Avaya: The Next M&A Target

The telecommunications company Avaya Inc. is in negotiations to sell a part or all of itself, in what may be the latest round of deal making in its industry. Among those interested are two rivals — Cisco Systems and Nortel Networks — and the equity buyout firm Silver Lake Partners. Avaya, based in Basking Ridge, N.J. and valued at $6.1 billion, has retained the investment bank Credit Suisse as an adviser. The company, the one-time business communications arm of Lucent Technologies, and before that AT&T, is one of the nation’s top makers of phone equipment, rivaling Cisco, Nortel and Alcatel-Lucent in providing Internet-based communications to corporations.

Of course, this is not a surprise. The telecommunications sector has proved mature for deals recently. Actually, there should be more consolidation in the telecom-equipment industry. The massive consolidation among telecom carriers in the last few years have left telecom-equipment space too crowded, with too many vendors chasing after too few deals. Smaller equipment makers such as Avaya have to do their own deals to compete with their bigger rivals. Last year, telecom equipment manufacturers Alcatel and Lucent merged in an $11.6 billion transaction. In addition, Western equipment makers are facing pressure from low-cost Asian manufacturers, as well as the growing size and purchasing power of a few large phone companies.

Why Avaya is an ideal target for private-equity firms? The company has $829Million in cash and no debt; it generates strong and stable cash flows combined with increasing profit margins. The company provides equipment that moves traditional phone systems onto integrated IP network platforms that provide voice, email, conference, IM and video communications. About half Avaya's revenue is derived from long-term service contracts, which ensures even more recurring cash flows.

So, why Nortel? First, a Nortel-Avaya deal would be consistent with Nortel’s strategy of increasing focus on enterprise and professional services. In a research report, UBS analyst Nikos Theosopoulos said buying Avaya would give Nortel 30% of the enterprise voice market, as well as more scale in the services business. However, I’m not sure Nortel is ready for such a big move. Despite the progress made by CEO Mike Zafirovski in restructuring the company, there is still plenty of more work to be done and operating costs to be reduced. An acquisition would definitely complicate the situation. On the other hand, Nortel has no choice but to move forward with the deal in order to compete with bigger equipment maker providers, such as Cisco Systems, Inc.

The way I see this potential deal is quite simple. Another big wave of consolidation is around the corner in the telecommunications industry. It doesn’t really matter if buyers will be private-equity firms or competitors. It is just the inevitable path for an industry that is becoming more mature.

What is going on with CableCARDs?

CableCARD, which most cable companies must start renting out on July 1 because of an FCC mandate, will let a variety of store-bought devices tune in premium cable channels. Simply by slipping the card into a slot on the back of any enabled equipment, such as a digital video recorder (DVR), a media-center PC, or a flat-panel TV, subscribers can get premium programming. It sounds too easy and interesting.

The problem is that cable companies, telephone outfits, and consumer-electronics makers are back at it, fighting over your TV set. The little credit-card-like device could determine how much money these companies collect when viewers in the near future can start downloading most of their premium movies and videos from the Internet. All these companies are throwing in all kind of extras to get you to use their gear, or not use the opposition's. For instance, TiVo Inc. is offering the Amazon.com Unbox movie-download service. Comcast, Time Warner and other cable providers are likely to do everything possible to keep you from buying a competing device at a store. New cable customers have to call them to get a CableCARD, no matter where they plan to use it. And, of course, cable providers are working hard to point to the downside of using separately purchased equipment. Some cable providers may charge as much for a card as you now pay to rent a box.

What is more intriguing is that equipment different from Set-Top-Boxes (STB) provided by cable companies such as DVRs and TiVo’s, doesn’t allow cable customers to watch on-demand shows. In fact, cable companies will license software to let such equipment makers offer on-demand and pay-per-view, but only if they agree to display prominently the cable provider's logos, ads, and programming. That's a deal-breaker for many companies that are trying to establish their brand and make money off downloadable content.

Makers of DVRs and other gear see CableCARD as the future. It would provide vastly more choices as companies strike deals to allow movies and other content to be pulled directly from the Internet. If that happens, it would be the end of cable. Honestly, I don’t see happening any time soon.

