Friday, September 26, 2008 Yahoo! still lacking a significant catalyst

[Posted on September 24, 2008 - 10:02 AM]

We're not sure whether this amounts to truly fresh news since people have been writing about it since at least Monday, but the Financial Times is reporting that Yahoo! Inc.'s [YHOO] revamped board has given the go-ahead to negotiate a combination with AOL LLC. At this point, there shouldn't be that much to talk about since the two were reportedly in discussions when Yahoo! was madly searching for alternatives to a deal with Microsoft Corp. [MSFT], or at least looking for some leverage in any Microsoft talks.

If the two sides are talking, the question becomes whether a deal really does anything for Yahoo!, or is just the combination of one large and struggling Internet company with another. At least one analyst thinks the deal would do little for Yahoo!, though it could depend on terms.

Cowen & Co. LLC analyst Jim Friedland says he believes it's possible Time Warner could exchange AOL for a 20% to 40% stake in Yahoo!, but that valuation is likely to be a major hurdle to getting a deal done. In a research note issued earlier this week, Friedland writes that such a deal would give Yahoo! incremental scale, but that a combination of two assets that are experiencing the same secular challenges would not yield material value.

If an AOL deal is not enough to shake Yahoo! out of the doldrums, what could? Eric Jackson, a Yahoo! shareholder who has been openly critical of the company, believes there's one way the company could possibly turn things around.

"The only thing that would do that is for the company to name a new CEO who's not [current CEO] Jerry Yang and not [president] Sue Decker who would look at this thing with a fresh set of eyes," Jackson said in an interview. "I bet the shareholders at Lehman wish they would have had someone with a fresh set of eyes rather than an insider over the past eight months."

Jackson said the only time he's been optimistic about Yahoo! in the past six months was when activist investor Carl Icahn announced he was staging a proxy fight for control of the company's board of directors. But with Icahn unable to garner a majority of seats on the board, Jackson said it will be difficult for him to enact major changes at the company or to get Microsoft back to the bargaining table.

"I'm pretty skeptical whether Icahn and his colleagues are going to push this forward and do anything," he said. "They can't push Microsoft. It's up to Microsoft whether they want to do something, and my guess is that Microsoft is going to wait for Yahoo!'s shares to collapse further and try to get it on the cheap." -- David Shabelman

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Thursday, September 18, 2008 Activist Investor: Stale Ideas Killed AIG, Lehman
By Eric Jackson
09/17/08 - 09:43 AM EDT

As we all try to digest the unprecedented volatility that has besieged the stock market this week, with Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) and Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) now washed away, there is one question that is often repeated: How could so many smart people get things so wrong? It wasn't hubris or laziness. It was the inability of the board members and CEOs to look at the problems facing their companies with fresh eyes.

Newcomers like John Thain at Merrill took decisive actions to create the maximum shareholder value under the circumstances. Old-time CEOs like Dick Fuld at Lehman and Robert Willumstad at AIG(AIG Quote - Cramer on AIG - Stock Picks), who is a new CEO but has been on AIG's board since 2006, dawdled, and their companies are now paying the price -- one with bankruptcy and the other agreeing to a government bailout last night.

Management theorists Don Hambrick and Danny Miller conducted a study on the seasons of a CEO's tenure 20 years ago. They found that CEOs had the freshest eyes early in their tenure. They revisited old decisions made by their predecessors and charted a course for the organization under their leadership. After only a few years though, the CEOs began running their companies from within the prism of their past decisions. If their strategy didn't work out, they would defend it, stating that it simply needed more time.

This tendency for defensively believing in past decisions is not a CEO condition -- it's a human condition. It's not a trait that gets noticed when times are good, but it can be a deadly trait in so-called "perfect storm" times like the one we're currently living in.

It's up to the boards to hold CEOs responsible for their decisions by questioning them when warranted. Sadly, that didn't happen in the case of Lehman and AIG. In the case of both, it cost them the companies.

