in the equity markets over the last several months, and in particular the US markets, given the fragility of the recovery.

It is very hard to see in the financial press many people that are worried about this, which is why I was happy to see the piece by Lex in the Financial Times.

If you have seen thoughtful articles on this issue I would love to know about them.

Intuit Sells Division to Private Equity for $128m

2009-12-07T10:19:00.003-05:00

I note that Intuit has decided to sell off a small division (2% of group turnover) with fairly low operating margins compared to the rest of the business. I think that they have received a good price for this asset, at >30x operating profit, and 1.7 x revenues.

I am sure that this signals a trend that we will see as the larger tech players continue to react to the changing macro environment and give more focus to the core and successful parts of the business.

It also sends an important message to the rest of the group divisions - "start making the grade from a operating point of view, or you may find yourself with new owners." I think that this is a great way to motivate people to the key parameters that drive their business, whether that be revenue growth or focus on the bottom line (or indeed both).

To the best of my knowledge Sage has acquired well over 100 companies but has never divested anything of size.

I wonder if there are hiddne pieces of the business that could be considered as non-core, either from the perspective of operating metrics and margins, or indeed products that are not contributing to growth. The other area that could be interesting to look at for divesting might be operating divisions in non-core geographies.

Until Sage takes the decision to divest something, everyone at Sage will continue to live under the impression that being acquired by Sage means you are getting into a family that you can stay with until you retire. Maybe its time to look at that again. This does not mean that Sage is anything but a well run company, nor does it mean that they can't continue with the traditional acquisition model. I would see this as a sign of strength and maturity rather than perceived weakness!

Given the pricing that Intuit has received in this deal it would be interesting to see whether Sage could increase shareholder value by identifying and then divesting some non-core assets out of the business.

Can this team fix the problems?

2009-12-01T05:36:00.003-05:00

When the US (and the world) is faced with arguably unprecedented economic challenges, who better to fix the problem - public sector government officials or people with extensive private sector business experience? Check out this chart below:

It examines the prior private sector experience of the cabinet officials since 1900 that one might expect a president to turn to in seeking advice about helping the economy. It includes secretaries of State, Commerce, Treasury, Agriculture, Interior, Labor, Transportation, Energy, and Housing & Urban Development, and excludes Postmaster General, Navy, War, Health, Education & Welfare, Veterans Affairs, and Homeland Security—432 cabinet members in all.

Analyze the successful economic presidents from the US past. And look at the remarkable contrast with Obama's cabinet makeup. Is he headed for success or doomed to failure?

Thoughts?

More exits for the PE industry in Israel: 2 big and 2 small

2009-12-01T04:53:00.002-05:00

IBM bought Guardium for $225m. Guardium raised more than $20m from a few of the smaller Israeli VCs (Ascent, Veritas, Cedar, StageOne)

Broadcom acquired Dune Networks for $180m. Dune raised about $50m from larger VCs (Pitango, Evergreen, JVP, USVP, Alta Berkeley, Aurum SBC)

NICE acquired Orsus for $22m. Orsus raised more than $70m in VC funding, mostly prior to 2001.

CA is rumored to be acquiring Oblicore for $20m. Oblicore raised over $20m, mostly from JVP and Concord VC.

HP buys 3COM...

2009-11-17T10:34:00.011-05:00

HP recently announced that it has agreed to buy 3Com for $7.90 per share, or approximately $2.7 billion cash. In 2007, 3Com agreed to sell itself for just $5.30 per share, or $2.2 billion, to Bain Capital Partners and China’s Huawei Technologies. That transaction got held up and subsequently stopped because of U.S. government concerns about Huawei’s involvement. This is a 22% appreciation during one of the worst economic periods in modern times. Not bad.

3com's stock has steadily improved over the pat few years. It is not because of the company's growth numbers. But I believe it is based on its improvement on its gross margins - based largely on moving production and logistics to China.

The graph to the left compares the gross margins of 3Com, HP and Cisco. With 3Com's significant improvement from 40% to 57% in four years, it seems that HP now has its sights on Cisco's core offering of network switches, routers, wireless access points and controllers, IP voice systems, and intrusion prevention systems for enterprise and small-medium businesses.

HP has 100 times more revenue than 3Com and only 50 times the market cap. This again is probably based on gross margins. Therefore, this transaction will have 2 major affects on HP:

1) It will be nicely accretive

2) It will enable HP's world class sales network to have a complementary new portfolio of products to its core customer base. Enterprises and SMEs will be able to enjoy a broader HP offering and pass on paying Cisco's premiums.

When looking at Israel, HP has a large presence here. It has been based largely on acquisitions - including Indigo, Scitex, Nur, and Mercury. This 3Com acquisition will open many further complementary acquisition targets in Israel.

I believe networking companies that have historically been built to be acquired by Cisco (or bust) should be thinking more about HP now.

So what is Cisco up to? Well, it seems that Cisco has been aggressively looking into the more consumer markets. It acquired Pure Digital and there are rumors that they are looking at Jajah. I guess it is hard to match Cisco's expectations for growth and margins in the markets that they are already active in.

In short, I believe this could be a very good thing for Israel and I would predict that HP will be 2x its size in Israel within 5 years.

Congrats to IDIT and PNMsoft in the FAST 50

2009-11-01T07:57:00.003-05:00

Wanted to congratulate IDIT and PNMsoft on being included once again into Deloitte's Fast 50 awards.

For those that do not know: IDIT is a leading vendor of enterprise software systems to the global insurance industry and is lead by its CEO Yoel Amir, and PNMsoft is a leading vendor of Microsoft based BPM solutions, and is lead by its founder and CEO Gal Horvitz.

In particular I wanted to thank all of the employees and management of both companies for their continued hard work. You continue to make us at Goldrock proud of your achievements!

Looking forward to another year of growth!

Solel brings Success to Bet Shemesh!

2009-10-15T09:57:00.003-04:00

I don't have a great deal of knowledge when it comes to solar power, or cleantech in general. Nevertheless I wanted to blog about this $418 million acquisition because of the story and location of the business.

