Sunday, August 9, 2009

What playing the disclosure gambit tells your investors

As previously noted, I publish my rants and opinions in this forum, and desperately try to keep to the facts on Filing Watch™ and Private Semiconductor™. My work tweezing strategic information from semiconductor company SEC and court filings for publication in Filing Watch™ has revealed a great diversity in corporations' interpretation and application of accounting standards, regulations, case law and generally accepted practices. Some corporations continue to view the objective of regulatory filings to be minimal compliance, while others appear to follow the spirit of the rules and disclose information useful to the investor community for judging both the merit and risk of owning the company's stock. As an example, the disclosure of customer concentration; all customers contributing more than 10% of the company's revenue during the reporting period can be addressed in the following ways:
  • Complete evasion method: Customer "A"= 27%, Customer "B"= 16%, Customer "C" = 12%
  • Hiding behind ODMs and distributors: Foxconn = 27%, ASUSTeK = 16%, Avnet = 12%
  • Telling the useful truth: Apple = 27%, HP = 16%, Dell = 12%
Another puzzling act is the pooling of acquisition financials. Here is a recent example from Intersil:
  • During the third quarter of 2008, we purchased D2Audio Corporation (“D2Audio”) and Kenet, Inc. (“Kenet”). D2Audio was a privately-held fabless semiconductor company with leading technology in the design of digital audio power amplifiers. Kenet was a privately-held, fabless semiconductor company with leading technology in the design of high-speed, extremely low power data converters. During the fourth quarter of 2008, we purchased Zilker Labs, Inc. (“Zilker”), a privately-held, fabless semiconductor company with technology leadership in high efficiency digital power integrated circuits. The purchase consideration for the three acquisitions was $44.7 million in cash paid to complete the mergers, net of cash and cash equivalents received for the three companies, and for professional fees and the assumption of certain liabilities. The purchase consideration is subject to change depending on the final purchase accounting. Based on our preliminary evaluations, which are expected to be completed no later than the fourth quarter of fiscal year 2009, the acquisitions included approximately $13.2 million of definite-lived intangible assets, which will be amortized over five to seven years, and goodwill of approximately $19.2 million. In addition, approximately $2.8 million of in-process research and development (“IPR&D”) was expensed as a result of the acquisitions.
So, what message are companies choosing to send to their investors? Do they treat their disclosure obligations as a deposition and try to get away with one word answers, or do they provide useful and insightful information, allowing those who read SEC filings to made informed decisions?

Monday, May 4, 2009

Let the consolodation begin

I've pontificated for the last 18 months that the semiconductor industry is poised for firestorm of consolidation, but there has been very little action due to the stalled capital markets and executive leadership teams focused on revenues, cost cutting, balance sheet clean-up and falling stock prices. Small M&A deals have been closing quietly, much to the satisfaction of a handful of boutique advisory firms. In the last six weeks though, several larger mergers and carve-out acquisitions have been announced:
  • QLogic acquires NetXen
  • NetLogic acquires "search engine" carve-out from IDT
  • IDT hijacks Tundra from suitor Gennum
  • Microsemi acquires "defense and security" carve-out from Endwave
  • Ikanos acquires "broadband access" carve-out from Conexant
  • Broadcom launches unfriendly acquisition of Emulex
  • Microsemi acquires "rad hard" carve-out from Spectrum Control
  • Microchip acquires R&E International
  • Rambus acquires packaging patents from Inapac
  • LSI acquires "RAID adapter" carve-out from AMCC
  • Trident Microsystems acquires "frame rate conversion and audio" carve-outs from Micronas
  • Western Digital acquires SiliconSystems
  • Microchip accumulates 9.2% of Supertex
The stage is now set with irrationally low market valuations, very poor (wafer, assembly & test) capacity utilization, a maturing industry where scale is attractive and revenues having declined significantly. Seems like very dry kindling waiting for a spark........

Will the semiconductor industry consolidate in an orderly and logical progression resulting in bigger and healthier competitors benefiting all parties? Or, will we follow the path of other 50 year-old industries and consolidate in a fury of ego and hubris which transfers shareholder equity into the ether?

