Shoulda, Woulda, Coulda, Gone Long Energy

In light of Gustav's increasing strength and imminent re-destruction of Louisiana coastline, I wish I would have gone long energy before the close on Friday.

I'd be absolutely shocked if oil and natural gas prices don't rocket upward by at least 5% during Asian trading tonight. Gustav has shut down the majority of energy production in the Gulf and a significant portion of refining capability on land.

Refining capability had been underutilized during the previous weeks leading up to the storm, so refineries not affected by the storm should be able to maximize production (if they want to) to compensate for shut-downs. The US Department of Energy plans to release oil from reserves if it is deemed necessary; so there should be no lines at the pumps next week.

My instincts say that futures will jump and oil company equity will drop Monday, so long both USO and DUG would have been a good trade. Higher prices don't help companies who are shutting down production and are enduring damage to their rigs, while the Saudis will reap higher prices for the oil they are pumping.

Thankfully I don't do much driving while here at school, but gas prices should surely be higher in the coming weeks and months, even if only due to the fear factor. The extent of Gustav's disruption and damage waits to be seen. I sympathize for lives and property in the path of the storm, and hope that the early evacuations minimize damage.

A Crucial Side Note: Multiple democratic pundits, from position-holders to the fat, shameless Michael Moore, have called Hurricane Gustav a "blessing from God." Below are two links. Please note that these are thoughts produced by the intellectual kin of Barack Obama when you don't vote for him this November. How heartless must a person be to claim that the destruction of homes and property and loss of life can be a positive event?

http://www.redstate.com/diaries/absentee/2008/aug/30/fowler-fouls-hurricane-is-gods-favor-to-dem/
http://www.businessandmedia.org/articles/2008/20080830000004.aspx

Backing up the Take-Two Truck

I closed my last post, which was about Take-Two and Electronic Arts entering into a confidentiality agreement, with a cautious sentiment. I said that I was planning on maintaining my disclosed position, TTWO Sept $27.5 and $30 calls, or selling contracts as premiums rose.

There was little spike in the stock price or options premium, so I decided to load up on more calls. TTWO has now set September 4th as the date of their earnings report and conference call for the quarter ended July 31st.

TTWO made $1.52 per share in during the quarter ended in April; much of that money was made during the few days that Grand Theft Auto IV was sold during the end of that quarter. However, sales continued to be strong during this quarter and TTWO's results should reflect this. The consensus estimate for this quarter is only $.55/share, which could easily be beaten; in fact, TTWO has beaten estimates handily each of the past four quarters. Full-year predicictions (currently $1.85) also may be revised upward; so far this year, TTWO has tallied -$.41 and $1.52, for a total of +$1.11. The estimes for the next two quarters, $.55 and $.19 could be easily crushed. TTWO is releasing GTA IV in Japan in early October and on the PC in November (which falls under the next fiscal year), so sales should continue to trickle down to TTWO's bottom line.

As long as TTWO comes in at least in-line this quarter, ERTS will have to re-bid at a much higher price or admit that TTWO is too expensive for them. If ERTS does make the $1.52/share that they're expecting to tally this year, the stock trades at about a 32 P/E. ERTS's asking price of $26/share for TTWO assigns a 14 P/E. Activision-Blizzard trades at a P/E in the high 20's. ERTS cannot expect TTWO to sell out at such a discount to itself and the industry.

So I am indeed speculating as this tango proceeds. If TTWO's management has presented its material to ERTS's board already, they could forseeably make an offer before earnings to minimize the influence of the investor community's reaction on a takeover price. If TTWO reports in-line or surprises positively, shares should jump for many reasons - TTWO's shares are deeply undervalued compared to its competitors, and investors like me may think that ERTS will pony up more for the company.

Shares currently seem to be hugging the $25 level, but I'd be surprised if they stayed there for long. It's time for ERTS to sack up and make a reasonable bid, or leave TTWO alone. The lead-lined takeover cloud capped TTWO's share price as it released the best-selling media release of all time and subsequently reported unbelievable earnings. It's time for the sun to shine on TTWO.

Disclosure: Long TTWO Sept. $27.5 and $30 calls.

Electronic Arts Wining and Dining Take-Two

According to a Reuters press release after-hours, Electronic Arts (ERTS) and Take-Two (TTWO) have now entered into confidential discussions regarding a potential merger.

