Portland's Wireless Pipe Dream

I attended a presentation in Portland, Oregon this week on the City of Portland’s “Unwired Portland” initiative to bring WiMax/Wi-Fi to the city. Although Portland has wisely shied away from the prospect of owning and operating a system themselves, they’re still dreaming. The city wants a commercial enterprise to build a network that:

• Provides free access for all to a “walled garden” of city-related sites
• Provides low-cost access to the disadvantaged
• Provides high QOS service for public safety and other city uses
• Is lower cost to all end users than existing broadband options
• Is offered at wholesale cost to the city
• Is provided on an open access basis so any ISP can resell the service

There was lots of discussion about the wonders of wireless, bridging the digital divide and all the great things that could be done (wireless meter reading; on-site building permits, etc) with wireless, but little acknowledgement of the real obstacles to making this work. The hardware to build networks may be getting cheaper, but the cost of operating those networks and providing customer service is rising. Implicit in the City’s proposal is an assumption that existing commercial services generate such excess profits that operators will be clamoring to build and operate this, despite the multiple ways the City’s requirements drive margins down and costs up. That's not the case. While someone may step up to provide some of this initially (and even Google's much-touted proposal for San Francisco wouldn't come close to providing what Portland wants), I predict that there will never be a wireless service in Portland resembling the “wish list” above.

It’s a shame the City can’t scale back its plans and focus on something workable. Solve the City’s needs by buying service from commercial operators. Verizon offers EV-DO in Portland, and Cingular will be there with HSDPA within six months. Better yet, buy from Clearwire once we launch service there! As for the digital divide issue, are there really a lot of disadvantaged citizens out there, toting laptops but stymied from joining the rest of us on the internet by the lack of a free broadband wireless connection? Besides, Portland, like many cities, is full of free Wi-Fi hotspots. The Personal Telco project in Portland has set up free sites all over the place – in cafes, streets, parks, etc. Publicize those to the disadvantaged, set a few new ones up in easy-to-access places – in short, do the easy, quick things rather than the grand, overarching scheme.

More on Working Capital

Questions about inventory and liabilities in working capital – a buyer’s level of concern about these matters will depend a lot on what kind of business is being purchased. In the case of inventory, I would usually have a physical audit done even where inventory is relatively nominal. It’s easy and cheap to do. I wouldn’t do it pre-closing, since there will be a closing statement of working capital that includes inventory levels. You can reconcile to that statement via a post-closing physical audit done as part of the working capital adjustment process. If the inventory records don’t reconcile the seller has to true up.

If inventory is a bigger part of the deal, unique, or of indeterminate quality, you’d want to physically review it as part of diligence. You might go so far as to get specific reps to address any particular inventory concerns. Typically, however, you’ll simply verify that inventory is present pre-close, take the closing statement, and then true up post-closing. In the corporate world, this work will most likely be done by your accounting team, so be sure to stay on their good side.

Liabilities are also pretty easy. You’re going to do a full diligence on your target, much of which will relate to accounting. It won’t take much digging to find understated or omitted payables. If you do find them, you’d want to consider walking – it’s a bit of a red flag . . . Lagging payables that come through post-signing should flow right into any working capital adjustment process.

Otherwise, you account for post-closing unknowns – whether unreported liabilities or litigation – via the reps and warranties and your indemnity rights (asset deals) and price (stock deals). That raises a subject for a later post – why thorough diligence is far more important in stock deals than it is in asset deals.

Working Capital

Brad Feld is running a very informative series on Letters of Intent; the latest post covers price and structure. Brad's comments on working capital shouldn't be taken lightly just because in his example they only account for $1 million in a $150 million deal - working capital is an area where it's very easy for the parties to talk past each other and end up with a very ugly dispute during negotiation of the definitives or even post-closing. It's also an area where you'll want to make sure your accounting professionals are at your side as you draft the LOI and the working capital provisions in the agreement.

While not a major issue in early stage companies, receivables can be a big point of contention in mature company deals, as they can represent several percentage points on the value of a deal. For example, a company selling for $100 million could easily have $4 million in receivables. Absent an explicit discussion of working capital (and many deals get to the point of drafting definitives without ever going through an LOI), the buyer may well assume that the $4 million receivable is an asset included in the purchase price, while the seller assumes it is on top of the purchase price as a working capital adjustment. This is not a negotiation you want to be having after you've already agreed on price.

As the buyer you might even consider detailing in the LOI the treatment of aged receiveables in the working capital adjustment. While you may pay full value for current receivables, you'll probably pay next to nothing (or nothing) for receiveables more than 90-120 days old, and a sliding scale in between. This will be a negotiation of its own, as it directly impacts purchase price. A lot will depend on where you are in diligence, whether the business is similar to your core business, and what your own internal rules are on creating reserves for receivables.

Game Theory Nobel

The 2005 Nobel prize for economics went to a couple of long-time stivers in the field of game theory, Thomas Schelling and Robert Aumann. One central finding of game theory is that cooperation and giving up short term gains leads to greater long-term advantage. This finding is styled as counter-intuitive, but I suspect that to most who spend a lot of time negotiating it seems pretty obvious.

While there are situations that call for a take-no-prisoners, zero-sum style of negotiating, the vast majority of cases call for a more nuanced approach. Game theory experiments show that working cooperatively toward a mutually-acceptable solution, and even sometimes giving up points in the margins, ultimately leads to the best outcomes. How much more compelling is this conclusion in business, where most negotiations involve trading partners who you will deal with again and again?

Ig Nobel-ists

I love the Ig Nobel prizes, awarded every year at Harvard by the Annals of Improbable Research for deserving works that meet this simple but expansive criteria: "Achievements that cannot or should not be reproduced."

See here for the complete list of 2005 winners, highlights of which include: Medicine - "Neuticles" replacement gear for fixed dogs, Literature - Nigerian e-mail scams, and Chemistry - a scientific study determining, once and for all, whether humans swim faster in water or in syrup (no, I'm not going to spoil the surprise by telling).

H.R. - actively harmful?

Great interview in Business Week Online with Marcus Buckingham. Despite the provocative title, Buckingham makes some great points about the need for managers and organizations to focus on developing their peoples' strengths rather than curing weaknesses.