In this environment, even the most gilded companies' CEOs -- such as Lloyd Blankfein of Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) and John Mack of Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) -- need to be questioned by their boards. Worst-case scenarios must be discussed and preparations made.

Just because a CEO has a long tenure at a company and holds the title of chief executive doesn't mean he or she will fail; it simply means he or she needs to be on guard against "conventional wisdom." Conventional wisdom a few months ago was that Lehman was no Bear Stearns.

Wachovia's (WB Quote - Cramer on WB - Stock Picks) new CEO, Robert Steel, appears to be using his financial industry experience (he formerly served as head of equities at Goldman and undersecretary of the Treasury), as well as his lack of Wachovia tenure, to make quick moves in downsizing and separating the good and bad aspects of the bank in his first couple of months on the job. It warrants watching if he can be successful in doing what's needed at that bank in comparison to Thain's moves at Merrill.

Vikram Pandit, the CEO of Citigroup (C Quote - Cramer on C - Stock Picks), deserves a lot of scrutiny. He came to Citi after his Old Lane hedge fund was acquired. So far, he has done little to separate himself from the model that Sandy Weill built and for which Chuck Prince acted as caretaker. Will Pandit be just another caretaker? How will Citigroup be defined under his tenure? We have yet to find out. In the meantime, the company's stock drifts lower with the industry, and Citigroup continues to pay a dividend it can't afford. There is no urgent capital-raising needed yet, but Pandit needs to have the pressure kept on him.

In these difficult times, all CEOs and directors must come to work each day with fresh eyes to confront the problems they face. No matter how much past success they've achieved, no matter how esteemed these CEOs are, Lehman and AIG have taught us how easily everything that it took generations to build can be lost.

There, but for the grace of God, go I.

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Saturday, September 13, 2008

Google's Interest in GeoEye and Geospatial Imagery

A few days ago, I wrote about Google's potential interest in buying geospatial imagery company, GeoEye. Here are some additional reasons for why Google might want to acquire GeoEye and control the actual satellites and additional analytical tools which GeoEye possesses as a supplement to their Google Earth product.

One of the first companies which Google acquired after it went public in 2004 (for an undisclosed sum) was Keyhole -- the foundation piece for Google Earth. As a carry-over from that acquisition, Google has continued to sell its Google Earth imagery to end users for a fee: Google Earth Plus (for a $20 annual subscription) and Google Earth Pro (for a $400 annual subscription).

At first glance, it doesn't seem to make sense for Google to keep such a subscription model in place with its dominant Google AdWords Search model. Yet, Google aspires to make money beyond AdWords. They have continued to invest in a competitive suite of applications as an alternative to Office (called Google Apps). They have done so, because they believe people will save their data and files through Web services in the future (in the cloud) rather than on their PC. If this occurs, Microsoft is tremendously weakened and Google grows.

Google Earth is yet another way for Google to make money. However, it is less a money-maker on its own, rather than a way of driving loyalty and therefore revenues back to Google Search and Google Apps. For Google to keep its Google Earth subscription model in place 4+ years since the Keyhole acquisition suggests it has further plans for this model of selling its high-end earth imagery. It is not a mistake that it has maintained this model.

Consider this also. Google is interested in developing its relationship with Government (the largest customer for satellite imagery). Go to for more evidence of this. Google's focus in this niche centers on 3 services: Search, Geospatial Images, and their Google Apps suite of Web services (Gmail vs. Outlook, their own apps vs. Office). (To see an example of a government client that has used Google Earth to improve their efficiency, see this case study on the US Forest Service.) As Google develops their relationships with such a client, it becomes much easier to go back and communicate the benefits of search and Google Apps. Microsoft would have to more heavily invest in its Virtual Earth offering to keep up with Google (or perhaps acquire GeoEye's smaller competitor, DigitalGlobe -- who's revenues at the time it filed its S-1 earlier this year were smaller than GeoEye's).

