Author Archives: Scalper1

Hackers, Insiders Can Threaten M&A Activity, Say IBM, Fortinet

Chinese hackers had already roamed Nortel’s systems for nearly 10 years when, five years after the breach discovery, business communications firm Avaya acquired bankrupt Nortel Enterprise Solutions — and, unknowingly, also acquired that company’s attackers. That was a bellwether moment for the M&A world, says Caleb Barlow,  IBM ( IBM ) vice president of security. Until then, an acquisition target’s cybersecurity situation wasn’t a box on the usual M&A checklist. “It was the moment everyone in the M&A community woke up,” Barlow told IBD. “They said, ‘We better be looking at their security posture as well, otherwise you could not only legitimately acquire the company, but also the attacker.” As Barlow recounts, Nortel’s downfall came down to seven passwords, including the chief executive officer’s. Hackers with Chinese IP addresses gained access to Nortel’s network as early as 2000 and so thoroughly dug in that they weren’t discovered until 2004. Avaya, which acquired that Nortel business for $900 million in 2009, didn’t learn of the breach until after its acquisition closed. And even then, the hackers were still entrenched in the system. “No one had really thought about this type of problem before because cybersecurity wasn’t one of the normal things you’d think about in the M&A process,” Barlow said. “In my view, it’s now a critical component.” Quantifying Risk In A Bidding War Consulting firm Deloitte found 70% of 2,500 firms surveyed in 2015 considered security to be a “high” or “very high” priority in M&As. That’s up from 64% in 2014. Both corporate and private equity respondents increased their due diligence efforts over the span of the year. But also in the 2014 Deloitte survey, 78% of firms said security wasn’t a general piece of M&A due diligence, and 66% said rapid-fire M&A bidding made cyber risks “very difficult” to quickly quantify. Deloitte didn’t reiterate those questions in its 2015 survey. Rapid-fire M&As include  Apple ( AAPL ) chip supplier Skyworks Solutions ( SWKS ) and Microsemi ( MSCC ) last year facing off in a month-long bidding battle for PMC-Sierra ( PMCS ). Due diligence might or might not have been rushed in that deal, but such aggressive bidding wars are infrequent, Fortinet ( FTNT ) CFO Drew Del Matto told IBD. More often, an acquirer examines a target’s products, financials, policies and systems. IT security is just a new layer of the necessary due diligence. This mindset is new, and there are built-in risks with every piece of due diligence, NSS Labs CEO Vikram Phatak says. NSS Labs independently tests and reports on the efficiency of cybersecurity products, similar to Consumer Reports. It’s likely an acquirer has “a really good handle on the debt the company will have, the expense structure of the company, the historical growth rates,” he told IBD. “Where you get a little sticky is they may not have time to do all the (security-related) due diligence by calling the customers.” Cybersecurity works along the same lines, Phatak says. Tech companies, especially, should have a keen understanding of the security measures in place, BitSight CEO Stephen Boyer told IBD. BitSight rates the cybersecurity posture of about 40,000 companies, similar to a FICO score, so customers can assess their own security risk but also the risks of potential or current partners, vendors and customers. “If you go in and say, ‘Who’s in charge of this (security)?’ and everyone looks around, then you probably have a problem,” Boyer said. Avoiding Post-Merger Slip Even including cybersecurity within due diligence isn’t a surefire protection, Boyer said. Former telecom provider Pacnet discovered a breach on April 3, 2015, after Telstra finalized its $697 million acquisition of Pacnet. Telstra was notified on April 16 — the day the merger completed. An SQL code injection on a Pacnet Web service application server opened hackers to the network, email and administrative processes. Acquirers should be “monitoring that window of due diligence up until the week the deal closes,” Boyer said. “Monitor it all through the process, because there would be a slip-up along the way.” Before signing off on a merger, an acquirer should get a sense of the target’s cybersecurity culture, Barlow says. Examine past incidents — processes, logs and reports. if those documents aren’t available, then there might be a problem. That goes double for a tech company. “If they don’t have those policies in place, then you start asking other questions,” Barlow said. “If they weren’t paying attention to security, what else weren’t they looking at?” Phatak suggests acquirers also scope out a target’s security vendors. Not every cybersecurity vendor is built the same and the quality of a target’s security purchases can be very telling, he told IBD. “Make sure the company you’re acquiring didn’t skimp on security,” he said. “(Products) are not all equal, but from a compliance perspective, a check-box perspective, they all look the same.” Breaches From The Inside Del Matto estimates two-thirds of breaches come from the inside, at the hands of either careless or disgruntled employees. M&A, often accompanied by layoffs, can breed the latter. “When people feel like they’re at risk, they’re more likely to do something that may expose the company to a cyber risk,” Del Matto said. More benign actions, like inadvertently visiting an infected website, can lead to malware attaching on the system. But Del Matto is more concerned about the damage a disgruntled employee with absolute access can wreak. Barlow suggests a company identify its “crown jewel” and then tuck it into a protected place with limited access. That crown jewel could be IP, financial information, client lists, personal information — basically anything worth stealing, Phatak told IBD. “If someone is able to get into the customer list, they could see what deals are in the (pipeline),” Del Matto said. “They may monetize those by selling them or, worse, leaving the company with those lists in their hands.” Beyond guarding that data, an M&A-engaged company should embrace employees into the new culture, he said. Because, “when you buy a company, you buy a competitive advantage. If that leaks out in some other way, you’re destroying the value of the M&A.”

