Archive for the ‘Corporations’ Category

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Imagine you asked your bank for a business loan. Your bank manager – if indeed there are still members of the genus ‘argentaria procurator’ (that’s Latin for bank manager) left – might ask for the spreadsheets. If they revealed a big fat salary for you, the ‘procurator’ might say: “My Dear Homo Sapien, it appears you expect the bank to take all the risk.” You may well have found you were out on your ear (pércipe) before you could say “ego odi bancarii” (I hate bankers).

Imagine, with the help of your bank, you were trying to arrange one of those MBIs (management-buy-in), MBOs (management-buy-out) or indeed a BIMBO (buy-in-management-buy-out). You would be expected to chip in an amount roughly equal to your annual salary. Nassim Taleb would refer to it as “skin-in-the-game”. Shakespeare’s Shylock might have called it a “pound of flesh.”

Barclays is raising money to bridge a shortfall in its capital ratio. So far we have heard not a dickey bird about how management at the bank may contribute; not a hint about whether this year’s bonuses might be in the form of shares contributing to the fundraising.

Some might respond by saying “nam hypocritae.”

© Investment & Business News 2013

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Perspective makes all the difference. On this side of the pond, BP – along with its two US partners –made a dreadful error. In the case of BP the causes of the errors were complex. Its boss at the time was trying to change the culture, and make the company more safety aware. BP works with cutting edge technology, drilling for oil in the deep places of this planet. It possesses skills at searching for and releasing oil lying beneath the oceans which are second to none, but inevitably, when you push technology to its limit, you occasionally get it wrong. With the Macondo oil platform, the consequences of getting it wrong were calamitous. BP was unlucky, it could have been a rival, a US firm, for example, but alas BP was the one hit by a bolt of misfortune.

From the perspective on the other side of the Atlantic, the view is quite different. Run by a complacent Brit, “who wanted to get his life back”, BP put profits before all else. It ignored warnings. It allowed a culture to develop in which employees at the firm told their bosses what they thought they wanted to hear. BP was a company that represented all that was bad about corporate culture. Consider this anecdote to illustrate the point. Its partner, Halliburton told BP that it needed 21 metal centralising collars to stabilise cement laid down before drilling. So what did BP, with its attention forever on cost cutting, do? It laid down just six such collars.

There is no doubt that there are companies, individuals and indeed lawyers, in the region of the US affected by the Gulf of Mexico oil spill that have tried their luck. Ads have circulated urging people to lodge claims. Stories abound of firms gaining compensation from BP for the most spurious of reasons. Perhaps their turnover fell in the year of the oil spill, but for reasons quite unrelated to BP. Perhaps their turnover fell because their finance director booked invoices that would normally have been sent in the year of the oil spill into the following year. Perhaps their turnover fell because firms changed their accountancy practice for just that one year.

Is it fair? It depends on the narrative to which you are subjected. If you believe that BP was guilty of huge arrogance, with compete disregard to human life in the build-up to the oil spill, then you might say the company hasn’t changed; that it is shamelessly trying to put the blame on innocent US victims.

If you believe BP was unlucky, and is no more guilty than its two main US partners in the oil project – Halliburton and Transocean – if you believe that its former boss Tony Hayward was singled out by the US because they just didn’t get the British tendency for understatement, then you might feel that the giant oil company has been treated shamelessly by the US system of so-called justice.

The ‘FT’ has run a number of anonymous articles fighting BP’s corner. One article headlined America’s shameful shakedown of BP and said that the “gulf settlement should be fair, not an exercise in extortion.”

Robert Kennedy Jr told the other side of the story. In a recent interview with the ‘Telegraph’ he responded to the argument that BP was being bullied by the US legal system. He said: “They are being picked on as an oil company that wrecked our Gulf and lied about it… I don’t care if it’s a British company or Exxon. I would rather sue Exxon than BP, because I think Exxon is a worse company. But Exxon didn’t do the Gulf spill.” He said damages should be sufficiently punitive that “it gives an incentive to their industry to spend as much money on protecting the safety of the public and the environment as they do on their tax lawyers, who are trying to reduce their tax liabilities.” Now take legal fees. BP forked out no less than $1.5 billion in payments to law firms acting for apparent victims of the oil spill in May and June alone. BP called these charges “perverse and outrageous.”

What it has managed to do is get the US legal system to investigate and former judge and – more to the point – former director of the FBI Louis Freeh is on the case. The Feds, as it were, are trying to see whether BP has a right to cry foul.

