Clash of the titans
The weakness of the US based car manufacturers was displayed when Toyota overtook GM the world's top car seller earlier this year. GM has not been giving up and noted higher sales attributed to its strong presence in Latin America and Asia. Meanwhile, it seems that customers in North America seem to associate Toyota with high quality and fuel efficiency (and rightly so), making up for the weaker sales on its domestic market. Toyota is expected to beat GM in annual sales for 2007. GM has to either take away Toyota's competitive advantages (superior quality etc.), or refocus their own core competencies (more on this story: http://online.wsj.com/article/SB118491895284472882.html?mod=home_whats_news_us ).
Dow 14000
Yesterday, DJIA broke yet another thousand of points, springing doubts that it is just too high...
The importance of expectations
... and promptly fell 150 points today, as blue chips were releasing disappointing Q2 earnings data. Google's shares went down 5.2% despite quarterly profit grow of 28%, Microsoft also fell despite growing profit... just shows once again, that the markets expectations are the most important (See: http://online.wsj.com/article/SB118493115406772925.html?mod=home_whats_news_us ).
Friday, July 20, 2007
Bits & Pieces
Wednesday, June 20, 2007
Fighting for a piece of the pie...
Blackstone's upcoming IPO has received a lot of media attention last and this week. Part of the reason is executive compensation package, totaling a multi-billion dollar figure (More on the distribution of Blackstone IPO proceeds: http://online.wsj.com/article/SB118156915112631131.html).
This whooping sum is characteristic for the private equity sector, which is the place to be nowadays - lots and lots of money can be made " by amassing investments from pension funds, endowments and wealthy individuals -- then buying up companies, turning them around and reselling them" (The WSJ on the private equity firms, http://online.wsj.com/article/SB118156915112631131.html). The attitude of business schools supports the notion of the private equity sector's popularity. The best business schools in the country create classes and specializations focusing on private equity, try to attract people with industry experience, as well as guest speakers and professors from the sector (See: http://online.wsj.com/article/SB118160869757131959.html).
It is all an understandable process; however, others might want a piece of the same pie. The hedge funds and private equity firms which are publicly traded and are limited liability partnerships have enjoyed lower tax rates than entities formed as corporations. However, the government tries to get more from their profits: "Wall Street's new masters of the universe, hedge funds and private-equity partnerships, are suddenly finding the universe a less-hospitable place.The latest pressure arose this week when the Senate Finance Committee decided to introduce a bill to tax financial-services partnerships that are publicly traded, as giant Blackstone Group soon will be, at the same higher rate paid by corporations." (From: http://online.wsj.com/article/SB118195651141637425-search.html?KEYWORDS=private+equity+taxation&COLLECTION=wsjie/6month More on the issue at: http://online.wsj.com/article/SB118185483791435821-search.html?KEYWORDS=private+equity+taxing&COLLECTION=wsjie/6month). The Wall Street Journal also notes, that lawmakers in Britain have similar intentions as the American ones: "Private Equity's Tax Breaks GetHard Look on Both Sides of Pond " (Read the whole article at: http://online.wsj.com/article/SB118212440211838480-search.html?KEYWORDS=private+equity+taxing&COLLECTION=wsjie/6month). The attitude is clear - private equity firms enjoy a real boom of their sector, as well as the advantages given by being publicly traded, without what is felt as fair rate of taxation imposed on them. Regardless whether it is the case, or the buyout firms just do not have enough lobbying power (See: http://online.wsj.com/article/SB118212767498638611-search.html?KEYWORDS=private+equity+taxing&COLLECTION=wsjie/6month), it is clear that in the end it is just about a greater cut of the big and growing private equity pie.
Monday, June 18, 2007
High risk loans - financial salvation, or another slump approaching?
Not all business entities enjoy a successful start up period, as many new business projects fail. Apart from that a lot of the established companies run into trouble, for a number of reasons including erosion of customer base, bad investments, a down turn in a given industry and many more.
