I am probably one off the few who does not care about the Super Bowl one bit. I have it on in the background with the sound off only so I can know when it's time to get out to dinner and beat the rush. It's halftimee, some band is on and I've had some thoughts:
- Herb is on to something here. But this is just the tip of the iceberg. Over the past decade, companies have been forced into engaging in more and more unnecessary financial engineering by those who have proposed that:
a) Cash is a bad thing to have
b) If you're going to have cash, you should maximize the return, regardless of whether you truly understand the risks.I doubt that this is the first big company that should have known better that will have to come clean in the same way.
- Smaller companies already have had to come clean. Here's Kevin Depew's note about CKE Restaurants (NYSE:CKR) last earnings release:
Increasingly, earnings for these companies are only tangentially related to their core business. For many of these companies, say, a restaurant operator, or a network equipment seller, how its "business" is going is only a sideshow. Many companies today are essentially hedge funds masquerading as businesses.
- Many of these companies, like the afformentioned CKE are just the suckers in the game. As the old poker adage notes, there's always a sucker, if you can't figure out who it is, it's you. When you're the CFO of a relatively small fast-food chain with $10-12m in earnings every quarter, which is borrowing money to buy up stock and is getting sold on complex derivative investments, then you are the sucker. Period. The investment bankers and consultants selling you on this crap are going to eat you alive.
- Jeff Matthews identified this trend last year, showing us The Shareholder Letter You Should, But Won’t, Be Reading:
So, in order to finally start getting things done instead of spending all day explaining to these hedge fund fellows and the Barking Seals on Wall Street why we weren’t “returning value to shareholders,” we decided to do the big buyback and the big dividend.
And for a few weeks there, it was pretty nice.
The stock jumped, the phones stopped ringing, and the Barking Seals started congratulating us on the conference calls instead of asking us when we were going to get rid of our cash.
Unfortunately, not only did getting rid of our cash and taking on a huge debt load NOT “return value” to you, our shareholders, it actually crippled the company for years to come.
- I won't further comment on the "cash management" scheme utilized by two real-estate professionals at the top of my previous entry, but it's right there should you not notice the same general attitude. (Debt = good, Cash in the bank = bad)
- I'm really looking forward to Moo Shu at Yang Chow while everybody else is watching the Super Bowl.
-btc