This is the latest development in a soap-opera-like courtship that has disappointed TTWO investors as the share price has been stagnant since ERTS's first offer of $26 this spring. ERTS extended the offer multiple times throughout the summer. ERTS withdrew the offer earlier this month, but agreed to view a presentation of non-public material by TTWO's executives.

This disclosure of privacy should stoke investor speculation that a new offer may be in the works. Whether an offer is publicly made, however, remains to be seen. Electronic Arts seemed set on acquiring TTWO at $26, but many investors thought that the bid was a shrewed tactic to cap TTWO's share price as it released Grand Theft Auto IV, the biggest game release ever. But Electronic Arts shareholders may be disappointed by a higher bid, as each dollar increases the takeover price by about $75 million. A price in the $30s, which would represent a reasonable premium in light of GTA's success and TTWO's earnings potential, would represent a bid increase of hundreds of millions of dollars.

I may sell some of the options, likely the 30s, if TTWO share prices (or options premiums) pop tomorrow at the open. After speculating twice on this merger, I'm willing to take profits when I can (hopefully) get them. TTWO didn't move much after hours, so maybe longs aren't enthused by this hype anymore. However, TTWO and ERTS will probably clear the air with a new bid or a conclusive "not-interested" statement fairly soon.

I held TTWO calls that expired (worthless) at the end of August, and did buy September calls at both the 27.5 and 30 strike.

A New Search Engine: Cooler than Cuil

For some reason that I could not comprehend, a new search engine called Cuil (pronounced cool) debuted within the past week to much fanfare. TV and internet news outlets, including MarketWatch.com, picked up on this non-event.

In my experience, the search engine returned limited, irrelevant results.

However, I stumbled upon another search engine called Scour that I actually like. Scour, like other search websites, compiles results from the Big Three - Google, Yahoo, and MSN - and attempts to combine the results with internal metrics and package them relevantly. Scour combines the engine rankings along with user votes and comments to arrange results in a certain order.

Best of all, Scour pays users (albeit peanuts) to search, comment, and vote. One search results in one point, while commenting or voting can increase the total per search to four points; after 6,500 points, they'll send a $25 Visa. They do provide toolbar plugins for Firefox and IE, so it's easy to earn points without altering your usual routine. To me, the allure of Scour isn't making money, it's getting good search results (and being able to creep my websites' rankings all in one place) while diverting some revenue away from Google into a smaller company's pockets.

At least the people at Scour were able to pick a decent name. Really, Cuil?

Grand Theft... Vista?

My previous post addressed the possibility of another company bidding for Take Two (TTWO), a video game maker that currently has been offered to be bought out by Electronic Arts (ERTS).

Take Two's chairman said (in a press release) that multiple other parties were performing due diligence and TTWO was in early discussions with these potential suitors.

In my previous article, I threw out Viacom, as many pundits often cite them as wishing to become a player in the growing video game industry. However, I think that there's a more likely bidder.


I think that Microsoft is a likely bidder for TTWO. Microsoft already makes a video game platform (Xbox and Xbox 360) and also independently publishes video games. Years ago, they made a video game acquisition when they bought tiny Bungie studios, the company that developed the Halo series. Microsoft had already published the Halo games, but they decided to bring the production in-house to reap the benefits of vertical integration. I can't tell you how many dollars Microsoft has made, but Halo has now produced three best-selling games, and its exclusivity on the Xbox (it's also available on the PC, but no other console) has driven console sales too.

Besides Halo, Grand Theft Auto, TTWO's signature game, is the other dynasty of the video game universe. GTA IV, the most recent addition, released earlier this year, broke sales records that were set by Halo 3 last year.

Halo 3 generated sales of $170 million dollars during its first week last fall. (As previously discussed, virtually every component of creation, production, and distribution is internal, so much of this amount must fall straight to MSFT's bottom line). Compare that to a major blockbuster movie's debut weekend (the numbers are very similar), and the growing value of video games becomes clear.

However, that total, while impressive, is dwarfed by GTA IV's first week, as the game reported $500 million in sales.