Yet federal judge Carl Barbier doesn’t seem impressed with BP’s arguments. The oil company has been accusing the US claims administrator Patrick Juneau and his office of acting unfairly. But Judge Barbier accused BP Boss Bob Dudley of “going beyond the line”, and of making “unfair, inappropriate, personal attacks” on Mr Juneau.

It does seem to depend on the narrative to which you were subjected in the first place.

Supposing, however, the narrative is retrospectively changed. It turns out that had BP followed Halliburton’s advice and employed 21 metal centralising collars, instead of six, it would have made no difference. Soon after the oil spill, Halliburton ran two simulations of what would have happened in the event that BP had heeded its advice, and the simulations showed that the end result would have pretty much been the same. So what did Halliburton do? It asked the people who ran the simulations to destroy them.

Halliburton has been fined $200,000 for its wrong doing, while BP has forked out around $40 billion. Some say there is a disconnection there.

But then that is the snag with narratives. When pieces of the narrative are changed at a later date, the overall initial impression is unaltered. The narrative changes us, and retrospective changes to the narrative don’t reverse the original effect it had on us. If we were to find out years after we first heard the story that that actually Cinderella was a manipulative little so and so, we would probably still think she had an evil step mother and sisters. Not that BP is Cinderella, but there is someone who is as white as the hero from the best child’s story: Dick Cheney, former US Vice President, no less.

Of course Halliburton is essentially honourable; its former boss went on to become US Vice President.

But if your narrative of US history when Cheney was Vice President is a tad cynical, and you view him as something of a war monger, who made Attila the Hun seem like a socialist, then no doubt you will see this as yet more evidence that BP has been screwed by the US legal system, while Halliburton with its links to the very top of the US government, has got away with the tiniest of fines.

© Investment & Business News 2013

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Dotcom bubble: what madness? How could anyone have been so stupid not to have seen it coming? And then it happened again, a company with a p/e ratio off the charts, a track record going back just a few years, founded by a person/persons so young they looked as though they should still be at school, and yet they queued up to buy shares on flotation. How stupid was that? It is just that it may not have been so stupid after all.

Replace the word Facebook with the word Google and things look much the same, except we can now look back with the benefit of hindsight, and say that Google was cheap when it was floated. It is just beginning to look as though Facebook was cheap too.

The latest result from Facebook told an impressive tale. Sales were up 53 per cent in the latest quarter, profits were up by… well …numbers can’t tell us, because the company went from losing $157 million in the equivalent quarter last year, to making $333 million profit this time around.

Now look at the company’s valuation. Its market cap is $83 billion. Turnover was $1.81 billion in the latest quarter. That is still quite a multiple. Just bear in mind, however that on flotation the p/e was… well, as the company was making a loss at the time, it was infinite.

Now consider a story doing the rounds a couple of months ago. The ‘Guardian’ in particular made a lot of noise about it. It cited research from SocialBakers indicating that the company had lost four million users in the US in just one month. It was a real ‘woe is Facebook’ story; proof, or so many said, that the company was full of naïve hope over reason. It is just that SocialBakers reacted to the ‘Guardian’ story saying: “Sometimes, journalists get stats wrong.

The Facebook stats found on our page are not primarily intended for journalists, but rather Ad estimates for marketers.” It added: “Around 50 per cent of the UK’s entire population is on Facebook – which is amazing!” and suggested: “The bottom line here is that there is no story.”

Jan Rezab, CEO at SocialBakers, said: “We previously published a clarification to one of The Guardian’s articles three months ago. In this article, I explained the stats in question, revealed the source of the stats, and admonished journalists against jumping to conclusions about them going forward. Well, The Guardian did not heed the advice, jumping to an even bigger conclusion this time.”

And that in a nut shell says it all. No one can really know for sure whether Facebook is worth its current value, but to laugh it off is not wise. It is fun to suggest companies such as Facebook are made of little more than smoke and mirrors, but little things like facts are rarely allowed to get in the way of a good story or indeed a bit of fun.

Take the argument that Facebook can’t make money from mobile advertising. In the latest quarter mobile advertising made up 41 per cent of the company’s ad revenue.

Consider the story of Google. Its share price has risen from around $100 in 2004 when it was floated to around $900. Yet during this time, its p/e ratio has crashed, so that now it is around 26 – still highish, but nothing spectacular. At flotation, Google’s market cap was around $23 billion, now it is making more than that in profits in less than a year.

