Three Companies to Watch

I can’t say that any of these picks are surprising.

After poring over the Silicon Valley 150 list, there are several candidates. But I think there are three companies that are in particular peril heading into 2009 — Advanced Micro Devices, Sun Microsystems and Palm.

[From O'Brien: The three valley companies most vulnerable in 2009 - San Jose Mercury News]

I decided to look at this from the other direction, pick 3 companies that should weather the economic turmoil and do well. I’m limiting my selections to publicly traded companies and trying to avoid being obvious by picking something like Apple or Google.

1) Netflix: Solid management team and little in the way of serious competitive threats, Netflix is looking forward with a downloadable service that gets high marks and a pricing plan that is appealing. Their balance sheet is moderately strong, with the only caution flag being their cash fluctuates dramatically quarter-over-quarter. What is most in their favor in my analysis? Affordable entertainment that will be a firewall for most families… things will have be pretty bad before broad cross sections of the market find it necessary to cancel their $17 a month 3 DVD Netflix account. Potential weaknesses are a dependence on managing customer churn and physical infrastructure costs. Analysts have recently cut their ratings but that’s on valuation concerns following a rally on the stock, rather than operational issues.

2) eBay: This one takes a little explanation to frame it properly. First and foremost, if eBay does nothing different they will be in for a very rough year ahead, but if they kill that asinine price increase and make amends with their power sellers, they could turn things around. This is a company that should thrive in a down economy and with their stock having been hammered for the last 6 months it should be a bright spot to focus on. eBay has done so much wrong over the last year that I’m willing to bet they finally do something right and their market and brand position are strong enough to provide a good bounce back.

3) Oracle: Ellison gets a lot of credit for calling a big shift in the enterprise software market 3 years before his competitors figured out what was going on, even more so for staking $35 billion to executing on the strategy. Oracle has all of the parts that enterprise IT runs on, and while companies may slow down their IT expenditures they will not stop cold and just like those big oil tankers out at sea… they take a long time to come to a stop. Oracle’s maintenance revenue stream alone ensures healthy cash flow for years to come. Two areas that may come to flank them, the first being a good amount of debt on their balance sheet that will require servicing and probably has some significant covenants that will dictate a precise level of performance the company has to achieve. Secondly, software as a service and cloud computing are not their strong suites and the culture shift is daunting.

More on this topic (What's this?) Read more on Hong KONG&CHINA Gas, Netflix at Wikinvest

Craigslist and Why Contracts Matter

So eBay sues Craigslist for what appears to be a legitimate shareholder rights issue, and Craigslist responds by saying they won’t talk about the specifics except to say this:

Sadly, we have an uncomfortably conflicted shareholder in our midst, one that is obsessed with dominating online classifieds for the purpose of maximizing its own profits.

[From craigslist blog » Blog Archive » Complaint Department]

Kedrosky more or less nailed the narrative on this, as confirmed by the Craigslist blog today. Craigslist is basically saying that it doesn’t matter what agreements they were obligated to, that their only obligation, legal or otherwise, is to their mission.

The seeds for this dispute go back to 2004 when it was a former Craigslist executive who sold his shares to eBay, as opposed to the company itself. This no doubt has been a thorn in their side since then, as Newmark himself said then:

“I made a gift of some equity in craigslist to a guy who was working with me at the time,” Mr. Newmark wrote on his Internet blog (www.cnewmark.com). “I figured it didn’t matter, since everyone agreed that the equity had only symbolic value, not dollar value.”

While no one will ever confuse Newmark for a “greedy rat bastard capitalist” (as I was called the other day in the parking lot at Bucks, well not the rat bastard part but called a capitalist, really), the degree of naiveté that started with the assumption that the stock would never have any value to the circumstances that led up to this lawsuit is kind of shocking.

It may well be that Kijiji is at the heart of the dispute and that the recently launched eBay classifieds service could have violated a section of the shareholder agreement. It may also be that eBay had nefarious objectives when they bought the stake in Craigslist originally. All of these factors may be in Craigslist’s favor, but if it’s true that the Craigslist Board of Directors met in secret and engaged in a sham stock reorganization where the sole purpose was to dilute eBay’s stake in the company and trigger a provision that prevented eBay from electing a Director to the Board, and then inserted a poison pill into the bylaws, well then Craigslist is wrong.

If Craigslist asserted the Kijiji violated their agreement, then they should have disputed that in public and through the appropriate legal channels. While Craigslist will certainly win the PR battle, if the facts are as eBay asserts well Craigslist will lose the legal battle.

Shareholder agreements are contracts that determine what rights various parties have and the process through which disputes are defined and then resolved. These agreements matter and while the public may discount them based on biases they hold, but in a court of law it is black letter law.