Cox Communications loves Customer Care

Today’s discussion is something that I’ve been thinking for a while but never really found a company that sets the example. But lucky for us, the consumers, that might be changing. U.S Consumers generate about $60 billion of yearly revenue just on voice plans. In fact, cable companies have been laying miles of new fiber-optic cable and doing everything they can to steal chunks of that business from the phone giants. However, they haven’t been very successful yet, pulling away just about $5Billion in phone revenues.

There seems to be one exception, Cox Communications. They found a formula that works, which is beating phone companies on customer service. On a variety of metrics, from network performance and reliability to billing and cost, customers in several regions describe Cox as their preferred provider. That is a big surprise given the poor reputation that many cable providers have among their own customers. But developing crossover appeal will become increasingly important as the broadband lines blur. Cable companies are offering new phone plans; AT&T and Verizon are launching TV and other advanced video services. Further, Cox, Comcast, Time Warner, and Advanced Newhouse Communications are beginning to sell a wireless phone service, Pivot, in select markets.

Let’s keep in mind that phone is the fastest-growing portion of most cable company’s business. For instance, Cox is generating about $1 billion a year from its 2.1 million phone customers, with profit margins of about 50%-60%, with nearly 20% of the homes in neighborhoods where it offers phone service signed up, according to researcher IDC. Conversely, less than 7% of customers in cable giant Comcast's neighborhoods take its phone service. (Cablevision Systems Corp. has the industry's best phone-penetration rate, 29%). On the other hand, phone companies capture 5% or less of their potential TV customers.

But let’s get back to customer service. First, Cox uses one customer-care provider, with U.S.-based centers. Second, rather than pushing agents to hurry customers off the phone and causing multiple call-backs, Cox strives to handle issues in a single call and grades representatives on how well they eliminate problems. Third, to avoid confusion, field technicians tap into the same system used by call-center reps. However, performing at the same high level in wireless could be challenging as they will use Sprint Nextel Corp.'s cellular network, which has been overwhelmed with problems after Sprint's troubled integration with Nextel. Also, cell-phone service is one area where consumers seem less eager to switch. So, it will be Cox’s job to convince customers that cable companies can provide wireless service and customer service at the same time.

And it finally happened: Alltel goes private

On a much expected deal, TPG Capital LLP and the private-equity arm of Goldman Sachs Group Inc., agreed to purchase wireless operator Alltel Corp. for $27.5Billion, in the largest venture of private-equity money into the wireless business. The buyers will pay $71.50 per share for the company, which represents a price of about 10% higher than where the shares traded last Friday. The buyout group will put $4Billion of its own equity, while banks led by Citigroup Inc. will make “equity bridge” loans of greater than $600Million.

Now, let’s see the strategy behind this deal. Alltel has 12 million subscribers mostly in the Midwest, West and South. The company became an attractive target after spinning off its wireline unit last year to put more focus on the faster-growing wireless telecom business. From the finance standpoint, Alltel shares trade around 9 times its cash flow, an attractive multiple to private equity buyers who are increasingly paying in the double-digits as competition for deals grows tougher. So far, so good.

There are two key points that trouble me a bit. How about the strategic questions that new buyers will face? First, it is unclear how the company will approach the bidding in a coming Federal Communications Commission auction of radio spectrum for wireless broadband communications. This new spectrum and the building out of a new high-speed wireless network would be very costly; however, it might be necessary as larger competitors, such as AT&T, Verizon Wireless and Sprint Nextel are all increasing the speed available on their networks to offer new applications. Up to now, management said the company is willing to invest in its network. However, it seems to be very difficult to predict which direction the company will take, but this is a key fact or to consider moving forward.

I think the Alltel deal is just the beginning of a huge wave of telecom deals. Private-equity investors are showing strong interest in telecom companies. Just to mention a few deals, in Canada, Kohlberg Kravis Roberts & Co. and three pension funds have been in discussions to buy BCE Inc. In the U.S., Sprint-Nextel has also been a rumored target during the last month. So, let’s expect more deals and action to come in the always exciting telecom sector.

