December 2006 Archive
Looking for a career in a dynamic and exciting industry? It might be a great time to take a look at becoming a subprime mortgage lender. (Those in search of career stability need not apply.)
If you already know what subprime lending is, skip this paragraph. If you don’t really understand it, here’s the skinny: Subprime lenders offer mortgages (or auto loans, credit cards, etc.) to those among us who don’t have the most pristine of credit records. Subprime borrowers typically pay more than they would if they were “prime” – higher interest rates, with more creative loan packaging, etc.
The business has been booming for the past five years or so, and is even credited with boosting what had been a declining home ownership rate over the past decade by helping those with poor credit obtain mortgages. Subprime mortgages are said to account for 13% of outstanding mortgages today.
But with the overall housing market slowing down, marketplace competition increasing, margins narrowing, and investors calling in their IOUs in the form of buybacks, well, let’s just say the squeeze is suddenly on.
In just a few short months, the industry has been turned on its head. Companies have been pared down (ACC Capital’s Ameriquest Mortgage, Option One Mortgage, and Secured Funding), shuttered (Ownit Mortgage Solutions, Sebring Capital, and NetBank’s Meritage Mortgage unit), sold (Aames Investment, bought by Accredited Home Lenders; the subprime business of Champion Mortgage; Chapel Funding, acquired by Deutsche Bank; First NLC Financial Services; and Saxon Capital, acquired by Morgan Stanley), placed under agreement for sale (First Franklin Financial and the subprime wholesale business of ECC Capital), and said to be headed for sale (Ameriquest Mortgage and Option One Mortgage again).
In all the seeming insanity surrounding the industry in recent months, some level-headed analysts have made it a point to mention that the mortgage business in general and the subprime business in particular are historically cyclical.
I’m reminded of the old saying that one never forgets how to ride a bicycle. Let’s just hope some of these “cycle riders” can keep pedaling without getting skinned up too badly.
The Seminole Tribe of Florida, which took the first bold step into Native American gaming back in 1979, has once again made history with a deal to purchase Hard Rock Cafe International from British leisure firm Rank Group. While this isn’t the first non-gambling business to go tribal, its $965 million price tag is by far the largest.
The Seminoles opened the first high-stakes bingo hall on a reservation and won subsequent legal challenges that allowed other American Indian tribes to follow their lead. According to the National Indian Gaming Commission, tribal gaming revenues have reached $22.6 billion, up from $5.5 billion 10 years ago. Some 200 tribes (of about 560 in the US) operate more than 350 gambling facilities.
Other tribes that have made names for themselves in the gaming industry include the Mashantucket Pequot and the Mohegan, which operate two of the largest casinos in the world. The economic power of Native Americans is growing in other ways, too, as tribes diversify into sports teams, bottled water, and supermarkets.
The Hard Rock deal includes 124 Hard Rock Cafes, four hotels, two casino hotels, two concert venues, and the world’s largest collection of rock ‘n’ roll memorabilia (including Hendrix’s guitar and a Madonna bustier), plus the Hard Rock brand. And this is not the end of the tribe’s ambitions. The Seminoles plan to use the purchase as a stepping-stone for expanding their gambling operations. The tribe already licenses the Hard Rock brand for two of its hotel casinos in Florida.
So the Hard Rock, which was “anti-established” in 1971 by two Americans in London and has grown into a symbol of American culture, has come back into American hands. Its slogan “Love all, Serve all” seems to me to be the perfect addition to the Seminole’s portfolio. The tribe’s history of never surrendering was aptly reflected in Florida Seminole vice chairman Max Osceola’s statement when the deal was announced: “We’re going to buy Manhattan back one hamburger at a time.”
With the mid-term US elections behind us, the politically minded are wondering whether the Democrats will tackle the contentious issue of health care reform. Some legislators have decided the country is ripe for new policy, and they’re not waiting for their cohorts to argue otherwise at the national level. They’re taking the issue to the states.
The Milwaukee Journal Sentinel reported recently that several congressional leaders — from both sides of the aisle — have proposed allowing novel health care programs to be initiated and funded on the state level to see which work best. Lawmakers would then float proposals for the most effective and efficient programs up to Congress.
A few states have already introduced innovative programs — from the notable get-everybody-insured-now program (Massachusetts) to subsidized insurance for low-wage earners and sliding-scale medical fees (Vermont and New York), with a variety of initiatives in between. Several states have also passed provisions providing health insurance for children who reside there. Will the programs work? And, even if they’re effective and affordable within a state, will the programs translate nationally?
