Posts Tagged ‘google’

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The deal between Vodafone and Verizon announced earlier this month is, in fact, the third largest corporate deal in history. In comparison the deal between Microsoft and Nokia is small beer, but it is still a massive arrangement by any normal yardstick. Interest rates are low, but they may not be low for much longer. Is now, and pretty much right now, the time for a new M&A boom?

Let’s look at some of the reasons why the two mega deals of this month have happened. Okay, there is good strategic fit. Verizon and Vodafone both see new opportunities, particularly thanks to 4G in their domestic markets. In the case of Microsoft and Nokia the rationale for the arrangement is pretty obvious and has been discussed to death elsewhere.

But consider two other factors less commonly discussed. In the case of Vodafone and Verizon the factor is low interest rates. Fears that rates may rise soon, was possibly the main rationale for the timing of their deal – indeed Verizon referred to this very point. In the case of Microsoft, the software giant is one of the companies with a massive cash pile. There are many of them. Corporate cash piles have been a particularly notable phenomenon of recent years. Market bulls have been predicting the release of this cash mountain for some time. In the case of Microsoft, its partial release has been triggered by desperation – fear of Google, Samsung, and Apple, even Amazon. Other companies may start spending because they see signs of an economic pick-up. The reason may not matter. It was surely inconceivable that companies were going to sit on all that cash for much longer, but a trigger was required to release it.

Look further down the corporate league and other evidence of new M&A activity emerges. David Lloyd Leisure has been bought by private equity firm TDR Capital – and its new owners have plans for expansion.

The ‘Telegraph’ recently quoted Greg Lemkau, who is the co-head of M&A at Goldman Sachs, as saying: “Within two or three years from now, people will be looking back on this time as a golden opportunity.”

But the overriding point is this. The economy both here and in the US seems to be improving, and pretty significantly too. M&A is always popular during an economic upturn. But because interest rates are set to rise, the ideal timing for such activity is now.

Not everyone in the corporate world has cottoned on to the recovery; they were likewise slow to spot the seriousness of the crisis five years ago, but as the recovery gatherers momentum, the penny will drop, and then we will see a rush for leveraged deals before rates rise much further.

What are the implications? AS M&A activities rise, so too will equities. The FTSE 100, the S&P 500 and the Dow will all pass new highs – probably.

Is it all a good thing in the long run? Well that will be the subject of another article.

© Investment & Business News 2013

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Braille is a good idea, so are guide dogs. But that does not mean people are likely to choose to be blind. Yet economists seem to have chosen this very approach when it comes to practising their so-called science. It is a shame because in so doing, they are rendered pretty useless; their theories are about as relevant as an English/Elvish dictionary. The truth is that we are in the midst of a new revolution, one that may yet make the industrial revolution look like a dry rehearsal for what we about to witness. Make sure you are strapped in, and make sure you are au fait with what’s going on.

Maybe one of the interesting things about the great beef burger experiment that hit the headlines this week was the revelation of who was backing it. You probably heard about it. In a laboratory in Maastricht, Dr Mark Post has developed a way of growing beef in a petrie dish, and earlier this week he cooked a beef burger on live TV for critics to eat. It’s doubtful whether the ingredients provided by Dr Post, or indeed his cooking prowess will get an airing on Master Chef any time soon. Many find the whole idea of beef created from stem cell research a tad frightening. Not even Douglas Adams thought of this. In his book ‘The Restaurant at the End of the Universe’ a pig that wanted to be eaten was featured, but pork grown in a lab? Well that seems like an idea that is too farfetched for the man who thought of an infinite improbability spaceship.

The point about meat is that it is not very efficient. So we get these beef processing factories, otherwise known as cows, or pigs, that eat lots of grass, drink lots of water – most of which comes out of the back end as waste – take up a lot of space, and then, after a long time interval, they are eaten, in a practise some people think is barbaric. Beef created the Dr Post way is kinder on the environment, uses less resources, is more humane, and it offers another benefit… what is it now, it is quite important. Oh yes that’s right, it may end world hunger.

