Subba’s Serendipitous moments

April 28, 2009

Market capitalization of Microsoft and Apple

Filed under: Business,Competition,Strategy — Subbaraman Iyer @ 11:17 am

In my last post here, the chart that I picked up from Bloomberg could be misleading. For the sake of clarity let me state the market capitalization numbers:

Microsoft’s market cap is $181B based on the latest data here

Apple’s market cap is $ 111B based on the latest data here

However the main point that I made in the post still stands. Here\’s the market capitalization of both companies over a 5 year period.

Market cap data for Microsoft and Apple

Market cap data for Microsoft and Apple

The Bloomberg chart was on a log scale and I didn’t realize it.

Thanks to Balaji — one of my blog readers for flagging it.

April 26, 2009

Will Apple overtake Microsoft?

200904261310.jpg

Though some may argue that market capitalization is not a strong indicator, but it still remains a proxy for market success. Apple had been having a lot of product successes, while Microsoft continues to flounder.

For one, Apple’s iPod and iPhone have been stellar success creating the halo effect for other Mac products. Microsoft Vista has clearly failed, and XP users will switch to Microsoft’s new OS — System 7 due for release this year.

A comparative assessment of Microsoft and Apple can be found here.

The last quarter — Apple surges, but Microsoft declines

There is enough literature comparing these 2 companies. Apple has finally managed to steal the thunder from Microsoft not just for products but financial results as well.

The quarter ending March 2009 is significant both for Apple and Microsoft and may be the real inflection point.

Here’s news about Microsoft:

Microsoft reported the first ever drop in quarterly profits in its history.

Revenues in Windows software was down 15% and this can be attributed to a number of reasons:

The traditional purchases of PCs and laptops were weak due to the slowdown in the economy.

Netbooks the new category that has seen the biggest surge in 2008 uses Windows XP (a stripped down version of Windows XP Professional) contributing to lesser revenues. It is clear that Vista is a failure and Microsoft will have to wait till System 7 to create customer interest.

The Microsoft Office is rarely deployed on Netbooks further eroding Microsoft’s revenue base. Microsoft’s Office 2007 has again received only lukewarm response. In fact, most users are happy with Windows 2003.

The Microsoft online business continues to lose money and it is unlikely that they will see any turnaround, notwithstanding how the alliance with Yahoo pans out. While the explanation is weak ad spending, Google has not been impacted much.

Still Microsoft sits on a cash hoard of $ 25 billion despite the fact that net cash from operations in the quarter declined by 16% this quarter.

Microsoft has begun retrenching. It has already laid off 5000 workers and based on the rumor mill, this may double in the next 2 quarters.

The same calendar quarter, but Apple produces the best non-holiday quarter in its history

A 3% decline in Mac sales, and that too in the high end “Pro” line because of reduced spending by the US education sector due to economic slowdown. The consumer spend for Mac seems to be not affected at all.

The iPod continued to grow at 3% with a 70% market share in the U.S and also a dominant market share in all other countries.

The iPhone had a stellar quarter with a 121% growth.The iPhone is now sold in over 80 countries and 21 million units have been shipped.

Apple’s remarkable achievement was the AppStore with over 35,000 apps and surpassing the 1 billion downloads in about 6 months time.

Apple sits on a cash hoard of $29 billion and clearly has no specific plans with the cash.

Well, the lesson is Apple continued to innovate not just around products and technology, but around business models. Its App Store is now the benchmark for software applications that can be downloaded.


April 20, 2009

Oracle acquires Sun — Unexpected and interesting

Oracle announced that it is going to acquire Sun for $9.50 in cash valuing Sun at about $7.5 billion or $5.6 billion net of Sun’s cash and debt.

The deal comes after talks between IBM and Sun failed. I had analyzed why the IBM may not really need Sun here and here. IBM had offered $9.40 per share. Oracle’s offer is a 40% premium over Sun’s closing price.