The bankruptcy legislation in the USA is quite lenient in comparison with other developed countries. This is the main reason for a large number of post-bankruptcy emergences in America. The airline sector can serve as a great example - companies disappear and returns, the latest examples being Delta and Northwest (See: http://online.wsj.com/article/SB117792554117386751-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month . Still, the whole process associated with seeking Chapter 11 protection is painful for the management, employees, creditors and stockholders. To put it clear or even blatantly - every one tries to avoid if possible. What can financially troubled firms do then?
There's a lot out there...
"In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization -- a painful experience for employees, creditors and shareholders alike -- are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the perfect deal - troubled companies get the time and means to turnaround their business, and lenders, mostly investment banks and hedge funds, get a nice risk premium on the loans amounting to a couple percent over the LIBOR rate. The whole process is so easy because "There's a lot of money out there" (From: http://online.wsj.com/article/SB118161526044432160.html). As mentioned above - corporate bankruptcies are at decade low. Everything seems perfect, does it not?
Shaky grounds
"When rescue lending fails, the extra debt can make a bust just more spectacular" (See: http://online.wsj.com/article/SB118161526044432160.html). The head of restructuring and recapitalization at the investment bank Jeffries & Co puts it this way in a quote for the Wall Street Journal: "To quote Alan Greenspan, there's some irrational exuberance on the part of investors." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the investors did not learn much on the rise and fall of junk bonds in the 1980', or the recent sub-prime mortgage sector failure (An interesting view on that: http://online.wsj.com/article/SB118212541231038534-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month). A rational investor has to remember to asses the risk of an investment and measure the benefits on the risk adjusted basis. Private equity firms, as well as investment banks or hedge funds may have a lot of capital, which does not mean they should just throw it away! Hopefully, rescue financing will stay a useful investment/financing tool and not a symbol of the next big slump.
The bankruptcy legislation in the USA is quite lenient in comparison with other developed countries. This is the main reason for a large number of post-bankruptcy emergences in America. The airline sector can serve as a great example - companies disappear and returns, the latest examples being Delta and Northwest (See: http://online.wsj.com/article/SB117792554117386751-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month . Still, the whole process associated with seeking Chapter 11 protection is painful for the management, employees, creditors and stockholders. To put it clear or even blatantly - every one tries to avoid if possible. What can financially troubled firms do then?
There's a lot out there...
"In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization -- a painful experience for employees, creditors and shareholders alike -- are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the perfect deal - troubled companies get the time and means to turnaround their business, and lenders, mostly investment banks and hedge funds, get a nice risk premium on the loans amounting to a couple percent over the LIBOR rate. The whole process is so easy because "There's a lot of money out there" (From: http://online.wsj.com/article/SB118161526044432160.html). As mentioned above - corporate bankruptcies are at decade low. Everything seems perfect, does it not?
Shaky grounds
"When rescue lending fails, the extra debt can make a bust just more spectacular" (See: http://online.wsj.com/article/SB118161526044432160.html). The head of restructuring and recapitalization at the investment bank Jeffries & Co puts it this way in a quote for the Wall Street Journal: "To quote Alan Greenspan, there's some irrational exuberance on the part of investors." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the investors did not learn much on the rise and fall of junk bonds in the 1980', or the recent sub-prime mortgage sector failure (An interesting view on that: http://online.wsj.com/article/SB118212541231038534-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month). A rational investor has to remember to asses the risk of an investment and measure the benefits on the risk adjusted basis. Private equity firms, as well as investment banks or hedge funds may have a lot of capital, which does not mean they should just throw it away! Hopefully, rescue financing will stay a useful investment/financing tool and not a symbol of the next big slump.
Notice
My blog has not been updated in the last couple of weeks. There is a number of reasons for that, mainly the fact of being overseas for most of this time. However, this should change now.
Wednesday, April 25, 2007
The letter C...
