Sunday, October 12, 2008

Weekly recap - Under $2

The stock closed at $1.96, down 92 cents or 32%. Yes, thats a $1 handle on the stock and that was even off the low of $1.65. The DOW & S&P lost 18% and the Nasdaq was down 15% for the week. It could have been worse as the market made a dramatic surge late Friday "limiting" losses. Despite the significant declines in the market, UTs decline was particulary severe because of their clean balance sheet and already reduced share price (valuation). Nevertheless, the lack of liquidity and institutional support shows what can happen when certain institutions need to get out of a $2 stock that has an average volume of less than 1 million shares recently. As of this posting, the futures are skyrocketting and will atleast get the market off to a good start.

For the week, here are some discussion points.

Viraj Patel filing - No other PRs from the company except some updates on compensation (what a surprise on the PR front) for the interim CEO Viraj Patel. Basically, Mr. Patel gets a $100k bonus for his added responsibilities and a waive of previous performance clauses tied to 60k RSUs. He also gets another $46k for a turnaround "retentions" bonus contract set in late 2007. Its easy and tempting to make additional smug comments on compensation for management but in this case atleast they are going to save on Barton's future compensation.

Huawei cancels handset sale - "Given the current global market conditions and prevailing economic uncertainty the interests of the company are best served by postponing the sale process," Huawei said in a statement. Morgan Stanley had been advising the firm on the sale, which was expected to raise around US$2 billion for a majority stake in the handset division. According to people who had seen the information memorandum produced by Morgan Stanley, the unit is this year expected to report revenues of $3.5 billion and produce net profits of about $400 million.

Nortel MEN - Nortel's metro ethernet networking division is on the blocks with lukewarm interest. According to a story in the Financial Times, Nortel’s efforts to sell its metro Ethernet network business isn’t going well.
Citing two investment bankers not involved in deal, the sale has “stalled” or it’s “lukewarm”.
Given the volatile capital markets environment, this should not come as a major surprise. As well, you have to believe Nortel is looking to get an attractive price - let’s say $1-billion to $2-billion - for MEN, which will be a challenge.
The FT quoted one of the investment bankers as saying MEN is worth $700-million in a “good” market, and it has attracted 10 bidders with “lukewarm” interest.

The news above regarding Huawei and Nortel shows the difficult environment in selling even profitable business units. There has been consistent discussions with the low share price of UT that it could be on the block but that is very unlikely in this environment. At the very least, it will not get a decent price. UTs board had a chance to sell it back in 2006/early 2007 (atleast some parts of it) but chose not to and the company is hopefully further along in its turnaround than most companies that are just feeling their slowdown. We'll see.

A final note taken from a Nortel blog ( Paul Kedrosky, a venture capitalist and well-known business pundit, believes the telecom equipment market is heading for even more difficult times because many of its customers (e.g. carriers) are going to badly hampered by the credit crisis.
Carriers “can’t afford to build out because the availability of credit isn’t what it once was,” he said during an interview on Yahoo Finance’s TechTicker.
When asked about consolidation within the industry, Kedrosky said it has to happen given the market’s dynamic and that “Nortel doesn’t make it out of this cycle alive”.

So, in terms of speculative play on a sale, Nortel would probably be a higher probability than UT. It seems management/board will always wait until the VERY LAST minute before selling out ensuring maximum pain for shareholders, unfortunately. Lets hope (again) that UT can be an exception. BTW, Yahoo is trading in the $12/share range. Does anyone believe (including the yahoo board/management) that Microsoft's $33/share (or even the $31/share) was not a gift from God at that time? Its unbelievable that it took yahoo's board/management to bail out Steve Balmer and company. Lets "hope" there is someone left to bail out UT shareholders.......

Have a good "trading" week everyone. Keep the powder dry and those fingers quick ;-)

PS... There are a lot of stocks trading that have daily charts that mirror 5 year charts in terms of price range. So, if you really want to "go for it", this is your market :-)

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