Spectrum Wild Cards May Add Supply, Impact Verizon, T-Mobile, AT&T

Federal regulators appear set to go forward this spring with the auction of airwaves now owned by local TV broadcasters, but other spectrum-related developments loom as wild cards that could increase supply, thereby impacting wireless industry competition and M&As. Those other developments include the contract award for FirstNet, the federal government’s plan to create a nationwide wireless broadband network dedicated to public safety; the re-emergence of LightSquared, renamed Ligado Networks, from Chapter 11; and whether wireless firms succeed in lobbying to use commercial LTE technology in unlicensed spectrum now allocated to Wi-Fi. The Federal Communications Commission still plans to begin the “Broadcast Incentive Auction” on March 29. The auction, which could last five to six months, will free up an estimated 60 megahertz to 80 MHz of prime, low-frequency radio spectrum for wireless services. Results of the spectrum auction could affect the competitive future of IBD Leaderboard company AT&T ( T ), which has seen accelerating growth in recent quarters, and rival Verizon Communications ( VZ ) — a member of IBD’s Big Cap 20 — as well as highly rated Comcast ( CMCSA ). AT&T and Verizon are expected to buy TV airwaves in the auction, and cable leader Comcast also will likely bid, say analysts.  Alphabet ’s ( GOOGL ) Google has ruled itself out. AT&T and Verizon own more than 70% of low-frequency airwaves in the top 100 U.S. markets. Low-frequency airwaves travel over long distances and can pass through walls, improving in-building services. The FCC will impose a “quiet period” that bans negotiation over spectrum until the auction is over. Satellite TV broadcaster Dish Network ( DISH ) has acquired some 75 MHz of midband spectrum — which covers a little less territory than low-frequency spectrum — but it lacks a wireless network partner and is in limbo until the auction ends, analysts say. Dish has filed to bid in the auction, but observers are uncertain that it will. The auction’s outcome could well raise or lower the odds of some major deals, long rumored in the industry: — that Comcast will acquire a wireless services provider; — that a cable TV leader will strike an alliance with Verizon; — that Verizon will enter into a spectrum-leasing deal with Dish; — that Dish and T-Mobile will merge. But even beyond the auction, by early 2017, further developments involving the FirstNet contract, Ligado, unlicensed-LTE and satellite wireless firm Globalstar ( GSAT ) could impact Dish’s plans, as well as the spectrum strategies of AT&T, Verizon and T-Mobile. That’s because all these elements provide alternatives for network capacity, aside from the auction. Here’s a run-down of several scenarios: — FirstNet. Whoever wins this first-responder contract would need to invest in network infrastructure. Congress has set aside 20 MHz of spectrum — a wide swath of the airwaves — in the “D block” of the 700 MHz frequency band for the public safety network. The winning bidder is expected to enter into a lease agreement with the FirstNet authority for access to the 20 MHz of prime airwaves. While the FirstNet public safety network would be prioritized for emergency responders, the winning bidder would also be able to use the spectrum for commercial purposes and consumer services. The government will award the FirstNet contract after the TV airwave auction ends, if the government’s timetable proceeds as planned. Verizon has been viewed as the front-runner, but AT&T has made clear that it’s interested. T-Mobile ( TMUS ) could bid but faces long odds vs. AT&T and Verizon, analysts say. — LTE-U. Verizon and T-Mobile have been biggest proponents of developing a technical standard that would allow 4G LTE commercial technology to use unlicensed spectrum. Google, Microsoft ( MSFT ) and the Wi-Fi Alliance, which certifies Wi-Fi network gear, have lobbied the FCC to protect unlicensed airwaves, saying that interference could impair Wi-Fi services. Apple ( AAPL ), a Wi-Fi Alliance member, has not said anything publicly. Verizon and AT&T claim that no special LTE-U equipment certification is needed as long as devices meet certain basic FCC rules for unlicensed spectrum. Chipmaker Qualcomm ( QCOM ) has been backing LTE-U deployment. The FCC in February allowed Qualcomm to move ahead with LTE-U testing at two Verizon facilities to demonstrate that the technology would not interfere with Wi-Fi. Qualcomm and the Wi-Fi Alliance have been working on “coexistence” plans. The cable TV industry has a big stake in the outcome, analysts say, because Comcast, Charter Communications ( CHTR ) and others have been expanding public Wi-Fi networks. While Verizon has targeted 3.5 GHz spectrum in the near term, it could try to carry out LTE-U in higher 5 GHz airwaves that cable TV firms covet. If LTE-U gets a green light, the Apple iPhone and other devices could support the technology