July 2008 Archive
The world of monoclonal antibodies and genetic testing may seem far removed from the realm of mortgage-backed securities and the other bogeymen of the current credit crisis, but the biotech industry is still feeling the fear. Despite an increasing number of profitable biotech companies, like Genentech and Applied Biosystems, the industry is still dominated by unprofitable start-ups that rely heavily on venture funding and capital from the public markets. And the economic environment being what it is, companies are having a hard time going public or getting attractive acquisition offers from larger life sciences companies.
That leaves the venture capitalists in a bind. Venture capital firms like to cash out their investments – either through IPOs or sales of a company – in about five to seven years. But with “exit opportunities” limited right now, they are having to put more of their money into bankrolling later-stage biotech companies while they wait for a better IPO environment or a juicy acquisition deal to come along.
The good news is, venture firms are still ponying up lots of cash. The MoneyTree report for the second quarter of 2008 (produced by PriceWaterhouseCoopers and the National Venture Capital Association) shows that overall funding from venture capital firms has held steady so far this year. But there is a difference in where all that money is going and what it’s being used for.
According to the report, investment in life sciences companies (which includes both biotech and medical device firms) went down 14% in the quarter. Perhaps more importantly, the amount of money going into later-stage companies – the ones that at another time would probably be going public – has gone up, potentially leaving the next crop of new, innovative start-ups without the money to, well, start up.
So what’s the solution to the capital quandary? Some analysts think that, with the IPO option not available, the life sciences sector will see more mergers and acquisitions in the vein of Thermo Fisher Scientific’s acquisition of Open Biosystems (a maker of RNA research tools) and Invitrogen’s proposed merger with Applied Biosystems Group. Experts are also optimistic about the growth of emerging markets like India and China and the likely increase in funding from government sources like the NIH. But even with those bright spots, early-stage biotechnology companies may have to get creative when it comes to finding the money to fund their innovations.
Banks are desperate to move CDOs, those dangerous collateralized debt obligations that are backed by subprime mortgages, off their books. The problem is, who is brave, or stupid, enough to buy them?
In Merrill Lynch ’s case, that would be Lone Star Funds. But Lone Star was far from stupid — they agreed to the deal because Merrill Lynch funded most of the transaction. Lone Star Funds is buying the CDOs for $6.7 billion, and Merrill is financing the purchase up to $5 billion. It’s better than being on the hook for the estimated $11 billion that Merrill Lynch says the investments are still worth — a dubious estimate at best, since for all intents and purposes, the CDOs are worthless. Merrill Lynch is basically paying Lone Star to take them off its hands and its books. It originally valued the package at $30 billion (it’s hard to tell if that’s what it paid for the investments, since none of these figures are crystal clear).
What is Lone Star going to do with this hot potato? The company is no stranger to distressed assets. Those are its bread and butter. Maybe it’s hoping that the government’s bailout of Freddie and Fannie and the homeowner relief plan will stabilize the underlying mortgages and it won’t be left holding the bag. Most likely they will be collecting on the underlying debt. (Hey, it might just be a few pennies on the dollar, but after a while, it adds up.)
In the meantime Merrill Lynch still hasn’t extricated itself from these investments, it’s just moved them from one column to another. It’s a good move and a necessary one, but as the company is finding out, that’s one sticky hot potato.
Native North Americans believed in the Corn Mother (the first woman to bear offspring, a kind of Eve). After the white man took over and tamed North America, corn became the Midwest’s gift to the country and the world – year after year of bounteous corn crops grown on rich farmland fed us and almost everyone else.
Now corn is a high-priced double whammy. At least it appears that way to the average American consumer progressing through an average weekend.
First, on the average American’s to-do list for the weekend: gas up the car. We all know the story on that. Suffice it to say the price of gas is out of sight. (Hummers, and even your run-of-the-mill SUVs are the dinosaurs of the auto industry — big galoots doomed to extinction but that’s another blog.)
Then on to filling the fridge for the week. A fryer from the supermarket, a gallon of milk from the convenience store – it doesn’t matter where you go. It’s costing more. And if our average American decides to see a movie – alas, even the popcorn at the theatre, never a bargain in the best of times, costs more.
What does corn have to do with all this? Lots. You see, in December 2007 the federal government passed an energy bill mandating that ever larger amounts of ethanol be used to run our vehicles. The bill was passed with seemingly good intentions (if not outcome). It was meant to reduce the US’s dependence on foreign oil and to help curb global warming.
But our lawmakers forgot to take into account that the product of choice for making ethanol in the US is corn, as in an ingredient that food manufacturers large and small turn into Aunt Jemima Syrup, Froot Loops, Fritos and hundreds, if not thousands, of other products. (There are other options for ethanol production. Brazil, for instance, makes it from sugar cane, probably no better a choice, as it is a food crop as well. But ethanol can be made from agricultural byproducts such as corncobs, straw and sawdust. Kraft and General Mills don’t use much of those in their plants, at least I hope not.)
Corn farmers supported the bill of course, but hey, here was a chance to make some extra income. The law awarded farmers money for every bushel of corn that was used for ethanol production. Ethanol manufacturers (everyone from agricultural giant, Archer Daniels Midland – the #1 ethanol producer in the world — to small newly formed companies created to take advantage of the government’s largesse) became preferred corn farmers’ customers, at the expense of long-time corn users/customers such as dairy and poultry farmers, beef ranchers who use corn for animal feed, and food and food-ingredient manufacturers who use corn for people feed.