And that brings us to the really interesting bit. The man who bankrolled Dr Post’s project was none other than a chap called Sergey Brin, a Russian-born immigrant to the USA, who – among other things – co-founded Google. When it comes to innovation Google is a rather interesting company. These days we have all heard of Google Glasses, and most of us have heard of its self-driving car. Did you know it has been looking at wind turbines that fly above the ground like kites? If it is the case that we are in the midst of a new industrial revolution, from an investment point of view picking the winners is a tad difficult.

But some companies – that’s companies with very substantial resources – are good at experimenting, and trying lots of ideas. Google and IBM are good examples. They may well be among the big winners from this revolution. Others, such as some of the giant pharmaceuticals, are like venture capital firms that specialise in an industry and in addition to money can offer distribution and marketing expertise. They are good firms to watch too.

Returning to recent innovations, there is also talk of a new ultra-thin integrated circuit, which may evolve to become a little bit like robotic skin that can monitor your health? This product was developed by Martin Kaltenbrunner at the University of Tokyo. It is perhaps the most interesting idea to emerge so far in this new brave world of wearable devices.

Then there is the world of medicine, and pharmaceuticals. Take, as an example, a company called Immunocore, which may have developed a cure for cancer. See: Exclusive: Cancer – A cure just got closer thanks to a tiny British company – and the result could change lives of millions

Immunocore, by the way, according to the ‘Independent’ article has attracted the attention of Genentech in California, which is owned by the Swiss giant Roche and Britain’s GlaxoSmithKline.

And finally, or finally for today, there is Hyperloop. We don’t know much about this product yet, other than it is an idea developed by Elon Musk, co-founder of PayPal, who says it will be able to transport people at 700 miles per hour, cannot crash, is immune to bad weather, and is self-powered, via the aid of solar energy – oh and, by the way, it is supposed to be much cheaper than other forms of transport. Mr Musk has this idea for Hyperloop to be able to transport people from Los Angeles to San Francisco in about 30 minutes. See: How does Elon Musk’s SF-to-LA-in-30-minutes Hyperloop work?

Who knows whether any of the products described here have traction, and indeed for that matter whether Hyperloop uses traction as the means of transporting people?

But they illustrate a point. There are some incredibly interesting radical ideas afoot at the moment.

Computers and the Internet must surely lie behind the new revolution. The latest generation of computers are now so fast they have made it possible to develop ideas in a way that was once impossible. The Internet enables the flow of ideas, and cross fertilisation as brains across the world communicate and share.

But economists still don’t get it. Some still deny that recent innovations have created wreath, and implicitly they are cynical about the next batch – that is assuming they know there is a next batch.

They make a catastrophic error.

Innovation can create wealth, and end poverty; it can lead to mass unemployment and inequality. How we ensure that innovations benefit all, is the big challenge of the 21st century.

Let’s finish by quoting Douglas Adams and drawing a parallel with economists. “The Hitch Hiker’s Guide to the Galaxy defines the marketing division of the Sirius Cybernetics Corporation as ‘a bunch of mindless jerks who’ll be first against the wall when the revolution comes’, with a footnote to the effect that the editors would welcome applications from anyone interested in taking over the post of robotics correspondent.”

“Curiously enough,” continued Adams in his book ‘The Hitch Hiker’s Guide to the Galaxy’, “an edition of the Encyclopaedia Galactica that had the good fortune to fall through a time warp from a thousand years in the future defined the marketing division of the Sirius Cybernetics Corporation as ‘a bunch of mindless jerks who were the first against the wall when the revolution came’.” Do you think economists will be the first against the wall come the new industrial revolution? Or will it be just some of them?

© Investment & Business News 2013

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If you live in a grubby old house, and there is a dead mouse on the kitchen floor do you blame the cat for killing the mouse, or do you say the problem is a bit more serious than that? The High Street has some problems. This weekend the ‘Telegraph’ paraphrased a government minister saying the High Street was dead. The solution, however, is not to make online retailers pay more tax any more than killing the cat will solve the problem of a mouse infested house.