Solel is a major employer in our region and the main excitement is that Bet Shemesh (where I live and work) is in the news for all the right reasons.

Solel and its founder Avi Brenmiller have been developing their technologies and growing this business over a decade and a half and have managed to successfully build a business today turning over more than $100 million. This is a fantastic achievement which has now been recognised by the worlds leading renewables engineering company, Siemens.

This blog is to take the opportunity of congratulating Avi and his team on this achievement, and for bringing this success to the neighbourhood!

The Next Bubble?

2009-09-07T03:12:00.004-04:00

Several years ago you may recall that following the last bust (the dotcom variety) there was a period of very low interest rates (thanks to Mr Greenspan) and as a result it was somewhat difficult to find investments that would generate a reasonable return.

Fortunately I had money to invest at the time, and thus myself and my partner went hunting assets classes that might provide such a return, and if possible in a non-correlated manner.

One of the areas we looked at was Viaticals. This is the general term for buying second hand life policies, typically from old people. The main reason why this business exists is to allow people to enjoy the benefits of the policy before they die, typically using it for health or residential care.

Due to the nature of the discount offered on the purchase, if managed correctly they can potentially offer above average returns over time, as the people pass on thus releasing the full value of the policy.

Of course the general rules apply:

their are no free lunches (risk/reward)
if it is too good to be true, then it probably is (this seems easy!)
read the small print (and then the REALLY small print)

In the end we passed on the idea, partly as we felt uncomfortable with the seedier end of this business which has a poor reputation, and also because the actual mechanism for making money is not as easy as it first appears. Risks include (but are not limited to):

the original policy holders living too long, during which time you have to keep paying the premium, hence eating away at your potential return, and of course an increased holding time also reduces the IRR;
ultimate beneficiaries suing the secondary purchaser when the original holder dies.

I read with interest an article in the NY Times about bankers sitting around figuring out the next way they can make money from securitizations (as if we have not had enough) and lo and behold they are talking about the securitization of life insurance policies, to be packaged and sold off to the unsuspecting investing community.

When they come knocking on the door to offer this, remember that you read my blog in September 2009. I am not suggesting that you should not buy, just make sure that you do not fall again into the trap that caught us out last time with CDO's CLO's etc.

They will undoubtedly tell you that the product:

is backed by a major financial institution
has a AAA credit rating, perhaps backed by a different equally solid financial institution (like AIG or Lehman Bros)
Historic defaults show that there is little or no real risk to the equity

And I could probably go on!

Happy hunting!

5 Notes about Lev Leviev

2009-08-31T08:36:00.005-04:00

All the press in Israel were "shocked and surprised" by the news that Leviev-controlled Africa Israel has admitted that it cannot see its way to paying off all of its debt and will need to restructure. The only real surprise is how long it has taken for them to admit it!
Of the debt mountain that Africa Israel has built up, the vast majority has been to the institutions who have blindly subscribed for its bonds during the bubble years, without worrying too much about the underlying ability of the company to repay.
The banks have a relatively minor exposure, thus there is no dramatic impact on the stability of the financial system. Within this amount, it is worthwhile noting that Bank Hapoalim has a significantly larger exposure than Bank Leumi - is this bad luck, or bad risk management? Given the events of the last 18 months, it would look more like the latter than the former.
It is crucial that the bond holders act firmly with Leviev, otherwise the genuine ranking of bonds in "tycoon" controlled companies - like Leviev, Tshuva, Fishman etc will be called into question, hence undermining future confidence in the corporate bond market.
How comforting to know that the Israeli market can withstand problems at one of its biggest companies and bond issuers without overall market panic setting it. This is a crucial period for the markets, during which it is important that moral hazard is not created by weak treatment of failing management teams.

I have a great deal of admiration for all of the "big guns" of the Israeli capital markets. They are not afraid to travel far and wide to seek out investment opportunities. This does not mean that our pension fund investors blindly follow them everywhere they go, without creating the crucial distinction between risk levels at different companies.

Finally on a personal note. Those of you that know me well, know that one of my hobby horses is conflict of interest. Whilst entrepreneurs like Leviev and Tshuva have both public and private entities doing substantially the same thing, the public's money should not be used to fund their public entities, as there is no real protection against what is an obvious and in-built conflict of interest. Our financial institutions must protect the public from this situation if the Tel Aviv capital markets seek to continue its maturing process whilst trying to attract the best investors from around the world.

Krugman vs Ferguson

2009-08-24T04:52:00.003-04:00

I was reading about the "Great Debate" between Nobel prize winner Paul Krugman, and Harvard Professor Nial Ferguson about the how the future looks and what the right course of action is for governments in order to secure a stable economic future for the world. This is just one example, I could of course have picked, Buffet, Soros, Rubini, Bill Gross and many others to describe the debate.

Those of you who know me, know well enough that I am no economist - indeed I have very little academic claim to fame. It will be no surprise to you to discover that I am not going to weigh in on this particular debate.

Then why, you my ask, I am writing about this at all!

The answer is simple.

At Goldrock we are in the business of backing management teams to execute on their growth plans. Management in a era of uncertainty is certainly more challenging than in "normal" times.

During my short military career as a humble tank driver in the Israeli army we were taught a very important lesson in risk management. Loosely translated "when you are in doubt, then have no doubt."

This is broadly helpful when only risk is to be considered as it will keep you away from making some risky blunders, neutralizing the uncertainty, which is such an important element in risk.

However, this is not so helpful when managers and entrepreneurs are being asked to make decisions in the current uncertain environment that could have a long-term affect on their future growth prospects, which is, after all, why they are in business.

My take, for what its worth: Whilst Krugman and Ferguson are so far apart in their analysis and economic conclusions, it is probably too early to simply ignore the risk which still abounds in markets around the world, and that risk management will be a tool whose importance will be over-weighted for some time to come.

