Desicritics Category: BizTech: Stocks

Shareholder's Dissatisfaction at Satyam's Board

Ashish — Fri, 19 Dec 2008 10:10:40 EST

If you have been reading the financial papers for the past two days, you would have realized that suddenly something seemed to be happening at Satyam, and if you were more interested, you would have read that suddenly Satyam seemed to be in the eye of a storm regarding issues of corporate governance.

It all started when Satyam announced that it was planning on spending $ 1.3 billion on diversification, and that too, this amount would have been spent on buying Maytas, a company in which the promoters of Satyam hold a 35% stake. This was not a deal that was approved by shareholders, and apparently not even by the board.

The shareholding of the promoters in Satyam is only 8%, with institutions holding a majority, and this action by the promoters saw an incredible reaction on the stock exchange. Immediately after this move, there was a reaction from shareholders, with the ADR on the US market falling by 52%. The next day, financial newspapers unanimously denounced this move as a gross violation of all norms of corporate governance, and in moves that would have scared the promoters, institutions threatened to review whether there is a trust in the management of the company.

Now, this proposed move has been withdrawn, but has left a mark on the management of the company that is difficult to get away; it will take time before the trust quotient can be restored:

Even as Satyam's deal to buy Maytas had to be hastily annulled in the wee hours of Wednesday morning as the company lost 52% on its ADR listed on the New York Stock Exchange (NYSE), a credibility crisis has begun to grip India's fouth largest IT company. "How can we trust the management of this company and its board of directors after it tried to enter into a deal that prime facie would benefit only the promoters who just own 8% of Satyam ? We have to examine whether the management needs to be changed," cried analysts in a reflection of the deep anguish caused by the now stymied move.

"58% of Satyam is owned by FIIs and they had no inkling that such a deal was in the works. There were questions about the future of Satyam after acquiring these companies when it doesn't have any experience in these businesses. It makes more sense to deploy your funds in related businesses or pay your investors," said Sourav Mahajan, analyst with Karvy.

The company is doing fire-fighting, but this is not the US. In the US by now, with company promoters holding 8% and with such a move, there would have a far more critical reaction. Here, institutions typically do not show much emotion even when they hold a majority of the stake in the company; in fact, the public and private displays of reaction is unprecedented. This reaction is obviously not what Satyam was expecting.

However, one expects that with the share buyback announced after this as an attempt to mollify shareholders, there may not be much beyond what has been stated; the only difference being that the management of Satyam (and other companies) would be a bit wiser about what they can do or cannot do. What remains true in this case is that the board of the company proved ineffectual, and needs to be looked afresh.

Wall Street - Cold, Flat, and Broke

C R Sridhar — Mon, 6 Oct 2008 11:40:33 EDT

“Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns.” - Michele Catalano of Long Island, an angry blogger.

The month of September was cruel for Wall Street. Stormy winds blew away the venerable institutions of Wall Street and they collapsed one by one like a pack of cards. Lehman Brothers, the 158-year investment global investment bank, went belly up. Merrill Lynch was swallowed up by Bank of America. American International Group (AIG), a $1 trillion insurance company, had to be rescued by $85 billion dollar deal by the Federal Government on the ground that it was too big to fall. Capturing the mood of panic in Wall Street Mike Whitney, a widely quoted freelance writer, wrote ‘Lehman gone; Merrill Lynch swallowed up; AIG Going… Who’s Next for Madam Defarge?’¹

Madam Defarge and the tumbrels were kept busy while heads rolled in the basket in a grisly fashion. Fannie Mae and Freddie Mac, the biggies of Mortgage lenders, became terminally ill requiring a massive bail out at a cost estimated to be in the region of $5.3 trillion. Washington Mutual went bust followed by Wachovia. Earlier in March, Bear Stearns became insolvent after bad bets turned into bad debts requiring Fed intervention. The concept of Wall Street investment banking was blown sky high when the remaining Goliaths Morgan Stanley and Goldman Sachs haemorrhaged sustaining huge losses and took the unprecedented step to covert themselves into low risk and tightly regulated commercial banks. The pervasive mood of despair and anger of Main Street was reflected by the black humour on Wall Street, one of the most popular being-“Question-What is the difference between a pigeon and an investment banker? Answer- Only a pigeon can make a deposit on a BMW.”

