Sunday, November 1, 2009

Discussion on sale of UT, its prospects and GM situation

This is my response to some message board chatter:

"Must have been the board exams working on your mind."

I dont doubt that Flip. I'm still recovering after the 160 questions in 8 hrs. I just don't get why it takes them 13 weeks to get us the results....O'well alteast it won't ruin the holidays if the results are bad.

"I see no reason why the company could not be sold now for more than the current trading range. If I wanted a company with cash, no debt, technology, a global footprint and a US listing, I would be willing to pay over the current price.....if the company was for sale. The point is, the company is becoming worth less every day given the cash burn and lack of revenue."

Again, this is flawed thinking. The company was burning $50m/quarter for quite some time so we knew their book value was going down. However, did you buy the company for their "value" or for the potential turnaround and increase in profits? For any tech company, I would argue that people don't buy it for their book value but more for upturn in their business. Actually, for most tech companies, its the "cycle" in their businesses. The memory companies for example do really well as memory prices stabilize and move up. You can't even touch those companies at ANY price if the prices are falling but they are like gold when it is increasing (look at SandDisk, WDC, and STX for ex.).

The question with UT is not about management/BOD at this point but whether you believe there will be an up cycle in the next 2-3 years. Have they atleast put themselves in position to take advantage of the boom in 3G, iptv, broadband, etc. I continue to be negative on the board and sometimes Blackmore (for not acting quick enough and no defense of the stock) BUT, I didn't really invest in those things 4-5 years ago and definitely didn't invest in those the last 2 years.

I could and have been wrong on the ramp of the business but that doesn't mean it will never happen. There is a significantly higher chance of success after this current restructuring, move back to China, focus on certain markets/products than at anytime before. I'm sorry if you don't like my optimism but I am more focused on the business than whether they can be sold for $5 (we talk about it but thats not the main focus).

You and others can focus if the cuts were too much or too little but does it do the company any good in producing products that were way ahead than before? I am more interested in quality of contracts with higher margins than just getting contracts. I am more interested that their breakeven point is $350m rather than $750m or over $1B in revenues.

As I've said before, the company has already lost its chance to become the next Cisco, Huawei, etc a LONG time ago. The question is whether they can be profitable and have a nice niche position/business model that could potentially accelerate as markets/products ramp. I would not have a problem bringing up the potential sale when it actually is meaningful (when the stock is much higher and business has turned around). Even earlier this year before the restructuring, there was a potential sale but definitely not now. Anything is possible but it would really be idiotic at this stage.

I end this posting with some excerpts on a very good article recapping the GM bankruptcy/restructuring by Steven Rattner (in the latest Fortune magazine). Steven Rattner led the government takeover/bailout of GM/Chrysler. In it he talks about the GM board:

"It seemed completely obvioius to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential."

He ends the article by saying, "Like any patient that undergoes major surgery, a successful recovery is far from assured. .....In the case of GM, the overacrching question is whether, without infusion of new blood, its management team can implement the massive cultural change that is essential. But by dramatically lowering the break-even point for both companies, we believed we were creating a healthy margin of error."

This is really the question for investors right now.

Have a good rest of the weekend.