However this acquisition by Oracle is both unexpected and very interesting. Sun’s software assets could become better strategic assets to Oracle than Sun’s server or storage business. After Sun acquired MySQL , the relationship between Oracle and Sun had soured. Oracle had acquired Innobase to neutralize MySQL but it hadn’t made much headway. Of course Java could become the pivot of Oracle’s middleware strategy.

The open source database angle becomes interesting. Having MySQL in its stable gives Oracle access to its huge developer base and web applications market. Will Oracle kill MySQL to protect the Oracle 11g cloud margins or milk it for whatever it is worth before allowing it to die in neglect will be interesting to watch.

Sun has a large installed base and becomes an immediate target market for Oracle to target with its applications.

Since Sun’s manufacturing is already outsourced, there’s nothing much left for Oracle to do. It can sell whatever is left in the hardware business — the storage, server and any other chip business to either HP or Dell.

Oracle now fine tunes the database performance on Solaris and sells a combo. HP and others will feel the impact.

Oracle gets the scale and muscle to attack IBM.

On the overall, there seems to be a better strategic fit between Oracle and Sun, than Oracle and IBM. Both companies also have a strong feisty culture and hyper competitive spirits so integrating them could be easier.

What is also interesting is that Sun’s board approved the deal quickly and unanimously after just scoffing IBM’s deal which was just 10 cents less per share.

April 15, 2009

Satyam clearly overvalued

Subsequent to my earlier post where I mentioned that Tech Mahindra seems to have over paid for Satyam, got an email from an ex-Satyam employee(who prefers to remain anonymous) He mentions that Satyam’s annual revenues are more likely to be between $1.3 – $1.5 billion.

If that be the case, then Tech Mahindra has valued Satyam at a revenue multiple of 1X revenues which is quite high by industry standards in the current environment. Even Accenture a blue chip with impeccable credentials is only quoted at 0.7X revenues.

So, it indeed looks that Tech Mahindra has over valued Satyam.

It is also intriguing that since the beginning there were no serious contenders for this business — be it from US or Europe multinationals or even from Indian IT service providers. L&T which was considered the favorite to win was only trying to reduce their average buying price since they had acquired 12% of Satyam for a high price in the past.

April 14, 2009

Tech Mahindra gets Satyam — Pays more, interesting challenges ahead

Satyam Computer Services ranked as India’s 4th largest outsourcer by revenues (after Infosys, TCS ,Wipro) and which went through some very anxious times following the scandal brought about by its founder has found a new owner.

After a bidding war where only 3 parties participated (Larsen & Toubro, Tech Mahindra and US investor Wilbur Ross), the prize has gone to Tech Mahindra.

Tech Mahindra offer of Rs. 58 per share (U.S $1.16) was 21% higher than the next bidder (Larsen And Toubro who already own a 12% stake) The offer price is also 23% higher than its highest traded price since the news of the scam broke out in early January.

Since the auditors Deloitte and KPMG are in the process of rewriting the accounts it is difficult to value the company. But based on a number of sources, Satyam’s annual revenues are in the range of $1.5 billion -$1.7 billion (down from projected revenues of $2.1 billion for 2008) with an operating margin of 3% while Tech Mahindra’s margins are in the range of 22% with revenues of $900 million. No one knows the extent of liabilities and also the exposure of the firm to some of the class action suits that’s likely to follow in the US.

Hence at the acquisition price, Tech Mahindra has paid a big premium and also brought some big challenges just to add $ 1.2 billion and a 3% margin business. Did Tech Mahindra over value Satyam? I certainly think so.

But as they say Value lies in the eyes of the beholder!

Tech Mahindra will have some big challenges not only in funding the acquisition but also running the Satyam operation. It is one thing to run a business where one client (British Telecom holding a 31% share) accounts for close to 70% of the business and another to deal with a diversified client base with poor operational efficiencies. Tech Mahindra will also have to learn to manage a work force almost twice its own size and dispersed globally.

Tech Mahindra will also have to figure out whether they want to keep this as an independent entity with a different name or do a possible merger. I think the advantages to be gained by an immediate merger may be limited in the short term since there are no synergies to be realized.

