With the plunge in the equities markets, there are certainly some compelling opportunities. Just look at Napster Inc. (NASDAQ: NAPS), an online music operator. The company has $69.8 million in the bank and a market cap of $66.4 million. Yes, Wall Street is valuing the business at below zero.
Well, hedge funds are taking notice (this is a according to Bloomberg.com). For example, Eminence Capital LLC has increased its equity stake to a cool 9%. This is usually the first step in forcing a company to sell out.
One possibility is for Napster to go private. However, this will probably not carry much of a premium.
Instead, I'm sure the hedgies want Napster to get an offer from a strategic player, such as RealNetworks (NASDAQ: RNWK). Oh, and another possibility is JDS Capital Management Inc., which owns eMusic.com. Keep in mind that the firm purchased one million shares of Napster in Q1.
Actually, Napster controls about a majority of the U.S. online music subscription market. The problem: it's a niche market.
So, with hedge funds swarming, it's going to be tough for Napster to ignore things. In fact, in Friday's trading, the company's shares spiked 27% to $1.39 as the rumors buzzed.
RealNetworks (NASDAQ: RNWK) delivers digital information and entertainment. The firm's RealPlayer product downloads and streams audio, video, and other multimedia content. Its RealOne software and subscription service provides access to news, sports and entertainment content. Its Rhapsody digital music service delivers more than 1 billion songs per year. Its RealArcade is one of the largest casual games destinations on the Web. The company also assists businesses with tools for creating, delivering, and licensing digital content. Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) are competitors.
The firm pleased investors last week, when it reported Q1 EPS of two cents and revenues of $147.6 million. Analysts had been looking for a loss of three cents and $141.6 million. Management also guided Q2/FY08 estimates above consensus views, announced a $50 million share repurchase program and said it intended to spin off its global casual games business. Kaufman Brothers reiterated its "buy" rating on the shares and boosted its price target to $9.
Yahoo, Inc. (NASDAQ: YHOO), which is going to have an interesting week after last week's unsolicited bid by Microsoft Corp. (NASDAQ: MSFT), is outsourcing its online music business. Instead of operating its own music download service (which apparently has not been very profitable), the company will give that chore to Rhapsody America, operated by RealNetworks, Inc. (NASDAQ: RNWK) and Viacom, Inc. (NYSE: VIA).
Yahoo! will migrate customers of its in-house music subscription service to Rhapsody in the coming months. With RealNetworks and potential Yahoo! owner Microsoft being bitter enemies, it will be interesting to see if this partnership lasts should Microsoft succeed in taking ownership of Yahoo for $44.6 billion.
Does Yahoo! have the chops to do much outside the email, search and display advertising arenas? It has not seen growing profit despite being the world's largest internet property (until recently), but shedding itself of assets like its online music business is in line with the company's recent turns as it concentrates on core businesses and trying to be everything to everyone -- and making money from just a few pieces of its business.
Viacom's (NYSE: VIA) MTV unit is setting up a partnership with online music operator RealNetworks (NASDAQ: RNWK) to create an online music store to try to compete with the Apple (NASDAQ: AAPL) iTunes store. MTV's large marketing budget and substantial reach on cable TV will be the key to the effort.
Large wireless operators Verizon Wireless and Vodafone (NYSE: VOD), the largest carrier in Europe, will distribute the service. Apple has a music distribution deal with AT&T (NYSE: T) based on its exclusive sales arrangement for the iPhone.
While most competitors to the Apple music store and player powerhouse have done little, the new venture has a chance. Unlike projects like the Microsoft (NASDAQ: MSFT) Zune, Verizon and Vodafone has close to 150 million wireless customers between them. The would rival the number of iPods in the market. MTV's global brand as the top music video channel should also help.
However, these deals almost always fall apart because there are too many parties with different agendas. RealNetworks would like to boost its flagging Rhapsody online music store. MTV would like to find some success outside its cable distribution and the two wireless carriers would like to have a product to compete with the iPhone/iTunes juggernaut.
But, that is a lot of moving pieces with competing interests. Apple can sleep soundly tonight.
MOST NOTEWORTHY: Apple (AAPL), Ariba (ARBA), EMC Corp (EMC), Anadarko Petroleum (APC) and RealNetworks (RNWK) were today's noteworthy upgrades:
Apple Inc (NASDAQ: AAPL) was upgraded to Buy from Hold with a $160 target at Citigroup following yesterday's pullback; they believe Mac should remain strong through year-end, Q3 consensus estimates look conservative and believe production cuts should not be a surprise.
Roth Capital upgraded shares of Ariba (NASDAQ: ARBA) to Buy from Hold as they believe shares work higher over then next few quarters; they expect seasonally strong September and December quarters and believe that revenue bottomed last year.
Goldman added EMC Corp (NYSE: EMC) to its Conviction Buy List, citing Q2 results and multiple product cycles.
Anadarko Petroleum (NYSE: APC) was raised to Market Perform from Underperform at BMO Capital following better than expected Q2 results and guidance.