Standing for: "consolidation". This word is very important in the banking sector nowadays, as it has became a more and more global industry. Banks branch internationally and they face stiffer and stiffer competition both in their respective and domestic markets.
The European banks are in an unfortunate situation that they are being exposed to competition of US and Japanese based banks, from the biggest bank in the world - CitiGroup's CitiBank, through other banking giants from these two countries.
The European way to fight back was and still is consolidation - fewer bigger banks have a greater chance of successfully competing with oversea rivals. Companies such as Deutsche Bank, Banco Santander, Royal Bank of Scotland have been pursuing this strategy. If a bank is not strong enough to overtake its competitors, than becoming and attractive acquisition target, and in turn achieving a big payoff for its stockholders becomes essential.
ABN Amro, one of the three biggest banks in the Netherlands is a well capitalized, efficient financial institution operating business units on 5 different continents (For more information see: ABN Amro reports http://www.abnamro.com/com/about/reports.jsp ). There has been some attention in the media about the possibility of ABN acquiring some other European bank. As it turned out however ABN was an acquisition target itself.
The British Barclay's Bank offered 90 billion $ for taking over ABN, but another bid emerged suddenly. Fortis Bank NV, Banco Santander and Royal Bank of Scotland are trying to conduct a hostile take-over of ABN, worth over 100 billion $. The extraordinary thing here is not only the rarity of hostile take over in the banking industry, but the value of the deal making it the biggest in the banking industry history (More on that: http://online.wsj.com/article/SB117748527305881826.html?mod=home_whats_news_us ).
Because of the magnitude of the deal and the power of the involved parties this is turning out to be very interesting. One thing that is pretty certain - ABN stockholders will receive a handsome payoff and one of the parties involved will leave the table empty handed.
***
DJIA does it again!
The Dow has done it again. The Dow Jones Industrial Average has surpassed the 13,000 point mark, achieving a new all time high (See: http://online.wsj.com/article/SB117750071157281919.html?mod=home_whats_news_us ).
The European banks are in an unfortunate situation that they are being exposed to competition of US and Japanese based banks, from the biggest bank in the world - CitiGroup's CitiBank, through other banking giants from these two countries.
The European way to fight back was and still is consolidation - fewer bigger banks have a greater chance of successfully competing with oversea rivals. Companies such as Deutsche Bank, Banco Santander, Royal Bank of Scotland have been pursuing this strategy. If a bank is not strong enough to overtake its competitors, than becoming and attractive acquisition target, and in turn achieving a big payoff for its stockholders becomes essential.
ABN Amro, one of the three biggest banks in the Netherlands is a well capitalized, efficient financial institution operating business units on 5 different continents (For more information see: ABN Amro reports http://www.abnamro.com/com/about/reports.jsp ). There has been some attention in the media about the possibility of ABN acquiring some other European bank. As it turned out however ABN was an acquisition target itself.
The British Barclay's Bank offered 90 billion $ for taking over ABN, but another bid emerged suddenly. Fortis Bank NV, Banco Santander and Royal Bank of Scotland are trying to conduct a hostile take-over of ABN, worth over 100 billion $. The extraordinary thing here is not only the rarity of hostile take over in the banking industry, but the value of the deal making it the biggest in the banking industry history (More on that: http://online.wsj.com/article/SB117748527305881826.html?mod=home_whats_news_us ).
Because of the magnitude of the deal and the power of the involved parties this is turning out to be very interesting. One thing that is pretty certain - ABN stockholders will receive a handsome payoff and one of the parties involved will leave the table empty handed.
***
DJIA does it again!
The Dow has done it again. The Dow Jones Industrial Average has surpassed the 13,000 point mark, achieving a new all time high (See: http://online.wsj.com/article/SB117750071157281919.html?mod=home_whats_news_us ).
More on that in the upcoming posts...
Thursday, April 12, 2007
Employee rights & responsibilities...
The modern society assigns a number of roles to people. A very important one is the role of an employee. Work constitutes a significant part of the adult life of most humans. It is natural that certain rights and responsibilities come with it.