Tuesday, February 17, 2009

We pay for the illusion of safety; are we getting a good deal?

In what warped universe does a mutual fund that has lost 30% in the past 14 months deserve a 5-Star rating?

Selling is the act to convince a buyer they will receive good value for money. It is important that we consider the actual value of safety, as it is a key selling point for every transaction. Our purchases of food, medicine, automobiles, airline tickets and investments rest on a foundation of safety.

We fund government agencies (SEC, FDA, USDA, DOT, etc.) to regulate some products and their sales with the belief that a high level of safety will be established and maintained, or at least the open disclosure of risk will allow buyers to make informed decisions. The conspicuous public outrage directed at Bernard Madoff and his $50B Ponzi scheme is a societal response to an individual’s outrageous behavior and the failure of our government’s regulation. While investors were lured by their own greed to obtain impossibly consistent returns, all confidence schemes require the perpetrator to sell the illusion of safety to retain their investors. Today Madoff is under house arrest, his known assets seized, and all of his family and business associates are being compelled to answer, “what did you know and when did you know it?”

Our desire for reassurances of safety compel us to fund independent rating agencies such as Underwriters Laboratories, Moody’s, Standard & Poor’s, Morningstar, Insurance Institute for Highway Safety, etc. I’m personally astounded that after catalyzing a global financial disaster, Moody’s and S&P have not only survived, but seemingly thrive today. This leads me back to Morningstar that provides equity research and ratings services to investors. In what warped universe does a mutual fund that has lost 30% in the past 14 months deserve to maintain its Morningstar 5-Star rating which it has held for 10 years? By any rational measure, a 5-Star rating is intended to engender safety and encourage investment in a particular fund. Does the fact that it limited its losses compared to the broader market garner the 5-Star rating? Let us now all acknowledge that the measure of safety provided by the financial ratings agencies was a very poor deal and maybe their CEO should be under house arrest! By the way, how many of us received calls from our “maintain a balanced and diversified portfolio” investment advisors in 2007 telling us to get the hell out of the market? Not I!

Sunday, February 8, 2009

What do I look for when building a team?

I've shuffled the priority of these hiring criteria over the years, but this list has served me well:
  1. Very high level of professional and personal integrity.  This is profoundly difficult to measure in an interview, but it is the primary value of hiring people with whom you have previously worked and now trust. 
  2. Intellectual brilliance.  I'm living proof of how someone can compensate for his shortcomings, but you must surround yourself will the brightest people you can attract to solve the great challenges your business will face.  Aspire to be the dumbest guy in the room.  I've often described this quality as hiring intellectual athletes.  A candidate's work experience might not be precisely what you were seeking, but a keen intellect and a willingness to take on new challenges are much more valuable.
  3. Great student.  Loves to learn new things every day.
  4. Great teacher.  Loves sharing their knowledge to help others succeed.
  5. No jackasses. This is not the same as "no ego" or "team player."  Life is just too short to work with jackasses no matter how valuable you might think they could be to your business.
  6. Great work ethic.  Great technologists and business people work hard because they enjoy the challenges and want to succeed.

Saturday, January 31, 2009

Optimism and enthusiasm in northern California

For the last two days of this week, I was in San Jose (Santa Clara, Palo Alto, etc.) to meet with old friends in the semiconductor business and to make new connections with investment banks and law firms to whom Parallel Semiconductor LLC may be of service.  I am always delighted by the optimism of the bay area, its entrepreneurs and those supporting their innovation and growth.  Just a few highlights from my trip:

  • The good fortune to hear F. Scott Kieff address the topic of Non Practicing Entities.  If you ever have the opportunity to read or listen to Scott's views (easy to do with so much of his material available on the Hoover Institute web site) he will allow you to see IP and patents in a very new (possibly a very old) light.  Highly recommended! 

Thursday, January 29, 2009

Strategy and the game of Battleship

So often we speak to "strategy" as a high level, time based, roadmap of technology and products forecasting years into the future.

Has anyone ever built a successful business implementing such plans?  Not I.  I prefer to craft my strategies using the game of Battleship method.  The original game rules (PDF) for those too young or too old to have played.

