There aren’t a whole lot of investigative journalists out there covering penny stocks and other small-cap companies.
Roddy Boyd does, though, and this weekend he posted a look at education-software company Blackboard Incorporated, which is selling itself for a nifty $1.65 billion to Providence Equity Partners. Boyd picks its business apart:
When Blackboard’s business is carefully pulled apart, a very different picture emerges from what management has shown the world. In reality it is two companies: The company that Providence thinks it is buying has grown rapidly and moved aggressively to expand its product offerings. Widely held, it is a market leading software company whose brand is well-known.
Then there is the real Blackboard, the very opposite of what a leading software company traditionally is. Michael Chasen doesn’t talk about this company on conference calls and its cadre of enthusiastic analysts never got around to going behind the numbers, where a declining competitive position, baffling acquisition binge and weakening financial state all merited research. Revealed in obscure footnotes and buried documents, Blackboard would just as soon it stay buried.
It’s hard to see why Blackboard is worth as much as the market and Providence say it is. It made $16.6 million last year, which would give it a trailing price-to-earnings ratio of 100. Boyd points out that Blackboard’s margins were super-thin, at 7.6 percent on an operating basis (3.7 percent on a net-income basis). At least it had profit margins last year. So far this year, it has lost money.
Boyd also raises questions about whether the Defense Department has been overpaying for Blackboard’s software. The Naval War College pays $100.55 per student—far more than what other colleges pay.
— Rick Bookstaber, who somehow finds time to blog here and there while also working for the Financial Stability Oversight Council and the SEC, has a fascinating post up on how changes in capitalism itself are increasing inequality:
Among the many sources of this rising disparity in income is the changing nature of capitalism. A little bit of capital goes a lot further in building out the virtual world than it did in the burgeoning industrial revolution with its railroads, steam-driven mills and iron foundries, or even in the pre-rust belt, brick and mortar 20th century. Not only does it take less capital, the capital that is required need not be committed for very long before the outcome of the enterprise is manifest…
The reduced capital requirements for creating even multibillion dollar businesses can be thought of as providing a new type of leverage, what might be called functional leverage. Functional leverage means that a given amount of capital can capture a greater base of production. Which means that it is easier for the entrepreneur to bootstrap up from one enterprise to the next while maintaining a much higher equity stake than would have occurred during the period of capital intensive production. Think of the trajectory of Google, Facebook, LinkedIn or GroupOn. How much capital was needed to push the businesses past the billion dollar valuation mark, and how long was that capital required? When the IPOs in these businesses finally do occur, it is not so much to allow access to further capital as to provide a channel for the owners to monetize their stake…
Thus the rise of the super-elite is not a product of educational differences, but rather a result of the new capitalism which creates bigger winners, and does so much more quickly than in the capital-intensive capitalist era. Less capital is needed, it is applied for a shorter period before the results are realized, and because less capital is required, the entrepreneur captures more of the value of the enterprise.
Here’s his kicker:
Marx considered the role of labor and capital during the Industrial Revolution and called capital the king and workers the subjugated. Now we may be moving into an era of capitalism where capital — and workers — become incidental.
— Bank of America is in trouble.