Microsoft Stuns The Street

People love to knock Microsoft. Kevin O’Leary, host of BNN’s Squeeze Play recently called its Vista operating system “a piece of junk”. That acrid sentiment is shared by many. Despite reliability issues and problems over compatibility with things like printers, Microsoft saw Windows’ sales increase 25% year-over-year. The quarterly report Microsoft unloaded late yesterday was stunning. On revenue, Microsoft beat estimates by 1.4 billion. Now that’s what I call “blowing away the street”.

Analyst David Garrity of Dinnosaur Securities told me today Microsoft executed almost to perfection in every single business category. Its games division, traditionally its weakest sector made its first profit in 4 years. And Microsoft could only count one week of Halo 3 sales ($300M) which fell in the last quarter. Obviously Halo 3 will bring in hundreds of millions more in sales in the months to come and the full effect on the top line will be felt in upcoming quarters.

Microsoft’s stock leaped in After Hours trading, surged in the pre-market and sustained those gains in the regular session. Suddenly everyone loves Microsoft again. Garrity says this earnings statement proves Microsoft can grow despite its size.

ABCP Mess Not Over Yet

HSBC Securities Canada is being sued for providing poor investment advice to a client. Aastra Technologies says HSBC advised it to buy almost $14M in third party asset backed commercial paper. Up until August, parking your cash in ABCPs was seen as a smart and more importantly safe bet. Now the market is in an actual freeze. Nobody wants to buy new paper. And holders of existing paper can’t cash out. And we’re not talking about an insignificant amount of cash. $35B is at stake here.

I spoke to Montreal lawyer Avram Fishman. He represents some of the holders of this dubious debt. He says investors who hold ABCPs are right to sue because it may be their only hope of getting their investment back. Also some holders of that debt can't afford to hang around for their notes to mature at a later, unspecified date. Investors bought the notes based on short maturity dates (as little as 30 days in some cases). Why should they have to wait longer for their money?
Fishman says more law suits are imminent.

Madonna is ditching her label, Radio Head selling direct to fans

Madonna is ditching her long term beau. No not Guy Ritchie. Her record label, Warner Music Group. The pop princess is inking a deal with concert promoter Live Nation for about 120 million dollars.

The deal includes record sales, concert ticket sales and merchandizing. Madge’s deal is groundbreaking because it consolidates every revenue stream under one roof. Historically "artists" had to cut separate deals with different companies for different revenue streams.

Radio Head has started selling its new record direct to fans. With a twist. The band is allowing fans to decide what price its music is worth. They can download the songs for free if they want. I spoke to legendary Canadian music producer Jake Gold about this arrangement today. He says Radio Head will fare just fine using this tactic. But Gold says the strategy won’t work for everyone. Radio Head has an extremely loyal fan base. Not many of the its fans are likely to gyp the band and download the music for free. An upstart band with no name recognition is likely to get jipped.

Is Cott a terrible investment?

Investors hate uncertainty. Much of the uncertainty around the fate of Cadbury Schweppes' drinks division is now gone. The company says Schweppes will be spun off and get a listing on the NYSE next year. The stock moved up about 2 percent on the news.
At its core though, the development is a massive disappointment for management. CEO Todd Stitzer admitted today that post credit crunch, the debt market is still in terrible shape. And that an acceptable sale price was unlikely. In other words no private equity company was interested in ponying up the cash. Obviously. What financier would be willing to cut a 15 billion buck cheque to private equity today? Nobody that’s who.
Still the worst off today would seem to be Canada’s Cott Corp, a bit player in the soft drinks market. In March, when Cadbury announced its plan to shed Schweppes, one of the scenarios being touted by analysts was private equity would buy Schweppes and then merge it with Cott. Another wilder, more outlandish scenario was that Cott might even buy Schweppes. Mon Dieu! Considering Schweppes is 28 times bigger than Cott it would have been a pretty nutty deal. But not out of the question considering the credit zeitgeist at the time.
Alas all that is out the window today. Cott shares lost about another 1 percent of their value today. The company is worth about half of what it was a year ago. Rubbish investment going forward? Analyst David Hartley at BMO told me today all might not be lost for Cott shareholders. The company is so cheap now that private equity may buy it anyway. If it was attractive during the height of the boom at 16 bucks. And Hatley maintains it’s still attractive today at 8 bucks. Dire credit market be damned.

Cognos Conundrum

Shares in Cognos (CSN TSX) zipped up the most in a year today. About a 10 percent pop. For good reason most would say. Its chief competitor Business Objects of France is being taken out at a fat premium by SAP of Germany. Consolidation is gripping the business software sector and Cognos is the only standalone left. RBC analyst Mike Abramsky figures there’s a 95% chance Cognos will be acquired now. Abramsky upped target on the stock to $59. That's about 11 bucks higher than where the stock closed today. A nice gain for sure if everything pans out as planned.
Another analyst I spoke to on the phone today had a wee bit of a different take though. Nathan Schneiderman of Paradigm Capital in California says investors should not be buying shares in Cognos. He views the SAP acquisition of Business Objects as a negative development for Cognos and has actually cut his rating from a buy to a hold. Reason being in recent months, both of Cognos’ chief competitors have been acquired. Business Objects by SAP and Hyperion solutions by Oracle. Neither Oracle nor SAP had their eyes on Cognos and neither is likely to pursue Cognos now. Not good says Schneiderman. Furthermore a Cognos takeout is likely to take months to materialize. The company’s Q3 earnings due out in about 8 weeks will likely be released before any deal is announced. In Q2 the company missed the street and the stock sold off. That Schneiderman says could happen again.

The Zeitgeist Has Changed

The Japanese are prodigious savers. Historically they’ve socked away about 20 percent of what they earn. Citigroup knows this. HSBC knows this. That’s why both banks are upping their exposure to the Japanese market. HSBC recently said it would open its first retail branch there in January. Citi which already has a beefy branch structure in place today announced it's scooping up the chunk of brokerage Nikko Cordial it doesn’t already own for $4.6B. A 16% premium. Nikko shareholders will get Citi shares for their trouble. No cash. Increasingly big deals are being funded using equity as opposed to cash. The cash component of Toronto Dominion’s $8.5B purchase of Commerce Bancorp is pretty small too. Only about 25% of the deal. This seems to be the lasting legacy of the global credit crunch. A tighter and more stringent credit market means companies are unable to borrow the bucket loads of cash they need to fund these massive deals. That may also be driving down the overall value of deals and the premiums being paid. Bank analyst Gary Townsend commented on BNN today the premium being paid by TD for Commerce Bancorp was pretty thin. Savvy deal making by TD you could say. Or the zeitgeist may have changed.