I might humbly suggest that those journalists and reporters in both the traditional and financial media are largely missing the grander point on Apple the company and Apple the stock.  Running businesses is a lot more than seeing what ratios look like on financial numbers and saying whether something is undervalued, fairly valued or overvalued.

Fundamentally, and whether it is said this way or not, Apple has a monopoly position in digital music.  It’s easy, it’s fun, it’s cool and nobody I know anywhere has any desire to forklift upgrade their digital music, throw away their investment in purchases and ripping CDs in to iTunes or ever starting over again on another platform.  There may be an exception to every rule, but ever since Apple launched the iPod and “got it right” on MP3 players, nobody has even dreamed of challenging them in this area … not Dell with their media player, not Microsoft with Zune … no one.

As part of iTunes, Apple has made photos, videos, music, movies and now mobile applications simple, easy and bundled under one roof.  The anchor to this roof is most definitely music, and this anchor is something that no other smart phone manufacturer has anywhere.  Google and Android, Palm and Pre and Research in Motion and Blackberry just don’t have this natural anchor and draw to their application stores like Apple … so don’t expect them to be able to make the in-roads that people believe in the smart phone mobile application world.  Unfortunately there is just no other compelling reason to go to their mobile application stores as there is with Apple.  Sorry, but there just isn’t.

Ultimately, a pre-existing and trusted billing relationship exists with Apple’s consumers and the loyalty to the brand now goes way, way, way beyond the religious cult that it used to be.  As a result, Apple isn’t just winning the battle for mobile devices, but it’s also beginning to get people to shift from their Wintel PCs back to the Mac platform in meaningful numbers.  I expect that this trend will not only continue, but that it will also accelerate.  I’m not suggesting that Macs are suddenly going to be back on top in terms of market share, but I am saying that the “halo effect” of Apple’s mobile dominance is paying dividends on their Mac desktop and laptop numbers.  Plus, the next great battle of the larger PC war is going to be when the smart phones fundamentally become the PC of the future.

In parallel, Apple has a massively deep managerial bench of talent and it is my contention that most of the iPhone and iPod product and services designs and offerings were created during the period that Steve Jobs was completely out of the company.  My understanding from some detailed research and discussions with many inside Apple was that Jobs wasn’t even around day to day when the iPhone was created internally as his medical issues were already well underway … just not publicly known.  Steve Jobs might get credit for everything great at Apple, but the reality is a far, far different story and the number of fantastic individuals that are involved and responsible for the success of these mobile platforms at Apple goes way, way beyond any one person.

The fundamental aggregate talent in engineering, management and operational execution is what has driven Apple to greatness … not any one man … and not even Steve Jobs.  Apple didn’t miss a beat when he was out and won’t now that he’s back or if he’s out again.  The rich multiples Apple’s stock gets are a result of this dominance, not a cause of it.  The multiples will also look modest with the penetration of the world’s next large computing platform: the smart phone.  While Apple, Palm, Google and Research in Motion will alll have a market share, Apple owns 75% of all application downloads in the world and has an even larger dominance in music.  These market shares are like GOOG and search, MSFT and Windows, CSCO and routers/switches, EBAY and auctions.  Said another way … nobody can challenge this any time soon.

I will personally admit to having a great respect and admiration for Steve Jobs.  I think that he’s a great visionary and leader and wish him well with his health and most recent recovery.  I believe that he and Larry Ellison of Oracle should get much more credit for what they’ve done in the 2000s than Michael Dell at Dell, John Chambers at Cisco, Bill Gates at Microsoft and others of that decade as they grew their businesses in novel, unique and meaningful new ways after the decade of “a rising tide lifting all boats” was over and the penetration rates of PCs, cell phones and the Internet (broadband connections) rose from virtually nothing to more than 100%.  Said another way, from no market to a mature market … all in a single decade.  That penetration rate is about to be replicated again in the coming decade, but this time with the migration from cell phones to smart phones instead of the migration from circuit switching to packet switching from a decade ago.  Steve Jobs will remain an icon and a brilliant visionary.  However, with or without him Apple is strong, deep and well positioned to dominate as the monopoly that it is … even if most people don’t realize it just yet.  As a result, I like LEAP call options and/or core common stock holdings for Apple as it is clearly already a winner and will continue to be one through 2020 very, very easily.

Today we see more evidence of the stresses in “the system”.  It’s not so much that the markets are up or down in a big way.  In fact, today they don’t seem to be doing very much of anything, as the Dow is down a little more than 100 and the Nasdaq is off about 40 as of this writing.

