In 1905 Frank Brunell publisher of the Daily Racing Form caused a revolution among horse players.. He believed that the past record of a horse was a major factor in determining present performance. In 1905 the Daily Racing Form compiled and printed the past performance record of every horse in the race.
The horses with strong past performances were favorites and most players bet on the favorites.Those horses with limited success stories were long shots and paid off more on longer odds. The long shots sometimes pay off but are rarely seen in the winners circle in the big time races.

Those folks evaluating Groupon, Skype, Linkedin and Facebook obviously never looked at a Daily Racing Form. The DRF lists the success history of every horse in the race, it lists the hoses parentage and their success. It indicates the strength of a horse over specific distances and conditions. The horse value is determined by a successful record over a period of time.

The handicapping of current Internet favorites with values of billions being thrown around could use a little bit of Frank Brunell’s technique. Before betting big on any of these new companies a sensible player would look for some indication of a winning record (profit) somewhere. In horse racing the trainer with success and a jockey who had ridden winners are an indication that a horse is in good hands and may be worth a look. If these companies were in steady hands on a ride to the winners circle there might be increased optimism. None of these companies have indicated any evidence of deserving their financial evaluations. No profits, no experienced guidance and competent business parentage with previous success is missing. They all are long shots to reach anything near the billions of value being discussed.

Completely unrelated thought: Anyone driving a Prius should be able to park in a handicapped space without a handicapped tag. They obviously are handicapped.

Groupon has certainly attracted attention with the news that it is preparing an IPO. The experts are weighing in both pro and con. Some of the Internet commentators do not understand the difference between gross income-net income and profits. The gross is often quoted as a reason to be excited about the IPO.

There are a few clear thoughts about the situation that should give pause before betting the mortgage money on an investment in Groupon when they go public.

The management structure of the company is unproven and has an operating model that is not receiving huzzahs from a large part of the customer base that has given them the impressive gross income.

The company has yet to make a profit from that gross. The operating costs are higher than any comfort level ordinarily achieved by a well run company. They have decided to expand the coupon business into a retail grocery market area in which the existing companies doing the business are not yet profitable.

Groupon’s original financial backers (Lefkowski and Keywell) seem to be pretty much out of the Groupon deal and are in the process of structuring an online pawn shop. (That is beyond anything I can even think about)

Goldman Sachs, Morgan Stanley, and Credit Suisse are underwriting the Groupon IPO. This is a step up from Lefkowski and Keywell. Where did Digital Sky Technology go after their $135 ,000,000 early investment? They have not strayed far, since they are among those providing venture backing. They are said to be are very active in the secondary market where the valuations being discussed are absurdly high.

I think the secondary market must be populated by individuals that are chagrined that they missed out on investing with Bernie Madoff. There are too many questions surrounding Groupon for an unsophisticated individual such as me too feel comfortable about the company. I wrote about some of the basic concerns several months ago.

I don’t know if the company will make the IPO investors money but I am sure that Goldman Sachs, Morgan Stanley and Credit Suisse will squeeze out a few dollars from the deal

Venture Beat is a site that often writes about technical issues that gets my thoughts rolling on the business issues involved in those technical developments.

In a recent Venture Beat piece the Microsoft acquisition of Skype for $8.5 billion dollars was covered. The article focused on serious technical issues that Microsoft would face when the acquisition process was completed

The following paragraph is quoted from the article.

“When Microsoft gets its hands on Skype, it’s got work to do. Cleaning up the service to stop regular outages, preventing hackers from making Skype protocol open source, and expanding the scope of video chat in some of the most widely used programs in the world will all be important.”

There is no doubt that major work needs to be done on Skype before Microsoft can think about making profitable use of their acquisition. Venture Beat focused on valid issues in the piece but did not comment on the $8.5 billion dollars acquisition price as being the heart of the Skype issue.

I wonder what Steve Ballmer would say to the Mercedes dealer who told him that: “Your new car will cost $125,000 dollars and is a wonderful car with great performance potential. To reach that performance level Mr. Ballmer you will need to take the car to your mechanic and have him rework the fuel injection system, play with gear ratios and deal with various compression issues.”

I am sure Ballmer would tell the dealer to forget it and walk out of the showroom. He however bought a similar deal from Skype for $8.5 billion and didn’t walk away from that conference room where the numbers were being developed.

Ballmer has led Microsoft to a market share price that has shown no progress over the ten years of his reign. Everyone has witnessed the You Tube recordings of his embarrassing performances on stage discussing the Microsoft story of the moment. The Microsoft moment that bought Skype has the potential of being an embarrassment to eclipse anything You Tube has to offer featuring Steve Ballmer.