It is little harsh to say that Nick Boles, the planning minister, said the High Street was dead when what he actually said was :“People’s shopping habits are changing very fast as a result of the rise in internet shopping and changes in lifestyle and working patterns.” He continued: “We need to think creatively about how to help town centres thrive in this new era. We want to encourage local councils to concentrate retail activity into the prime shopping streets in the heart of their town centres and adopt a more relaxed approach to underused retail frontages.”. See: The traditional high street is dead, says minister

It might be more accurate to paraphrase him as saying: “The High Street is dead long live the High Street.”

So Mr Boles wants to see more unused retail space turned into homes. He is surely right. We don’t have enough homes in the UK, but we do seem to have an abundance of retailers struggling to make a living. And if more people lived on the High Street, maybe we would see new stores opening up to cater to their needs.

But Sainsbury’s and Morrisons’ big idea is to tax online retailers. Last month Sainsbury’s boss Justin King said: “The burden of taxation in the UK falls very heavily on bricks-and-mortar retailers versus internet only retailers.” He said: “For every pound that we have saved [as a result of corporation tax cuts] we have paid around £2.50 extra in other taxes, primarily business rates. If the tax burden falls ever more heavily on those businesses that have real presence that is something that has to be addressed.”

But does that sound like sour grapes to you? Isn’t one of the key USPs of internet retailers that they don’t need expensive high street positions? Instead, for them, position on Google is more important than the real position defined by bricks and mortar.

To tax online retailers more, seems ever so slightly as if Justin King wants to follow the tactic adopted by a previous King, a certain King Canute.

© 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

According to the OECD, US household gross debt to gross disposable income had fallen from 130.7 per cent in 2007, to just 107.9 per cent at the end of 2012.

According to the Fed’s latest US Financial Accounts, debt as a share of disposable income has fallen to 110 per cent, from 112 per cent at the end of last year.

At the same time US house prices have at last begun to rise, and both the Dow Jones and S&P 500 have recently hit all-time highs, which has pushed up the value of US assets. Paul Dales, Senior US Economist at Capital Economics, put it this way. He said: “The ratios of debt to net wealth and debt to assets have fallen to rates more in line with long-term trends.” He explained further: “Every $1.00 of debt is now backed by $6.30 of assets, whereas before the recession it was backed by $4.80 of assets.”

Okay, returning to OECD figures, US household gross debt to gross disposable income was just 96.4 per cent in 2000. So in comparison to that year, debt is still quite high. But the trend is clear. US households have seen their own balance sheets improve markedly.

When you think about it, the above data illustrates why the economy has struggled so much in recent years. Despite interest rates being at record lows, US households have engaged in some pretty drastic deleveraging. Economists who failed to spot the crisis in the making during the mid noughties, failed to grasp that US households had simply run out of puff, and that the combination of falling house prices and over indebtedness meant an extended period of readjustment was inevitable.

This adjustment may have a couple more years to run yet. But it is not unreasonable to assume that by the midpoint of this decade, the US consumer will be able to lead the US economy into a new growth period. In combination there are signs of companies moving their manufacturing back to the US, which is a trend that was predicted by the Boston Group some two years ago. Both Apple and Google, for example, have recently announced new products which, just like Bruce Springsteen, will be made in the USA.

In the UK we are seeing something similar, but on a smaller scale. UK household debt to income has fallen too. In fact it has fallen even more sharply than in the US, but then again it was much higher to begin with. OECD figures indicate that UK household gross debt to gross disposable income was 146 per cent at the end of 2012, around 25 percentage points down on the 2007 high, but still among the highest levels in the OECD. Maybe the OECD data is simply telling us the UK deleveraging process has longer to run. If the US will enjoy growth like it used to in 2015, maybe in the UK we will have to wait until, say, 2017.

But it is interesting to note that Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

So this is good news, albeit that the time frame is more stretched that we might prefer.

But good news can create bad news, and that is what the markets are worrying about. To find out why, read the next piece.

© Investment & Business News 2013

Hiatus. Sometimes we enter a kind of interim stage. And when that happens, it is human nature to see this as somehow significant. In truth it is as significant as a stopped clock telling us the time.

Google is in at the moment. Sure, its tax affairs are not in with politicians, and the holier than thou media. But this has nothing to do with Google being evil, or amoral, and it has everything to do with globalisation and technology, which makes it hard for governments to act unilaterally.