The data continues to be bleak, whether it’s unemployment numbers, manufacturing numbers or pretty much anything else that we want to cite.  However, with that said, everyone continues speculating about our having hit “the bottom” back in October/November when we successfully retested the lows and held.  Even better though is the view that the market has already “priced everything in” except for “new surprises” or macro events.  Yeah, OK, sure it has.

Clearly Mr. Market is expecting the Fed to drop the Fed funds rate by at least 75 basis points to 0.25% at the end of its FOMC meetings today and tomorrow. But, while most of the world is focused on the Fed and “quadruple witching” options expiration this Friday, today I want to focus on the oil and gas patch and the latest announcement from Weatherford International that they too are leaving the United States for the greener pastures of Switzerland. 

Someone in Washington DC needs to start paying attention to how many large US corporations in the energy complex are simply throwing in their operational white towels and literally bailing out of the US in droves (at least in terms of their corporate structure, HQ leadership and investment).  At last count this puts Transocean, Foster Wheeler and Tyco in Switzerland and Haliburton in Dubai, in addition to many, many others that are probably less known by “the masses”. 

This is absolutely great, just great (insert frustrated sarcasm here for effect).  Perhaps as a next step our illustrious leaders can see if they can effectively drive Cisco Systems, Google, Microsoft, Apple and the entire core technology complex out of the country as well (again, insert frustrated sarcasm here for effect).  I’m sure that such grand political efforts would breed the basis for further improvement in the US economy and much stronger future prospects for the continued global leadership of our great nation.  Please, please, WAKE UP!!

Oil Companies Voting With Their Feet—Investor’s Business Daily

Source: 15 December 2008 (c) 2008 Investor’s Business Daily

Energy: Another day, another oil company fleeing the country. No, this isn’t Ecuador, the banana republic that just defaulted on its debt after chasing out investors. It’s the United States, and what we’re seeing is self-defense.

Much political hay has been made in Congress about “unpatriotic” corporations that move operations abroad. Weatherford International is the latest, taking its headquarters from Houston to Switzerland. The oil services company said that it wants to be closer to its markets. But what it really meant was that it no longer saw the future in the U.S.

In a political atmosphere of blaming corporations, it’s no wonder. Halliburton fled to Dubai in 2007. Tyco International, Foster Wheeler and Transocean International all went to Switzerland. As a pattern emerges, America’s global standing diminishes, in part because it’s based on the willingness of companies to invest. It’s an especially bad sign when domestic companies flee.

“The U.S.is an important market,” Weatherford CEO Bernard J. Duroc-Danner told the Houston Chronicle Thursday. But, “it’s just a market. It’s not the primary market.”

How does that sound for a loss of global leadership? If that’s not clear enough, try this: “In the hierarchical pecking order, (Houston’s) not going to be Rome anymore.”

What accounts for this vote of no confidence in the U.S.?

Start with the demonization of oil companies. Executives have been hauled before Congressional star chambers, held up to abuse and ridicule, and then blamed for high oil prices as if they wanted to kill their markets. Rising global demand, nationalizations and Congress’ failure to open the country to drilling go ignored.

Huge companies such as Exxon Mobil, whose market cap exceeds the GDP of most countries, create $100 billion in earnings in quarters when oil prices soar. It looks high, but over the years, the industry’s average returns, at 9%, are less than other industries.

Nevertheless, Exxon’s profits are evidence of its success at extracting oil from miles below the earth’s surface, even underwater, and from unbelievably hostile environments, such as the Arctic. Instead of being objects of national pride for their productivity and efficiency, and subjects of heroic Hollywood movies, their success is considered to be dishonest.

Congressional hostility affects oil companies’ operations abroad, too: Exxon, remember, noted that Congress’ animus toward oil profits directly encouraged Hugo Chavez’s uncompensated expropriations of $1 billion of Exxon’s assets in Venezuela, which drove oil prices higher.

With an expanded Democratic Congress and an incoming Democratic president determined to create “patriot corporations,” it’s no surprise to see companies try to get out while they can. Make no mistake — it’s investment fleeing the country. As this goes, foreign capital could flee next.

Congress’ abuse sets the political tone for the worst to come.

First, oil companies, like all corporations, endure the second-highest taxation in the developed world (39.25% of their income), which dampens their competitiveness. The 2007 OECD average is 27.6% and falling. Worse still, U.S. firms are taxed on operations around the world, unlike the global standard, making a move of headquarters a defensive move.

Meanwhile, politicians openly say they want to hike taxes on oil firms. President-elect Obama seems to have backed off, but questions remain as to whether he can stand up to a rapacious and economically ignorant Congress that hasn’t.