One government client that Google has great interest in developing a relationship with is the National Geospatial-Intelligence Agency (or NGA). NGA also happens to be GeoEye's largest customer. This coming week, Google is a Gold Sponsor of the NGA's Industry Day. This is a classified conference for US citizens only at which the NGA will lay out their plans for the coming year. (GeoEye is a Silver Patron for the conference.) Google will be continuing to push the benefits of Google Earth and Google Search Appliance (its tool for pulling key information from government clients' own records) at this conference and afterwards. They would not sponsor this conference if they did not see opportunity in this government vertical in the years ahead. (GeoEye's chief competitor, DigitalGlobe, is interestingly not a sponsor at this event.)

Some evidence that the NGA has big plans in the years ahead came out last week when the IT consulting firm NJVC, who works closely with the NGA and is also a Gold Patron at the conference mentioned above, announced that it is expanding its square footage by 33% and hiring 100 new employees in expectation of significant growth in the firm in the coming 4 years. NGA is NJVC's largest customer.

Matt O'Connell, CEO of GeoEye, has also discussed rapid expansion to keep up with planned growth in orders from NGA and other customers now that the new GeoEye-1 satellite was successfully launched last week. GeoEye did $200 million in annual revenues a couple of quarters ago and will certainly exceed that in the coming 2 quarters now that they've successfully launched their newest GeoEye-1 satellite last week. The NGA will continue to be a very important customer to GeoEye.

Google also clearly sees opportunity here in this space. The question for Google is how can it take Google Earth to the next level? This is where GeoEye becomes interesting as an acquisition target. By owning GeoEye, Google would own the proprietary images it captures from its satellites. There would continue to be the need to invest in future satellite launches to stay ahead with the most up-to-date technology but Google certainly has the capital and the interest in space to do this. Owning the satellites also allows Google to develop the tools and unique services which can become integrated into Google Earth but (perhaps more importantly down the road for Google) its Android operating system which it will roll out on future mobile handsets (think highly unique location-based services here).

Google could sit back and just buy images (as Microsoft and Yahoo! do) from GeoEye and DigitalGlobe, letting them take the risk of launching the satellites, but their opportunities to develop proprietary location-based services would diminish (or become easier for Microsoft, Yahoo! and others to copy down the road).

GeoEye is a more compelling potential acquisition target for Google than Digitalglobe for two reasons: (1) it has the newest satellite in space today with the most advanced features and (2) it has a cadre of tools for using the images which their private competitor DigitalGlobe lacks. These tools came, in large part, from the MJ Harden acquisition done last year by GeoEye. More tools, from Google's perspective, means more usage of Google Earth from its clients and therefore more usage of Google Search and Apps.

Additionally, Google and GeoEye have grown closer in these last few weeks. The two companies agreed that GeoEye would not sell its images from GeoEye-1 to any other online portal. Google's co-founders, Larry Page and Sergey Brin, were at the launch of GeoEye-1 in California last Saturday (Page remember has signed up to be launched into space himself in 2011).

Google doesn't buy GeoEye for $200 million a year in revenues. It buys GeoEye to make Google Earth and Android truly remarkable in the years to come, as well as cementing Google's place in the Government vertical with its core Search and Apps offerings.

A deal before the end of the year would make sense as GeoEye is beginning discussions with other parties about funding its next satellite GeoEye-2. Google has the opportunity to control the specs of what that would look like if they do the deal now instead of waiting and having to share the specs with other parties.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Thursday, September 11, 2008 Activist Investor: Why Google Cares About GeoEye

09/11/08 - 10:00 AM EDT
By Eric Jackson

GeoEye (GEOY Quote - Cramer on GEOY - Stock Picks) is a relatively small company that takes pictures of the Earth from three satellites it operates in space. You've probably never heard of it. However, Google (GOOG Quote - Cramer on GOOG - Stock Picks) co-founders Sergey Brin and Larry Page have. In fact, both attended last Saturday's launch of GeoEye's newest satellite at Vandenberg Air Force Base in California. In fact, Google's logo was on the side of the rocket that launched the satellite into space.

Why were they there, and what does it mean for Google and GeoEye investors?

