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URL:  https://boards.fool.com/were-talking-about-issuing-a-large-amount-of-new-17725594.aspx

Subject:  Re: Additional Funding Requirements Date:  8/22/2002  7:33 PM
Author:  Somewhere Number:  1690 of 10889

We're talking about issuing a large amount of new stock (not debt, as some of your comments also seem to imply.)

I'm not clear what you were talking about in the first place, which I even mentioned in my last post, but it doesn't really change anything.

Given the above, it should not be difficult to understand why the agreed upon price for a major stake in Sirius would differ from the price at which you may be willing to sell 100 shares

You assumed that someone buying a large block of shares would probably pay a premium for the shares, which works out well for current shareholders as yourself.

But take Tyco as an example. They had a cash crunch problem coming up. Needed money. Lots of it. Fast. So they sold of their CIT unit. The problem was that everybody knew Tyco was desperate for cash. It's hard to get anyone to pay a premium for it when they know for Tyco it's the difference between bankruptcy or giving away the farm. Giving away the farm is a far better choice.

Sirius needs investors more than investors need Sirius. Thus, I find it improbable that a large investor will pay a nice premium to the current price. If I had $600 million to wave around as a carrot, I'd tell the company to give me a billion dollars of stock or I'd find some other place to park the money. The management could tell me to take a hike, but then risk having to declare bankruptcy in the near future. What do you suppose they'll choose?

One company I have lots of stock in is Pixar. They're quite the opposite. They've built up a war chest with more than a quarter billion dollars in it, and that gives them far more negociating power than they had before. It's a great example of why a great balance sheet is a gift that just keeps on giving.

When the original Toy Story came out, Disney financed most of it. They also got to keep most of the profits as a result. Something like a measily 10%. I'm sure Pixar didn't like the deal, but they were some no-name outfit nobody ever heard of before with limited resources, and they didn't have much choice in the matter. They signed on the dotted line to produce three movies in such a manner. Toy Story was the first.

With the success of Toy Story, they had a little more negociating power. They had more money. They had a successful movie under their belts. And with their success, Disney wanted more movies out of them. So they renegociated the contract. Now Pixar would create five movies for Disney, but they'd split the profits 50/50.

Since then, Pixar has produced three more hits (A Bug's Life, Toy Story 2, and Monster's Inc). Money is really rolling in now. They've built up a war chest with half a billion dollars. They have no debt. They have a brand that's actually worth something now. Pixar is still obligated to create three more movies for Disney, but I bet Disney isn't going to like how the next negociations will go. Imagine it:

Pixar: Well, we have a quarter billion bucks and no debt. We'll split the profits and give you 10% for the opportunity to market our movie and use the characters in your theme parks. If you don't like it, well, we'll just make the movie without you.

Disney: Well offer you 50/50.

Pixar: Okay, you can have 5%.

Disney: We'll take it.

See the difference? With lots of cash and no debt, Pixar has enormous clout in the negociations. With little cash and tons of debt, they'd be lucky with whatever they can get. Sirius falls into the second category, and if I had $600 million to invest, I'd wring a deal out of Sirius that would not be good for the current shareholders. That's business.

Also, are you saying that the board is not independent, and that the assets are not really worth what they're reported to be worth, and that there are a whole lot of other terrible things about to befall us, or are you just bringing up every risk that you can imagine.

I don't know if the board is truly independent or not, but I doubt it. It's not to slam Sirius in particular, though, because I think all companies are guilty of this transgression to some degree. Yesterday there was an article by Whitney Tilson on the fool at http://www.fool.com/news/foth/2002/foth020821.htm. In it, he talks about a speech by Charles Munger many years ago which includes "Why are boards of directors so consistently dysfunctional and unable to rein in even the most egregious behavior by CEOs?" I agree with the observations whole-heartedly. So don't worry about feeling defensive, I'm really not picking on Sirius in this case. I think it's the norm. That doesn't make it right, though, which is why I wouldn't give them much credit for looking out for the stockholders.

Assets also have a notorious ability to be under or over-stated, and again this has little to do with Sirius in particular. In fact, this could happen without any attempts by management trying to influnce stock prices! Property bought decades ago may be seriously undervalued. Perhaps stock bought years ago is still on the books at the price it was bought rather than the price it's currently trading at. Cisco not to long ago took a two billion (billion!) charge to its inventory for being over-stated. However, when a company is losing money hand-over-fist, regardless of the true value of the company's assests, the value of those assets--both true and imaginary--will continue to decrease. I take book value with a huge grain of salt no matter what company we're talking about. Cash is great, because it can be valued very precisely. Even short-term investments are easy to value. Beyond that, book value is a notoriously difficult concept to pin a number on, which also makes it a notoriously useless number.

Nope, the only reasons I would not invest in satellite radio can be boiled down to having loads of debt, little cash, and no expectation that it will reach profitability in the near future. Satellite radio may survive, but the current shareholders aren't going to reap the benifits no matter how good the product is.

-- Ryan
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