Stupidity is contagious. It gets us all from time to time, and even respectable companies can catch it. As I do every week, let's take a look at five dumb financial events this week that might make your head spin.
1. Buy high, sell low
It's not like Google (Nasdaq: GOOG ) to make mistakes, but it may be heading that way by considering the exercise of the demand registration rights tethered to its 5% stake in Time Warner's (NYSE: TWX ) .
Google paid $1 billion for its minority stake in AOL four years ago. It can now force Time Warner to choose between buying those shares back at today's depressed assessed price, or taking AOL public to give Google an open marketplace to unload its shares.
Regardless of how this ends, doesn't it simply open the door for anyone -- possibly even a paid-search rival to Google -- to step in and buy AOL whole? Google has a good thing going with the veteran online network. Rocking the boat to cash out at today's moribund prices doesn't seem like the Google I know.
2. Like a broken record
Warner Music Group (NYSE: WMG ) posted disappointing quarterly results on Thursday, but that's not much of a surprise. With digital sales growth decelerating even as CD sales continue to plummet, none of the major labels have things easy.
Warner makes the cut here because of a comment made in its earnings press release: "To enhance financial flexibility, we remain focused on managing our balance sheet by generating significant free cash flow, evidenced by our impressive $549 million cash balance," CFO Steve Macri notes.
True, the label has managed to grow its greenback hoard. However, the CFO also fails to point out that Warner Music still has $2.2 billion in debt. You need to read four paragraphs deeper -- or head even lower to the balance sheet -- to understand that the company still carries a considerable net debt balance.
3. Game theory at its worst
Three months ago, Electronic Arts (Nasdaq: ERTS ) announced workforce reductions as it posted disappointing quarterly results. THQ (Nasdaq: THQI ) followed suit. The exact same thing happened this week, with THQ following EA in announcing layoffs and studio closures after posting soft results.
I'm no expert on company morale, but I predict a shortage of printer paper and toner cartridges at both businesses over the next few weeks, as employees begin crafting a flotilla of resumes.
4. Warren Buffett is in Hog heaven
Warren Buffett is making another opportunistic investment from Berkshire Hathaway's (NYSE: BRK-B ) massive Money Bin. Who's getting a splash of Berkshire cash this time? Why, it's Harley Davidson (NYSE: HOG ) !
Harley shares revved higher once Mr. Market learned that Buffett was snapping up $300 million in unsecured Harley debt. But I don't get the confidence in Harley, especially considering that:
- Harley will be paying Berkshire a 15% annual interest rate on the money being borrowed, a ridiculous yield even in this high-spread environment.
- The lofty interest payments find at least one analyst slashing Harley's profit potential this year by $0.18 a share.
- Moody's subsequently downgraded Harley's creditworthiness.
Buffett is naturally taking a chance by offering unsecured debt to a company desperate enough to offer a 15% return, but I'm going to give the investing world's rock star a free pass until he proves fallible. The real dummies here are the investors bidding Harley higher after this expensive move.
5. Time for a change
Bringing this roundtrip excursion home, let's close where we started (with Time Warner's uninspiring quarterly report). The media giant's biggest top-line decline came from AOL itself, which posted a 23% dip from last year's revenue.
Operating profits held up nicely as higher-margin ad revenue helped offset the perpetual decline in the company's subscriber business, but how could AOL let itself go like that? The company had 26.7 million access subscribers at its peak nearly seven years ago. Today, it has just 6.9 million subscribers, and shrinking. Google may be getting out of its AOL stake too soon, but it seems like Time Warner may eventually get out of AOL too late.
Let's beat the dumb drum:
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