The dour looking, Harvard educated economist Nouriel Roubini was one of the early sceptics to predict the financial meltdown in Wall Street when he dropped the bombshell way back in 2006 that US would be heading towards the most serious financial and banking crisis since the Great Depression. His dark prophecies were met with derision and disbelief earning him the epithet- the prophet of doom. But Roubini had the last laugh when the US financial system melted down as he had predicted and he became an instant celebrity on media channels.

A bipartisan blunder

One of the contributing factors for the financial meltdown was the reckless financial deregulation that led to financial concentration and inefficient markets. The perception of regulation as hampering the animal magnetism of Wall Street bankers was a dangerous delusion that fostered the irrational drive to take unacceptable risks. As the economist Arthur MacEwan explains-“When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn’t take particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.”²

Moreover, the extent of deregulation reached dangerous levels with the repeal of Glass- Steagall Act of 1933, which was passed after the financial debacle of 1929. This act separated investment banking from commercial banking and protected the investors from risky speculation of investment banking. Thus a commercial bank could not be in both insurance and/or investment business.

Hectic lobbying for Wall Street by Phil Gramm -the Republican Senator from Texas and the economic advisor for John McCain - and Robert Rubin in the Clinton administration were the guiding forces for the repeal of the act. This repeal became law when it received President Clinton’s assent in 1999. In 2000 another nail was driven in the regulatory coffin when Gramm introduced the Commodity Futures Modernisation Act, which excluded the scrutiny of counter derivatives, credit derivatives, credit defaults, and swaps, by regulatory agencies. Many economists hold the view that the repeal of the Glass –Steagal Act was instrumental in causing the 2007 subprime mortgage crisis.

The crucial point is to note that Wall Street enjoyed the support of both the Republicans and the Democrats for the repeal of the act. Even today both the presidential candidates Obama and McCain receive campaign money from Wall Street bankers and executives. This prompted Ralph Nader, the consumer activist, to acidly comment that there are no significant differences between Democrats and Republicans on major issues pertaining to Wall Street.

A flawed business model

The reward system is skewed in favour of brokers who make money for their Wall Street employer and not how well the client portfolios perform. As Pam Martens, an insider of Wall Street, says “A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients’ accounts have done.” This attitude is responsible in her words for “ the industry to be irreconcilably incentivized to corruption just as brokers have been socialized to silence.” This is on account of the fact that the broker receives more commission on investing junk bonds in client portfolios rather than investing in safe treasuries.

The other questionable practice is housing a trading desk inside the same company that is supposed to give unbiased research to the public. As Pam Martens points out “For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.”³

Perils of a casino economy

While greed, corruption, and an excessively deregulated financial market offer interesting explanations about the systemic collapse of Wall Street, they remain unsatisfactory as they not explain or explore the deeper malaise afflicting the US economy. For a rigorous and conceptually sound analysis, one must turn to the series of extraordinary essays written by Harry Magdoff and Paul Sweezy in Monthly Review during 1970 and 1980’s.

The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third world economies as sources of cheap labour, raw materials and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”⁴

The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.⁵

In the productive economy, money is used to purchase raw materials, machines, and labour to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M–M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy as there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

This sorry state of affairs is evident when one examines the failed financial institutions of Wall Street. One common denominator linking these institutions is that all were under capitalised and over leveraged. As Mike Whitney points out “when Bear Stearns went down, it was levered at a ratio of 26 to 1. When Carlyle capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally taken over by the US Treasury; the two behemoths were levered at 80 to 1, which is to say that they had a one dollar cushion for every $80 they had loaned out.”