And with Apple’s share price having fallen sharply over the last year – from $702 in September to $450 at the time of writing – and with Google’s having risen – from $647 in November to $867 at the time of writing – their fortunes have been in stark contrast.

Apple’s market cap is now $423 billion; Google’s $288 billion. The gap appears to be closing.

Google has its glasses, its driverless cars, its new Motorola phone – talk has it that the phone will know when you are driving, know when it in your pocket. There is no talk of it being able to tell you whether someone of the opposite sex fancies you however – which may be a major oversight by Google.

Apple has… well, there will be a new iPhone and iPad, but there’s not much happening.

It appears that the number of Android Apps is set to overtake the number of Apple apps too. So far 50 billion apps have been downloaded for the Apple products; 48 billion for Androids. Apple reckons it is seeing around 2 billion downloads a month. Google says it is seeing around 2.5 billion a month. Analysts reckon total downloads for the Google family will surpass Apple downloads this year.

Apple’s shares are trading at a pe ratio of just 10.76. Google shares at 26. No wondering – let the facts speak for themselves.

Poor old Apple! It is hard to see how it can make do with a mere 2 billion downloads a month

Google is an exciting company, and it may well see its extraordinary growth rate continue for some time. But the markets may be writing off Apple far too soon.

Apple is not good at hiatus moments. Apple went from almost bust to becoming the world’s biggest company by market cap via disruptive technology. With its iPod, iPhone and iPad Apple invented a market place, or at the very least (in the case of the iPod) turned a niche market with a specialist following into a mass market.

Right now, the state of technology is such that we are in an in-between stage. We are awaiting the next phase in the evolution of technology. In nature evolution does not work at a steady pace, it often works in fits and starts, it is like that in business too.

To write off Apple now, at this in-between stage, is simply absurd. Its smart watch or TV player may or may not change the world, but until we know more, we cannot say whether Apple has lost its innovative edge.

As for downloads being a miserly 2 billion a month, don’t analysts have iPhones? Don’t they know that Apple tries to impose some form of quality control on its apps? Don’t they know that in the Apple market the onus is on quality over quantity? Apps downloads may be fewer, but are existing Apple apps used more or less than Android apps, do you think?

© Investment & Business News 2013

The penny has finally dropped. When individual countries try to tax companies the results is that the businesses go elsewhere, or hide behind their globalised operation to get around one country’s rules. We demonise Google and Apple, but the truth is that they are operating within the law. And when did it suddenly become immoral to try to reduce taxes while acting within the law?

The solution is global. EU leaders have agreed to agree, that one day they will agree. That may be a little harsh. The EU is to rush through rules to enforce greater transparency in how companies break down their business into the various regions in which they trade.

Ireland has spoken up. Its Enterprise Minister Richard Bruton told national broadcaster RTE that some companies “play the tax codes one against the other”. He said: “That is tax planning and I think we do need international cooperation through the OECD to deal with the aggressive nature of that.” He does, ever so slightly, have the veneer of a Turkey that has just voted for Christmas.

The big problem with the issue of corporate tax, indeed a financial transaction tax, is that the challenges posed by globalisation have been hijacked by those who favour tax cuts no matter what.

When one country, or even a region as large as the EU, imposes a financial transaction tax, or a tax on corporate profits, there is always a risk that multinational companies will simply move to another region, taking jobs with them. And they can always use the multinational nature of their business to circumnavigate paying taxes.

The fact is that across the world, corporate profits to GDP are approaching an all-time high. Much of the money generated by large companies is not creating wealth; rather it is sloshing around the system ending up in government bonds. And because, thanks to austerity, governments are not spending the money the markets want to lend to them, the result is economic stagnation.

The fact is that distribution of income and wealth across the world is becoming more uneven. You don’t need to be a diehard flag carrying member of the Communist Party to think this is a problem. Right now, the global economy needs to see taxes used to take money from profits that are not otherwise being spent, and from financial transactions, to help alleviate the lot of those who are being penalised by globalisation.

© Investment & Business News 2013