It might seem as if software colossus Microsoft Inc. has pushed the federal government back on its haunches, and that it and other sector-dominant companies have less to fear from antitrust regulators.
Not so, says Thomas J. Nolan, managing partner in the downtown office of Howrey Simon Arnold & White LLP, one of the nation’s leading antitrust and intellectual property law firms.
“I think the point a lot of people are losing sight of is that Microsoft has been determined to be a monopolist that engaged in illegal conduct,” Nolan said last week. “That’s the real message out of the Court of Appeal.” Despite that finding, the U.S. Department of Justice recently decided not to pursue a break up of Bill Gate’s company.
Even so, Nolan said investors should tread carefully. It is legal for a company to assume huge market share, explained Nolan, but it is not legal to try to repress competition.
While Microsoft’s legal defense has perhaps blunted actions on the federal level, many private litigants have some heavy ammo to bring to court against Microsoft in private suits, said Nolan and he is one to know.
He has just spent almost 12 years riding herd on a largely successful suit brought by Litton Industries (now a part of Northrop Grumman) against Morristown, N.J.-based Honeywell International Inc.
Back in 1990, Litton retained Nolan to file civil charges that Honeywell illegally maneuvered to monopolize the manufacturing and distribution of a certain type of navigational equipment.
The suit went to trial in 1996, resulting in a $234 million ruling in Litton’s favor. A later trial, to ascertain punitive damages, resulted in a $250 million jury judgment in Litton’s favor, plus treble damages. The rulings are being vigorously appealed by Honeywell.
Nolan said that the lesson for investors is that behavior that courts determine is monopolistic can result in extensive and time-consuming legal battles, and ultimately may carry sizable penalties.
“It is interesting that the Sherman Antitrust Act of 1890 is still alive and well after 110 years. I think that is because the principles that underlie the law are classic. In this country we believe in competition, not monopolistic behavior,” said Nolan.
Investors should be aware that many more antitrust suits are likely to be filed in coming years. Due to concentrations in industry after industry, more sectors of the American economy are coming to resemble the computer software industry there are one or two giants that are market dominant. Of course, it is a small step from market dominance to using corporate clout to budge a few players off the field entirely, said Nolan.
Interestingly, many investment advisers today recommend buying stocks of companies that dominate their industries. But investors may also want to ponder whether anti-trust actions, either federal or civil, might knock the props out from underneath a company’s stock at some point, warned Nolan.
Tough Lenders
The economy has booms and it has busts. Usually one sees the same patterns in each cycle, said Russell Hindin, who has three decades in the corporate money-raising game, including the last 22 years as nameplate partner with Woodland Hills-based boutique investment banking shop Hindin/Owen/Engelke Inc.
Banks usually extend too much credit too easily in the upswings, and then overreact, and hit the brakes too hard in the inevitable down cycle. Once banks pull in their horns, borrowers are forced to turn to more expensive sources of cash, sometimes called “alternative lenders,” such as those who lend on assets, receivables or even something as esoteric as a brand name, said Hindin.
But this go-around is different due to the insolvency of several lenders and industry consolidations there are fewer lenders for troubled small cap companies to tap than at any time in the last 30 years, said Hindin, who works with companies worth anywhere from $3 million to $200 million. Finding cash to pull a company through a couple tough years is trickier than ever.
“The restrictions are much higher at places that will lend, and there are not as many options as before,” he said.
Many troubled businesses, unable to raise bridge funds, have to sell. But buyers cannot find easy financing either, so chary are lenders. The upshot? “A business that might have sold for $1,000 two years ago would sell for $400 to $600 today,” said Hindin. “Buyers come out in this market, and if they can afford it (given the lack of leveraging), they can buy very well.”
Many might assume that most troubled companies today are either tech or manufacturing outfits, but in fact many U.S. farmers are hitting the skids due to cheaper imports, said Hindin. “I am working now with a large apple orchard that is getting hurt by apples from China,” said Hindin.
Beam an Image
Someday, in the not-too-far future, police officers might carry Web cams all the time. Suppose officers confront a suspect, but he runs away. If officers got an image of the suspect with their Web cams, the snapshot could be readily transmitted to all other officers on the ground, aiding in the search.
Sound like Buck Rogers?
“That scenario is not as far off as you might think,” said Nick Memmo, partner in Westside venture capital shop Kline Hawkes LLP. Memmo just put together a $10 million financing for Santa Fe Springs-based IP Mobilnet Inc., which included their own funds and cash from three other VC outfits. Among the other investors was E*Capital, an arm of downtown Los Angeles-based Wedbush Morgan Securities Inc.
IP Mobilnet is rigging up police departments and other agencies to be able to transmit images by Internet, using the 150 to 800 megahertz radio bandwidths for the final link to cops on the ground. Those are radio frequencies commonly used by transportation, utilities and public safety agencies.
The L.A. County Sheriff Department is already a customer, said Memmo. “This is a company projected to go cash flow positive within a year,” he said. Kline Hawkes tends to invest carefully, often in second-stage companies that already are proving out, noted Memmo. IP Mobilnet fit the bill.
Exit strategies for Kline Hawkes include a sale to a large outfit, such as Motorola, Memmo added.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].