With huge quantity of money sloshing around the world and being invested into financial speculation there has been an explosion of speculation. One mind-boggling figure is “the daily trading on the world currency markets, which has gone from $18 billion a day in 1977, to the current average of $1.8 trillion a day! That means that every twenty-four days the dollar volume of currency trading equals the entire world’s annual GDP!” Moreover, “Today financial analysts frequently pretend that finance can levitate forever at higher and higher levels independently of the underlying productive economy. Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casinos where the number and values of transactions have increased far out of proportion to the underlying economy.”⁶

This flight of investment from the productive economy to the casino economy is made worse by the availability of easy credit to persons who are least credit worthy. Many Americans who had little financial stability to buy houses took on mortgages, which were attractive on the face of it but carried a heavy debt burden. As real wages declined for the American household, it took on more debts for meeting the consumption needs. Total household debt stood at the end of March 2006 at 11.8 trillion.

Prudence in lending money to credit worthy persons was thrown to the winds as the banks encouraged people to borrow more and spend more. As the report in Wall Street Journal says “The banks are more aggressive because they rarely keep the loans they make. Instead, they sell them to others, who then repackage, or securitize, the loans and sell them to investors in exotic-sounding vehicles, such as CLOs, or collateralized-loan obligations. Every week brings announcements of billions of dollars in new CLOs, created by traditional money-management and hedge funds, which then sell them to other investors.”⁷

The toxic power of optimism

The belief in alchemy led mankind in the futile quest of converting base metal into gold. The bankers and traders in Wall Street were the practitioners of the alchemy of finance, which was the elusive quest of converting junk bonds into real wealth. There was an incorrigible optimism and conviction that ordinary people were meant to be rich. There was also goodwill for the captains of finance whose investment schemes were magic wands to transport investors to prosperity. Such a feeling of trust, as Galbraith reminds us, is essential for the boom.

The media played its role by lulling us into a false feeling of comfort by assuring that the fundamentals of the economy was strong and invincible. Critical views were suppressed in debates as the effusions of malcontents. A financial disaster was merely technical correction and there was more money to be made in depressed stock prices. As the financial pillars collapsed in Wall Street last month, a pie hit the glum faces of the financial analysts. The malcontents were right. As Galbraith again reminds us wisely-“when people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms.”⁸ In the aftermath of the melt down, the sceptics were rehabilitated quickly and became instant celebrities on talk shows. They taught us an important lesson, which the financier Bernard Baruch learned during the Great Depression: “ Any one taken as a individual is tolerable sensible and reasonable- as a member of a crowd, he at once becomes a blockhead.”

Plus ça change, plus c'est la même chose.

From the financial bubbles of the Mississippi scheme and South-Sea Bubble to the delusions of Tulip mania and the Great Depression nothing much has changed. As Charles Mackay says in his book Extraordinary Popular Delusions & the Madness of Crowds, “Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

But there is very little that one learns from speculative disasters, as human memory is short and unreliable. The Great Depression taught the American public the perils of unregulated market and the elected representatives passed the Glass- Steagal Act to protect the ordinary investors from financial ruin. The Act was repealed in 1999 when the memory dimmed about the Great Depression. Then another financial disaster hit Wall Street. Now there is talk of imposing controls on financial markets again.

“Wall Street”, a cynic once said, “ is a Street with a river at one end and a graveyard at the other.” Perhaps it would be appropriate to inscribe on the tombstone the words, Plus ça change, plus c'est la même chose. The inscription in French simply means, the more things change, the more they're the same.

----------------
1 The Tumbrils Roll at Dawn- Mike Whitney
2 The Greed Fallacy- Arthur MacEwan-Dollars & Sense.
3 The Wall Street Model: Unintelligent Design- Pam Martens- Counterpunch.org
4 Stagnation and the Financial Explosion- Monthly Review Press.
5 The explosion of debt and speculation- Fred Magdoff- Monthly Review
6 The explosion of debt and speculation- Fred Magdoff- Monthly Review
7 Wall Street Journal, March 3, 2006.
8 The Great Crash 1929-J.K.Galbraith- Pelican Book.

