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A group of Rakon shareholders are getting impatient with its undervaluation and want directors to put the company on the block.

In Tech company shareholders frustrated at low value RNZ reports:

A group representing 14 percent has written to the board asking it to immediately market the company to international investors through a tender, amid reports that some Australian investment funds have been showing interest.

“[We] believe the company is significantly undervalued and the company is failing to highlight this value to outside investors,” the letter said.

The story doesn’t carry a byline.

Rakon’s disgruntled shareholders want the company sold to international investors as a way of unlocking their investment. They make it clear they don’t think they will get a big payout from what should be a boom as the 5G mobile telephony market gathers momentum.

Waiting for 5G acceleration

RNZ goes on to quote Rakon chief executive and managing director Brent Robinson. He says:

“As 5G accelerates, so will Rakon and its financial position will be more attractive.

“Be patient, it’s early days for 5G and I believe Rakon’s performance should improve a lot, as far as profits are concerned over the next few years.”

Rakon is a 50 year old New Zealand technology company. It makes frequency control components including quartz crystals. Telecommunication accounts for over half the company’s revenue.

On paper, Rakon is well placed to profit from the worldwide 5G roll out. It appears to be the kind of company New Zealand’s economy needs.

Mobile carriers are spending billions building 5G networks and will continue spending vast sums for the best part of a decade as they build out 5G further and further. Rakon sells its components to 5G equipment makers like Huawei and Nokia. It should be a bonanza.

Not fast enough

The problem is that despite the huge investments in 5G, the roll-outs are not proceeding at the predicted speed. Asia is moving fast. Vodafone has already built a network here, Spark is about to follow. Other countries are not moving as quickly.

It doesn’t help that Rakon’s customers are caught up in a trade war, possibly an espionage row, between the US and China. It is possible that Rakon can supply one team, but not the other. That would hurt its market.

Rakon’s share price has languished to the point where it is a possible takeover target. The shareholder letter suggests at least some of Rakon’s owners want out.

 

Geoffrey Moore wrote Crossing the Chasm in 1991. The book is still an important sales reference for technology companies.

Moore says you can rank customers on a technology adoption scale. These customers can be companies, organisations or individuals.

There are five ranks. Moore divides the five into two clear groups and the gap between these groups is large. Or in his words, a chasm.

Moore’s first group are early adopters. They feel they must have the latest technology. This can be about prestige or perceived competitive advantage. They are willing to pay a high price to get hold of technology early.

This high price is important. Technology companies get a big margin which funds further development or marketing.

Visionary

The next group are visionary customers. They need a product to gain competitive advantage or control costs. They accept immature support and absorb any technology risk.

They’ll pay a premium, often less than the early adopter premium. This allows companies to develop marketing channels and support infrastructures. These are important in the next phase.

Moore’s third phase is the bulk of the market. Moore calls them early majority or pragmatic customers. They look for clear pay-offs from a technology investment. They deliver the profits and locks a technology into the mainstream.

The fourth group are reluctant adopters. They buy mature, proven technologies if there is a sensible business case. They look for commodity products.

The last group are those who may never adopt a technology. There are companies that still don’t use email, mobile phones or computerised book-keeping.

Crossing the chasm

Moore says for any technology to succeed it must cross the chasm from the first two phases and enter the third. It’s an Evil Knievel leap, many technologies can’t make it.

The bridge across the chasm might be technical. It can be about channel organisation or support infrastructure. There are political matters such as establishing a standard or it might come down to old-fashioned marketing.

To pick winners, focus on the product or technology’s ability to cross the chasm between visionary and pragmatic customers.

Besides Moore’s chasm, there are common sense ideas of price and utility.

A product which meets certain key standards can sell. The number sold depends on price and function. A lower price or more functionality means higher sales.

If the first two phases allow a maker to build in enough functionality or reduce price through economies of scale then it’s easier to cross the chasm.

Standards are successful

Standards are a further good indicator of likely success. Yet you need to read the signs.

Many so-called standards are anything but open. Accepted standards aren’t always the ones which prevail. Think of market dominating companies like Intel or Microsoft.

The standards used in a particular product or technology are not always fixed. For example, developers can change a non-standard communications protocol with a software upgrade.

Work, rest and play

Moore started out looking at business technology. The principles also apply to consumer products such as smartphones.1 The rules don’t change much between the suits and the open-neck shirts but their interpretation does.