We have seen some improvement in the trading environments for our portfolio companies, but I think that the reality of this is not as rosy as the reaction of the world's stock markets.

As a result we ask managers out there to have a little more patience. We have seen some of the fog that has shrouded growth prospects lift in recent months, but we think only far enough as to see a few paces ahead. We will need some more robust indicators of economic improvement before feeling confident about the return of serious growth prospects to the economies of the world.

As a manager of money, rather than a manager of businesses I have the luxury to be able to sit on the sidelines for a while, and whilst we have seen the investing environment improve, we still retain a cautious stance.

Micro Focus "Migration" Challenge

2009-08-13T07:51:00.002-04:00

I am a keen reader of TechMarketView and have been a fan of the Holway view of the world for many years.

Philip Carnelley made an interesting comment yesterday on the integration challenge ahead for Micro Focus having made recent acquisitions that increase turnover by 55%, just over Holway's rule of thumb which holds that companies acquiring businesses over 50% of their size tend to be high risk acquisitions.

The thought that occurred to me was that the "migration" issue that Philip referred to is the post merger integration of the two acquisitions, whereas ir could just as easily be the focus on the Borland and Compuware deals will take the focus away from their legacy migration business, and whether this is a strategic decision to diversify, or whether these skills compliment this part of the business.

Migration and modernisation have long been seen as the plumbing and rather dirty end of the IT business. In the current environment, and indeed as we go forward with the backdrop of weak economic growth the old Yorkshire adage of "where there's muck there's brass" might apply to this segment of the business.

Sage Twitters it Right!

2009-07-23T07:44:00.004-04:00

You may remember some time ago I blogged (Be Smart Not Right!) on the handling of the Kashflow PR attacks on Sage, and that I felt that perhaps the Sage guys were missing a trick in getting too "formal" with Duane.

Well, I take my hat off to them and in particular to Paul Stobart, UK MD of Sage, by cutting through the BS and communicating directly and in real time with their channel partners and customers through Twitter yesterday.

There are those that might claim that Sage's partner base is too large, and indeed there may be even those over the years that might have wanted to take the knife to cut it down to a more manageable size. Right or wrong, this sort of initiative allows the company to directly interact with the more active and lively parts of the channel, which is what Sage clearly needs to do in order to stay at the forefront as a lead vendor in the SME market.

REAL US Unemployment

2009-07-21T05:55:00.003-04:00

I am sure many of you have seen and/or heard analyses that argue that the US unemployment rate is really higher than reported, due to a number of factors. Here are a few bullets that use facts (that I got from WSJ) to put things in perspective:

Where are we today:

Current rate = 9.5% unemployment
7.2 million jobs lost since the start of the recession
The cumulative job losses over the last six months have been greater than for any other half year period since World War II
The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion

That is bad. but it may be worse than it sounds. Now, let's increase the 9.5% to a more "real" number:

1.4 million people wanted or were available for work in the last 12 months but were not counted, since they may not have sent out a resume in the past 4 weeks - this adds about 0.8%.
The number of workers taking part-time jobs instead of their sought after full time jobs has doubled to about nine million, or 5.8% of the work force. Taking 50% of this, adds 2.9%.
The average work week in the private sector (~80% of the work force) is now 33 hours. Almost one hour less than prior to the recession. (This is driven by things like production capacity in the US is dropped to an average of 65%.) This is tantemount to 3.3 million fewer employees - an additional (quasi) 2.2% for unemployment.
Alltogether, one could conceptually add about 6% to the 9.5% number - bringing it to well over 15%!!

So are there signs of improvement? Not looking good. And this is based on the uniqueness of this recession.

First of all, the average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948.
Second, the number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
Third, unemployment has doubled to 9.5% from 4.8% in only 16 months; very fast.

Why has all this happened? What is so unique?

I believe that in this recession, the employee cutbacks are not simply cutbacks. Normally, companies do cutbacks, and then rehire once the economy improves. The fire based on decisions taken earlier in the business cycle - to ensure earnings targets, etc.

But (if and) when economic activity picks up, (as quoted from the WSJ - ) "many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business."

Just look at two huge sectors and employers in the US - the auto sector and the financial sector. The US auto market is forever slashed across the sector's value chain, while the financial services companies have exited many parts of the world of finance - never to return.

So it seems that Americans and many other parts of the world have to rethink how to rebuild.

China - What are they saving up for?

2009-07-20T03:29:00.003-04:00

I remember when I was a kid, I used to get a weekly allowance. I used to spend it as I wished. But when there was a specific reason, I would save my money towards the larger purchase. Like Nike Air Jordans, roller blades, etc.

So my question is simple. What is China saving up for? I fear the answer...

Twitter's moment? - cont

2009-06-18T08:11:00.002-04:00

Richard Stacey has an interesting post titled Twitter is making and destroying history.

Twitter's moment?

2009-06-17T16:15:00.004-04:00

I joined Twitter 6 weeks ago and, frankly, could not see the genius. My tweets were of the "sunny day, got bad heartburn" kind. The people I tracked provided nothing interesting. And so, I quickly gave up.

The aftermath of the Iranian election may end up being a watershed event, not only for Iranians but for the rest of the world too (emphasis on the "may"). This thing is unfolding hour by hour. And it turns out that the very best way to follow the event is on Twitter. So suddenly I am now finding myself checking Twitter every few hours and using it as a source of serious, real time information about a critical current event.

The 1991 Gulf War made CNN into the world's most important news source. Could the Iranian revolution (yes, please) of 2009 do the same for Twitter?

Salute to Stanley Fischer!

2009-06-07T08:02:00.004-04:00

The Exception to the "Golden Rule" - He with the Gold Rules!

For the un-initiated there has been somewhat of a saga surrounding the position of Chairman of Bank Hapoalim, previously Israel's biggest bank.

The saga has seen a very public spat between the controlling shareholder of the Bank, Sheri Arison, and Stanley Fischer, Governor of the Bank of Israel.

The core of the argument has been about the suitability of its soon to be replaced Chairman; the direction that the bank has taken; and the governance employed to make those decisions during the last couple of years.