Facebook has another similarity with Google. Back in the mid noughties, soon after Google was launched, its Ad Words program represented perhaps the most cost effective form of advertising ever invented. The markets did not get that, which is why they undervalued the company. It is not like that now for Ad Words, of course; the auctioning process has seen to that.
Today it is Facebook that seems to represent an incredibly cost effective advertising medium.

This is why its revenue will probably continue to grow at a very rapid rate for some time, and profits to revenue will probably grow too, meaning that total profits may yet grow at a rate that dwarfs even the growth enjoyed by Google during its golden period.

No one can say for how long Facebook will occupy such a high proportion of the world’s consumers’ time? It may or may not go the way of MySpace, but based on current popularity the potential for the company to increase profits is enormous.

© Investment & Business News 2013

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What have Apple and the Duchess of Cambridge not got in common? Answer: Apple still needs a new baby. It’s the point that the markets don’t seem to get about the company. Its shares have been falling faster than a guillotine on the head of the last King of France, but the markets have been way too quick to write the company off. Yesterday saw good news from Apple as profits beat expectations and shares rose; but still the real story is being forgotten.

The company’s latest set of results were out yesterday. Profits fell to $7 billion in the latest quarter, from $9 billion in the same quarter last year. To put the numbers in perspective, profits from the equivalent quarter in 2011 were pretty much the same, but in for 2010 were only $3 billion, and just $1billion in 2009. In other words, they have risen sevenfold in four years, which some might say is impressive.

It was a similar story with sales, but if anything a tad better. Sales rose 1 per cent on the same quarter in 2012, and have risen by more than 400 per cent over the last four years.

But the markets don’t care about all that. What they care about is whether the company did better than expected, and on this occasion it did. It was down to the iPhone. It sold no less than 31.2 million units of the old girl in the quarter (compared with 26 million this time last year), a record for that particular three month period, in fact.

Sales of the iPad were down, and so were sales of the Mac, although in the case of the latter, the fall was not as great as that seen by the overall PC market.

Apple’s problem is that it is now operating in mature, or at least mature(ish), markets. When smart phones or tablets become commodities, margins will fall – it’s simple economics.

The company’s boss Tim Cook said: “I don’t subscribe to the common view that the higher-end smartphone market has hit its peak.” He added: “We saw very strong sales in many of the emerging markets.” And indeed sales into India, Turkey and the Philippines rose substantially. (As an aside, note that bit about sales to the Philippines rising. It is a different story altogether but worth mentioning at this point that at the moment the Philippines is one of the hottest markets in the world, from an investor’s point of view.)

But the real point is that Apple has proven itself to be the master of disruptive technology. It did it with the iPod, iPhone and iPad. When it comes to established markets it is just another player. Okay, it’s one with very pretty products, and maybe an important player, but Apple has no inalienable reason to outsell, say, Samsung in its key markets.

Apple’s big test lies ahead. The key for the company lies not with tweaking existing products, but disrupting markets with new products, such as smart watches or TV players.

Mr Cook also said: “Our focus is always on new products and services,” and “We are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014.”

So how about that? – laser focused, no less. Let’s hope that the new products are not laser discs.

© Investment & Business News 2013

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In the UK there is something confusing going on. They call it the productivity puzzle. Why is it that during the worst downturn ever suffered by the UK – at least it’s the worst since the beginning of the last century which is how far back the data goes – employment has kept growing to the extent that this year it passed an all-time high? Data provides a hard answer: productivity has been falling. But what the data does not do is provide the reason why.

Maybe the reason can be provided by the existence of Zombie companies. Once again, hard data comes to our aid – they really do appear to exist.

So interest rates were slashed to record lows, and then just to be sure they were slashed some more. That was the story of the great downturn: record low rates. If things had been different, if central banks have been more circumspect, had fretted about inflation, and moral hazard, then the great recession of 2008/09, and the downturn that began in 2008 would have been far far worse.

Company liquidations and indeed individual insolvency levels would have soared. House prices might have crashed. Unemployment would have risen to horrendous levels, and youth unemployment would have topped 50 per cent in some regions. In fact if the Bank of England and the Fed had adopted that policy, the UK and the US would have ended up looking a lot like the Eurozone.