The CFO-CIO Crossover, Part III

Dr Bhaskar Dasgupta — Sun, 31 Aug 2008 12:30:59 EDT

We spoke about the interesting roles of CFO and CIO and about the development of both roles in the past and the present. In this essay we will look at the future and make some predictions about the cooperation between them.

1. What developments will occur in IT in the next three to five years? If one looks at a standard finance function, then these are the broadly the main chunks: Product Control, Financial Control, Finance Administration, Operations, Mandatory Reporting, Management Reporting, Taxation, ALM, Risk etc. All these areas are going to get impacted by improvements to workflow systems, communication applications, business intelligence systems, reconciliation systems, fraud detection and exception management systems, product control systems, spreadsheet management applications, better reporting cube / data warehouses / data marts, ERM systems, better cost analysis applications, and so on and so forth. One can write a full book on just this question, but those are the application facing bits. There will be huge numbers of finance related changes coming from the internet, the client aspects, the hardware bits, the database bits, the networking parts, the communication channels, the IT people, the service delivery model, and so on and so forth, which is too much to go into now.

2. What issues will arise for finance and accounting in the next three to five years? The main issues which will arise can be divided into the following categories:

(a) future regulatory driven change such as liquidity risk management proposals, contingency funding modelling etc. – this will cause a significant impact, best case scenario – a new regulatory report, worst case scenario – a full-blown Basel II type implementation;

(b) feeding old regulatory changes into BAU such as Basel II – Basel II has been rolled out but it will need more time to bed down and impact BAU aspects such as risk weighted capital allocation and performance evaluation;

(c) hitting barriers to service delivery such as human capacity or process architecture / issues;

(d) sharply increased demands for aggressive capital control and management;

(e) increasing demand for better quality financial intelligence and MIS by the business;

(f) little appetite for errors or operational risk or high emphasis on reputational risk management emanating from financial misstatements or mispricing,

(g) continuing and increasing M&A activity etc.

3. How will these issues and developments impact the CFO/CIO relationship? From a generic basis, as can be seen from the above, the level of technical and technology impact on the CFO is just going to grow and grow and grow. So CFO’s will become much more demanding. Not only that, they will expect CIO’s to take responsibility of BAU activities, something that is not commonly understood and accepted. SOXA approvals by CIO’s have caused a severe issue in terms of how CIO’s see their roles, but if this is going to be extended to other parts of the Finance business, then the CIO will become much more embedded in the BAU Finance Change function. So the impact will be from both sides, pushing each other into each other’s arms. Whether it is a hug or a squish depends upon how open-minded the two executives are.

4. How will the issues change the way IT aligns with business strategy? IT will move up the decision making value chain. Before any changes come down the pipeline, IT will start getting involved, because financial institutions have started to understand the benefit of including IT earlier in the decision making process. The business has started to realise that while they define the strategy, delivery is most often dependent upon IT. So the more they involve IT, the more delivery is improved in lock step. IT has to become proactive as well, in terms of analysing its service delivery model to become far more agile and mobile; in terms of analysing its technology M&A methodology; in terms of its reporting data warehouses; etc.

5. Will IT drive changes in business strategy? Will business strategy changes and external factors (e.g. globalisation) drive changes within IT? Will both occur simultaneously? Will IT drive changes in business strategy? On a corporate level we will see very little of that, but on a line of business level yes we will. I can see and have seen business strategy change because new technology has come forth, such as in trading. For example, expansion of product coverage within the FIX protocol can trigger changes in business strategy by suddenly opening new markets or changing existing markets. Changes in technical market infrastructure, such as addition of a new stock trading platform can trigger and driver changes in strategy. Better risk management and fraud detection technologies can give confidence to managers that they can extend personal loans or credit cards to new customer bases. Will business strategy and external factors drive changes in IT? Of course, completely. And yes, both can and do occur simultaneously.

6. How will these changes play out? Let me bring my tarot card deck, crystal ball and tea leaves cup out. That is to say that anything might be possible.