I am not a banking analyst, not an expert in bank regulation etc, but this is not the key.

Stanley Fischer has brought an enormous amount of credibility to the Israeli economy since being appointed in 2005, and is helping to steer Israel through the stormy waters of the global economic crisis.

Sheri Arison, about whom I have nothing particularly good or bad to say on a personal level, has clearly had a very strong difference of opinion with Fischer. She is part of the economic elite of Israel, which is popularly perceived as having too much economics way, in a way that creates significant imbalanaces within the economy to their advantage, and the great disadvantage of the rest of us.

During the campaign Arison went pretty low in her tactics, accusing Fisher and the Bank of Israel of McCarthyism and other conspiracies. In addition she went on to accuse him of corruption and lodge a complaint with the State Comptroller.

This was serious a error of judgment on Arison's part as the clear consensus (other than within the 10 richest families in Israel) is that Stanley is the straightest guy in town, who has done more than most to help navigate the country through the crisis.

Most importantly for Israel was Fischer's ability to stand firm against this onslaught. Had he not done so then it would surely have become open season on sensible independent regulators in the face of our business tycoons as they seek to apply the "Golden Rule" - he with the gold rules!

When I look at this in the context of Israel's overall position in the light of the global crisis, it gives me a high level of comfort that we are better placed than most developed (and many undeveloped economies) in that we are still have an independent, but strongly regulated banking industry that has not gone into meltdown during the last 18 months.

If the global crisis eases during the next few months, Israel is very well placed to take a strong advantage of the coming upturn.

ZenithSolar Goes Live!!

2009-04-27T03:10:00.005-04:00

In addition to my role with Goldrock Capital, since March 2007 I have been the finance & strategy advisor to an early stage solar energy company called ZenithSolar. ZenithSolar has developed a very unique concentrated photovoltaic CPV system that provides both electricity and thermal energy at a combined system efficiency about 75%. Truly groundbreaking.

On Sunday, ZenithSolar launched its first commercial pilot at kibbutz Yavne. Shimon Peres - the president of Israel - spoke and had the honor of cutting the ribbon together with the children of some of ZenithSolar's key management. There were a number of other government officials there as well - including the ambassador of Australia (since the Co-Founder and CTO of ZenithSolar is Bob Whelan, hailing from Australia).

The pilot consists of 32 - 11 sq. meter non-parabolic dishes that are each covered with more than 1,200 small mirror facets that each focus the sun's energy at on 10 centimeter squared high efficiency gallium arsenide (GaAs) solar cell module. Due to the extreme heat caused by the high concentration of the sun's energy onto the single module, the module is cooled with a closed loop water system that heats a hot water tank- consequently creating valuable hot water for various uses - which include domestic needs, washing, industrial processes, etc. 2 dishes together sit on top of a highly accurate 2-axis tracking system. This pilot is expected to generate between $75,000 and $100,000 of energy savings (both electricity and thermal) per year. This is thanks in part to the inflated rate of 2 shekels per kWh (about $0.50) that the Israel electric company must pay for each kWh that will be fed to the electricity grid.

This is ground breaking on many levels.

1) No other solar PV system in the world claims efficiencies beyond about 20% (claimed and delivered by SunPower). ZenithSolar is providing 75% - due to the system harnessing and utilizing the residual heat.

2) As an application - providing cogeneration (CHP) 100% clean energy to a residential gated community is probably the first of its kind on a global scale.

3) This is the largest grid connected solar installation in Israel.

4) Specifically in the CPV space, CPV has only had utility scale pilots in Arizona and Spain. This is possibly the first CPV pilot deployment to a REAL customer in the world.

5) The corporate achievements reached by ZenithSolar - with the resources and manpower that has been available to them since its founding in 2006 - is truly astounding and I congratulate Roy Segev - the CEO, and the entire team on a job well done!

The future is very bright for ZenithSolar!

The video below is the introduction speech for ZenithSolar and President Shimon Peres (in Hebrew) by Prof. Ezri Tarazi. Ezri is leading product design and strategy at ZenithSolar. He is also the head of the industrial design Masters program at the elite Betzalel Institute in Jerusalem. He has been with the company since the founding and has been integral to its success. At 1:45 in the video, you can get a good look at the solar field. It looks fantastic!

The BIG News: Oracle (not IBM) Buys Sun!

2009-04-20T12:16:00.003-04:00

Apropos to a previous post about the potential IBM / Sun transaction, instead Oracle was able to scoop up Sun following the breakdown of talks between Sun and IBM. So why did Oracle succeed and not IBM? What are the synergies? How will this affect the start-up / VC / PE world?

Rumors were that IBM could not complete the deal, since Sun wanted a hirer price. Price per share numbers that were mentioned ranged between $9-11 per share - about 100% premium at the time of the negotiations. Not too bad! But was it really price problems?

Oracle is paying $9.50 - within that range. So price could not have been the reason for the break down with IBM. So what happened? Here is my theory:

It seems that one of the main differences between Oracle and IBM (as an acquirer of Sun) is that IBM competes quite a bit more with Sun than Oracle. Oracle primarily deals with databases and software, while Sun is largely on the hardware and server infrastructure. IBM does both. When competitors combine - there is a lot more consolidation...and therefore more divisions shut down, more firing, etc.

With the Oracle / Sun combination - this can be a major change in the market - and create a real mammoth in the IT world. Oracle is buying new markets, products, customers, etc. Some may complement, some may not. This may enable Oracle to occupy a huge part of the IT infrastructure market, which may trickle into software sales for them as well.

In addition, with Oracle's history of successful large acquisitions (PeopleSoft, Siebel, BEA, etc.) and their subsequent integration processes, and IBM's history of smaller acquisitions - perhaps Sun chose the acquirer that would create more value to Sun - rather than just a higher price.

So I believe that Sun chose Oracle over IBM, not because of price, but because of the plans of the acquirer the day after the acquisition.