Fortunately, in the democratic countries of the UK and the US the electorate would have never have tolerated such a state of affairs. It appears that the electorate in certain Eurozone countries was powerless to act; their cross on the electoral ballot had as much meaning as an Egyptian voting for the Muslim Brotherhood.

But just because record low rates stopped the UK from suffering an even worse downturn, it does not mean that the policy hasn’t come with disadvantages.

A year or so ago, the then FSA issued data showing that between 5 and 8 per cent of mortgages could be subject to forbearance. At that time, Dr Angus Armstrong at the National Institute of Economic and Social Research said: “This has a familiar ring of the zombie firms in Japan which were insolvent but the banks would not close to avoid crystallising a loss.”

But what about the corporate world? We keep hearing about zombie companies, but are they for real?

So here is the data:

First off here is the chart that shows something is wrong:

And now here is the chart that shows why zombie companies may provide a partial explanation.

The Bank of England put it this way: “Liquidations have risen only modestly since the financial crisis, even though data from companies’ accounts suggest that the proportion of companies making a loss is higher than in the early 1990s. Insolvency professionals suggest that more businesses have been able to survive the 2008/09 recession because of the low level of Bank Rate, coupled with increased forbearance. That includes forbearance by banks on existing loans, by HMRC on outstanding tax payments, and by other companies on late payments.

Forbearance and low interest rates will allow some viable businesses to remain in operation through a temporary period of weak demand. But in other cases, where businesses will find it hard to compete in their markets when demand recovers, forbearance acts as an impediment to the efficient reallocation of capital and labour, reducing underlying productivity growth. Similarly, it may have dampened the incentives to carry out the restructuring needed by some companies in order to grow strongly.”

But in the US, where the central bank has been just as proactive as the Bank of England in promoting low interest rates, things have been different.

As far as households are concerned, there is a key difference in the way in which the mortgage market operates. In the UK if you find yourself with negative equity, having your home repossessed does not help because it is still your responsibility to pay the shortfall. In the US, it is the bank’s responsibility. This has led to a more ruthless approach to mortgage repossessions in the US, but at least this is kinder on those with negative equity and who cannot meet commitments, and it is has led to fewer so-called zombie households.

As for companies and entrepreneurs, in the US the same stigma does not apply to bankruptcy as there is in the UK. Indeed for US entrepreneurs, it sometimes feels as if facing bankruptcy is a sort of rite of passage. Chapter 11 is often applied very effectively in the US – consider GM for example.

In the US, we have seen record low interest rates, but creative destruction too.

In the UK where –to a large extent – we have only had record low rates, it may become a problem as the economy recovers, and rates finally rise.

© Investment & Business News 2013

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This may come as a shock. But apparently there used to be a system in the UK where if you wanted to send a message to someone, you wrote it down on a piece of paper, put the paper in a flat paper bag known as an envelope, stuck an adhesive picture of the queen in the top right corner of this ‘envelope’, and put it complete with this likeness of the Queen in a big red box.

Some people put other things in the red box, but they were not thought of positively by society. And then, something miraculous occurred; this envelope appeared on the door mat of the person for which the message inside was intended a day or two later.

It seems like a primitive custom, but that, according to a research recently made available on Facebook and emailed to journalists, is how things used to be.

And now, a company that operates in this state of the art way of delivering messages is set to be privatised. The Unions say that the Royal Mail is the type of company, offering such an essential service as it does, that should be under state ownership.

The Unions are right. How could we possibly manage without the Royal Mail if it wasn’t for email, Facebook, Twitter, Skype, LinkedIn, oh and DHL and TNT and, well… the list goes on a fair bit.

Delivering messages by the British postal service was once a lynchpin of the British economy, and indeed of the British Empire. Where would Victorian Britain have been without it?

But, and this may come as a shock to some, Queen Victoria is no longer on the throne and these days we have this thing called the Internet. Funnily enough, in this Internet age the Royal Mail has found a new function – namely to be the means by which shoppers and eBay users can have the products that they buy online delivered.

Some of the products shipped over the Internet will be sent that way only on a temporary basis. Love Film is a great user at present, but for how much longer? Given the increasing ease by which we can watch films online whether there will be a need for DVDs delivered by post seems unclear.

The Unions don’t like it, and it may be harsh to say that they need to accept Queen Victoria isn’t the throne anymore, but their concerns are legitimate. But the government has come up with a way to appease workers; 10 per cent of the shares on offer will be given to staff. Unions may try to block the privatisation, but once it has happened they will surely be forced to step back.

