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Fuzzy Math, Greater Fools and the Facebook IPO
I have several friends who think the Facebook IPO is the next Microsoft.
I think it's more likely the next Research in Motion.
Or perhaps the next Sony, Kodak, or Eastern Airlines–all of which were once world-class brands that got sideswiped by hungry new competitors.
Facebook…you may as well buy a lottery ticket.
Don't get me wrong. In just a few short years, Facebook has accumulated an unprecedented 845 million users representing 12.07% of the world's population.
But does that merit an offering worth as much as $100 billion?
Maybe to a lot of people, but not to me.
Think about the numbers.
There are 7 billion people on the planet today, 5.15 billion of whom live on $10 or less a day. Of that group, roughly 3 billion people live on less than $2.50 a day.
That means if you remove those who live on less than $10 a day because theoretically they can't afford a computer or don't have enough disposable income to be monetized, that leaves roughly 1.85 billion potential Facebook users.
In a perfect world where a company could capture 100% of its target market, that would cap Facebook's potential user growth at 118.93%.
But we don't live in perfect world. As far as I know, no company has ever captured 100% of its target market. Not once.
The Investment Lesson Behind the Kodak Bankruptcy
The recent bankruptcy of Eastman Kodak reminds investors they don't make companies like they used to.
Founded in 1892, Kodak shows that very few of these 19th century giants exist anymore.
Companies, like washing machines, just don't have the staying power they used to. Even the largest companies these days are unlikely to outlast a 40-year investing career.
The evidence for this increased corporate mortality rate is both substantial and startling.
According to John Hagel III, Co-Chairman of Deloitte LLP Center for the Edge and author of "The Power of Pull" (Basic Books, 2010), the lifespan of such companies is now about 15 years. That's a stunning change from 1937 when the average life expectancy of the companies in the Standard and Poor's 500 Index was 75 years.
A similar 1983 study of the 1970 Fortune 500 found the life expectancy of its companies to be around 40 years, with a third of them vanishing in the intervening 13 years.
Thus the progression from 75-year corporate lifespans to 40 and now to 15 since 1937 has been clear and more or less smooth.
The Kodak Bankruptcy is One of Many
Of course, not all these corporate deaths are due to bankruptcies – some of them are takeovers, which are much more common since the 1970s.
Even so, bankruptcy is not even enough to kill some companies. Think of the airlines, which have survived multiple Chapter 11 bankruptcies, staggering on like zombies through a fog of losses until – like PanAm in 1991 – somebody mercifully puts a silver bullet in their corpse.
Other companies disappear because they cannot cope with technological change. That is Kodak's problem, even though 120 years is a pretty good run.
However, entrepreneurs' motivations are different today.
Estate duties, which reached their current punitive level in Herbert Hoover's misguided 1932 tax increase, are another cause of short corporate lifespans. After all, if your company will be broken up on your death, you'd be wise to sell it in your lifetime and turn the money into a more liquid form.
The younger generation of entrepreneurs seems to have internalized this idea. Today, they go for repeated entrepreneurship rather than old-style empire-building.
Peter Thiel, for example, made his first billion when he sold PayPal to eBay Inc. (Nasdaq: EBAY). Then, instead of building a corporate behemoth, he used his money, skills and company-building know-how to jump-start several other companies, including Facebook and Palantir Technologies.
The corporate lifespan is thus much shorter than it was, and not likely to lengthen again.
As investors, that means we need to abandon (To continue reading, please click here…)
Three Glencore Xstrata Takeover Targets: TCK, AAL, FCX
The proposed mega-merger of Glencore International PLC and Xstrata PLC will create a global powerhouse with the potential to shake up the mining industry overnight.
If completed, the $90 billion deal will form a mining behemoth with control over one-third of the global market for thermal coal, and make it the world's largest producer of integrated zinc production. It will also rank as the world's third-largest copper producer and fourth-largest nickel producer.
Basically, the merger would create a super-giant that could compete with the industry's heavyweights – BHP Billiton Ltd. (NYSE ADR: BBL), Rio Tinto PLC (NYSE ADR: RIO), and Vale (NYSE ADR: VALE) – the mining industry's "Big Three."
The merger is certain to spark volatility in the sector, according to Money Morning Global Resources Specialist Peter Krauth, an expert in metals and mining stocks who runs the Global Resource Forecast investment service.
"What observers need to understand is consolidation like this concentrates decision making," Krauth said. "The fewer participants in an industry, the more impact they have.
When output is either increased or decreased by one or more mega producers, it will also have a larger impact on world supplies, and therefore prices."
With that kind of power, the Glencore-Xstrata deal will form a goliath with the appetite – and the muscle – to swallow its weaker rivals.
Glencore Xstrata: Hungry for Mergers
Based on estimated 2011 results compiled by Credit Suisse Group AG (NYSE ADR: CS), the new company would have revenue of $211.3 billion and net profit of $7.5 billion. That kind of clout would make its stock valuable currency for more acquisitions.
Plus, both companies are led by aggressive chief executives that have a history of snapping up competitors.
Xstrata has been racking up spectacular growth through acquisitions, although lately it has focused on organic or internal growth to boost production by 50% by 2014.
Glencore, a trader of metals, minerals and oil, has said the main idea behind going public after almost four decades as a private company was to grab acquisitions.
Of course, the new company would have more going for it than sheer size and a forceful management team.
Glencore has a giant global intelligence network of 2,000 employees in about 40 countries. Many of them are traders and marketers that collect extensive data on what commodity buyers want and when.
"Glencore's network makes the CIA look like your grandmother's coffee club," columnist Eric Reguly recently wrote in The Globe & Mail. "It has been adept at forecasting commodity prices based on intimate knowledge of production, demand, regulations, political whims, transport costs and movements everywhere."
Glencore's intelligence network will likely direct it to takeover targets that have iron ore resources, an area where Xstrata currently lacks exposure.
The industry's Big Three control nearly 70% of the one billion-ton annual iron ore seaborne trade, along with contract pricing. Lately they've been dampening prices by flooding the market with iron ore, driving high-cost producers out of the business.
But their mushrooming market shares have triggered more regulatory reviews by concerned governments. That should clear the way for the new Glencore Xstrata entity to target smaller competitors without the Big Three interfering.
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