This wouldn’t be the first time that programs have been started by states and then successfully risen to the national level, but normally such ideas flow in one direction. Ironically, for all of the political posturing going on, the experiments at the state level could indicate that congressional leaders within both parties are more ready to collaborate on health care reform than even they recognize.
2006 brought a crop of mega-mergers, spin-offs, and buyouts in the semiconductor industry. The popular parlor game now is: Which is the next company to be acquired?
The year has seen Bain Capital’s $3 billion buyout of Sensata Technologies from Texas Instruments, Infineon Technologies’ spin-off of Qimonda through a $628 million IPO, Philips’ sale of its semiconductor division (now NXP) to a private equity consortium for $9B+, AMD’s $5.4 billion acquisition of ATI Technologies, and the $17.6 billion buyout of Freescale Semiconductor. More recently, Advanced Semiconductor Engineering (ASE) is considering a private equity consortium bid of $5.5 billion and LSI Logic is ponying up stock worth $3.5 billion (check that market price!) for Agere Systems. And there’s talk that Intel and STMicroelectronics will each sell their flash memory businesses to private equity firms for about $3 billion.
There’s been a lot of conjecture among industry and stock analysts about which semiconductor companies are attractive acquisition candidates, especially to the private equity crowd, which is newly enamored of the industry’s prospects and looking for companies with positive cash flow and plenty of cash on hand.
Some are whispering about Marvell Technology Group and SanDisk. Both of those companies have been on the acquiring end of buyouts this year. Marvell spent $600 million in cash to buy Intel’s processor business for mobile electronic devices. SanDisk dealt out $1.5 billion in stock to acquire msystems, a competitor in flash memory products. It made that move just after Micron Technology picked up another player in the flash field, Lexar Media, for $850 million in stock.
Some chip companies are beating the private equity investors at their own game. NVIDIA, the graphics processor supplier, is acquiring PortalPlayer for $357 million in cash. Since PortalPlayer, which supplies chips for various iPod models and other electronic devices, has nearly $200 million in cash on its balance sheet, that deal is a steal.
I’ve heard a lot of bad ideas during my time covering the entertainment industry for Hoover’s (”Hey, let’s merge AOL with Time Warner!”), but a recent business deal between The Weinstein Company and Blockbuster would definitely be near the top of the list. Weinstein Co., the film studio started last year by former Miramax head honchos Harvey and Bob Weinstein, has agreed to give video rental giant Blockbuster exclusive rental access to all the movies produced by their company. That’s right, for the next four years, you will only be able to rent upcoming films such as The Nanny Diaries and the Quentin Tarantino/Robert Rodriguez double feature Grindhouse, at Blockbuster and nowhere else.
First, let’s look at the financial ramifications. This is a great deal for Blockbuster, which will gain its exclusive access by paying Weinstein Co. a percentage of each rental based on the film’s box-office gross, in return for a three-year claim on the flick. It’s no secret that online rival Netflix and the sale of cheap DVDs by big box players like Best Buy have been eating Blockbuster’s lunch for years. The rental heavyweight has been bleeding money quarter after quarter lately, and the deal gives it rights to what will no doubt be popular and prestigious movies. Clearly, Blockbuster hopes that it can steal customers who can’t rent Weinstein films anywhere else.
As for Weinstein Co., not to mention movie lovers, this is a bad deal, plain and simple. I don’t understand why the Weinsteins would voluntarily chop the firm’s home video rental revenues in half by ignoring not just the very popular Netflix service, but also the other big rental chain Movie Gallery/Hollywood Entertainment. Call me kooky, but I always thought that in the movie business, you wanted to get your films out to as many people as possible, but maybe mass distribution has lost its luster. (It’ll be interesting to see if Blockbuster rivals attempt to get around the deal by buying their own copies of the films and renting them out anyway. Should that happen, well, that’s why big corporations put lawyers on retainer.)
I doubt this deal will help Blockbuster woo new customers on any sort of large scale. Some people already think the firm has been disingenuous with its rental policies, such as the recent “elimination” of late fees to answer Netflix. The firm did all it could to distract customers from the fine print, which stated that if you kept the film too long, you were automatically charged the purchase price for the DVD. Blockbuster also refuses to carry NC-17 movies or popular “Unrated” cuts of R-rated movies because they’re too racy. I’m an adult, thank you very much. Looks like I’ll be joining many others who will wait for cable to see the Weinstein output.
Lastly, I find it odd that the Weinstein brothers, famous for their groundbreaking track record and for bringing independent movies to the masses, would climb in bed with a company that’s helped run a lot of mom-and-pop video stores out of business.
I wonder what the Weinsteins’ own mom and pop, Miriam and Max, would have to say about that.