I would like to comment on a part of Prof. Joseph DesJardins’* book “An Introduction to Business Ethics”. Chapters 5 and 6 of this work analyze employee rights and responsibilities respectively. The focus is on the ethical, not the legal/contractual framework.
Employee rights
First the author discusses the concept of a right to work and its meaning and extent. Later on, the ideas of employment at will and due rights are being contrasted against each other. The chapter also asks about the extent of employee participation rights.
In my opinion an employee does not have the right to get job he or she would like to obtain, but only those that correspond their skills and abilities. Whereas the inequality of power and means makes a good case for justifying the concept of due rights, it does just the contrary for the idea of participation. Corporations are not democratic institutions and they need hierarchy to be economically viable. An employee cannot expect same decision-making rights as the agent appointed by the owner of the corporation.
I acknowledge that in an optimal situation an employee gets both extrinsic (salary, benefits etc.) and intrinsic (job satisfaction, sense of fulfillment etc.) compensation from his or hers employment. It is clear to me that in exchange for that, employees should adhere to certain employer rules, which might sacrifice some of the employee privacy. The corporations have a goal to achieve a profit and an implicit obligation to act for the good of their employees. If this means screening for people abusing illegal substances or alcohol it just serves the greater good of all employees and the business entity itself.
Employee responsibilities
DesJardins opens this chapter covering employee responsibilities with a case study about Enron, which discusses the behavior of various Enron agents’ right before and during the fall of the energy-trading giant.
The principles of the agent theory are discussed subsequently. Employees are defined as agent hired by the principal (employer) to fulfill certain of the principal goals. The author makes a crucial distinction between regular employees and managers. It is pointed out that the manager’s expertise and the resulting information asymmetry in favor of the agent may result in abusing of the trust of the employer and lead to the question what is the extent of employee responsibilities.
Furthermore, the role and responsibilities of certain established professions which are holding particular social importance, or even the gatekeeper function, are discussed. Joseph DesJardins also writes about managerial responsibility and the conflicts of interests between managers’ goals and organizational goals are presented next. The author does a very good job in contrasting the Enron executives selling of their shares versus the employees that they have deliberately misinformed. That leads to the section employee loyalty, which presents a view point that employees should not have the moral obligation to be loyal to the company. This made me ask myself the question – if the employees do not have such a responsibility, does this mean, the company does not need to be loyal towards its employees and how does it affect the agents’ rights’?
The chapter is concluded with questions about responsibilities of employees towards outside parties. Such issues as honesty, whistleblowing and insider trading are mentioned.
The conclusion I have reached after analyzing the mentioned above readings is that employees have certain moral obligations towards their employers, as well as certain rights. If the organization is hurting the employee’s autonomy or dignity by deceit or any other kind of abuse, the right of the employee to be treated ethically overrides the possible loyalty. Another aspect of these responsibilities is that agent may feel compelled to have responsibilities towards third parties, or the society as a whole and in certain cases they might be more important than the employee responsibilities towards their principals.
I do not agree with Prof. DesJardins at certain points in his book, but it provides an inresting material for analysis. Sometimes I feel that the ethical aspect of an issue such as employee rights/responsibilities is overlooked…
I would like to comment on a part of Prof. Joseph DesJardins’* book “An Introduction to Business Ethics”. Chapters 5 and 6 of this work analyze employee rights and responsibilities respectively. The focus is on the ethical, not the legal/contractual framework.
Employee rights
First the author discusses the concept of a right to work and its meaning and extent. Later on, the ideas of employment at will and due rights are being contrasted against each other. The chapter also asks about the extent of employee participation rights.
In my opinion an employee does not have the right to get job he or she would like to obtain, but only those that correspond their skills and abilities. Whereas the inequality of power and means makes a good case for justifying the concept of due rights, it does just the contrary for the idea of participation. Corporations are not democratic institutions and they need hierarchy to be economically viable. An employee cannot expect same decision-making rights as the agent appointed by the owner of the corporation.