Welcome IPTV: Part II

Last month, CBS announced the imminent launch of the CBS Interactive Audience Network: a free, ad-supported network that will digitally deliver CBS programming and third-party content across digital media channels. CBS's ability to partner with leading next-generation interactive platforms is the best way to evolve from a content company to an audience company. The CBS Interactive Network's list of new content deals and online distribution partners in the emerging IPTV space is really long. Included are AOL, Microsoft, Cnet Networks, Comcast, Joost, Bebo, Brightcove, Netvibes, Sling Media and Veoh. Also, CBS previously negotiated content distribution arrangements with Yahoo, Apple's iTunes, Microsoft's Xbox, Amazon's UnBox and others. Mirroring its online strategy, CBS Mobile has concluded direct agreements with the three largest U.S. wireless carriers, AT&T, Verizon Wireless and Sprint, as well as leading next-generation platforms such as Qualcomm's MediaFLO.

What about cable providers? Comcast's strategy is to be the company that delivers entertainment, information and media on multiple platforms. The Fan, Comcast's broadband video player, is proving a successful enhancement to the TV experience as well. It is generating more than 80 million video views per month. Further, Comcast was quick to get involved in the DVR (digital video recorder) market. Their DVR is integrated with the digital cable service, which means that in addition to recording their favorite programs, customers have hundreds of channels to watch, and they can choose from more than 9,000 video on demand titles each month, many of which are not available on traditional, linear television. Speaking more broadly, Comcast is focused on developing applications built to take advantage of quad-play digital delivery. These applications will enable customers to receive television content, surf the Internet, make phone calls, and check e-mail or voice mail on multiple devices. They are piloting a new wireless service called 'Pivot' as part of a joint venture with Sprint that lets customers take their integrated home entertainment experience on the go. Through a new co branded wireless device, customers will be able to access TV content, music, video clips and games; access content on home DVRs and program their DVRs; use a single voice mailbox for home and wireless; surf the Internet using Comcast's Internet portal; and e-mail with Comcast e-mail addresses. That is amazing.

How about Hollywood? A number of film and tech industry superstars were among the earliest innovators in the digital video technology field, George Lucas' Industrial Light & Magic and Steve Jobs' Pixar notable among them. ClickStar, backed by Morgan Freeman's Revelations Entertainment and Intel, is digitally distributing first-release films by top industry names, as well as exclusive educational and documentary programming, before they hit the DVD and cable markets. A growing number of major studios, cable and TV production companies, including Sony Pictures Home Entertainment, Universal Studios Home Entertainment and Warner Bros. Home Entertainment, have agreed to provide films and programming in what might be viewed at least as partial acknowledgment that ClickStar has the right idea.

What about the people? It's the programmers and engineers working away at tech companies, cable and TV networks, telcos and equipment manufacturers who are collectively driving digital media convergence forward. A loose but resilient web of young entrepreneurial companies is playing an outsized role in the process. While companies such as Sling Media are offering new digital TV experiences through TV enhancement equipment and streaming wired and wireless IP services, companies such as Extend Media continue to work on increasingly powerful and flexible delivery platforms for digital content services. For example, the OpenCase solution from Extend Media is not simply an Internet TV distribution technology. The software doesn't simply distribute or push out video: It allows content and rights holders to control, secure, manage and, most importantly, monetize their broadband video assets. That's a key feature set for Internet TV deployments today, whether they make money via direct to own sales, rental, subscription or ad-supported models.

So, while threatening established TV networks, cable broadcasters and film studios, the emergence of IPTV and digital video also opens up a new world of opportunity. With more screens large and small popping up all over, people are watching more TV, films and advertising to the point where the danger may lie in over saturation. The battleground is less telco vs. MSOs (multi-cable systems operators), or even telco/MSOs against media and entertainment companies, than a sea change where open IP networks are taking over what was formerly requiring proprietary networks. Content owners and rights holders, as well as retailers, want to carve out a role that reaches the consumer directly without having to go through either Apple and its paid model or Google and its ad-supported model, the two opposing ends of the continuum in the industry right now. There is no question IPTV will be the next big wave in TV, entertainment and media. The big unknown, however, is how established and emerging providers of content and technology figure this entire difficult puzzle out.