Building up a head of steam to cross the chasm is harder for makers of consumer hardware. Consumers rarely look for a return on their investment in the business sense. They are less willing to pay top dollar for new products.

Complicating matters further is the way many products now straddle both markets. In some areas the consumer market influences business purchasing strategies. For example, the first customers to adopt the iPhone were consumers.

There’s a clear connection between Moore’s chasm and Gartner’s Hype Cycle. While the two look at adoption from different points of view, both recognise there is a hump to get over before a product or technology can succeed.


  1. In general I prefer not to use the term smartphone, here we need to distinguish modern iPhone-like devices from those that went before. ↩︎

Vocus means businessIn the last two years, four potential buyers have looked, then decided not to buy the Vocus Group.

Last week Australian energy company AGL withdrew its A$3 billion takeover offer for Vocus. This came only two weeks after Swedish private equity firm EQT halted its $3.3 billion transaction.

In 2017 private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners both withdrew bids. In each case, the deal floundered at the due diligence stage.

Bruised Vocus

It’s been a bruising experience for an already damaged Vocus. When AGL walked away from this week’s deal Vocus shares lost a third of their value.

On the surface, the bad news apparent during due diligence means there’s something bad in the financials that Vocus hasn’t disclosed to shareholders. It’s something that well-funded companies are not able to spot before bidding.

Reports in Australian media say that bidders walk away from Vocus because the plan to turn around the business is more complex than it appears from outside the company. There is something in this, but it is probably not the whole story.

Consolidation

Vocus is the result of a number of telecommunications industry mergers. It is a rare example of classic industry consolidation.

Along the way, Vocus acquired other companies. At times it has struggled to integrate the parts. That’s not uncommon in the telco sector.

Vodafone New Zealand acquired a number of businesses. Years later it has still not completely integrated the various back-end systems. Customer enquiries can mean service agents need to reference several screens to answer simple questions.

This Balkanisation is how large companies made up of smaller concerns often operate.

So long as there is plenty of forward momentum those tricky integration issues can be kicked down the road. Over time they can either be fixed or, for one reason or another, they simply stop being a problem.

The big Vocus problem

That’s a problem for Vocus, but it isn’t the big one. Far more serious is that Vocus’ Australian consumer business is losing money.

In part that’s because Australia’s NBN model has flattened the market to the point where it’s hard to turn a buck selling broadband. There’s no clear path to profitability.

AGL looked like a good buyer because it’s a power company. Combining power and broadband sales is a tried and tested strategy. If the AGL bean counters looking at Vocus’ books realised that could turn things around, the problem is worse than most of us thought.

Even though Vocus is, to some degree, a special case, it isn’t that out of line with the rest of the telecommunications industry.

No quick path to profit

All of which says bad things about the state of retail telecommunications. The private equity investors have looked and seen there is no quick path to profit.

More patient, longer-term investors like AGL, who have access to the magic formula of adding power sales to a broadband subscription don’t think it looks viable either.

If you work in the sector you might want to worry about that.

EQT Infrastructure’s A$3.3 billion takeover bid for Vocus Communications could see a new owner for the New Zealand business.

Vocus Group New Zealand includes the Orcon, Slingshot and CallPlus brands along with other assets. It is the third largest telco behind Spark and Vodafone.

The potential buyer, EQT Infrastructure, is a Swedish private equity investor.

Vocus commands good price

EQT’s bid, which became public on Monday, put a 35 percent premium on Vocus Communications’ trading price at the time.

Insiders say the bid is likely to succeed. Although there are other potential bidders waiting in the wings should EQT’s offer fall through. Either way, Vocus is likely to find a new owner soon.

The EQT bid comes only days after Infratil and Brookfield’s successful bid for Vodafone New Zealand. It suggests other telco sector mergers and acquisitions could be on the way.

This is not the first time investors have attempted to buy Vocus Communications. In 2017, private equity firms Kohlberg Kravis Roberts and Affinity Equity Partners, made a bid for the company. That was later withdrawn.

According to the Australian Financial Review, the key to renewed interest in the business is Vocus’s fibre assets.

Fibre infrastructure

Infrastructure is an increasingly popular investment class. The returns are relatively high and, in many cases, it faces little direct competition. Fibre assets of particular interest to infrastructure investors at present, they feel that its owners don’t always maximise its value.

The Australian Financial Review goes on to report it’s likely the buy will sell Vocus Communications’s retail business.

Presumably, this would also include Vocus’s New Zealand retail brands.