Second, Big Labor is feeling its oats, swaggering confidently with newfound political power. United Steelworkers approved a “national oil bargaining policy” for higher wages and beefed up its “strike defense fund,” both of which point 15 plans to squeeze oil companies, if not launch strikes.

“You have to prepare your membership for 2009,” according to USW International Vice President Gary Beevers on a union Web site. “The oil companies are ready for us; we have to be ready for them.” With Congress at their back, oil companies are unlikely to lose.

None of this portends well for the U.S.business environment. That’s why top-performing firms, such as Weatherford, are exiting. Until Congress learns to appreciate and value oil firms, this will continue, leading to less U.S. investment and influence as more competitive climes beckon.

Since my original post suggesting solutions to the ongoing nationwide mortgage crisis, I thought I’d provide a few updates and also another new (and what I believe to be critically important) suggestion for the use of TARP funds to stimulate the U.S. economy.

First, the mortgage crisis updates.  While all housing, real estate and financial data remains horrendous, there are rumors floating around that the federal government may, in fact, be considering a version of one of my previous suggestions.  Namely, in addition to the recent Treasury announcement to purchase up to $500 billion worth of Fannie Mae and Freddie Mac mortgage paper, the feds are now contemplating a blanket move to drive 30 year fixed mortgage rates to 4.5%. 

This, to me, is a *great* idea and is even better than the 5% rate that I had originally proposed.  While nothing is going to solve the mortgage crisis overnight, federal intervention to get mortgage rates down to a level that provides sound refinancing options for existing homeowners and great initial financing options for new homeowners will make a material difference from coast to coast.  Additionally, this approach would remove the moral hazard of only rewarding those individuals that were irresponsible in setting up their original loans and/or biting off more economically than they could legitimately afford.

You may ask yourself, why was 4.5% the magic number selected by Treasury?  I don’t claim to know the specific answer to this, but I think that I can reasonable come up with the math that would have allowed them to arrive at this number.  Namely, if 3 month LIBOR rates are at roughly 2.20%, and if the 10 year historic spread between LIBOR and mortgage rates is roughly 1.68%, then that would put 30 year fixed mortgage rates at about 3.88%, or 2.20% + 1.68%.  Right now the historic spread is far higher than the underlying 10 year average of 1.68%, so the difference between the historic average and today’s reality is probably closer to 0.62% (or 62 basis points) higher.  As a result, 1.68% + 0.62% equals 2.30% … and thus 2.20% + 2.30% equals our magic 4.5% mortgage rate number.  Simple enough? 

Now, let’s move on the second topic regarding new economic stimulus.  This one is much more straight forward and is one that embraces the creators of new businesses and new jobs: entrepreneurs.  As a serial entrepreneur myself, I have always believed that entrepreneurs come up with ideas that create new companies.  These new companies, in turn, create new jobs, which then create wealth that then gets consumed, reinvested or saved.  However, independent of which item of these is ultimately selected, the process stimulates economic activity and growth and the overall aggregate U.S. economy benefits immensely.

So, what’s my plan?  My plan is to take $4 billion from the TARP program and split it in to 20 batches of $200 million.  What we will do is transfer $200 million to each of 20 cities to be used exclusively for investment in early stage companies.  15 cities will be selected based on their ties to start-up building and would include cities already known for their ability to successfully create Internet, technology, biotechnology, software, hardware, financial and health care companies, with the remaining 5 cities being selected based on their severe economic challenges alone.  For the 15 cities, my chosen list includes, Seattle, San Diego, Los Angeles, Denver, Phoenix, Austin, Dallas-Ft.Worth, Atlanta, Raleigh-Durham, Richmond, Boston, Chicago, New York, Miami and the Bay Area (which I will treat as one city composed of San Francisco, San Jose and Oakland).  For the 5 cities, my chosen list includes New Orleans, Detroit, Minneapolis-St. Paul, Nashville and Cleveland.

Now that we have the money and the initial cities identified, we will have fund managers with start-up, venture capital and/or private equity experience locally selected to deploy the investment dollars.  Then, we will have local companies, either newly created or in “early stage” mode, be showered with $500 thousand to $1 million investments each on behalf of the U.S. Treasury and the American taxpayer.  These investments will be in the form of equity and will provide for roughly 300 investments in local start-up companies to the cities selected before all of the $200 million fund money is expended in each local market.  And, if you’ll allow me to use experience as my guide, I will posit that for a material percentage of these companies invested in by the American taxpayer, others will provide matching or follow on private investment in the form of high net worth individuals, Angel funds, venture funds, private equity funds and/or corporate strategic funds.