Is Mr Obama cramping your style?

2009-04-01T10:41:00.005-04:00

Two examples from this week of the brave new world we live in:
1. A friend of mine here in Israel is looking to buy a new car. He told me "the best alternatives for me are a Crysler or a GM, but I'm not willing to buy either. Who knows if there will be parts or service for them in the future?"
2. My brother is a manager at a company selling medical software in the US (www.surgimate.com). The talk in his market is dominated by one question: "what products will meet the criteria for the Obama Administration's $19 billion e-medical records initiative?" Or in other words how do you get a slice of the $19 billion pie.

The control that the US Government now exerts over the economy is palpable. Not only in the pages of the financial press, but in the everyday decisions of consumers and managers.

But here's the rub.

The reason that the United States has been the engine of growth for the world economy over the last 60 years is that they have been the most entrepeneurial, most creative and most market driven of the large world economies. But when vast parts of the world economy makes decisions based not on whether a product is good or bad, or whether there is real demand for a product or service, but based on what a bureaucrat, howefver skilled, decides, then markets are warped. The tangled net now being cast by Washington over business is about to cramp the very entrepeneurial spirit which is the only way out of this economic mess for the US and the world.

TARP for Dummies

2009-03-25T12:24:00.000-04:00

Quick post:
Very funny TARP for dummies from PEhub http://tinyurl.com/cj7rmv

IBM buying Sun - good or bad for business?

2009-03-19T03:44:00.005-04:00

There is an interesting article in the WSJ about the potential acquisition of Sun Microsystems by IBM. There are a few issues that the WSJ did not address that are direct affects of this transaction to the venture capital and IT oriented private equity markets.

1) One less acquirer -

There is only a handful of large tech oriented companies in the world that are active acquirers of tech businesses and pure innovation. Sun Microsystems is one of them. They did more than 20 transactions in the 1990s and more than 20 in this decade. Sun has not been such an active acquirer of Israeli tech (like IBM), but they acquired Aduva and they have a nice sized R&D center in Herzeliya. The VC / PE model is based on M&A exits to provide financial returns. More than 80% of exits are M&A. The M&A market will shrink after this acquisition. This handful of companies in the world understand that in order to sustain market leadership and in order to grow shareholder value is through organic AND inorganic / strategic growth.

Parenthetically, most large Israeli companies do not realize that acquisitions are necessary for value creation. Case in point, lets quickly explore arguably the star of the Israeli tech scent - Check Point. They are the founder of firewalls. Great internal innovation. Selling software at close to 100% gross margins and 40%+ net margins consistently. Sitting on a huge bag of cash. And only making small or distressed acquisitions - not strategic acquisitions. Growth is hurting and shareholder value is relatively low, compared to other active acquirers in the security software space - companies with less cash and worse operating performance (see MFE, SYMC, etc). But value is forward thinking. Forward thinking = longer term and strategic thinking, not just tactical. Therefore, acqusitions are key for large tech companies to grow.

2) Sun has more than 30,000 employees

"Consolidation" and "efficiencies" are code words for firing and shutting down units. This has good and bad implications. Mostly good for our industry, since it forces good people to enter the work force - where many will enter in start up world. This generates the recycling model, allowing for sound investment opportunities. This is true for Israel as well, where IBM has been and will be an active acquirer of Israeli tech. They have subsequently created R&D divisions across the country - Jerusalem (iPhrase, Unicorn, etc), Haifa (historical applied research center), and Tel Aviv (XIV, Diligent, etc).

3) BPM

Lastly, a bit more closer to home, within some period of time after the acquisition, there will be one less BPM player competing in the market (disclosure: Goldrock Capital is an investor in PNMsoft). Sun acquired SeeBeyond and is now called Sun Java Composite Application Platform Suite. And IBM made BPM acquisitions with FileNet and ILOG. It will also take some integration time for IBM and Sun, and may set them back in the market a bit. We shall see!

No more need for leverage in the Private Equity business?

2009-03-18T17:34:00.004-04:00

Is seems that for the past year, a trend has been developing in private equity. Non leveraged buyouts. deals are harder to find. credit is harder to secure. LPs are 'unsure' if they want funds to call capital. So the funds are getting creative to be able to continue to invest. The funds must pay much cheaper pricing and have a story that can convince LPs that the upside is huge. Risk, or course, is higher, since the funds have to deploy much more capital per investment, and the value of the asset must significantly increase to exit with a profit. In the old days, LBOs could make serious returns without creating too much value - since profitable businesses would be paying off the debt, paying less corporate tax and within a short period of time - paying off the debt while the fund owned the company. The funds could do 2-3x without creating any value!

Will LBOs continue to exist, or will only a handful of EBO value generators take over - leaving behind the days of financial engineering?

A few big LBOs have been seen trying to move to the EBO model - like Advent, Hellman & Friedman, and others.

Here, at Goldrock, we are pure equity players - and we strive to assist our companies to grow and create REAL shareholder value. Will see if the rest will follow...

The climate is Right for innovation

2009-03-16T12:33:00.004-04:00

I would like to draw your attention to an interesting blog posted today by PNMsoft on innovation. I liked their realism, connected to a desire not to give up on innovation as a culture. Since I know the guys over there pretty well, you can assume that they have their feet on the ground and use innovation as a driver for furthering their business in a way to give benefit to their customers, rather than for its own sake. This helps them to keep the right balance and perspective during these uncertain times - happy reading!

Gartner's Kathy Harris is pushing the innovation agenda in her latest blog. "The climate is right for innovation and organizations that don’t change may lose their edge or even disappear. You can’t not innovate"

Kathy's innovation strategy is a bit ahead of its time.

Most companies are in the midst of the credit crunch. Their focus is on survival. Some will cut projects, some will cut staff. Long term planning usually gets chucked out the window in times like these. Innovation budgets are slashed. It takes real guts to be able to sit down calmly and think of innovation.