RealNetworks (NASDAQ: RNWK) was upgraded to Hold from Sell at Soleil on valuation after reporting solid Q2 earnings...
OTHER DOWNGRADES:
PetSmart (NASDAQ: PETM) was upgraded to Outperform from Neutral at Credit Suisse.
BWS Financial raised Xoma (NASDAQ: XOMA) to Buy from Hold.
Google (NASDAQ: GOOG) is trying to convince [subscription required] the Justice Department that it should seek to extend its anti-trust oversight of Microsoft (NASDAQ: MSFT). A U.S. District Court agreed in 2002 to keep track of Microsoft's anti-competitive behavior.
Of course that was back in the day when Microsoft was using its Windows operating system to crush companies with competing browsers, like Netscape, and competing media platforms, like RealNetworks (NASDAQ: RNWK).
Google claims that because Microsoft's Vista OS has been found to make it difficult for PCs to run the Google desktop search function, that the government should continue to keep an eye on Redmond. The government's current watchdog role ends in November.
Google is telling the government that it cannot take care of itself. If Microsoft is the originator of future bad behavior, it cannot come back to the courts with a new case. Microsoft is too big and too bad to be controlled.
It is an argument that is too clever by half. Google is not Netscape and it is not RealNetworks. It competes with Microsoft on an even footing. It does not need the help of the federal government to make sure that Vista does it no harm. If its problems persist beyond November, it can always come back with a new complaint. But Microsoft probably gets the message.
Google (NASDAQ: GOOG) has complained to the Justice Department that Microsoft's (NASDAQ: MSFT) new Vista operating system made it difficult for companies to run desktop search functions on the system from the world's largest software company.
Rather than put up a fight over the antitrust implications, Microsoft has made changes to Vista to avoid a battle with both federal and state governments. The Justice Department and seventeen states have agreed to Microsoft's solution to the problem.
Perhaps Microsoft is getting wise in its old age. Or, perhaps it is getting timid. The company has been hit with antitrust actions in Europe and the U.S. over matters that range from using its operating system to give its internet browser advantages over Netscape to harming RealNetworks (NASDAQ: RNWK) by pushing the Window Media Player with its operating system. Microsoft ended up paying billions of dollars in fines and settlements.
The news certainly represents a change for heart. Microsoft has gotten out in front of the problem rather than waiting to fight an accusation brought by a government agency.
The New York Timesreported over the weekend that the top antitrust official at the Justice Department was helping Microsoft (NASDAQ: MSFT), urging investigators to reject complaints of antitrust practices at both the federal and state level.
The world's largest software company may have needed the help. The Wall Street Journalwrites [subscription required] that Google (NASDAQ: GOOG) prepared a detailed report that was given to the government in April. The report detailed how Microsoft's new operating system, Windows Vista, puts rivals at a disadvantage. At the core of the complaint is the allegation the Microsoft's desktop search, which helps users look for data on their own PCs, makes it difficult for customers to download rival products.
If the government decides to push the issue, Microsoft could be in for another long round of antitrust prosecution. It has already paid out penalties to Time Warner (NYSE: TWX) for hurting the Netscape browser franchise and to RealNetworks (NASDAQ: RNWK) for unfair competitive practice in the media players space. The European Union is still fighting with Microsoft about how it has abused its monopoly power in the region.
Google is shrewd. Anything that ties up Microsoft in its flagship OS business takes resources away from the company's other ventures, such as the search market. It also allows Google a better footing as it goes to market with word processing and spread sheet products of its own.
And Google does not even have to pay the legal fees.
RealNetworks (NASDAQ: RNWK) has released a news multimedia player that could give the likes of Viacom (NYSE: VIA), CBS (NYSE: CBS) and other large media companies fits.
Real has been producing software players for PCs and cell phones for over a decade. But, the new player will allow consumers to take video from all major formats including Flash, Apple (NASDAQ: AAPL) Quicktime, and Microsoft (NASDAQ: MSFT) Windows Media and store them on the PC hard-drive. The player will also allow users to rip video from sites like YouTube, Google (NASDAQ: GOOG) and Yahoo! (NASDAQ: YHOO).
Acccording to TechCrunch: "Every content creator will now be challenged by the real possibility that if their product is DRM free, it's likely to be ripped from the original source site and even burned to CD." And Barron's writes: "Once you capture the video, the software provides an easy way to send links to the content to other people."
So video pirates and video sharing buffs have YouTube in a bottle. Video can be captured on a PC hard-drive and sent to as many other computers as the user would like. Hard to trace. It is not as if a copy of Saturday Night Live is on the front page of YouTube. Instead, its is being hidden and sent out from a PC hidden somewhere among the other tens of millions of PCs around the world.