Vocus has New Zealand local fibre assets. It picked them up from the former FX Networks business now wrapped into the Vocus Group.

One interesting angle is that after 2022 regulated UFB wholesale prices will be based on network asset values. If fibre becomes a sought after asset for investors, that could put pressure on the regulated price.

HP’s EliteBook x360 1030 G3 is a premium business convertible laptop. It’s the kind of upmarket laptop a big company employer might hand you if they think you need portability and flexibility.

You might choose it yourself. It is a solid, no-nonsense choice with all the features a business user needs, although a touch expensive by 2018 standards.

While you can get more grunt and graphics for the same money or less elsewhere, you won’t get them in such a compact package and with such a quality feel. HP added security features to the business laptop that, depending on how you work, could tip the balance.

At first glance the Elitebook x360 looks like a tiny conventional clamshell laptop. It opens to show a full size keyboard and screen.

HP HP EliteBook x360 in different modes

Convertible

The Elitebook x360 is a convertible. Its 360 hinge means you can open it right up, then fold the screen under the keyboard to give you a tablet. It can also work in what HP calls tent mode to watch video or propped up on a flat service to give personal presentations.

HP says you can get “up to” 18 hours of battery life. Computer maker battery life estimates are often exaggerated. Even  so, you can expect to keep going for the longest of work days.

In testing I found you can get almost nine hours of constant use from the battery. If you take breaks away from the screen it should more than last all day.

As you’d expect the Elitebook x360 is small and light. Yet, at 1.25 kg it feels a shade heavier than it looks.

Build quality

Some of this heft is down to the build quality. The Elitebook x360 has a solid milled aluminium case. This computer feels like it is ready for you to carry it from place to place. I’d be a little concerned working on an industrial site, but it is more than robust enough for everyday business use.

It’s not the best-looking laptop, at least to my eyes, but it is far from embarassing.

HP describes it as the world’s smallest business convertible. That’s a specific claim and, to my knowledge it is true. At only 15mm deep, the Elitebook x360 is a fraction thicker than the MacBook, but Apple’s laptop doesn’t covert into a tablet.

The screen measures 13.3 inches across the diagonal. Resolution on the review model is 1920 by 1080 pixels, there is also a 3840 by 2160 version.

Privacy

The computer comes with Sureview: an integrated privacy filter. When you hit the F2 button, the viewing angles of the screen at reduced so that anyone looking at the display from over your shoulder or the next airplane seat can’t read anything.

HP says this kicks in at 40 degrees. That’s hard to check. Yet it works as promised. Sureview isn’t for everyone, but is ideal if you work on private reports in busy places.

On the downside, Sureview dims the screen and makes it harder to read. It makes colours duller. I struggled a little with it trying to read the display head-on if text was in anything other than black on white.

You wouldn’t want to have Sureview switched on all the time.

Keyboard

HP has gone for a decent quality backlit keyboard. I found it easy to type. There’s little flexing. Otherwise it’s not remarkable one way or the other. If anything it reminds me of the MacBook Air.

The up and down directional keys look squashed. In practice they are not a problem. The touchpad is a good size and responsive. It works better than I’ve seen on some rival Windows computers.

Beneath the keyboard is a tiny fingerprint reader for another layer of security. You can use this to log-in, but the Elitebook x360 does a great job with Windows Hello. Its face recognition was close to flawless during testing.

HP has simplified the ports on the 2018 Elitebook x360. You now get two USB-C ports. One of these is used for charging. There is also an HDMI and a Thunderbolt 3 port. There’s no Ethernet port, although that would make the case thicker.

HP EliteBook x360 verdict

Prices start at around NZ$2,800. That money gets you a model with an Intel Core i5 processor along with a graphics processor, 8 GB ram and 256 GB storage. That lessw expensive models support 1920×1080 graphics.

Pay around NZ$4000 and you’ll get a version with 16 GB ram, 512 GB storage and 3840×2160 pixel resolution. According to the HP web site, these prices include a three year warranty for all models. That alone is worth hundreds of dollars.

The HP EliteBook x360 is a good choice, but you can get a better deal.

If you’re not interested in the security features, then you might do better looking elsewhere. There are less expensive models in the HP range that almost match the x360 on features. You can expect more raw power, better graphics and longer battery life when spending the same amount money. But if you’d prefer to stay safe from prying eyes, the EliteBook x360 1030 G3 makes a lot of sense.