But when the panic dies down, and company execs realize that the new circumstances requires rethinking - they will find Kathy's strategy "spot-on". Companies will need to innovate in order to remain competitive. Most current business models are no longer sustainable.

"Innovation is the ability to see change as an opportunity - not a threat."

The current crisis (burning platform) is a great driver for innovation...

Click here to read more

Leadership as a Management Tool – or How to ask for a Cup of Tea

2009-03-15T13:20:00.003-04:00

I have the great privilege of seeing many mangers at work (and some at play). In many cases our interaction with management is during a process by which we are checking their company out as a potential investment. This naturally means that they are in "sell" mode.

As a potential investor I have to try and find ways of getting behind this and discover what the manager is like in "real life" situations.

I have learnt that sometimes the really small things are the ones to watch for. How a CEO asks for a cup of tea from a secretary or colleague. How other employees talk to him during a tour of the office, or just as he is walking down the corridor. How management refers to one and other in meetings, and indeed what view they take of the contribution made by others in the organisation.

Why do I apply importance to these matters?

For me one of the most difficult intangibles when looking at a potential investment is the leadership skills or style of the management of the company. This typically starts at the top and is usually reflected all the way through the organisation.

In order for a small company to grow there needs to be strong leadership from the front. This leadership needs to encompass all of the employees and in many cases partners and shareholders of the company too.

Authoritarian style alone cannot achieve this, in order to the maximum from the company everyone must feel that they are making a contribution, and that this contribution is valued by the company's management. This in itself engenders out-performance by employees at every level as they strive to improve the company that they now identify with.

Managers can and must be pro-active in this area, and this style must be prevalent at all levels of the company:

Lines of communication must be open and transparent: Employees, Management, Investors, Board, Partners etc
No idea is a stupid idea
Make sure that you interact with as many employees as possible on a regular basis
Don't just talk about immediate goals
Use the time to understand what employees and partners would do if they were CEO for the day
Lead by example
Be accessible
Earn the respect of the company, don't demand it!
Recognise the strengths and weaknesses of those around you

These are just a few ideas about how to lead the company that you are trying to grow, in adverse markets you need better than average performance from the entire company in order to continue to grow. It is your job as a manager to achieve this, and it can only be done if you succeed in inspiring rather than demanding.

Management who either have this or learn it will be the ones to come out of the downturn, not just in survival mode, but also stronger.

Good luck!

Is Mark-to-Market a Good or a Bad Rule?

2009-03-15T13:16:00.000-04:00

For those of you who aren’t familiar with mark to market, the term refers to the present day value of an investment, regardless of how much was originally invested. It was put in place as a part of US GAAP in the early 1990s, and the use has increased steadily over the past decade, primarily in response to investor demand for relevant and timely financial statements that will aid in making better informed decisions (according to Wikipedia J).

A good example of mark-to-market is people’s homes. Let’s say you bought your 2 bedroom apartment in Miami Beach for $300k two years ago. Taking into account the current real estate market, if you were to mark-to-market the current value of the apartment it would probably be closer to $200k.

Companies like GE, Citigroup, Bank of America, Wells Fargo, and many other financial institutions would benefit greatly if mark to market accounting were suspended.

The largest example is probably AIG. Currently, AIG is a $1b company, give or take. The stock is teetering at around 50 cents! Compare that to Bank Hapoalim – Israel’s largest bank – which has a $2.2b market cap – with a tenth of the assets! AIG became insolvent and was subsequently bailed out by the US TARP, due to mark-to-market accounting standards. Without mark-to-market, it would have survived. But would this been a good thing, or a perpetuation of the financial facade?

But more importantly – to save the global economy - the question is would suspending mark-to-market be a good idea or a bad idea to stimulate or save the economic meltdown? Two options:

1) Bad: Suspending mark-to-market accounting could completely destroy the financial system, since banks would be able restore assets to their original value and investors would have a much tougher time understanding the true value of these companies.
2) Good: On the other hand, on paper the banks would look more attractive and the investment dollars would return to these institutions. Subsequently, lending / borrowing would be restored quickly, and perhaps the underlying values would slowly catch up to the paper value.

I am not an economist, so thoughts?

Sport and Politics

2009-03-08T16:10:00.003-04:00

Sadly over the last few couple of weeks we have been witness to several occurences where sport has been badly overshadowed by politics or terrorism.

As a lover of sport I have always found it remarkable that it is often used to as a way of creating leverage through the influence politics has on these situations.

The three most recent incidents are:

the visa row in Dubai, when two Israeli tennis players were denied entry because of where they came from. In this case, due to some fairly heavy international pressure and fairly obvious financial threatening, the Dubai authorities relented allowing the second of the two banned players to enter.
The second tennis incident is the David Cup match in Malmo that was played behind closed doors,without any spectators from either side (Sweden or Israel), under the guise of security considerations. In the background to this decision there seems to have been some political influence, rather than pure security based concerns. In this case it does not seem to have worked out for the Swedes as they lost the tie.
Finally and far more seriously was the terrorist attack in Pakistan on the Sri Lankan cricket team. This is an outrageous crime, which will create potential long term damage to cricket in general and Pakistan in particular.

We are living in very unstable times, and there is increasing tension around the globe as uncertainty on both political and economic problems blend to form a potentially toxic blend of unrest.

Perhaps it is naive to believe that we can keep sport and international politics separate, but we must hope that this remains the case. otherwise it will be a signal that there is very little left in our lives not tainted by the wider political environment.

Be Smart not Right!!

2009-03-04T03:51:00.006-05:00

Sometimes the best option is to be smart not right.

I note in the press that Sage (~15,000 employees and over $1.8bn in revenues worldwide) is having a spat with Kashflow, a tiny company in the UK.

The reason for the spat is that Kashflow, which offers a SaaS based accounting offering to UK SME's has made some allegedly disparaging remarks about Sage. The facts of the complaint will undoubtedly be reviewed by the Trading Standards Authority and if necessary they will oblige Kashflow to retract or change the information.