Welcome IPTV: Part I

There's a new wave of changes headed for the TV and film industries: Television viewers can choose what they watch, when and how they view programs and where they catch up on their favorite shows. That's just the beginning. The interactivity of the Internet, the emergence of DVR (digital video recorder) technologies, easier access to wired and wireless broadband services, and the development of digital network distribution formats for streaming multimedia content are forces that are combining to provide viewers with more choice. The great Internet TV race is on, and the field is crowded and getting more crowded all the time. Welcome IPTV. But with that the TV and film industries are in the midst of a major shakeup.

Whether the heat now being generated by IPTV can be maintained depends on the performance of still-evolving digital services delivery platforms. They have to seamlessly manage a huge variety and amount -- and it's still growing rapidly -- of digital video content on offer. Then they must navigate through a maze of networks, wired, mobile IP, 3G and 4G cellular, to reach a broad range of stationary and portable media devices that utilize a variety of proprietary and open standard formats. Not an easy task.

There is little doubt that the emergence of interactive Internet and mobile TV offerings poses a threat for established companies and new market entrants all along the respective industries' value chains. Still, there are huge opportunities as well. Equipment manufacturers, distribution partners, content producers, TV networks and film studios are all struggling and experimenting with ways to tap into the rapidly growing Internet TV and film markets and get a handle on how viewers can, and want, to make use of them. Viewers themselves are struggling to come to grips with how to use set-top boxes and portable devices, and figure out which content and services are accessible and affordable.

The idea of watching appointment TV is being disrupted by the DVR, which has taken the 'water cooler' chatter out of the mix. Consumers now watch what they want to watch, when they want to watch it. Technologies like Slingbox from Sling Media take that a step further by giving consumers the ability to watch TV not only when they want to, but also wherever they want to. The interactive nature of IPTV, as well as the unsettled state of devices, formats and standards, stands in severe contrast to the passive nature of traditional TV viewing. Social networking sites such as YouTube have demonstrated the potential for interactivity to attract viewers and drive network traffic.

The key technological drivers pushing IPTV viability are high-speed bandwidth, powerful hardware, evolved codecs and DRM (Digital Right Management). There are numerous technical hurdles in the path toward widespread IPTV adoption, including the variety of consumer software and hardware options, the rapid proliferation of viewing devices, and the need to establish links between multiple vendors. But the major challenge is really about defining a business model that works. That's why just about every media and entertainment company is experimenting with Internet TV-related applications. The market is uncertain which models for delivery will prove profitable and sustainable: download, rental, subscriptions, ad-supported, or some combination of the above. This has created the need for companies like Extend Media that can supply and/or stitch together the many moving parts required to deliver these services. However, it's emphatically clear that IP-based distribution, instead of proprietary networks via satellite or cable, is now a viable video distribution mechanism with the potential to eclipse all other methods in the future. Refashioning and re-engineering themselves to deliver programming to fragmenting mass markets that are getting comfortable with various new media channels has not only led established players to ally themselves with numerous new content and distribution partners, technology providers in particular, but also to rethink their business models and devise new ones suited to the nature of digital channels.

On my next blog, we will discuss how different players are pushing IPTV in very diverse ways.

AT&T Move into Advertising

Believe it or not, AT&T is now thinking about advertising. Who would have thought 10 years ago that the company would put out a press release expecting targeted advertising related to its video and wireless services to become a billion dollar business in the next three years? No question that times have changed and AT&T must look for any additional source of revenues to keep up with the coming competition from OTT (Over-The-Top) providers, such as Google, Yahoo and Microsoft.

Let’s spend some time on this. Point taken, AT&T's combination of being the largest U.S. broadband Internet provider, a wireless carrier and its nascent U-Verse video service delivered over broadband networks provides it with a unique opportunity to sell advertising. The company thinks there is a good opportunity in advertising especially given the assets their business has available, such as lots of wireless subscribers and their latest move into TV.