For the mere cost of $2.5 billion (25% over ERTS's bid, or about $32/share), MSFT could absorb that massive revenue- and profit-generating game along with the rest of TTWO's portfolio. TTWO does make other games; BioShock was a surprise success this year, and its sports franchises, covering basketball, baseball, hockey, and tennis, are ranked highly and sell well.

Microsoft could become a serious player in the video game industry if they made a console and sold the two best selling games on the planet. Making GTA exclusive to the Xbox (like Halo is) would be a terrible decision, but providing some incentive, like an earlier release date, could drive additional Xbox sales too.

Such a takeover would be so insignificant to MSFT as a whole; unlike an overpriced Yahoo takeover, buying TTWO at $2.5b would only use up about 10% of their cash, in a transaction that's only as big as 1% of their market cap. However, their growing video game department would certainly flourish, growing to a point where it could be spun off if MSFT deemed that most profitable.

Microsoft has the cash, the takeover desire, and the rationale for making such a purchase. The Grand Theft Auto franchise alone is worth more than this current takeover price (which is why many people think that ERTS submitted the bid before the game came out, so that they could cap the share price), and TTWO has many other promising games and franchises that MSFT could continue to build and polish.

I'm long ERTS and now own TTWO calls, so admittedly, I have an interest in a higher bid (especially from someone other than ERTS). But it is in no way ridiculous to conclude that TTWO could, and should, be bought for a price much higher than it's current share price (high $24) and offer price (~$25.75).

Take Two's Takeover

Electronic Arts (ERTS) has been courting Take Two (TTWO for some time now; just yesterday they extended their current offer to buy out TTWO at about $26 per share just as it was set to expire.

Electronic Arts bid for TTWO when the shares were trading in the mid-teens, as TTWO struggled to do much of anything between releases of the different editions of Grand Theft Auto. However, the recent installment has been successful beyond expectations, and TTWO plans to ride that gravy train until its final stop.

In light of the success of GTA IV, TTWO is claiming that ERTS's offer significantly undervalues the business, which may be true. Here's what the chairman of TTWO said today:

"We are fully engaged in a formal process to evaluate strategic alternatives that have the potential to deliver greater value than EA's inadequate offer," said Strauss Zelnick, Take-Two's chairman. "As part of this process, we continue to engage in meaningful discussions with multiple parties, a number of whom have been conducting due diligence."

The chairman hinted, if falling short of explicitly stating, that there are other companies shopping for TTWO. In the golden age of the video game, traditional media companies like Viacom have been previously suggested/speculated upon being interested in such a purchase. Otherwise, ATVI would be the only likely suitor, though they just completed their own merger with another company.

However, since the chairman stated with more-than-hypothetical language that there is the possibility of another offer, I think it's worth it to gamble here. I bought TTWO August 27.5 calls for $.15 today; the shares closed at $24.66, a discount to ERTS's offer. September calls at 27.5 strike went for about $.70.

Certainly, a higher bid is far from certain, and ERTS could get tired of pursuing the stubborn TTWO and let its current offer expire. However, if another company does come in with a bid of, say, $30, owning either options contract will result in windfall profits.

Owning something like the Aug calls might actually be the safest way to play this; the enormous upside potential is preserved, while the downside from a the end of ERTS's extensions won't be too painful. I can't say that I expect a new bid to emerge - and for one to be announced within the next month is even less likely - but I'd rather lose a little money speculating than miss a hugely profitable trade.


(Disclosure and note: I am long TTWO Aug 27.5 Calls. If a new bid is made, I have a crystal ball for sale... but actually, any success predicting such an event is because of common sense and/or dumb luck.)

Google: Bad for Me, Good for Them

I'm an entrepreneur at heart, and I like when my little business ventures and investing happen to coincide. Running a business using products by eBay, Amazon, and Google allow me to have some additional insight into the actual usage and application of their tools.

I defended and then berated eBay, who has, through their own actions, distanced, scattered, or simply banned a growing number of important sellers.

I have written good things about Amazon.com multiple times - their Fulfillment by Amazon service allows small, medium, and large merchants to enjoy Amazon's world-class supply chain at a (somewhat) reasonable cost.

Now it's Google's term to get an in-depth, er, superficial analysis based on my experiences with Google's tools.