I wrote about GeoEye earlier this year and have a large long position in the company. While the company has had issues largely of management's own making (delays in the launch of the satellite, minor earnings restatement and poor communication with investors), it has now overcome all of these with the near-textbook launch of the GeoEye-1 satellite last week.

GeoEye operates in a duopoly in the U.S. with DigitalGlobe, a smaller, private and less well-capitalized competitor. Both companies take geospatial images of Earth and sell those to governments and commercial customers. Until the last six months -- when GeoEye gave up some market share to DigitalGlobe, which launched its newest satellite in the sky last fall -- GeoEye was a $200-million-a-year company with 45% operating margins. It will now quickly return to that size and much more in the next year.

GeoEye-1, the satellite launched last weekend, is a game-changer for the industry. It's the first satellite to take color images of earth with the highest resolution. If you want to snap some images of a baseball plate at your local park, GeoEye-1 is up to the task. DigitalGlobe, assuming it goes public in the next year, will not leapfrog GeoEye with a better satellite for at least two years.

From a valuation perspective, GeoEye is compelling. The stock closed Wednesday at $26.31. Assuming the company returns in 2009 to its revenue run rate of six months ago, GeoEye is trading at 5.2 times 2009 earnings. BCC Research estimates that GeoEye's industry market is increasing from $1.9 billion this year to $3.2 billion by 2012. With that type of growth rate, a valuation of 12-15 times 2009 earnings is more than justified for GeoEye today, which would put shares at $60-$76.

The largest risk facing GeoEye -- and weighing on the stock -- had been the prospect of an unsuccessful launch of GeoEye-1 last Saturday. That risk is now past. In 30-45 days, GeoEye's largest customer, the National Geospatial-Intelligence Agency for the U.S. government, will sign off on the quality of the first images and start to place orders with the company.

The Google Factor

All of these valuation assumptions don't take into account that GeoEye announced, just days prior to the launch, that it would provide images from GeoEye-1 to Google exclusive of other online portals. The company has yet to give financial details of the arrangement, but Google clearly cares about GeoEye, as the attendance of the founders at launch confirm.

GeoEye is strategic to Google from a couple of angles. First, GeoEye will provide images to Google Earth and Google Maps. More importantly, GeoEye is intimately tied with Google's plans for Android, the mobile operating system it will roll out to handset providers later next year. Google is effectively buying proprietary mapping technology from GeoEye that can be later integrated into new location-based services we have not yet seen.

For example, with high-resolution images from a satellite that circles the earth several times a day, it becomes possible to integrate real-time traffic information when plotting traffic directions. It also becomes possible to easily track GPS-equipped vehicles.

GeoEye also has significant mapping tools that can be used to analyze multiple or time-series images, an interesting feature that could be interesting for Google Earth and Google Maps to implement.

If the connection between Google and GeoEye came down to merely improving Google Maps, you might have expected a Google product manager to attend last week's launch, not the co-founders. The fact is that Brin and Page have a personal interest in space. From investing early in Google Earth to last year's news that Brin signed up to take a personal space flight in 2011.

While some Google critics have poked fun at the company's interest in space, you cannot watch a news broadcast now without seeing some wide-angle image of a country that zooms into the city or location of interest to the story courtesy of Google Earth. There is also a long-term secular trend that we want to know exactly what's happening now in any place globally. The most accurate and up-to-date images of earth are part of that trend, and GeoEye-1 falls in the sweet spot of that demand. Google intends to take advantage of that (to say nothing of the government's continued interest in this information).

Put all of this together and you need to attach a premium to GeoEye's shares as a potential takeover target by Google beyond the price target I mentioned earlier. GeoEye is currently putting together plans to build GeoEye-2, its next-generation satellite for launch in 2011. Google just might want to have that satellite exclusively for its own use. If so, Internet giant would likely want to purchase the company in the next six months, before others agree to funding terms with GeoEye to develop that satellite.

Keep your eyes on the sky for a fast-rising GeoEye stock price.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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