None of these challenges are easy. It would be interesting to watch the turnaround.

Satyam caretakers — the interim Board members like Karnik, Deepak Parekh and others did a great job transitioning it from a broken and rudderless ship to finding a good caretaker and owner. The entire Indian IT industry also played a mature role in not poaching Satyam’s clients or its employees.

April 13, 2009

Goal setting

Saw this snippet from a news magazine that I chanced to browse yesterday.

Ted Turner (founder of CNN) had just joined his father’s billboard advertising business when he was in his early 20s They lived during the depression and this strengthened Ted’s determination to work hard and be a millionaire and a own a plantation.

By the time Ted had joined the company, his father had all those things and and Ted remembers clearly his father taking him aside and saying, “Son, you be sure to set your goals so high that you can’t accomplish them in one lifetime. That way you’ll always have something ahead of you. I made the mistake of setting my goals too low and now I’m having a hard time coming up with new ones.”

I then remembered one of my school headmaster who once told me: “Not failure, but low aim is crime”. It has remained with me since then, and continues to inspire me.

April 6, 2009

IBM — Sun deal fails?

Filed under: Business,Competition,Model — Subbaraman Iyer @ 11:35 am
Tags: , , , , , , , , ,

IBM withdrew its $7 billion offer for Sun reports the NY Times which reports that Sun believed the offer was too low and the offer was rejected by the Sun Board. The Wall Street however is not so categorical about the rejection and believes the deal will go through.

I wrote earlier that IBM doesn’t need Sun. It is Sun that needs IBM. Sun has been in the market for a long time courting probable suitors.

The failure of the deal will hurt Sun more than anyone. Customers will be wary of purchasing Sun gear. Moreover the management will be questioned about their commitment to a go-it-alone strategy. Hence Sun may accept the lower price offered by IBM. Sun doesn’t have much choices left.

My assessment is that Sun’s problems may actually worsen after the failure of the talks. IBM comes out unscathed.

April 3, 2009

Sad about Silicon Graphics

A Silicon Valley icon disappears — unwept, unhonored, unsung. Thanks to my analyst friend for the tip.

Silicon Graphics which made the hottest workstations for high end applications and built awesome machines for making movies was sold for just $25 million to server maker Racker Systems.

I almost wanted to cry because I have seen the power of their technology when I used to be marketing CAD/CAM systems 20 years ago and often competed with them. SGI machines were used to make movies. Jurassic Park and Terminator 2 were made on SGI machines.

Silicon Graphics was founded by the famous Dr. Jim Clark who subsequently left the company and founded Netscape.

There have been bigger failures, but they still were acquired for billions, not for something like $25 million.

I did see it coming even 2 years ago when I wrote about the lessons that one can draw from its road to bankruptcy. But is eventual sale for such a miniscule amount at a bankruptcy court is definitely saddening.

Well, guess that’s business!

April 1, 2009

Emotion and speech

A saint asked his disciples, ” Why do people shout at each other when they are angry?”

The disciples thought for a while. One of them said, ‘Because we lose our calm, we shout for that.’

“But, why shout when the other person is just next to you?” asked the saint. “Isn’t it possible to speak to him or her with a soft voice? Why do people shout at a person when they are angry?”

Disciples gave answers but none satisfied the saint.

Finally the saint explained, ‘When two people are angry at each other, their hearts move away a lot. To cover that distance they must shout to be able to hear each other. The more angry they are, the stronger they will have to shout to hear each other through that great distance.’

Then the saint asked, ‘What happens when two people fall in love? They don’t shout at each other but talk softly, why? Because their hearts are very close. The distance between them is very small…’

The saint continued, ‘When they love each other even more, what happens?

They do not speak, only whisper and they get even closer to each other in their love. Finally they even need not whisper, they only look at each other and that’s all. That is how close two people are when they love each other.’

MORAL: When you argue, do not let your hearts get distant, do not say words that distance each other more, else there will come a day when the distance is so great that you will not find the path to return.

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