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Prepping for OFC/NFOEC Presentation

I’m working on my presentation for OFC/NFOEC:

We may be entering a market phase where liquidity is more important than brains. Lower rated corporate bond yields are increasing at a time where the fed is cutting rates. The price of risk is going way up. Therefore, companies in our sector that are well positioned but unprofitable and under-capitalized could be at the mercy of those which are foolishly run and liquid. This, I am sure, terrifies the management of many companies with leveraged balance sheets.



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    Additionally, investors have their own independent credit issues that may cause them to be net sellers of stocks. Small, volatile issues may be affected more than larger companies, who can use their relatively more valuable shares or cash on hand to buy out their smaller competitors.

    A foolishly run but liquid company may also see their relative strength as an opportunity to use pricing as a weapon to expand market share at the expense of an under-capitalized competitor.

    It all does, however, beg the question of how foolishly run is a company that enters a market phase you describe with precisely the correct tools to prosper?

    Posted by hi_lee_evolved | February 11, 2008, 2:19 PM
  2. Maybe the liquid company is not so foolishly run?

    Posted by osxman | February 11, 2008, 4:13 PM
  3. Yes, thank you for pointing out what is a rather obvious contradiction. What is smart in one era becomes foolish as the winds shift.

    Posted by Andrew Schmitt | February 11, 2008, 5:26 PM
  4. This could be the opportunity for some long overdue consolidation in the semiconductor and optical space.

    Not many company are overly “liquid” but the ones that are, might have the opportunity to even better leverage their cash position in this difficult time.

    I think it would be nice to do some research on this topic for a few of the “usual suspects” in this space to see if a case can be made for this possible wave of M&A.

    Posted by kbg_lem | February 12, 2008, 4:14 AM
  5. Perhaps the real advantage here, in a market phase of the type that you describe, is not in running a company well, or un-foolishly, but in having the advantage of scale.

    If, for example, Huawei thinks it would be a good idea to buy an apparently undervalued company like Powerwave, whether or not buying Powerwave is, for them, a good idea, they can do so after screwing up other things, or even after over-paying for Powerwave.

    If they subsequently decide that buying Powerwave was a bad thing, they can sweep the scraps under the table and get on with their lives.

    The terrified former managers of Powerwave will still have to find jobs.

    Is the CEO of Yahoo! on linkedin?

    Posted by hi_lee_evolved | February 12, 2008, 4:36 AM
  6. I am a big fan of vertical integration (what I assume you mean by scale) but it requires sufficient capitalization to allow a company to ride through a downturn and still support all of the associated fixed costs.

    Posted by Andrew Schmitt | February 12, 2008, 8:45 AM