MOST NOTEWORTHY: Schering-Plough Corp (SGP), Jones Soda Co (JSDA), RealNetworks, Inc (RNWK), Westwood One, Inc (WON), and Darden Restaurants, Inc (DRI) were today's noteworthy upgrades:
Prudential raised shares of Schering-Plough Corp (NYSE: SGP) to Overweight from Neutral to reflect management's activity on the deal front and recent data on the drug TRA.
ThinkEquity upgraded shares of Jones Soda Co (NASDAQ: JSDA) to Accumulate from Source of Funds after disappointing Q1 results. The firm believes results will get better in FY07 as the canned soda roll-out continues and high fructose corn syrup inventory is depleted.
RealNetworks Inc (NASDAQ: RNWK) was upgraded to Market Perform from Underperform at JP Morgan, citing valuation.
Bear Stearns upgraded shares of Westwood One Inc (NYSE: WON) following reports the company hired UBS AG (UBS) to help find potential buyers.
KeyBanc Capital markets raised Darden Restaurants (NYSE: DRI) to Buy from Hold based on accelerating same-store sales at Olive Garden.
OTHER UPGRADES:
Bear Stearns raised Plantronics, Inc (NYSE: PLT) to Peer Perform from Underperform.
MOST NOTEWORTHY: J.B. Hunt Transport Services, Inc (JBHT), Nvidia Corp (NVDA), International Flavors & Fragrances Inc (IFF), RealNetworks, Inc (RNWK) and Marchex (MCHX) were today's noteworthy upgrades:
Baird upgraded J.B. Hunt Transport Services Inc (NASDAQ: JBHT) to Outperform from Market Perform based on strong trends in Intermodel, valuation, and a $500M share buyback.
Pacific Growth upgraded shares of Nvidia Corp (NASDAQ: NVDA) to Buy from Neutral citing valuation.
Buckingham upgraded International Flavors (NYSE: IFF) to Accumulate from Neutral following the company's Q1 report.
RealNetworks Inc (NASDAQ: RNWK) was raised to Buy from Accumulate at ThinkEquity after its Q1 report.
Susquehanna upgraded Marchex Inc (NASDAQ: MCHX) to Positive from Neutral. Susquehanna has increased confidence that Marchex will be able to increase monetization via Yahoo!'s (YHOO) Panama upgrade, improving 2008 TAC rates and increased value of owned sites following a major upgrade for 2H07.
OTHER UPGRADES:
Jefferies raised Symantec Corp (NASDAQ: SYMC) shares to Buy from Hold with a $21 target.
MOST NOTEWORTHY: Dell Inc (DELL), JetBlue Airways Corp (JBLU), Time Warner Inc (TWX) and Spectrum Brands, Inc (SPC) were some of today's notable upgrades.
Goldman Sachs upgraded Dell Inc (NASDAQ: DELL) to Buy from Neutral with a $28 target to reflect the potential for buyback as well as other growth steps in the company's turnaround efforts.
JetBlue Airways Corp (NASDAQ: JBLU) was upgraded to Neutral from Reduce at UBS.
Time Warner Inc (NYSE: TWX) Inc was upgraded to Outperform from Peer Perform at Bear Stearns.
Prudential upgraded Spectrum Brands Inc (NYSE: SPC) to Neutral from Underweight with a $5 target on valuation.
OTHER UPGRADES:
United Technologies Corp (NYSE: UTX) was upgraded to Outperform from Neutral with a $79 target at Credit Suisse as the firm believes management can achieve better results across the company's commercial business.
JP Morgan upgraded Applied Biosystems, Inc (NYSE: ABI) to Neutral from Underweight.
Matrix USA upgraded Realnetworks, Inc (NASDAQ: RNWK) to Buy from Hold on valuation.
Calyon upgraded Red Lion Hotels Corp (NYSE: RLH) to Add from Neutral with a $14 target.
Prudential upgraded PDL BioPharma Inc (NASDAQ: PDLI) to Overweight from Neutral with a $28 target.
Citigroup added Caterpillar Inc (NASDAQ: CAT) to its Recommended List.
RealNetworks Inc. (NASDAQ:RNWK) traded for $12 in December. On a good day, the stock now changes hands at $8.
Real is one of the internet stock survivors of the 2000 crash. For one day in 2000, it hit $96. At that time, though, it was in a different business. The company was the only true competition for Microsoft Corp.'s (NASDAQ:MSFT) Windows Media Player. Apple Inc. (NASDAQ:AAPL) has a competing product called QuickTime, but the battle for the multimedia PC player was between Real and MSFT.
As Real started to lose ground, it did two things. First, it used its player platform to build a music and game download business. Then, it sued Microsoft for antitrust violations for trying to push its player out of the market.
Real won the suit and collected $761 million. That left the company with almost $700 million in cash against a market cap of less than $1.3 billion.
With the plunge in the equities markets, there are certainly some compelling opportunities. Just look at Napster Inc. (NASDAQ: NAPS), an online music operator. The company has $69.8 million in the bank and a market cap of $66.4 million. Yes, Wall Street is valuing the business at below zero.
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