The Royal Mail has too many competitors for the Unions to risk weakening it, and the job security of members.
But there are some questions.

Does Royal Mail have an unfair advantage? In much the same way BT used to have (perhaps still does) an unfair advantage in supplying cables to the home (which the competition authorities tried to counteract), the Royal Mail has a distribution monopoly. When was the last time you went to the Post Office to send a parcel and the clerk asked you if would be using the Royal Mail or DHL today?

And then there is timing.

Privatising state companies, such as the Royal Mail and indeed Lloyds Bank and RBS, may well be a good idea. Frankly, the government coffers could do with some extra money. But does that mean the ideal timing is now? It may, but right now the government can raise money easily and cheaply.

The plans to privatise the Royal Mail have nothing to do with whether this is a good time, and a lot to do with where we sit on the political calendar.

Finally, there is a question mark over the belief, commonly held, that governments are lousy at running companies and that the private sector is always best. Maybe the private sector is best, but perhaps not for the reasons generally given. Lots of private firms turn out to be badly run, even more badly run than state owned firms. It is just that such firms go bust. State firms tend to get more subsidies.

See it in terms of evolution.

This works by having lots of different ideas, and selecting only a very small proportion of them. You can’t second guess what evolution will throw up next. The private sector scores over the state sector because it has survivor bias built in. Good businesses evolve. The state sector tries to do things via a kind of intelligent design, and that is what doesn’t work.

© Investment & Business News 2013

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The economist Robert Gordon opened a can of worms a year or so ago when he suggested that technology is having a limited impact upon the economy; that the computer revolution is not increasing wealth like the industrial revolution or the move towards mass production did in the early 20th century. In short the good days are behind us. But is that really right?

Other see it in terms of low hanging fruit. They say we have picked the fruit that can create economic growth the easy way. The growth period supported by carbon fuels may be approaching its end – or maybe the end will be delayed if the hype about shale gas is to be believed – and this era of growth is coming to an end. But is that really right?

Capital Economics pointed out that it took 60 years before the steam engine invented by James Watt in 1769 materially boosted productivity. If history teaches us one thing, it is that there is a time lag between innovation and growth.

Sometimes we even get economic depressions in-between, as happened between the innovation we call mass production and the post World War 2 economic boom.

So to say that the computer has not created growth and neither will it, does seem to be a bit hasty.

The thing about technology that economists often forget is Moore’s Law. Computers are getting more powerful all the time and, as this happens, their potential to influence growth rises. Sometimes technology can steadily increase in power, but we barely notice it until it passes a kind of breakthrough point. When that happens we start to notice it more and more.

Apple is a good example. Steve Jobs had a dream of combining design with technology. But this was only really viable once technology had passed a certain level; a level it may have passed in the early years of the 21st century. And then the company went from flirting with bankruptcy to the biggest in the world within just a few years.

Certain burgeoning technologies may suit the UK rather well.

Take biotech. The industry is on the verge of some seriously major breakthroughs. And in this industry, the UK is the world leader.

Or take 3D printing. Critics make the same mistakes economists often make when they forget about Moore’s Law. This is a burgeoning technology, which is set to become steadily more powerful and relevant. The 3D printer costing £699 and for sale in Maplin may help users to replace missing chess pieces or new cases for their phones, but future 3D printers will do an awful lot more. NASA is funding one project to make a printer than can create a pizza from powders. It may be only a matter of time before one can say to a printer: “Tea, Earl Grey, hot.”

But 3D printing may transform industry in a way that is just as radical as when mass production took off, but this time it may work in reverse. Manufacturing may return to local craftsmen; even to the High Street as it becomes possible to have bespoke clothes, furniture, even cars made without necessarily paying more money.
Debt matters, but it matters less if your income is growing. It matters even less if the percentage interest on debt is less than the percentage growth in income.

Many critics say we face a debt crisis, that the economy is about to implode. But they forget about technology. And their error may be dangerous. If we try to cut debt at a time of innovation, the result may be falling demand at a time of rising productivity.

The debt hawks may mean well, but their belief that we must suffer pain before we can see recovery may be both wrong and dangerous. If we try to cut debt, with a resulting fall in demand at a time of rising productivity, the result may be an economic depression of great severity. The arch bears may be right in prophesying doom, but they may be right for entirely the wrong reasons.

© Investment & Business News 2013