Saturday, March 19, 2011

GM: Watching a Success Story Unfold

The once stellar Blue Chip company, which had all but fallen off a cliff, was rescued days before it threatened to shut its doors for good. Against all odds, and with the involuntary support of the taxpayers (bailout Funds) GM went into structured bankruptcy like a battered lamb, and emerged like a lion. Eighteen months ago, there were more than enough economists, auto industry analysts and political figures arguing against bailing out the big three auto makers. The American people had also had their fill of Bailouts, especially as increasing numbers feared being laid off.
Keeping hope alive, GM pressed on.
The IPO issued November of last year, brought in over $20.1 billion, with an additional $2 billion raised in the days following the historic offering. GM’s offering goes down as the biggest Initial Public offering Ever. There were several objectives at play here; to capitalize the new firm to get back on its feet, pay off creditors, pay back most (if not all) of the Government bailout funds, and revitalize their brand. The company’s market valuation was estimated to settle somewhere in the range of $50-70 billion after the much anticipated IPO. However, in reality analysts estimated that the company needed to yield a total valuation closer to $70 billion if the government was going to break-even on the bailout funds.
Although GM’s marketing campaign was well received in the weeks leading up to the sale, the IPO did not stand up to the hype and expectations. Ultimately, the valuation landed on the bottom range of the estimate at $50 billion, with a share price of $33 per share. Still, considering the size of the IPO, it was a huge success.

As the sales numbers continue to climb a success story begins to take shape. Reuters reported that last month marked a 49% jump in auto sales for GM, as a clear affirmation that their business strategy is working. Further, the 102-year old corporation posted four consecutive profitable quarters, which yielded a net income of 4.7 billion for the calendar year, with gross revenues of $135.6 billion in its first full-year of operations. Well done GM, well Done.

So far, it would appear that GM has taken lemons and set up a lemonade stand. It is exciting to watch the GM comeback success story unfold.

Interesting Article concerning GM's Move to Cut unnecessary spending amid Japan Disaster, Click Here

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The Cohn-Reilly Report

Friday, March 11, 2011

Myspace: Down but Not Out

Presently down, but in no way out of the game, Myspace, which is currently owned by News Corp, has hired investment banking firm Allen & Company to sift through the nearly two dozen firms interested in an acquisition or merger with the social networking site. Although Myspace’s popularity has been edged out by Facebook in recent years, it still has over a quarter of a million users. Since the social networking pioneer is free to it members, advertisers and affiliate contracts has been the main source of income, thus revenues began to take off by '2005. We’ve reported how well Facebook’s Mark Zuckerberg made out with a recent infusion of $1.5 billion via creative financing put together by Goldman Sachs. The Goldman-Zuckerberg finance documents indicated a Facebook value of an astounding $50 billion.

To put it in perspective, of the growing number of social networking sites, Myspace is ranked 3rd - just under Facebook and Twitter. So, what is the likely valuation? By the 2nd quarter of 2007, Myspace was on track to surpass the expected $500 million in revenues, but has since seen revenues decline steadily with intense competition stemming from Facebook and Twitter.

The Wall Street Journal Reported that News Corp is open to merging Myspace with another business in exchange for cash or equity in the merged firm. Myspace is a longway from the solid financial footing of Facebook, but New Corp realizes there is untapped potential in the Myspace brand. Considering the reported 4th quarter losses amounting to over $150 million, how can this, still viable, business be restructured, and re-marketed to emerge profitable once again? I suppose that will be for the winning bidder, and their business strategists to determine.

Back to Home Page K. Reilly
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Thursday, March 3, 2011

Will Oil Derail the Recovery?

Here we go again. As we know by now, most of the major downturns that have occurred in the US and the world, since the 1970s, have been preceded by sudden increases in oil prices. We are at levels, currently around the $100/barrel mark, that will impact inflation, GDP growth and potentially employment.

As described by the U.S. Energy Information Administration, since the United States is a net importer of oil, higher oil prices affect the purchasing power of U.S. national income through their affect on the international terms of trade. The increased price of imported oil forces U.S. businesses to devote more of their production to exports, as opposed to satisfying domestic demand for goods and services, even if there is no change in the quantity of foreign oil consumed.

When oil prices increase, the consumer suffers – sounds all too familiar. Purchasing power diminishes as consumers use more of their income to pay for products that are directly affected by oil such as gasoline, heating petroleum, and jet fuel. Less money is spent on other goods and services causing a vicious cycle of contraction, due to decreases in retail expenditures and diminishing confidence. Since companies depend on oil for transportation and other operational needs, the increased costs to run businesses are passed along to the consumer in the form of inflationary prices. To further compensate for increased energy costs and less demand, firms will reduce the bottom line of expenses by laying off workers. This scenario results in lower GDP and higher unemployment.
Since we have made some real progress during the last 12 months for economic recovery, I am hoping we do not fall back into a recession pattern, but oil is a real risk here. After Tunisia, the unrest spread to Egypt, causing a spike in prices due to worries about the possibility of the Suez Canal shutting down; one of the most important oil transport passageways in the world. The Libya uprising caused more market jitters as 1.5 million barrels a day of oil was choked off, later covered by Saudi Arabia, the world’s largest oil exporter, to prevent shortages. The unrest appears to be continuing and spreading as protests have been reported by CNN in Iran, Iraq, Syria, Algeria, Morocco, Jordan, Oman, Yemen and others in the region. Interestingly, it was reported yesterday that there could be protests in Saudi Arabia coming. Since it doesn’t take much for oil prices to react quickly - that would certainly adversely affect the market if it really happened. Also, the high peak spring/summer driving months are approaching - could we have $5 a gallon gas prices? Some analysts think it is possible, given the uncertainly of what is happening in the world and how oil reacts to it. I certainly hope not, because the scenario I outlined above could become a reality.

Read about the higher Oil Prices' Impact on Housing Recovery
C. Cohn
Cohn-Reilly Report