Kodak, Motorola: Can't restructure? Sell off your Patents

Both Motorola and Kodak, icons of American innovation in the 70s and 80s, have been struggling in the last decade to reinvent themselves. Selling assets, spining off subsidiaries, streamlining operations, outsourcing non core business. Yet with the succession of CEOs and unending announcements of retructuring plans, neither company has figured out what to do with its rich patent portfolio.

"Obviously they've spend billions of dollars in the last 3 decades researching, developping and registering these patents, now probably all written-off in their balance sheets" remarks Rachid Sefrioui, Managing Director at Finaventures, a California-based venture capitalist. 

While Silicon Valley is innovating and backing entrepreneurs who cleverly discover new uses for mankind, neither Motorola nor Kodak have decided to open up their portfolios to VCs and entrepreneurs. Surely there could be enough in there to come up with a dozen blockbuster applications that could pay off for either company.

Instead both companies are discretly shopping around their pristine patent portfolios to the highest bidders. Once cash proceeds are washed down by executive bonuses and restructuring costs, both companies will probably go the route of Polaroid and Borders...chapter 7.

And that's the glamour and tragedy of innovation.

China's Baidu restructures: better late than never

Baidu, the largest Chinese search giant, announced a restructuring plan of its business units including sales, operations, user products , commercial products, and new technologies such as cloud computing and mobile.

The Company said it will implement an executive rotational program in an attempt to spur innovation and efficiency. This is the biggest ever organizational restructure since its founding in 2000.

"I always said that technology re-invests itself every 18 to 24 months", asserts Rachid Sefrioui, founder of Finatech, a regional technology leader with 700 employees, "and therefore a company needs to re-adjust its organizational chart every 24 to 36 months to re-invigorate executives and boost productivity."

According to Baidu, after the reorganization the search company will reach new levels of productivity in operations, increase sales, and better coordinate synergies between its divisions.  Reorgs often spur fresh gusts of innovation in processes but also in customer acquisition, new products and new markets.

Tech Valuations: back to big $$$ per eyeballs! (hint: The ARPU isn't there)

According to my calculations in the table below, the best annualized ARPU (Average Revenue Per User) is still in the Telecom business. Though Telecom isn't as sexy as the "visionary potential" of Facebook, but at least it delivers real revenues with the data revenues portion of ARPU getting to around 10-15% now. And since Mobile is the name of the game for social networking and social gaming, Mobile Operators are going to always be in the mix.

So did AT&T overpay for T-Mobile? Not according to the table below. T-Mobile US  acquired by AT&T for $39B for 34M subscribers, that's a $1,147 valuation per subscriber, and these are PAYING subscribers. With 2010 revenues at $17B, Annual ARPU is $500 per subscriber (An average monthly bill of $42 per subscriber). So valuation comes to 2x ARPU.

Microsoft bought Skype for $8.5B for 124M users (source 2010 S-1 filing; not the 600M names in their database), that's a $68 valuation per user. Skype 2010 revenues were about $800M, so that is an annual ARPU of $6.45 (yes, that is 6 dollars and fifity cents!). Worse, out of the 124M only 8M users are subscribers and generate that $800M, so the "effective annual ARPU" is $100. So for the sake of comparison to the T-Mobile Deal, Microsoft paid a $1,062 per Skype subscriber (the 8M paying ones). So valuation comes to 10x ARPU. Or in "PR" terms, $69 per user on the basis of the 124M users, so that still comes to  11x, anyway you look at it.

Similarly, in its IPO, LinkedIn is valued at $3B with 100M users, that's a $30 valuation per user. LinkedIn 2010 revenues were about $200M. Granted in that revenue figure, subscriptions accounted for 25%, advertising for 30% and recruiting for 45%, the fact is the recruiting revenue and the advertising revenue is driven by the 100M users on the network. So it is fair to calculate an ARPU of $2 per user. So valuation comes to 15x ARPU.

Facebook valued at $67B with 600M users, that's $112 valuation per user. Facebook 2010 Revenues were $1.9B. So ARPU is $3. So valuation comes to 36x ARPU.

In the end, bankers, shareholders and acquisitive CEOs always find a way to justify the premium of the "strategic value". Though public shareholders - yes including those of AT&T, of cash-cow Microsoft and of soon-to-be-public LinkedIn, should really analyze the impact on market cap compared to other revenue, margin and cash.

Turnarounds: Why? Why? Why?

When I am retained to advise on the turnaround of a company, my only tool, after 20 years of experience, is the word "why". The magic of the word "why" never ceases to amaze me. I discover time and again how executives and their teams continuously take actions in a mindless manner, simply because it's been done like that in the past.