7. Will these changes have an impact on IT’s influence on the integrity of the financials? Anything that changes IT has a 30-50% chance to impact the integrity of the financials (based very roughly on the proportion of systems impacted by SOXA compared to the non-impacted systems). So that will indicate where we have an issue if any external factor impacts technology.

8. What does the future look like for finance and accounting technology? Very bright. And that is primarily because the finance and accounting arena is and will be hit by a tidal wave of changes from its business clients, regulators, professional bodies (IASB..), and so on and so forth. And massive, rapid and huge change like this is perfect breeding grounds for that perfect storm for technology, it will provide mandatory driven investments, fear, ambition, vagueness, and dreams for results/order where technology loves to breed and innovate

We have spoken about the interesting roles of CFO and about the development of both roles in the past and the present. We have also made some predictions about the developments in the future. One aspect is certain, technology is here to stay. While before a CFO would worry about the professional standards, rules and processes versus the humans who would operationalise them, the CFO has to worry about the technology as well. In many structural ways, technology itself is changing the finance profession and vice versa. The future not only promises to be bright, it promises to be entwined like the proverbial double helix.

Technorati Tags: technology, management, financial institutions

Does Every Cloud Have a Sell Order Lining?

Dr Bhaskar Dasgupta — Tue, 26 Aug 2008 08:35:42 EDT

While my days of sitting in front of a trading screen are now long gone and lost in the dim and distant past, every time I pass a trading screen, the familiar tightening of the chest, thumping of the blood and dampening of the palms still happen. How prices are made in the financial markets is a fascinating phenomenon. The theory is pretty simple. The current price of an asset in the markets is supposed to be the best estimate of all the participants of the future performance of the asset. So if the price drops, then the market (or people like you and me) expect that the future performance will be bad. Of course there is much more to it than this.

We are not all Vulcans; we do not have a straightforward unemotional way of judging the future. Strange things do impact us. If I woke up, toddled off to take a shower and found that the hot water had finished, I would be miffed. My day would not be good after this not so good start and frankly I would not be in a good mood. My performance, my duties and responsibilities, my behaviour towards my family, colleagues and friends, howsoever tiny and picayune, will deteriorate. I will go about my day being grumpy and expect the future to be dark.

If I was woken up by my 4 year old little girl who clambered into bed with me early in the morning and then we spent 15 minutes whispering about frogs, princesses, flowers, babies, naughty elder brother, toys, dresses, boyfriends and so on and so forth, then I get out of bed after getting a big hug and a whispered, “you are the bestest daddy”, that’s it, my day is made. I will go through the day with a spring in the step, a smile on my face, a twinkle in my eye, a song on my lips and heart on the sleeve. My behaviour would be good, and I will do my duties with a cheery smile and it would be a great day. I will think the future will be great and wonderful.

So my mood influences how I feel about how the future will be. And this is why good moods, good news and good feelings/emotions push economies and markets up. People feel good about the future so that they go out and purchase stuff, go take up credit, buy houses, spend money and invest in stocks. When the mood goes bad, they stick the money under their mattress, sell their investments, plonk cash into gold and so on and so forth. Governments therefore constantly try to keep giving good news, putting a positive spin on things. That’s why they love big spectaculars, the 100th anniversary of the country’s founding, the Olympics, the Birthday of the President/Queen, the launch of the first hospital, etc.. Good things, things that make you want to celebrate and feel good about the future. (Also if you feel good, you will re-elect the government…)

Since moods influence our perception of the future so much, it is not surprising to hear that stock prices are sensitive to time. For example, did you know that stock prices move differently on Mondays and in January? Or that they move differently between summer and winter? Yep, not only does time influence trading, the weather influences trading as well. And I was reminded of this when I read a recent paper by Chang, Chen, Chou and Lin in the Journal of Banking and Finance (2008, 32, 1754-1766). These doughty chaps went deeper into the weather and trading relationship to explore how prices moved intra-day. In other words, is there a relationship between the prices on the New York Stock Exchange and the weather patterns during the day? As it turns out, yes Sir, there is indeed a relationship. Stock returns are lower on cloudier days. You have more seller initiated trades during market open if the weather is cloudy (akin to your hot water running out?). When the skies are cloudy, the price jumps about much more and does not settle down as much all through the day. There is a ton of research on this topic already, human bio-rhythms do drive trading and economic behaviour.