by 2018. — LightSquared , now Ligado. Former Verizon Chairman and CEO Ivan Seidenberg is chairman of Ligado, while former FCC Chairman Reed Hundt is a board member. Ligado, controlled by private equity firms, has a sizable 35 MHz of midband spectrum. After emerging from bankruptcy, Ligado reached agreements with tractor maker Deere ( DE ) and GPS device maker Garmin ( GRMN ), resolving issues over potential global positioning system interference. While Ligado might provide services to industries such as energy or transport, or pursue next-generation 5G services, it could sell the airwaves as well. The company hasn’t spelled out its new business model, analysts say, and it’s still awaiting some FCC approvals to use the spectrum for commercial purposes. — Globalstar.  The FCC has been studying Globalstar’s petition to use airwaves in the midfrequency 2.4 GHz block for wireless services. The Wi-Fi Alliance and other groups have opposed Globalstar’s plans, citing possible interference issues. Globalstar could lease capacity to a wireless firm or an Internet company if it wins at the FCC. Globalstar’s stock, though, has plunged about 50% in the past year to near 1.40 while its FCC approval has languished. Image provided by Shutterstock .

ETF Update: February May Have Started Slow, But It Finished With A Flood

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. Before we jump into what happened in the ETF industry in the last three weeks, I wanted to bring up an opportunity for authors, and potential authors, who are looking to learn more about the writing process and improve their craft. My colleague, Rocco Pendola , is currently running The Seeking Alpha Author Experience , an information series to further the partnership between Seeking Alpha and our contributors. In his own words: Our goal is to provide an unprecedented resource for author success and, more specifically, one that helps writers reach and keep expanding the boundaries of their individual potential. As a writer, you have personal style, your own voice and analytical and rhetorical ways you go about helping other investors. We’re not here to change that. We simply want to A) help you optimize your approach, B) share what we have seen work from a broad and diverse sample of techniques and C) be here to answer questions and concerns you have related to the best ways to get your message across to investors. I’ve had a number of contributors and new authors reach out to me because of the ETF Update series, and I imagine there are more of you who would be interested in contributing but have questions about the process. If interested in learning more, use the form at the following link to sign up for The Seeking Alpha Author Experience . Rocco sends all Author Experience materials out in installations via email, so while part of a community of contributors, you can receive one-on-one attention simply by clicking “reply.” You will receive no more than one email per day. I have been reading along and really enjoy his insights, so if you are looking to learn more about writing and contributing to Seeking Alpha I would highly recommend signing up. Now back to the regularly scheduled ETF content. While the first two weeks of the month only saw four launches , the month ended with 11 more. Markets also started to show signs of life again in mid-February, which is good news for ETFs looking to attach investors. As we have a lot to catch up on and there any many others on this platform covering the broader picture, lets jump right in! Fund launches for the week of February 15th, 2016 UBS (NYSE: UBS ) launches the first of many ETFs (2/16): The UBS AG FI Enhanced Europe 50 ETN (NYSEARCA: FIEE ) was the first of 3 launches from ETRACs, the ETF division of UBS, over a week. FIEE is an exchange traded note linked to the performance of STOXX Europe 50 USD (Gross Return) Index, the largest blue-chip stocks in the STOXX Europe 600. The 3 largest holdings are Nestle ( OTCPK:NSRGF ), Novartis (NYSE: NVS ) and Roche ( OTCQX:RHHBY ), all Swiss companies like UBS. UBS’s second launch of the week (2/18): The ETRACS S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA: OILX ) “reflects the excess returns that are potentially available through an unleveraged investment in the contracts comprising the index, plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts,” according to a press release at its launch. This is not a new product idea, but with an expense ratio of 0.50% OILX is able to undercut the existing competition. ProShares gives its futures strategy ETF another chance (2/18): Later in March ProShares will be shutting down a couple funds that never found traction in the market, including the ProShares Managed Futures Strategy (NYSEARCA: FUTS ). However, in preparation of this closing, ProShares launched the ProShares Managed Futures Strategy ETF (BATS: FUT ), which is a new and improved version of FUTS. The fund structure has been updated in