Further, AT&T plans to spend over $6 billion to build out the infrastructure for U-Verse, which started rolling out last year over high-speed fiber-optic networks. The service will be built on top of Microsoft Corp. Internet protocol television (IPTV) platform and will be available to 18 million homes in 13 U.S. states by the end of 2008. Expectations are very high as the company believes the U-Verse service will allow advertisers to better target customer interests and explore new interactive ways to TV watchers because it runs on top of an Internet network. The final piece of the puzzle would be to find a partner to sell and serve advertising over the IPTV platform to consumers. Even though Microsoft will be providing the IPTV platform, it is still premature to say that they will be the preferred partner that AT&T is looking for, especially as they trail Google Inc. and Yahoo Inc. in Web advertising sales.

Bottom line, AT&T move into advertising makes absolute sense. They have the infrastructure, the strategy, the money and the strength muscle to make this business succeed. I wonder, however, whether they would be able to compete with experienced advertising powerhouses already out there, which started out from scratch and learned to compete against Over-The-Top providers. There will be some learning curves and mistakes on the way, but I think AT&T has what it takes to generate that $1Billion in the next three year. Time will tell.

Executives on the Move

Cisco Systems
Vince Hassel was named chief financial officer of Linksys, a division of the company. Mr. Hassel joins from Flextronics International Ltd., where he was vice president of finance for the components division.

3COM
Jay Zager was named executive vice president and chief financial officer of the voice and data networking company, effective June 23. Mr. Zager, 57 years old, will succeed Don Halsted, who is leaving to pursue other opportunities, but will serve as an adviser during the transition. Mr. Halsted, 50, couldn’t be reached to comment. Mr. Zager joins from Gerber Scientific Inc., where he was executive vice president and finance chief.

Verizon Wireless
The operator of the nation's most reliable wireless network and leader in customer loyalty, has named William (Bill) Spargo to the recently created position of director of Data Sales for the New England Region. In this role, Spargo is responsible for leading and training Verizon Wireless' consumer and business sales teams on mobile productivity solutions like BroadbandAccess wireless Internet service, and VZ Access mobile email solutions. Spargo will be based in Meriden, Connecticut. Mark Harris has been named director of Retail Sales and Operations for Southern New England to replace Spargo.

What is going on with Alcatel-Lucent?

Alcatel-Lucent reported earnings on Friday. It was its first full quarter since it completed the merger and results were somehow disappointing. Company is still struggling itself after the recent trans-Atlantic merger and that continues to cause big troubles. Further, slump in wireless revenue, which fell 15% to €1.2 billion ($1.62 billion) from a year earlier, is creating new headaches as they now face a new threat to its business. So far, problems are coming from more competition in emerging markets such as India, Russia and Africa as well as rival Swedish firm Telefon AB L.M. Ericsson, which is very strong in wireless equipment and GSM technology.

So, let’s focus on the wireless sector for a moment. Alcatel-Lucent launched a new base station during the first quarter, which seemed to cause some orders decline in anticipation of the new product. Also, the company walked away from several bidding processes for wireless-equipment contracts due to competitive pricing pressures, in particular in Latino America. No customers or specific projects were mentioned and not much detail was given either. I find really hard to believe that one single region of the Emerging Markets world has caused such an impact on the wireless business, especially when the company never really focused on that region.

I’d like to also comment on some of the reasons why the two telecom-equipment makers first merged. In theory, they announced the merger as response to increasingly competition in the telecom-equipment business, especially from low-cost manufacturers in China. The combined company would deliver €1.4 billion in annual cost savings by 2009, by cutting 9,000 jobs, merging research and development, and trimming redundant products from its portfolio. It looks like Alcatel-Lucent is still on track to deliver the expected €600 million in synergies in 2007. Layoffs, which will account for about half of the cost savings, have already begun at U.S., Asian and European offices. However, there is a lot of room for improvement and progress seems to be very slow. It will be interesting to keep track of this part of the story.

Bottom line, I still can’t figure out what’s going on with Alcatel-Lucent. Company continues to struggle and I don’t really see an understandable path for recovery. I still remember two or three ago when I thought they were in the best position to beat Cisco. Clearly, it hasn’t materialized and in fact, I think they have already missed the train.