I can't help feeling that the only beneficiary of this now public row is Kashflow, who seems to be receiving disproportionate coverage for the size of company. Sage has unwittingly given this minnow an equal platform and in so doing has vastly increased the market's awareness of their existence. PR like this they could not have dreamed of.

If I were a psychologist I might analyse the situation by surmising that Sage is feeling a little raw that their SaaS has been withdrawn and that Kashflow seems to have got it right - perhaps a case of wounded pride from the clear market leader.

Dealing with competition and upstarts sometimes requires muscle, but occasionally patience and the ability to ignore can be just as relevant as a strategy.

Sage – please take note!

Humility - The Lesson for 2008 (and 2009?)

2009-03-01T10:07:00.002-05:00

I have been thinking about the real message of the financial and economic meltdown. There are some obvious ones:

The management of risk
Use of historic models to predict economic and financial outcomes
Level of ethical behavior within international financial institutions
Level of trust we give to commercial and financial counterparties

I could of course go on, the list is long, and there will be many books published and academic courses written relating to these and other results of the financial meltdown we have experienced, and the uncertainty we are likely to have to suffer.

My bottom line is somewhat simpler, and can be applied across the board by almost anyone in business, and many of those who are not.

Humility as a business tool sounds somewhat counter-intuitive, at least it does to me. When we think of Gordon Gekko from the film "Wall Street" that is not the first characteristic that springs to mind. In fact, that is also the case when I think about most characterisations that we are familiar with in modern culture in relation to business and financial leaders.

As investors in growth companies we expect our founders/managers to have confidence, not to say exuberance about their capabilities and the heights to which they can lift their companies. We would probably not invest in them if they did not possess these qualities.

The problem seems to be that this confidence and optimism has been replaced by a pervasive hubris leading to a feeling that we are untouchable and basically financial and business geniuses.

This was true at least until the last year or so. For me the world is now splitting into two categories of managers:

great managers, but have realised that they are not "Kings of the Universe"
the rest!!

The ability to be at least a little humble should not in any way decrease one's abilities to build companies or create shareholder value. It can however lead to a situation whereby you do not believe you have a monopoly on wisdom or all the answers. Other people inside your company and without may have a real contribution to make, with ideas that you had not thought of etc.

One way to detect humble behaviour is shown by a person's ability to admit mistakes. A great example of this appeared at the weekend with the publication of Warren Buffett's annual letter to Berkshire Hathaway's shareholders. On several occasions Buffett not only admitted his investing mistakes for 2008, but also castigated himself for making them, taking personal responsibility for these acts. Let us remember that Buffett's not the CEO of a failed or nationalised financial institution; it is still the most liquid of all the financial or investment companies, and will be so for some time to come. (By the way the letter is highly recommended reading - make sure to do so each year).

I had the enormous privilege of having a Father who possessed great skills in business, but also never over estimated his own personal abilities, allowing him to enjoy the contribution of others in the creation and building of Sage.

I hope that I am able to take this lesson for myself this year, and that you have the confidence to think about this, without worrying that it may diminish your business success!

Common Sense - The Module not Taught at Harvard

2009-03-01T05:36:00.003-05:00

It goes without saying that the current climate is creating great difficulties for companies trying to grow. It is hard enough just to survive! Most sources of capital have dried up, leaving managers and company board's scratching their heads about how to navigate the uncertain period.

For what it's worth, we are globally pessimistic with respect to 2009, and somewhat unsure about the prospects for 2010. If I had to guess I would suggest that when economic growth does return it will not be stellar, and will be accompanied by inflation as the money printing eventually take its toll.

As most other active fund mangers have done we remain in close contact with our portfolio companies at this time, in an effort to help them amend business plans to bring them in line with reality. We have seen some funds send out very radical presentations, which have inevitably been sent across the entire web, more or less prophesying melt down and advocating slash and burn tactics to stay in business. Perhaps the most famous of these is the now infamous Sequoia Good Times RIP presentation.

Whilst it is true that trimming the expenses has to be part of the survival strategy we do not think that is should be the only tool, and in fact each company has to look at its own unique situation before making possibly fateful decisions, with medium and sometimes long term consequences.

Common sense as a business tool is somewhat under rated, and to the best of my knowledge is not "taught" as a separate module in the great business schools of the world. Nevertheless at times like this (and probably even in the good times) it is helpful to remember how this "business philosophy" can illuminate the economic darkness in these trying times. A couple of common sense examples for us might be:

Looking closely at what is really core to the business:
- This does not mean only core revenue streams, or profit centres; but which people or products could I not do without in the running and future of my business.
Is my sales messaging or branding suited to the current environment
- Business savings and efficiencies, as opposed to faster go to market
How can I shorten sales cycles or delivery lead times:
- Emphasis on existing customers, or market niches where I have proven success
- Pricing strategy or financing terms

Obviously these are specific examples, based on our own companies and experiences, probably different to the companies relevant to your universe. I would like to draw your attention to a great article published over the weekend in the Jewish Chronicle of London, based on an interview with Dan Schwarzmann, the PWC appointed administrator for Lehman Bros – what a headache that must be! I am grateful to one of our LP's who brought this to our attention and I think that it gives some really sensible guidelines applicable to almost all companies during the current crisis.

Enjoy the article and I hope that it helps you to navigate the stormy waters that we can expect for some time to come.

Dr. Doom was right!

2009-02-25T11:29:00.002-05:00

Scary!
http://www.youtube.com/watch?v=2I0QN-FYkpw&eurl=http://www.peter-schiff.com/
I am with this guy on most issues. His basic argument is that the US economy has been driven by a fake economy - run on spending and credit. Real economy should be run on production and savings. Recessions are "healthy" economic cycles that effectively rebalances a healthy economy toward a higher rate of production and savings than spending and credit. Therefore - the stimulous packages in the US and across the globe are doomed to failure. In fact, it inflates the problem.
The video essencially shows Peter Schiff over a 2 year period being taunted by the expert pundints as fundamentally wrong in his predictions. Well...not anymore.
My question is can innovation, education, healthcare and other types of activities that the US and other western countries still maintain a healthy lead in - allow economic growth without physical production?
Yes, the general consumers must move from spending to savings. This will hurt the economy on a global scale - but will the US and western Europe EVER bounce back?