I acknowledge that in an optimal situation an employee gets both extrinsic (salary, benefits etc.) and intrinsic (job satisfaction, sense of fulfillment etc.) compensation from his or hers employment. It is clear to me that in exchange for that, employees should adhere to certain employer rules, which might sacrifice some of the employee privacy. The corporations have a goal to achieve a profit and an implicit obligation to act for the good of their employees. If this means screening for people abusing illegal substances or alcohol it just serves the greater good of all employees and the business entity itself.
Employee responsibilities
DesJardins opens this chapter covering employee responsibilities with a case study about Enron, which discusses the behavior of various Enron agents’ right before and during the fall of the energy-trading giant.
The principles of the agent theory are discussed subsequently. Employees are defined as agent hired by the principal (employer) to fulfill certain of the principal goals. The author makes a crucial distinction between regular employees and managers. It is pointed out that the manager’s expertise and the resulting information asymmetry in favor of the agent may result in abusing of the trust of the employer and lead to the question what is the extent of employee responsibilities.
Furthermore, the role and responsibilities of certain established professions which are holding particular social importance, or even the gatekeeper function, are discussed. Joseph DesJardins also writes about managerial responsibility and the conflicts of interests between managers’ goals and organizational goals are presented next. The author does a very good job in contrasting the Enron executives selling of their shares versus the employees that they have deliberately misinformed. That leads to the section employee loyalty, which presents a view point that employees should not have the moral obligation to be loyal to the company. This made me ask myself the question – if the employees do not have such a responsibility, does this mean, the company does not need to be loyal towards its employees and how does it affect the agents’ rights’?
The chapter is concluded with questions about responsibilities of employees towards outside parties. Such issues as honesty, whistleblowing and insider trading are mentioned.
The conclusion I have reached after analyzing the mentioned above readings is that employees have certain moral obligations towards their employers, as well as certain rights. If the organization is hurting the employee’s autonomy or dignity by deceit or any other kind of abuse, the right of the employee to be treated ethically overrides the possible loyalty. Another aspect of these responsibilities is that agent may feel compelled to have responsibilities towards third parties, or the society as a whole and in certain cases they might be more important than the employee responsibilities towards their principals.
I do not agree with Prof. DesJardins at certain points in his book, but it provides an inresting material for analysis. Sometimes I feel that the ethical aspect of an issue such as employee rights/responsibilities is overlooked…
* - Joseph DesJardins An Introduction To Business Ethics, McGraw Hill, second edition, 2006
Monday, March 26, 2007
Do you want to earn big? You have got to think small...
Why is small better?
Small stocks are being viewed as an attractive investment. An article in the Wall Street Journal discussing this trend starts in the following way: "International investors are starting to think smaller. They should have started earlier" (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month).
However there are some major concerns present in the common perception of small stocks. Small capitalization securities tend to be more volatile and hence more risky. Less data is provided for such companies, due both to the fact that smaller companies cannot produce a given level of financial data, as well as, because they seem to be out the focus of most analysts. Do the given above reasons determine that small stocks are not as valuable as an investment option? Not necessarily...
TINSTAAFL... or is there?
The acronym above means, "There is no such thing as a free lunch", and is widely used in economics and finance literature. In finance, this statement applies to the fact that an investor has to bear additional risk in order to achieve a higher return rate.
Surprisingly, small stocks seem to defy this rule and provide "a free lunch" on a regular basis. Historically, small stocks have brought higher returns than big stocks. The Wall Street Journal states: "Small and midsize stocks in Europe, Japan and other corners of the developed world have offered some of the best earnings growth anywhere in recent years. These stocks returned 25% a year, on average, for the five years through December, according to Morgan Stanley Capital International. Like U.S. small-capitalization stocks, small-cap foreign stocks outperformed large-cap foreign stocks for each of the past six years. Up 7% year-to-date, foreign small stocks are ahead again this year." (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month). Analyzing any kind of historical market data should lead to the same conclusion.