A Merger and Acquisition team with a level of talent expected in a company the size of Microsoft would have structured a deal that made sense. There are thought to be three potential outcomes of conflict.

t seems that the Ballmer team has s strategy that has added another potential outcome when negotiating with Skype.. We Lose–You Win,

Ballmer is a billionaire high on the Forbes list. Just how does something like that happen?
I’m almost on the verge of considering the C.J Fearnley theory that the Ballmer type of success is a coincidental convergence of random occurrences with the contribution of the individual being the least important element.

I’ve been searching for a reason that Microsoft paid $8.5 Billion for Skype. My business valuation metrics gave me no clue why that kind of money would be paid for a company that really had never made much money and had no plan to significantly increase income.

I called an old friend who is deeply involved in the Internet business and has recognition of technical talent of the highest level. I told Jeff that I was using all my tools to try to figure out why Microsoft CEO Steve Ballmer would pay that kind of money for Skype and was drawing a blank..

Jeff knows me well and quickly answered: “Buck you are just using the old methods of valuation and haven’t considered new possibilities. Microsoft probably really didn’t buy Skype with a plan in place to make a profit. That will come later . They paid $8.5 billion to make sure that no one else bought it.”

Sounds crazy but it is the only possibility I have heard yet. Steve Ballmer is making a classic Hendricks Texas Holdem play. In a Hendricks play you have a lot of chips and are playing with profits in the game.. Your two drawn cards have a number of strong possibilities when you see the flop (3 cards up). A Hendricks play is to make a big bet to make marginal players drop out so that your hoped for cards show up to make you a winner The odds are thought to be improved by having reduced the number of remaining players in the game. You make the bet without a clear picture but see the various strong possibilities.

The Hendricks play sometimes works and sometimes doesn’t. The stakes are a little different in the games in which I have seen this strategy played, than those in the Microsoft/Skype play. Thirty or forty dollars lost is not a game breaker, but $8.5 billion sounds like a serious gamble in which to use a Hendricks play.

I think that my “old” thinking that Jeff criticized still has a place in determining a $8.5 billion offer. The Microsoft price paid for Skype will probably reduce the competition among those seeking to control the Internet (one way or another)

Note: In Colorado the term Hendricks Play is named for a legendary poker player who used and developed this move among others. It may have other names in other locations but in Colorado it is a Hendricks Play

The business headlines are filled with multi billion dollar offers about Internet related companies acquiring or attempting to acquire emerging companies. In each instance the purpose of the M&A effort shows little relationship to the evaluations traditionally used by companies in their acquisition strategy.

The current climate resembles an epic Greek battle of the Titans, rather than a strategy to for expansion with a determination to show respectable return on investment. (ROI). The Titans in the news are Google, Microsoft, and Apple. They each are straying from the basic business requirements of maintaining clarity of purpose and exercising careful use of resources in expansion efforts.

Examination of the current activities of the Titans can be useful in small business in demonstrating the need for focus on customer requirements and improving service and product reliability. These basic business brush strokes are being lost in the rush by the each of the Internet Titans to take over the tools of Internet activity and destroy the competition.

These modern magicians of technology have little understanding or care for customers needs. Total control of Internet access and its use, is the basic thrust of the multi-billion dollars merger moves being taken by Google and Microsoft with Apple in the mix.

Scott McNealy founder and former chairman of Sun Microsystems could give advice about the unexpected consequences of engaging in titanic business wars. Sun under McNealy had great products, technical prestige and a seemingly unshakable market niche. McNealy decided to take down Microsoft and Bill Gates and that seemed to become his primary activity. We all know how that ended. If you want to get Scott’s thoughts these days you can find him on Twitter with little significant impact on the computing world. In a war among titans, some titans often fall.

The moves by the current triumvirate of titans are very interesting on several levels. It is becoming apparent that linear thought is the characteristic of the management of these three combatants. They are engaging in a battle much like the stuff of ancient Greece legends. Each are charging ahead with determination to win total victory and gain domination of the field of Internet battle.

If you have a growing business I recommend that you study these major companies which have lost almost all focus on sensible business metrics. Watching the problems that will be created by the intemperate business decisions being made, can be useful in your business progress. You will strengthen your understanding of having a business plan that has clarity, with a focus of purpose, designed to give a useful product or service to your customers. This can be a lesson to serve your growth plans well.