a number of ways, but the largest change in my opinion is that investors no longer need to fill out a K-1 form, which could have been a sticking point for the lack of interest before. For further analysis on FUT please read ” ProShares Re-Configures Its Managed Futures ETF Effort ” by Brian Haskin. Fund launches for the week of February 22nd, 2016 UBS wraps up a busy week with a high yield ETN (2/22): And for UBS’s final launch in February, the UBS AG FI Enhanced Global High Yield ETN (NYSEARCA: FIHD ). This fund, designed for Fisher Investments, tracks the MSCI World High Dividend Yield USD Gross Total Return Index. This makes FIHD very similar to the Barclays ETN+ FI Enhanced Global High Yield ETN (NYSEARCA: FIGY ), which tracks the same index and was also created for Fisher Investments. Pacer Financial expands its ETF lineup (2/23): For Pacer’s 6th ETF it introduced the Pacer Global High Dividend ETF (BATS: PGHD ), self described as “a strategy driven exchange traded fund that attempts to provide a continuous stream of income and capital appreciation over time by screening for companies with a high free cash flow yield and a high dividend yield.” By tracking the companies with the highest levels of free cash flow and dividend yields in the FTSE All World Developed Large Cap Index, PGHD hopes to return strong dividends for investors looking for global exposure. For further analysis on PGHD please read ” New High Dividend ETF With Free Cash Flow Focus By Pacer ” by Zacks Funds. Cambria launches a high yield bond ETF (2/23): The Cambria Sovereign High Yield Bond ETF (Pending: SOVB ) seeks return for investors through investing in high risk, high reward bonds either directly or through other exchange-traded products. “Foreign bonds are the largest asset class in the world, yet dramatically underrepresented in investor portfolios,” said Meb Faber , Cambria Chief Investment Officer, in a press release for the fund. “Moving away from a market-cap strategy and employing a value lens to foreign government bonds could help investors gain smarter access to income in a yield-starved environment.” WisdomTree expands in the Put/Write Space (2/24): The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEARCA: PUTW ) is the company’s first options strategy ETF, offering a collateralized put write strategy on the S&P 500. As described on the fund’s homepage, “the strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index.” For further analysis on PUTW please read ” Finally, Is PUTW The One We’ve Been Waiting For? ” by Reel Ken. Janus adds to ETF offerings (2/25): Open for business today are the Janus Small Cap Growth Alpha ETF (NASDAQ: JSML ) and the Janus Small/Mid Cap Growth Alpha ETF (NASDAQ: JSMD ). They are the first ETFs to launch since Janus’ (NYSE: JNS ) November 2014 purchase of VelocityShares. Both are what Janus calls Smart Growth ETFs utilizing a systemic process to identify resilient small and mid-cap companies poised for long-run sustainable growth. Janus’ ETP business had about $3.2B in AUM across 17 products as of year-end. Fund launches for the week of February 29th, 2016 Vanguard targets international dividend stocks with new funds (3/2): The company yesterday launched the Vanguard International High Dividend Yield ETF (NASDAQ: VYMI ) and the Vanguard International Dividend Appreciation ETF (NASDAQ: VIGI ). Both ETFs come alongside “investor” and “admiral” classes of mutual funds. VYMI, with a 0.3% expense ratio, tracks the FTSE All-World ex-U.S. High Dividend Yield Index which has more than 800 of the highest-yielding large- and small-cap stocks in both developed and emerging markets. VIGI, with a 0.25% expense ratio, tracks the Nasdaq International Dividend Achievers Select Index, which holds about 200 stocks with long track records of dividend boosts. The funds are international cousins to the $12B Vanguard High Dividend Yield Index Fund (NYSEARCA: VYM ) and the $19B Vanguard Dividend Appreciation Index Fund (NYSEARCA: VIG ). The new products also have cheaper fees than the SPDR International Dividend ETF (NYSEARCA: DWX ), which charges 0.45%, and the iShares International Select Dividend ETF (NYSEARCA: IDV ), which charges 0.5%. Goldman boosts ETF lineup (3/4): Goldman Sachs’ (NYSE: GS ) burgeoning ETF operation now offers five funds after the launch of the Goldman Sachs ActiveBeta Europe Equity ETF (NYSEMKT: GSEU ) and the Goldman Sachs ActiveBeta Japan Equity ETF (NYSEMKT: GSJY ). As with the previous three ETFs which dame to market late last year, the two new funds were opened with institutional assets of $25M each. Each has an expense ratio of 0.25%. Those original three now have more than $1B in combined AUM. In addition, the Goldman Sachs ActiveBeta International Equity ETF (NYSEARCA: GSIE ) – which came to market in November – has its fee cut to 0.25% from 0.35% Fund closures for the weeks of February 15st, 22nd and 29th, 2016 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.