I've been using Gmail since before it was cool, run Adsense on multiple sites, use Firefox with a Google toolbar, post on Blogspot (which is owned by Google), have used G's free "analytics" service before, have watched way too many YouTube videos, have listed items on Google Base (a sort of online marketplace that they have been trying to promote), have accepted and paid through Google Checkout, and lastly, have advertised using Google Adwords. I'll be dwelling on the last service.

Google Adwords is the half of their advertising enterprises that serves merchants. By now, most heavy internet users probably are somewhat familar with Adwords. (If you didn't know, it's those advertisement boxes containing links strewn all over this, and other, websites). Adwords is used by everyone from lowly cottage-industry merchants like myself to Fortune 500 companies - everyone seems drawn by the promise of ten-cent clicks leading to unfathomable sales.

In my experiences thus far, I haven't been able to discern that Adwords is very effective, at least for my business (Whacks Wax). I earned allotments of Adwords credits as I've signed up and renewed hosting contracts over the past five years, and I'd use them as they trickled in. Clicks on keywords that aren't too sought after, like "hot ski wax," are pretty inexpensive, so I set up some programs and let them run.

Maybe it was a result of my lackluster website or undesirable product, but very few clicks ever resulted in sales. It wasn't until I spiffied up my metatags and did some other SEO tricks, earning my website a spot on the first page of Yahoo and Google searches for many keywords, that sales came flowing in. The organic traffic was much, much more effective than the purchased hits.

I just set up CanadasCoffee.com as a means of distributing Tim Horton's, the world's most delicious (but hard to find) coffee. Once again, I have $50 of Adwords credits to play around with; I hoped some free advertising could jump-start sales.

However, the impact of my advertising buck has been wittled away as Google's algorithms keep making my clicks more expensive. The first day, all search terms (from "Tim Horton's" to the more obscure "buy tim hortons coffee" featured minimum bids of ten cents. Some terms had some other advertising competition, but not very many people were competing for most of the terms.

However, the cost of many terms has inexplicably increased in the two days since then. "Tim Hortons" is now requiring a bid of 40 cents per click, even though there are currently no advertisements shown when the term is searched.

My assumption (which may be incorrect) is that Google identifies when advertisers start advertising, and it will then increase the cost as the term becomes demanded (even if only a single advertiser is using it). That way, it can encourage less-searched terms to be paid for cheaply while slowly milking all it can out of more desirable, though uncompetitive, terms.

This strategy is good for Google - in the last quarter, they beat estimates and expectations because they managed to earn more per click. But it's bad for merchants, who are looking to use Adwords to generate sales as margins and demand are squeezed in a tough macroeconomic environment.

But unlike my nasty experiences with eBay, I'll admit that what's bad for me isn't bad for Google at all. Many people and companies believe in the effectiveness of Adwords, and there really aren't many alternatives for little businesses with advertising budgets in the hundreds of dollars. Adwords has now expanded into print advertising (and radio and TV advertising), and it helps advertisers find space in major newspapers for huge discounts (I put an ad for Whacks in the major Salt Lake City paper last winter for like $10, thanks to Google).

As Google's search dominance continues to grow, and as Gmail continues to become the world's premier free email service, the revenues from advertising should continue to grow. Monetizing international markets, especially China, will be essential for Google's onward success. Google ponied up billions for YouTube, but they still haven't been able to figure out how to make money from it; luckily, the cash from their other operations makes the lack of monetization less of a problem for GOOG than it would be for another company. If Google can manage to start making money from these non-core businesses, their furious growth should continue.

Google's earnings are released Friday, and clarity into how revenues hold up during tough economic times will be seen then. On one hand, Adwords is a cheap way to advertise, compared to purchasing hundred- or thousand-dollar advertisements in newspapers or on TV. But there's a chance that the coupling of thriftiness from big companies - like mortgage lenders - or abandonment by many small advertisers (like myself) may pressure growth. I have no prediction to offer.

But as I listed all of the Google services I use, it became clear that Google has built an unrivaled internet kingdom. Its most popular services - Gmail, YouTube, Adsense and Adwords, and of course, the search engine - are the best that the Web has to offer, and they draw users in with little coercing. It's less-popular offerings, like Base and Checkout, are being bankrolled by Google's vaults in an effort to buy market share.

So in the end, my thriftiness may be indicative of one fact about Google - they make a ton of money. Don't hate the player, hate the game.