(Big oil companies like Exxon are trying to fight back the ethanol scourge, no matter what it’s made from, but they seem to have lost their influence in this debate.)
The double whammy (a whammy we’ve smacked our own selves over the head with) is this: We use corn to make foods we eat, we use corn to fill the fuel tanks of our cars and trucks. Food vs. fuel.
It’s not nice to try to fool Mother Corn. She’s known for millennia what corn is for. It’s for sustenance. It’s for eating. It is her gift to us, a gift of food — for human, not transportation, systems.
Friday’s annual meeting of Yahoo! shareholders will be anticlimactic, thanks to a deal worked out last week between the company and activist investor Carl Icahn, who owns about 5% of Yahoo!’s shares.
Icahn called off his proxy challenge, striking a settlement agreement with Yahoo!’s board and management. Basically, one incumbent director will leave the board, the board will expand from nine to 11 seats, and two of the three vacant seats will be filled by Icahn and former AOL CEO Jon Miller, with Icahn to name a third director. (Please let it be Mark Cuban!)
Icahn briefly blogged on the settlement, which is so 21st century, of this aborted proxy battle.
What brought about this rapprochement? As others have noted, one event that may have tipped the balance and caused Icahn to seek a deal was the declaration by Legg Mason the week before that it planned to vote its shares in favor of the management nominees at the Yahoo! annual meeting. Bill Miller, the manager of Legg Mason’s flagship Value Trust fund, loudly criticized Yahoo!’s board and management for scaring off Microsoft, yet decided in the end to go with the devil he knew. Icahn reportedly saw Yahoo!’s institutional investors circling the wagons around the incumbent board and management and apparently decided against suffering a public defeat.
For their part, the Yahoos in Sunnyvale, California, knew they were about to report mediocre results from their second quarter, so they also had an impetus to come to an arrangement with the barbarians at their gate.
This sally by Icahn is looking like his crusade against Motorola — he buys a small but significant stake in the target company, blusters about the sins of the board and management, pulls together a proxy bid, and then calls it off in exchange for seats on the board for him and some cronies. It remains to be seen whether the Yahoo! episode will play out like Motorola did, with the CEO banished and the company broken up.
Meanwhile, the Evil Empire in Redmond, Washington — excuse me, I mean Microsoft — is officially washing its hands of any interest in all or part of Yahoo!, and turning to its own knitting to defeat Google. Knit one, Perl two? (A little coding humor.)
Yahoo!’s not out of the woods, with Congress scrutinizing its search advertising deal with Google and some shareholders still mad about losing out on $33 a share in cold, hard cash from Microsoft. (The stock closed Monday at $20 and change.) Not much yodeling going on at Yahoo! HQ these days.
The Arctic is “hot” again. No, really.
In previous centuries, the expeditions of James Cook, John Franklin, William Parry and others held out an (unfulfilled) commercial promise — an ice-free and relatively short sea route through the Arctic (the Northwest Passage) linking the riches of Asia with the markets of Europe.
Today, melting ice caps and rising oil prices have combined to create a new commercial opportunity in the Arctic. A major geological survey has found that the region might hold as much as a fifth of the world’s yet to-be-discovered oil and natural gas reserves. In a major assessment, the U.S. Geological Survey reported last week that the Arctic might have up to 90 billion barrels of undiscovered oil reserves, and 1,670 trillion cubic feet of natural gas. On its face, this is equivalent to 13% of the world’s total undiscovered oil and 30% of its undiscovered natural gas.
Good news for the governments of the US, Canada, Russia, Norway, and Denmark (through its Greenland dependency) and the numerous oil and gas companies that do business with them. According to Donald Gautier, the chief geologist for this U.S. Geological Survey project (despite a history of contentious territorial disputes) “most of the resources are on the continental shelf in areas already under territorial claims.”
Big Oil already has experience in the Arctic — the development of Alaska’s North Slope in the 1970s brought in such giants as BP, Shell, and ConocoPhillips, all of which currently jointly own and operate the 800-mile long Alyeska Pipeline, which links the oil fields of Prudhoe Bay to the port of Valdez. Russian and Canadian companies have had similar success in exploiting onshore Arctic oil and gas assets in their countries.
The prospect of drilling on the continental shelf in the Arctic raises serious environmental and conservation concerns. Environmentalists fear the addition of industrial activity might help speed the already accelerating melting of sea ice, reinforcing global warming. Conservationists are concerned about the threat of massive drilling to the Arctic’s unique natural systems and wildlife, and the dispruption to the way of life of indigenous peoples.
But the drive for new hydrocarbon sources is strong, and the Arctic has already proven its potential. In the past several decades, more than 400 fields have been discovered in the Arctic, with reserves of more than 1,100 trillion cubic feet of natural gas and 40 billion barrels of oil (or about 10% of the planet’s conventional oil and gas resources).
However, the Arctic is a long way from civilization and new fields may take a decade or more of expensive infrastructure creation to get the oil to market. Ditto the Northwest Passage. Captain Cook’s dream may now actually be a reality. (Last year, the ice-free Northwest Passage across the top of Canada was navigable by large ships for the first time). But with no nearby infrastructure (communications networks, power grids, ports, etc) the viability of a new shipping route, like the commercial availablity of new Arctic oil, is still many years away.