As soon as an outsider like me starts to constantly ask "why is this?", "why is that?", "why do we do it that way?", I start getting blank stares and angry responses. And that's what I want. It stimulates the brain, it energizes the thought process, it forces unconventional thinking. In brief, it takes everyone at the company out of their comfort zone. And isn't that why the company got in trouble in the first place? because everyone just got too comfortable and did not challenge themselves and each other.

Just like in real estate, "location, location, location" is the magic formula to a successful real estate strategy, in turnarounds, "why, why,why" is the magic formula. Sometimes the company goes from the brink of bankruptcy to being completely turned around simply because I ask "why, why,why". Most answers  lie within; executives and team members alike come up with solutions that have been in the back of their head for a long time. They simply did not bother putting them on the table because no one asked them, no one dared ask "why".

Sometimes problems are deeper and more urgent when I am asked to turnaround a company, and certain techniques are only learned with experience and battleground scars, but the "why" always solves at least 50% of the problem, even with outside suppliers and bankers. Sometime they don't even know what outcome they want out of a turnaround, but when asked "why", they start thinking about their actions.

So start asking "Why?"

Timing ripe for IT bargain hunting in Europe

While the IT mid-market continues to be soft in Europe, with margins being ever so squeezed by major accounts, Infosys is taking the lead and expanding its acquire-onshore-to-offshore-in-India business model. It has been known in European IT circles that Infosys is looking for acquisitions, and it might just have happened. Sources tell us that they may have finalised two European acquisitions. The leading IT offshoring giant will invest about USD 300M for the acquisitions.

Clearly the timing is right as European IT company values are down, for the mid-market ones. And if Infosys executes their integration correctly into their backoffice in India, margins will bump up and the acquisitions will look like a bargain. 

On another note, the IT giant is not sleeping on its laurels. I always said that you need to reinvent your org chart every 24 months. Well, Infosys has appointed a three member panel to chart out the giant's restructuring roadmap.

Infosys is looking to reorganize into seven key verticals, where each vertical will be divided into different horizontals. Three to four key vertical heads are likely to be shuffled in the reorganization. The restructuring roadmap is planned to take three to four months to complete. Good initiative!

Now they just need to officialize a good succession plan, and inform the market.

Mr. Board Director, You're Fired!

Most venture CEOs do not think ahead and let the wrong people get on their boards. A CEO must do proper emotional evaluation of the type of people he lets sit on his board. 

Sure a venture fund is entitled to a certain number of seats, but some venture funds assign the wrong people to boards. This DOES destroy value because these board members do not bring anything to the board or the CEO. Rather they bring their emotional baggage with them, mostly their insecurity.

Having lived through numerous venture boards, I thought I'd share with you my list of the traits of people who should NOT be on boards:

- a person who does not spend time understanding the business
- a person who wants to be the "Monday-quarterbacking" CEO of the business
- a person who "acts as if" he is a close friend of the CEO

- a person who likes to talk a lot, debate forever and never take positions
- a person who does not dare to stand up and say that he/she does not agree
- a person who thinks that surviving is enough for a company
- a person who badmouths everyone and thinks that building a leading company is easy

These are the most detrimental traits to any growth company. They discourage other board members from engaging the CEO, they make everyone regret the notion of proper governance, and finally they wind up disgusting the CEO from his job and his passion.

Venture CEOs should challenge their VCs to assign to their boards emotionally well-balanced directors, and retain the right to ask such shareholders to change "persons" if necessary. These should be as much part of term-sheets as any other financial clauses.

Reorganization before restructuring becomes a matter of survival

Technology companies have to constantly be on the lookout for entrants that will destabilize their competitive landscape. As I said many times, the technology map changes every 18 to 36 months. The fact that Facebook, a company founded a year after Google went public, overtook Google in 2010 in terms of unique users signing on in the US was a shocker not only to Larry Page but also to the Google board.

This week, co-founder Larry Page took over the CEO job from Eric Schmidt, and his first order of business was to reorganize the company. Indeed he laid out 5 key Business Groups within Google with clear accountability for each of their leaders to focus on bottom line, and the competitive landscape. And today's competitive landscape is Social Media.

Many companies get settled in a comfort zone thinking they are safe with their market share and leadership position, and forget to see their environment changing around them. And that is where cash flow slows down, margins start shrinking and debt-service becomes more difficult to cover. When that happens it is too late to reorganize. It is time for restructuring. New management is appointed. Payroll is cut. Overhead is drastically shrunk. And the company winds up fighting for its survival. 

The lead time between the awareness that a reorganization must take place, with clear accountability, and the time the necessity of a restructuring hits, is generally between 12 and 18 months. Yes, it does happen that fast.

I frequently recommend to the companies and CEOs I advise to reorganize their org chart and their business lines every 24 months regardless of sector, just so that group heads don't start getting too comfortable. But in the technology sector it is a matter of survival to reorganize in shorter cycles.