Cisco Fiscal Third Quarter Earnings Results

As stated when I started this blog about a month and half ago, it is not my intention to discuss financial results directly related Cisco Systems, Inc. However, since Cisco is a key player in the Telecommunications and Data Networking industry, I can’t let this news go by easy.

First, Q3 marked the one year anniversary of the acquisition of Scientific Atlanta. Going forward Cisco will provide guidance and comparison simply to year over year combined numbers. The company achieved record revenue of approximately $8.9B, a 21% year over year increase, slightly above guidance of 19-20% provided in the Q2 conference call. Cisco standalone revenue increase was approximately 17% year over year. This continues to be one of the fastest standalone year over year revenue growth rate the company has seen in several years. Order growth continued to be very solid with product book to bill of greater than 1. Non-GAAP net income was $2.1B, an increase year over year of approximately 16%. Non-GAAP earnings per share were a record $0.34 and GAAP earnings per share were $0.30, which were increases of 17% and 36% respectively year over year. Cash generated from operations was $2.4B, and Cisco repurchased $1.5B of common stock. Cash, cash equivalents, and investments were at $22.3B at the end of the quarter.

John Chamber’s comments:“Q3 was a very strong quarter. Our vision of how the industry was going to evolve appears to be playing out very much as we expected. We believe our differentiated strategy is also achieving the benefits to both Cisco and our customers that we thought were possible. We have a high degree of confidence in our strategy and business momentum. In addition, I would not underestimate the potential that collaboration enabled by Web 2.0 technologies could have on Cisco’s and the entire IT / Communications industry’s growth over the next five to ten years. I believe the next wave driving growth of both the Internet and IT sales will be built around collaboration and Web 2.0 capabilities. “

“We believe that Cisco is uniquely positioned. We are not aware of any other company in the IT and communication industry that is even close to these types of growth numbers and market share gains across such a broad array of products. From our customer segments to geographic theaters and product and technology markets, we are focusing on approximately 20 areas. It is extremely unusual to overachieve on almost all of our focus areas as we did in Q1 and Q2. Even in very strong quarters, such as this one, we would expect at least 1-2 of our focus areas to be in the low to mid single digit range or even negative.”

Some comments from equity analysts:

SCOTT MORITZ - THE STREET
Shares sank 6% early Wednesday despite a strong earnings report and enthusiastic talk from CEO John Chambers. In a conference call after the close Tuesday with analysts and investors, Chambers said the company's gains at the expense of smaller rivals allowed it to boost fourth-quarter revenue guidance. Cisco now expects year-over-year revenue growth of "15% to 16%" for the quarter, Chambers said, "above the high end of the guidance we have given." But that wasn't enough for some observers. Asked when the company would feel confident enough about the outlook to raise guidance to the 15% to 20% annual growth range, Chambers declined to fuel a more bullish case. "Growth in the midteens is good for a company of this size," Chambers said. "I'm going to resist the nudges at this point."

MERRILL
First, operating margins declined again this quarter, suggesting no material margin upside exists. Second, the strong trends are already reflected in the expectations. The EPS beat was a function of buybacks and not from positive business surprises. Third, Cisco beat revenues by ~$116mn, yet Scientific Atlanta grew $113mn sequentially. While this is not an apples to apples comparison, it is difficult to quantify how much of the trend is related to an abnormal and temporary boost in demand for set-top boxes and how much of it represents sustainable upside. How many large cap tech stocks grow 16% per annum and maintain high profitability? Very few. We are convinced that in the long run, Cisco will continue to generate value for shareholders. However, in the near term, we expect the stock to remain range bound, as in our view, Cisco is at the peak of its current cycle with risk of some momentum moderation post-4Q. Secondly, similar to this quarter, we believe it will be difficult to generate earnings surprises as the Street’s expectations already reflect the current business momentum.

Microsoft and Yahoo Chapter III

Today I’d like to spend some time discussing last week’s talks between Microsoft and Yahoo about a possible merger. Even tough it appears that merger discussions are no longer taking place; it doesn’t mean the two companies couldn’t cooperate in other ways. In fact, this is the third time both companies discussed a potential mega merger. So let’s analyze benefits and consequences from both sides.