So what does this do?  This direct stimulus addresses the heart of the problem accompanying the current ongoing crisis relative to unemployment and job creation.  I will be the first to admit that some of these investments will ultimately not pay off at all, and also that many of these companies underlying the investments will not survive.  However, for the U.S. taxpayer to make a good return on their investment, all we will need is a handful of successes in each individual market, or a few major successes anywhere throughout the country.  That’s all.  Simple, easy, straight forward and the best economic stimulus in the world … empowering ideas to spawn creativity to solve real problems to create real businesses to create real jobs that create real wealth to create real returns in spades.

Doubt that this is possible?  I sure don’t.  Way back in the late 1990s, Ron Conway, Casey McGlynn and Bob Bozeman took this exact approach in managing a $100 million Angel fund in the Bay Area called SV Angels LP (SV = Silicon Valley).  Ultimately they invested roughly $300 thousand per start-up company in a shot gun type of approach and as a result, were able to cover about 300 companies with the money raised.  Some of these investments, such as GirlGeeks.com and others, turned out to be spectacular failures during the Internet bubble and lost every penny invested in them.  However, some of their other start-ups turned out to have had liquidity events that ranged from modest wins to enormous successes.  These included companies like the one that I ran called Vovida Networks that was purchased by Cisco Systems for more than $100 million, and other companies that many of you would know well … from Napster to Plaxo to Google.  That’s right, Google, which as I understand it delivered more money back to the fund than the entire $100 million invested all by itself.

I know, I know, you’re saying that this is an unusual example that can’t be repeated again.  From my perspective I would suggest that not only are you wrong in this conclusion based on history, but also that even if you were right, this $4 billion in TARP money would have exponentially more valuable benefits to the entrepreneurs, companies, employees, governments and communities in which the money was put to work than the tens of billions of dollars already deployed through TARP to banks that are not putting virtually any of that money to work for the businesses and consumers that need it right now.

More specifically, out of a $700 billion TARP program, $4 billion put to work in this way wouldn’t even represent 0.6% of the entire TARP program.  Think about that.  Are you willing to invest up to 1% of TARP in a program like this across the country, or throw another $50 billion at Citigroup or AIG?  Exactly.  And, if anyone is upset about my choice of cities, let’s increase this commitment from $4 billion to $7 billion, take the full 1 percent of TARP as suggested and add another $200 million fund in each of another 15 cities across the country.

Trust me.  There would be no greater use of money than this modest investment in the great ideas of entrepreneurs to create the next wave of great American companies.  Period.  And, the return on investment to the American taxpayer will go way, way beyond the ultimate end state value of the equity purchased through all of these deals.

Mr. Obama, Mr. Paulson, Anyone in Government that Can Make Things Happen - please contact me and I would be happy to serve our country as the National Director for this program!

I am a serial entrepreneur and a founder of many businesses.  I am also an individual and fund investor that enjoys aggressive growth, start-ups and ideas that can either revolutionize an existing industry or launch a new one entirely.  Lately, however, I have been downright amazed to see the hubris and foolishness driving corporate decision making by founders with regards to mergers, acquisitions, valuations and exit opportunities.

Call me crazy, but I believe that any founder running any business that has taken outside money from anyone is nothing more than a steward of that business and has to focus their decision making and fiduciary responsibility with one simple goal in mind.  Namely, how do they take third party money to grow their business and create value and then monetize that investment in a reasonable timeframe in order to deliver returns to those investors.  By following this simple goal, it is likely that founders, employees, advisors, directors and investors will all benefit greatly and that the interests of all stakeholders will be in alignment with one another.

Don’t get me wrong here on my point.  I believe immensely in the vision, ambition and aggressive drive (or craziness) necessary for founders to be able to take an idea and turn it in to a great company (or any kind of company for that matter).  Without some of these underlying personality quirks and eccentricities, it is likely that a great idea would go absolutely nowhere at all.  However, when taking a look at the behavior of the founders running Facebook, Yahoo (NASDAQ: YHOO) and Sandisk (NASDAQ: SNDK), one has to wonder aloud what in the world is going through these individuals minds and why nobody on their boards or in their investor bases are intervening in a major, major way.

