Private Equity - the year that was
It was a year of huge records for Private equity, that is if you sidestep over the pothole in the road called the credit crunch.
First the great news:
1. Deal volume reached a record $1.5 trillion in mid December of 2007, up from $1.4 trillion in the same time last year.
2. Money raised by Private equity funds was also at an all time high with $199.4 billion raised by the end of the third quarter, up from $154.1 billion raised in that time period in 2006. 3. Good to know that
3. 2007 saw some obscenely huge deals - such as the $38.9 billion dollar acquisition of Equity Office Properties trust by Blackstone.
Then the, well, not so great news:
Deal volume, in dollars, was down in the second half of the year, although the number of deals did not lose too much ground (graph at left). Deals at below the 1 billion dollar level chugged on through the drought.
True, some funds went under but not too many people were mourning the loss. With the top deals getting overbid a lot, some were looking forward to the possibility of the market finally settling out.
Meanwhile people are bullish on the fact that 2008 will turn around and the PE market will gain back the lost ground. After all, they argue, the private equity firms are still sitting on large piles of cash, and they have to find someplace to put all of the money!
IncrediMail, Google, Adsense and Powerful Entities (Natural Monoplies)
IncredibleMail is an e-mail client, which produces multimedia emails, screensavers and wall papers. I do remember giving it a try when it initially came out in 1999. It allowed for beautiful “stationary” in the emails, when the the stationary concept was somewhat new.
IncrediMail was in the news yesterday because Google disabled their Adsense account, and since adsense revenues are a significant portion of their total revenue, the market reacted negatively to the news and the stock dived by 41%.
It seems that Google didn’t like IncrediMail’s “opt-in” policy of how the search results were being served to the IncrediMail’s clients. In fact, I see that one of their products, Magnetic, claims “The product offering includes pages generating keyword searches, resulting in revenue for the company.” I can see how this might violate Google’s TOS. IncrediMail doesn’t know exactly why their account was disabled.
And when Google turns off the Adsense account, you not only not get any future revenue, but all the “earned” money gets frozen too, and you permanently lose it.
There is a whole mob complaining about why IncrediMail didn’t prepare for the loss of Google and that they shouldn’t have put all their eggs in the Google basket.
To me it seems that IncrediMail didn’t rely on just one source of revenue- they had three sources:(i) subscription service, (ii) licensing revenues and (iii) Adsense.
I think this is more of an issue with Google. It has become so much more powerful and so much ahead of it’s competitor, that one has no choice but to use them. Google has become defacto monopoly or natural monopoly.
I am not suggesting that Google unfairly cancelled IncrediMail’s account; IncrediMail probably pushed the envelope on serving search engine results without getting full consent of the consumer.
In the current state of Internet web 2.0 environment, one does not have any choice but to rely on Google. You can go with Yahoo or use some other widget, but the results won’t be as good as Google without spending incredible amount of time - so why bother? In fact, till recently, if you used Google Adsense, its TOS prohibited you from having any other ads that provide contextual ad content on the same page.
I agree with an unknown senior executive at Time Warner:
Sometimes I don’t know what to think of Google. We have the best relationship of anyone with Google. On the other hand, you always have to worry when someone gets so much more powerful than all the competition out there. This is why I come down to this: I hope the government starts understanding this power sooner rather than later.
I admit that I have multiple Google/Gmail account. I am sure it is against their TOS and I worry that one day I will turn on my laptop and try to check my mail, and I will get a message “your gmail account has been disabled”. I wouldn’t know for sure as to why it was disabled and I would have no place to turn to get my data. Google doesn’t tell you why it is punishing you - and that scares me!
The one company that I love the most is Google and one company that scares me the most is Google!
We all need to understand the power that Google has.
Black gold and Yellow gold hit highs
He said it would happen - that the price of oil would hit $100 a barrel - and it has! Back in 2000 Michael Economides, author of "The Color of Oil", had predicted that oil would hit $100 a barrel - probably to great deal of good natured ribbing. The price of oil at the time was hovering around $30 and had not really gone too much above that mark in the previous decade, and even $50 was looking a bit far fetched.
It would have been a good time to buy into oil stocks as prices have risen higher year by year since 2002, to finally reach the $100 level in the first trading day of 2008.
Following a similar trend, gold has hit a record $900 per oz as of January 11th, 2008.
So what do you think the price of oil will be in 6 months? Is demand going to continue to outpace supply?
Take our poll (current poll is on the side bar; see here for past polls).
We will ask Michael Economides for his prediction for July 1st, 2008!
To colorful, delicate bubbles of 2007, 2008 and beyond
“
There have always been bubbles. There will always be bubbles…”
And thank god for the bubbles!
Judge Posner, one of the figures I admire the most, has written a very insightful piece on the Subprime Mortgage crisis, but the part that grabbed my attention was his eloquent description of how bubbles form.
A bubble begins when prices, in this case of housing, begin rising at a rate that seems inexplicable in relation to demand. No one knows how high they will rise. In conditions of uncertainty, there is a tendency to base expectations on simple extrapolation: if prices are rising, they are expected to continue to rise–for a time, but no one knows for how long a time. There is a reluctance to act as if they will not continue rising, for by doing so one is leaving money on the table. As a bubble expands, the rational response is to reduce risk, without forgoing profit, by getting in and out of the market as quickly as possible. The increased trading may keep the bubble expanding.
His observations and reasoning about how the housing, and subsequent investment bubble, got created are equally applicable to the web 2.0 properties and explains the valuation of many of the companies that we see around us. I have marveled over the valuation of Geni ($100M) and Tagged ($117M) and Facebook ($15B). In 2007 we saw the valuation of these companies rising at a rate that seems somewhat inexplicable.
Judge Posner also notes that the Bubbles are more likely to occur when downside risk is less than upside risk. In the Tech word, because the potential of “up side” is perceived to be very high, (e.g., Peter Thiel’s 500k investment in Facebook turning in to 1B+), the valuation of many Web 2.0 companies gets skewed.
But at the same time, as Judge Posner notes that even with the valuations that may seem skewed or inexplicable, it is not the time to walk away from the deals. The optimal thing to do might be to extract the up side from the expansion of the bubble. If the valuations of the start ups are rising, they are expected to continue to rise–for a time, but no one knows for how long a time. The bubble will continue to get fed and will continue to grow during this time. Hope you are participating in that growth.
There is a lot to be done over the next few years; open social, always on connection, moving office products to the web, more touch screen gadgets - and more specialized applications for the touch screen gadgets, HDTV, higher quality audio, DRM free music and each of these fields will spawn new startups, new Googles, and new Facebooks. There are opportunities abound and I hope the right one knocks at your door in 2008.
Happy New Year!
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