When Google was starting the founders had Do No Evil as a prominent element in their mission statement. Many thought evil to be a strange thing for a search engine company to be worried about.

The youthful founders of Google demonstrated foresight concerning possible operating dangers that seem to have since crept into the company as it grew into a giant force in Internet business. The founders may not have set out to Do No Evil but the company is populated with levels of management that now, See No Evil as it creeps into the company operations.

The Google move into China was the first public example of the evil that the company would work with if big money was on the table. Google was willing to participate in the censorship requirements of the Chinese government in order to move ahead with the huge opportunity offered by China.
The company over several years caved to the censorship requirements of the Chinese whenever their operating capabilities were threatened or occasionally limited by government action. After 5 years in China, Sergey Brin remembered his Do No Evil motto and after a momentous internal struggle got the company to cease their Chinese operations. His associates fought hard to keep China in operation despite the corruption of corporate morality that was involved

Meanwhile back at company headquarters evidence of a growing arrogance in operations was taking place as rapidly as the company was expanding. Google has become a company with little regard for it’s customers as evidenced in many operating examples. read more…

My interest in Google has until recently been rather benign. Like most people I brought
up the Google search page , typed in a subject and usually was presented with a raft of sites dealing with my subject of interest.

The offer of Google to buy Groupon for 6 billion dollars set me off on a pursuit that is opening up a world of discontent that I had no idea existed.

My first call concerning the Google offer for Groupon was to an old friend who is a real student of the stock market and very successfully invests based on a simple formula which includes an evaluation of the people running the company he is researching. My several part question to him was: What do you think about Google and the people managing the company and have you invested in the company?

His answer was short and to the point. “I wouldn’t invest with them. They have no understanding about mergers and acquisitions and they run the company like a bunch of Net Nazis. I was a bit dumbfounded by my friends description and thought that maybe he was simply having a bad day in the market and was verbally taking it out on Google.

The next conversation was with an acquaintance who is a M&A executive with a company that has about $9 billion in revenues. His response to my question about his thoughts on Google provoked an answer that was expanded to include Microsoft and their offer of $8.5 billion for Skype. He said” Google and Microsoft took off like rockets with the initial technology used in their start up plans. Since then they have demonstrated a combination of arrogance and incompetence in many areas required to sustain growth.
Neither of them seems to know the basic requirement of establishing a figure to offer in an acquisition attempt. Size of the target company does not determine the amount of the offer. The bottom line determines the offer . You don’t pay a company for the money you expect to make through your own hard work and expenditures in the future after acquiring.” This was from a 30 year veteran of mergers that has resulted in a profitable $9 billion revenue company about which little headline news hits the financial wires.

These two conversations set me off on the trail of answers as to why these experienced knowledgeable men had such strong negative feeling about Google in particular and the direction of the current state of several Internet related businesses. Further interviews with individuals doing direct business with Google produced even harsher comments

Tomorrow: Google Chronicles Issue#3 Do No Evil —Really!!

The Google story is the stuff of business legends. The growth and accumulation of cash in it’s short existence is amazing by the application of any standard. They are a company that currently reports having $36 billion in cash, cash equivalents and marketable securities.

That kind of success in a short time has stimulated them into stepping across the globe hoping to change the world in their vision while ‘doing no evil”.

Wael Ghonim as head of Google’s marketing in the Middle East and North Africa is credited with organizing the protests in Egypt using the social media site Facebook initially. When Facebook was closed down he went to a backup plan using Google Groups.

I have a uneasy feeling when a 30 year old marketing executive uses his Internet skills and his companies tools to overthrow a government, even when it is as repressive as that of Hosni Mubarak. There is the danger of unintended consequences resulting in a dangerous conclusion. The real question for Google which they did not address is : What are our executives doing overthrowing governments?

Google went into China preparing to conquer the Internet activity in that country. Their naïve approach will be a chapter in the historical recounting of the Google legend. They know technology but evidentially they have few historians on their staff. The first thing Google did when entering China was to forget their supposed iron clad purpose to “do no evil”. Google agreed to the Chinese insistence on censoring aspects of their search activity to accommodate the Chinese government requirements. They then spent 5 years stumbling around before they realized that China was not America. It took Google Co-Founder Sergey Brin, with impassioned threats to Google’s strategists, to get the company out of a compromised situation and shut down the China operation. read more…

If Google and Microsoft are determined to spend billions acquiring a company to aid in maintaining their capital value in the market they should have investigated buying Garmin, the manufacturer of various GPS systems. They each need a guidance device to steer their business back on the early path they followed for success. I’m not sure if Garmin has a business guidance device, but by expending a few billion dollars maybe one could be invented.