After News Corporation (NYSE: NWS) bought MySpace and then increased its value almost ten fold from its exit price, I could respect some of the preliminary decisions at Facebook to say “no thanks” to acquisition offers that underpriced the value that had already been created.  Heck, on my first business with my business partner we too said “no thanks” to Polycom (NASDAQ: PLCM), Terayon (NASDAQ: TERN) and others before finally saying “yes” later on to Cisco Systems (NASDAQ: CSCO).  But, when a Microsoft (NASDAQ: MSFT) comes along and offers $10B - $15B in cash for your business and allows an immediate path for outrageous monetization and returns for all parties involved in a reasonable timeframe and without any operational risk whatsoever, you just have to *run* to sign the definitive agreement on behalf of your stakeholders, say “thank you” and move on.  Put a checkmark in the “W” column, put the money in the bank, change lives economically forever for those involved and then, if you want to, go out and do it all over again as Steve Jobs, Jim Clark and Marc Andressen have done before you.  

With regards to Facebook specifically, fast forward to today and what do you find?  You find a company that is starting to look like it is running the near term risk of completely missing out on what might have been possible with a Microsoft acquisition, both certainty of outcome and massive economic returns.  True, Facebook has grown immensely over the past year and Tech Crunch did a fantastic job on October 31st summarizing this growth in terms of user growth increasing from 74M to 161M uniquie monthly visitors and web activity increasing from 35B to 61B page views overall.  After all, 118% and 74% year over year growth on such metrics are amazing and to be commended.  Unfortunately, though, the cost of that growth has been equally off the charts and now Facebook appears to need to raise significant additional capital in what can only be described as a horrendous capital raising environment as a backdrop.

Even though Microsoft ponied up a quarter of a billion dollar investment not too long ago at a nosebleed $15B valuation, it appears that Facebook is out talking to sovereign wealth funds in Dubai and elsewhere in the Middle East as no VCs or private equity firms appear interested in investing at the valuation desired by the company.  Uh oh.  Meanwhile, online advertising is being curtailed by companies large and small alike, only 1 in 4 new Facebook users are from here in the United States and international user add ons are growing despite these additions having little to no associated revenues and much, much higher bandwidth and access costs.  As a result, it sure looks like the $10B - $15B offered by Microsoft would have been a much, much better outcome than the operational risk now accompaying the future of Facebook from this point (Pointcast anyone?).

In parallel to this drama we have seen equally poor decision making coming out of both Yahoo and SanDisk as well.  Founders gone wild in both instances for sure.  Exhibit one is Yahoo and Jerry Yang’s similar refusal to a Microsoft offer that would have likely ended up in the mid $30s, and a premium to market of something around 100%.  On top of this immense economic benefit to investors and Yang alike, all Yahoo employees would have been retained by Microsoft and given quite lavish retention packages to ensure that they didn’t walk out of the door at closing.  Instead of saying “yes”, however, Yang decided that going it alone would be a much better path forward and this decision led not only to a Yahoo share price below even where it was pre-Microsoft offer (today around $12.70 per share), but also thousands of terminated Yahoo employees that otherwise would have all been retained with “in the money” stock options and compensation packages that would have preserved all of their past work and guaranteed their future work as well.  Great, great decision on that one Jerry.

Exhibit two is SanDisk, and very similar to the path taken by Yahoo, Founder Eli Harari did an absolutely fantastic job spurning Samsung’s $26 per share all cash offer while it was trading at basically half of that value.  Dr. Harari, despite currently owning less than 5% of SanDisk’s outstanding shares, made the “compelling case” that the memory industry was undergoing a cyclical down turn and that the Samsung offer was a low ball attempt to get a great asset in SanDisk at a market valuation not reflective of its true underlying intrinsic value.  Really?  Seriously?  You want shareholders to believe that somehow $26 in cash right now is less than $13 per share in stock value (which is now less than $10 per share as of this writing)?  And you want others to believe that the operational risk associated with the NAND memory market and future cash flows possible from the next upturn for SanDisk will more than offset the time value of money associated with the deal on the table right now in this market environment?

All of these examples are frighteningly similar in the ”founder foolishness” accompanying the decisions being made at the top of what are very much brand name and well known companies.  Founder CEOs should not and are not entitled to treat their businesses like “personal piggy banks” when they have taken outside money.  However, in all of these examples, similar founder behavior is being displayed and it is drastically and materially affecting each and every non-founder associated with all of them negatively.

The punchline for today is simple.  Be a founder.  Have a great idea.  Start a company.  Execute your vision.  However, while doing so stop forgetting about what your real job is.  If you want to do whatever you want, then stay private and don’t take any money from anyone.  However, if you elect to raise money or operate publicly, then realize that you are no longer what the company is all about.  You are simply there to be a steward on behalf of others.  In the cases of Facebook, Yahoo and SanDisk, it would be well served for all of their founders to collectively pull their heads out and understand this, immediately.