This characteristic might be explained by a greater risk present while investing in small caps. However, financial research and empirical evidence seems to prove that, as Robert Strong, CFA puts it, small stocks provide a higher risk adjusted rate of return. Additionally, this outcome seems to be persistent. (See: Strong, R., Portfolio Construction, Management & Protection, 4 edition, Thompson Southwestern, 2006, p.249.). This is commonly known as: "small firm effect - The tendency for firms with low levels of capitalization to perform better than finance theory suggests they should". (From: http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=0324232586&discipline_number=414 ). Known financial researchers, Prof. Eugene Fama and Prof. Kenneth French have researched the topic in detail, one should turn to their work for further information about it.
International diversification allows achieving a level of risk, which is approximately the half of the risk borne in a well-diversified domestic stock portfolio. Well established capital markets in Europe and Japan exhibit a similar form of market efficiency as the US markets, furthermore they do know carry excess volatility of emerging markets. Investing in small caps in developed international markets seems to be a very attractive option, carrying moderate risk and a premium risk adjusted rate of return on average, when compared with the large caps. That just brings an annoying thought that the US investors should have thought about foreign small caps earlier...
Small stocks are being viewed as an attractive investment. An article in the Wall Street Journal discussing this trend starts in the following way: "International investors are starting to think smaller. They should have started earlier" (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month).
However there are some major concerns present in the common perception of small stocks. Small capitalization securities tend to be more volatile and hence more risky. Less data is provided for such companies, due both to the fact that smaller companies cannot produce a given level of financial data, as well as, because they seem to be out the focus of most analysts. Do the given above reasons determine that small stocks are not as valuable as an investment option? Not necessarily...
TINSTAAFL... or is there?
The acronym above means, "There is no such thing as a free lunch", and is widely used in economics and finance literature. In finance, this statement applies to the fact that an investor has to bear additional risk in order to achieve a higher return rate.
Surprisingly, small stocks seem to defy this rule and provide "a free lunch" on a regular basis. Historically, small stocks have brought higher returns than big stocks. The Wall Street Journal states: "Small and midsize stocks in Europe, Japan and other corners of the developed world have offered some of the best earnings growth anywhere in recent years. These stocks returned 25% a year, on average, for the five years through December, according to Morgan Stanley Capital International. Like U.S. small-capitalization stocks, small-cap foreign stocks outperformed large-cap foreign stocks for each of the past six years. Up 7% year-to-date, foreign small stocks are ahead again this year." (From: http://online.wsj.com/article/SB117486630727948482-search.html?KEYWORDS=karmin&COLLECTION=wsjie/6month). Analyzing any kind of historical market data should lead to the same conclusion.
This characteristic might be explained by a greater risk present while investing in small caps. However, financial research and empirical evidence seems to prove that, as Robert Strong, CFA puts it, small stocks provide a higher risk adjusted rate of return. Additionally, this outcome seems to be persistent. (See: Strong, R., Portfolio Construction, Management & Protection, 4 edition, Thompson Southwestern, 2006, p.249.). This is commonly known as: "small firm effect - The tendency for firms with low levels of capitalization to perform better than finance theory suggests they should". (From: http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=0324232586&discipline_number=414 ). Known financial researchers, Prof. Eugene Fama and Prof. Kenneth French have researched the topic in detail, one should turn to their work for further information about it.
International diversification allows achieving a level of risk, which is approximately the half of the risk borne in a well-diversified domestic stock portfolio. Well established capital markets in Europe and Japan exhibit a similar form of market efficiency as the US markets, furthermore they do know carry excess volatility of emerging markets. Investing in small caps in developed international markets seems to be a very attractive option, carrying moderate risk and a premium risk adjusted rate of return on average, when compared with the large caps. That just brings an annoying thought that the US investors should have thought about foreign small caps earlier...
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