Steve Ballmer at Microsoft is reported to comment when he took over as Bill Gates successor that “the company didn’t need Gates but he would use him”.

Ballmer certainly needs Gates now. Ballmer has not moved Microsoft much beyond where Gates had developed the company. Ballmer is the 46th richest billionaire on the Forbes list. He graduated with honors from Harvard and is obviously a bright guy in many areas. More importantly than bright he has been extremely lucky. At Harvard he was a classmate of Gates and his room was down the hall from Gates.

Ballmer went to Stanford to study for his MBA and received a call from his Harvard classmate with an invitation to join the new company Microsoft. Ballmer took the $50,000 job that came with an 8% ownership position. He dropped out of Stanford before finishing his studies for an MBA. There was one course he should have taken before quitting

The course that used the book Value and Capital by John Richard Hicks was one that he missed. Buying SKYP for 8.6 billion dollars indicated that “distinguishing temporary, intermediate and long range equilibrium with expectations as to future market conditions affecting behavior in current markets” is something he might have heard about somewhere.

Microsoft is preparing to spend billions with an expectation that the current market will cheer the move based on the expectation of future markets being conquered by unproven, undeveloped plans that will unleash profits, due to the Skyp acquisition. Any conservative metric used to determine the value and sensibility of Ballmer’s move would ring a warning siren and flash blinding red stop lights. Ballmer seems to have done his graduate work studying some of the management moves of Scott McNealy at Sun Microsystems.

He should have been studying Larry Ellison at Oracle which acquired Sun for 7.4 billion dollars in stock. Sun was troubled but did $13.8 billion in sales revenue the year before it was acquired.

Sun Revenue year before sale $13.8 billion Oracle purchase price $7.4 billion
Skyp Revenue 2010 $860 Million Microsoft purchase price $8.5 billion

Skyp was founded in 2003 and purchased by Ebay in 2005 for 2.6 billion. Ebay could not make a profit with Skyp and sold it in 2009 to a foreign investment group.

Tomorrow on Buck Says: Is Helping Overthrow Governments Part of Google’s Business Plan

My initial research about the driving financial sources behind Facebook and Groupon is more than simply interesting. It is riveting.

Using a quote from the Joker, I think The financial brains working these deals “do not suffer from insanity, they enjoy it.”

The extraordinary valuations of these companies benefit from the fact that there are no comparables to make a supportable judgment as to real or projected value. The situation has an uncomfortable feeling similar to the hype that surrounded the housing market and the valuations that sent the economy into its current condition.

Checking the financial history of Facebook and Groupon indicates that they share several important sources for financial direction and development of their projected value used to raise funding

Groupon found initial support from a Chicago financier, Eric Lefkosky. He provided 1 million dollars to get Groupon rolling and gave early financial guidance. Groupon was evaluated as having a 1.35 Billion dollar value less than 2 years after beginning operations…

A secondary finance package of 30 million dollars was obtained from Accel partners followed shortly thereafter by a 135 million dollar injection of cash from Digital Sky Ventures an independent offshoot of Mail.ru. These companies were founded and controlled by Yuri Bentsionovich Milner the Russian billionaire, financial wizard.
( MBA from Wharton)

Yuri orchestrated the investments in Facebook and brought Goldman Sachs into the deal.
Goldman Sachs remains closely aligned with Milner and Digital Sky Technologies (DST)
Key partners and employees of DST are former Goldman Sachs executives.
DST partners Alexander Tamas, John Lindfors, principal Rahol Menta and Shou Chew investment manager, were all formerly with Goldman Sachs.

DST Has invested into these new age Internet based companies in a fashion that has created valuations that have no traditional metrics on which to base the valuation.
Milner has fashioned a pump and dump strategy utilizing a secondary market to sell parts of his investment based on the extraordinary unsubstantiated values that are created in the financial media. The secondary market is only available to people of wealth who apparently have more money than brains.

Yuri is far from insane. He has clearly recognized what Ponzi and Bernie Madoff understood about greed but has carefully structured a strategy that is legal in his promotional effort concerning values.

He obviously has studied history and injected Barnum’s sophisticated, depth of market, evaluation metric, which was based on the conclusion that: “There is a sucker born every minute”.

Tomorrow: Some thoughts about the geniuses at Microsoft and Google and how they fit in this picture.