Quote of the day...or of the past couple of centruries!

2009-02-02T10:22:00.000-05:00

"Owners of capital will stimulate working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks which will have to be nationalized and State will have to take the road which will eventually lead to communism." (Karl Marx, 1867)

Sound familiar!

Doom and Gloom

2009-01-04T04:58:00.002-05:00

Not a good way to start the new year...but Nouriel Roubini - AKA Dr. Doom - from Stern School of Business says the Worst Still Is Ahead of Us (see article below from Bloomberg). I don't agree that the economy's deflation status today will lead to an all out liquiidity trap - but it will strengthen the key currency - the dollar. And depending on how the Euro performs, the Euro may disappear ina few years and the currencies will once again be divided per country.

Nouriel Roubini Says Worst Still Is Ahead of Us: Year in Review
2009-01-01 05:01:00.7 GMT
Jan. 1 (Bloomberg) -- The global financial system in 2008 experienced its worst crisis since the Great Depression of the 1930s. Major financial institutions went bust. Others were bought up on the cheap or survived only after major bailouts. Global stock markets fell by more than 50 percent from their 2007 peaks. Interest-rate spreads spiked. A severe liquidity and credit crunch appeared. Many emerging-market economies on the verge of a crisis had to ask for help from the International Monetary Fund. The global financial system literally went into a cardiac arrest after the Lehman Brothers Holdings Inc. collapse and a meltdown was barely avoided through very aggressive policy responses. So what lies ahead in 2009? Is the worst behind us or ahead of us? Ufortunately, the worst is ahead of us. The entire global economy will contract in a severe and protracted U-shaped global recession that started a year ago. The U.S. will certainly experience its worst recession in decades, a deep and protracted contraction lasting at least through the end of 2009. Even in 2010 the economic recovery may be so weak -- 1 percent growth or so -- that it will feel terrible even if the recession is technically over.

Recession Spreads
There also will be recessions in the euro zone, the U.K., continental Europe, Canada, Japan and the other advanced economies. A hard landing for emerging-market economies may also be at hand. Among the so-called BRICs, Russia will be in an outright recession in 2009. Growth in China will slow to 5 percent or less, representing a hard landing for a country that needs expansion of close to 10 percent to move 10 million to 15 million poor rural farmers into the urban industrial sector every year. Brazil will barely grow in 2009. Even India will experience a sharp slowdown. Most other emerging market economies will suffer a similar hard landing. This severe global recession will morph into a stag-deflation, a deadly combination of economic stagnation/recession and deflation. In the advanced economies, with aggregate demand falling below growing aggregate supply, slack in goods markets will lead to deflationary pressures as companies' pricing power is restrained. Likewise, rising unemployment will constrain labor costs and wage growth. These factors, combined with sharply falling commodity prices, will cause inflation in advanced economies to ease toward negative territory, raising concerns about deflation.

Danger of Deflation
Deflation is dangerous as it leads to a liquidity trap: nominal policy rates can't fall below zero, so monetary policy becomes ineffective and even quantitative easing may not work. Falling prices mean that the real cost of capital is high and the real value of nominal debts rise. This leads to further declines in consumption and investment, thus setting in motion a vicious circle in which incomes and jobs are squeezed, aggravating the fall in demand and prices. As traditional monetary policy becomes ineffective, other unorthodox policies will continue to be used: policies to bail out investors, financial institutions, and borrowers; massive provision of liquidity to banks in order to ease the credit crunch; and even more radical actions to reduce long-term interest rates on government bonds and narrow the spread between market rates and government bonds.

Triggering Event
Today's global crisis was triggered by the collapse of the U.S. housing bubble, but it wasn't caused only by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans and student loans. There were also massive excesses in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will suffer massive losses as defaults surge; in the dangerous and unregulated credit default swap market. Moreover, these pathologies weren't confined to the U.S. There were housing bubbles in many other countries, fueled by excessive and cheap lending that didn't reflect underlying risks. There was a commodities bubble and private-equity and hedge-funds bubbles.

Shadow Banks
We now are seeing the demise of the shadow banking system, the complex of non-bank financial institutions that looked like banks as they borrowed short term and in liquid ways, leveraged a lot, and invested in longer term and illiquid ways. As a result, the biggest asset and credit bubble in financial history is going bust, with overall credit losses likely to be more than $2 trillion. Unless governments rapidly recapitalize financial institutions, the credit crunch will become even more severe as losses mount faster than recapitalization and banks are forced to constrain credit and lending. Equity prices and other risky assets have plunged from their peaks of late 2007, but there are still significant risks for more declines. An emerging consensus argues that the prices of many risky assets -- including equities -- have fallen so much that we are at the bottom and a rapid recovery will occur. But in the next few months the macroeconomic news, the earnings and profits reports, and the financial sector news from around the world will be worse than expected. This will put more pressure on prices of risky assets, with a chance of a 20 percent fall in global equity prices.

Meltdown Averted
While the odds of a systemic financial meltdown have been reduced by the actions of the Group of Seven and other economies, severe vulnerabilities remain. The credit crunch will persist and spread beyond mortgages. Deleveraging will continue, as thousands of hedge funds -- many of which will go bust -- and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing price declines and driving more insolvent financial institutions out of business. Credit losses will mount as the recession deepens. And a few emerging-market economies will certainly enter a full-blown financial crisis. So 2009 will be a painful year of global recession and further financial stresses, losses and bankruptcies. Currently, the probability of an L-shaped, stag-deflation is now rising to a third, while the probability of a severe U-shaped recession is two-thirds. Only aggressive, coordinated and effective policy actions by advanced and emerging-market countries can ensure that the global economy starts to recover -- however slowly --in 2010, rather than entering a more protracted period of economic stagnation.