For starters, it’s becoming pretty obvious that Microsoft’s online division has not lived up with Steve Ballmer’s expectations. There has been no progress against Google in Internet search. Further, Microsoft lost a deal to Google last month to buy online-advertising specialist DoubleClick. So it is time to consider other alternatives. One option would be to install new management to the online group, a fix that Microsoft has often used in the past. Also, Microsoft could unify the online group's services and the technology that underlies them, which are currently managed by different vice presidents. By having two groups working closer, they could compete against Google more effectively. Another option for Microsoft is to form a partnership with Yahoo as they have done in the past with questionable success. Yahoo previously provided Microsoft with search technology and advertising. However, Microsoft broke that relationship last year, as it phased in its own online-ad system, which has yet to attract a critical mass of advertisers. Bottom line, nothing really interesting from this side.

Yahoo doesn't appear interested in a major deal with Microsoft, specially these days that they have been working and depending largely on a new advertising-system upgrade, called "Project Panama”. Panama is now running and it seems that the system will contribute to company revenue, starting this quarter. Besides, Yahoo’s executives believe they have found the right strategy and are wary of any combination with Microsoft, for whom Internet activities remain only a small part of its business. On the other hand, Yahoo could benefit from some technical expertise coming from Microsoft as they could manage the technical platform and infrastructure of the companies' combined Internet activities. In addition, Yahoo's current staff could be in charge of the consumer parts of the businesses, such as Yahoo News, Finance and email. So, there might be some benefits for Yahoo.

At this point, any integration of the two companies' operations would also be a daunting prospect and it doesn’t seem doable in the short term. However, it’s clear that Google’s dominance in Internet search really worries both Microsoft and Yahoo and certainly the former has lots of power to try to turn things around. Only time will tell how this story unfolds, but definitely let’s wait for the next chapter.

Why Cablevision going private may sound right

Let’s get the facts straight first because this deal about taking Cablevision private has lots of interesting aspects. Cablevision Systems Corp.'s founding family has convinced the cable company's board to accept its $10.6 billion privatization offer, but first has to convince a majority of the non-family investors that their latest offer of $36.26 a share fairly values the company. Some investors already are saying they plan to vote against the deal. Of course, the valuation dispute comes at a time when Wall Street is becoming increasingly bullish on cable companies, which have been pulling ahead of competitors by selling bundles of phone, TV and high speed Internet services.

Now, let’s try to see the strategy behind the deal. Why the Dolan’s family would put $2Billion of their own money and raise more than $8Billion in debt to buyout their own company? There has to be a compelling reason and undoubtedly there is one. From a financial perspective the answer is free cash flow. Even though cable providers face new competition as phone companies roll out TV services and video migrates to the Internet, much of the heavy investment of the past decade, used to launch networks with new products such as high-speed Internet hookups, is coming to an end.

In the past, investors wanted operators to generate cash flow that could be used to buy back shares or pay dividends. But now, the decline in its capital spending has turned Cablevision into a cash-generating machine capable of throwing off hundreds of millions of dollars a year. Cablevision’s network is way ahead of Comcast and Time Warner Inc and is already prepared to offer all its customers a bundled package of services, including digital TV, phone and high-speed Internet. That means they will start generating free cash flow long before their competitors and that is what investors, both public and private, want to see. But that ability to generate huge amounts of cash will also make them desirable targets unless their stock prices become really expensive. We’ve already seen some examples, such the other two big cable companies, Cox Communications Inc. and Insight Communications, which recently have gone private following the same rationale.

Of course, there is the flip side of the coin. Even though Cablevision is very well positioned moving into the coming years, it is also one of the most vulnerable to increased competition. However, this potential lost revenue should not affect Cablevision as savings from reduced capital expenses would be really important. On the other hand, there is no certainty that cable networks and their infrastructure will remain updated for ever. In reality, it is the opposite. With the amount of development and evolution that Video on demand and IPTV will generate, cable operators would have to continue to heavily invest in capital expenditures, but that is another round of discussions. More to come on this for sure.