How To Destroy Value

It was reported today that Motorola (MOT) is shopping around its division that makes set top boxes and other equipment for cable and phone companies. The rumored asking price is around $4.5 billion.

That sounds great, but unfortunately for Motorola and its shareholders, the company paid $11 billion for it 10 years ago. Read how management gushed over it back then:

"This partnership will enable us to expand our portfolio for network access, delivering next-generation solutions along with 'home hubs' that will handle high-speed Internet access and video entertainment, as well as carrier-quality voice services," Motorola chief executive Christopher B. Galvin said. "People want access tailored their way and the ability to get online quickly and simply."

Some might say that Motorola didn't really pay $11 billion since it issued its own stock to complete the purchase. This is nonsense of course.

Deals like this might be a contributing reason to explain why Motorola stock has been a disappointment to many investors.

Interesting Article

I ran across an academic article recently that I haven't had time to read yet, but thought I would share it with readers of this blog.

The Financial Crisis as a Symbol of the Failure of Academic Finance? and it's available here.

This excerpt from the abstract drew my attention:

"Theoretical constructs such as the efficient markets hypothesis, rational expectations, and market completeness were too often treated as intellectual dogmas instead of (parts of) falsifiable hypotheses...the failure of academics to communicate the limitations of their models and to warn against (potential) misuses of their research - and sins of commission - introducing (often implicitly) ideological or biased features in research programs."

Full Citation

Blommestein, Hans J., The Financial Crisis as a Symbol of the Failure of Academic Finance? (A Methodological Digression) (September 23, 2009).

"Short-Termism" In The Market

I have blogged constantly about the value and importance of long term investing, and a recent report from the Aspen Institute came out with some practical proposals to fight what they call "short-termism" in the market.

Let's start with the problem as outlined by the institute:

"High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains."

"Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term."

"The focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors."

The report recommends market incentives to discourage such short term behavior. This would include revising the capital gains structure to impose a lower tax on stocks held for a longer time period, and an excise tax on short term trading.

These sound like sensible suggestions and should be taken seriously by the powers that be.

The full report is here.