Here's my simplistic model:
  1. You have to get in the game. You must field a prototype of your product and aggressively gather feedback and market intelligence.  
  2. Apply the product feedback and intelligence to adapt your product plans.  Some shots will be misses, but the hits can blossom into entire product lines.
I have no fundamental argument against the traditional approach of mapping SAM, TAM, competitors, SWOT or even executives with "Strategic" in their title.....but please don't call the output of this method a strategy until you have waded into the market and started to map your hits and misses.

Wednesday, January 28, 2009

Irrational exuberance to fear, uncertainty and doubt

So, the transition is nearly complete.  In little over a decade we have experienced irrational exuberance AND fear, uncertainty and doubt (FUD) in the global economy.  While the Nobel Foundation recognizes the profound complexity of Economic Sciences by awarding an annual prize, will our generation of consumers, investors and business leaders finally acknowledge that it is not the beauty of gaming theory, but psychology, greed, institutionalized deception and hubris which are truly the most powerful factors in economics?  Fear, uncertainty and doubt and now consumes us all.  The FUD is so deep that even aggressive investors and entrepreneurial business leaders are unable to act.  At best we are all dealing with our personal and professional fears, at worst we have bona fide crises (fund losses, crashing sales, crippled personal portfolios, etc.) to be managed.

So, where from here?  If the traditional venture capital model is on hold for now, let's invest our time, expertise and small amounts of private capital to bootstrap the next wave of start-ups.  Great companies like 37signals and those emerging from TechStars depend on great people, a huge investment of time and relatively little money.  Let's stop staring into the headlights!



Sunday, January 25, 2009

Phoenix real estate on sale

As highly publicized over the past 18-24 months, home prices in Phoenix metropolitan area have backed-up about six years in established neighborhoods.  The fundamental question is, "Where's the bottom?"  Might today's buyer reasonably expect another 20% decline (equivalent to an additional 2-4 year back-up)?  A new phenomena for me is the market splitting into two segments; wholesale (investors intending to "flip" properties and buying at auctions, short sales and foreclosures) and retail (end buyers intending to live in the home or rent out as a business).

Clearly the next crash will be in commercial properties.  Phoenix currently has more than 33 million square feet of empty commercial space with an additional 3.5M under construction.  Sale and lease asking prices have declined only slightly in the past 12 month, but in the past few weeks it seems as EVERYTHING has been posted for sale; established leased properties (including $150M in Penske automobile dealerships), vacant buildings and raw land....signs everywhere!  I wonder how much more TARP money will be needed to absorb these future bank losses?


Another leap from a perfectly good airplane

Every five to eight years I take my career in a different direction and depart from a perfectly good company.  Early in my career I was seeking greater technical challenges, but I have always had my fingers in both business and technology believing that engineers, as opposed to pure scientists, are judged by their ability to produce revenue and profit.

Early in December 2008, I publicly announced my February 28th, 2009 departure from Standard Microsystems (SMSC).  I've been VP of Corporate Engineering at SMSC since they acquired Gain Technology in June 2002.  In the past eight years, I've had the great privilege to work with some of the industry's best and brightest engineers and business leaders.  Together we have built engineering teams, design centers, great products and successful businesses which transformed a corporation.  I will always be grateful for the opportunities which were offered to me and the triumphs we enjoyed together

So, now what?  From today's global financial wreckage, corporate consolidation on a grand scale is inevitable and great new ventures and business models will emerge.  On March 1st, I will be joining Parallel Semiconductor LLC which provides engineering and management consulting services to semiconductor, financial and legal communities.  I will also be engaging organizations focused on identifying and helping young entrepreneurs succeed!

The next five years promise to be chaotic and fun!

Cheers!


An unusual start to a blog

Most business and technology blogs are pontifications of the author's wisdom and observations.

I'd like to start this blog recapping a few of my failed pontifications of the recent past:

October 2007 - "The market won't see a bottom for AT LEAST three more months!"  In reality, the bottom may be three, or more, years away.

Spring 2008 - "I'm afraid that Barack Obama may not be electable in 2008."  I could not be more proud of my Country's demonstration of color blindness.

Summer 2008 - "We'll never see crude oil below $100 a barrel again!"  Enough said.