Strange, no? You normally would not expect the valuation of your pension fund or your mutual fund to be influenced by something as silly as the weather, would you? Especially when the offices these days are all air conditioned, with scientifically calibrated lighting and all the modern conveniences, and so on and so forth. And after all that, you find that those highly paid traders are being impacted by cloud cover? And you call yourself as BSD’s? Pah, buy some umbrellas, you wimps!

(PS: this has nothing to do with investment advice at all, please do not invest based upon this essay)

Technorati Tags: financial institutions, financial markets, trading

MTN Walks Out on Reliance Communications - Family Feud

Aaman Lamba — Fri, 18 Jul 2008 17:18:22 EDT

It is one of the strange vagaries of modern Indian business that some of the largest companies exhibit concentration of captial to an extent not dreamed of by even the robber barons of the 19th century. Even with publicly listed companies, the mostly rubber stamp board allows significant decisions to be taken by the CEO, who in many cases is accountable to pretty much no one. While the institutional investors might not object as long as their interests are protected, there is an insidious effect of long-term erosion of capital and confidence that goes beyond even what one might expect with neo-liberal economies. The bull run of the last few years has emboldened the corporate satraps to disregard even their erstwhile political cronies.

The acrimonious Reliance conglomerate break-up and continuing feud has been reported in the business pages much like a celebrity hatefest in the gossip columns. The growing potential for irreparable damage to a significant tranche of capital due to impulsive decisions derived more from personal animosity than business rivalry has been ignored, or overlooked in the heady period of a bull market.

Recent events might mean it is time for greater regulation of the fragmented conglomerate, if only to preserve Indian credibility in global markets. The Mukesh Ambani-founded Reliance Communications went to Anil Ambani under the terms of the breakup agreement, currently controlling close to 66.75% of the company's shares, The company is now the second-largest mobile carrier in India, The Ambani zest for growth had led Reliance Communications to bid for 67% of Hutch in 2007, before being pipped at the post by Vodafone. It went on to acquire global companies like Yipes to further increase its global scale.

Reliance Communications entered into 'exclusive' talks with the MTN Group after the South African company ended dialogue with India's No. 1 mobile provider, Bharti Airtel. The two companies would have a combined worth exceeding $70 billion and over 116 million subscribers, making it the sixth largest telecom company in the world. Various options were explored by RelCom and MTN, including a reverse buyback, and the exclusivity period extended.

Matters were complicated when Reliance Industries, headed by Mukesh Ambani, raised the possibility of invoking their 'right of first refusal' under the terms of the break-up agreement. Anil Ambani and Reliance Communications questioned the validity of this clause, and refused to engage with Reliance Industries on the matter. Matters reached a head Thursday when Reliance Industries initiated arbitration proceedings against RelCom.

The MTN Group and Reliance Communications announced today in identical statements that they were ending their talks and the exclusivity period, with the statement

“Owing to certain legal and regulatory issues, the parties are unable to conclude a transaction, Accordingly, it has been mutually decided to allow the exclusivity agreement to lapse.

The news was greeted by concern in both Indian and global circles. Future negotiations between Indian and foreign companies could be overshadowed by the risks that affected the MTN-RelCom talks, and this could affect the global standing of Indian companies.

All the same, everybody loves a winner, and it is not unrealistic to expect Anil Ambani to bounce back soon enough from this debacle. The global appeal of Indian markets and incumbent players may overcome the fears of litigation, and at best, a higher risk premium might be applied to future deals.

It is unlikely the government will intervene, letting the markets take their own course. A market dominated by a few large players with ever-increasing concentrations of wealth (and risk) is not quite a free market, though, and may require some fresh air or new rules to level the playing field.

Reliance Communications - Go, India Go

Varun P — Mon, 19 May 2008 07:47:06 EDT

Reliance Communications or RCOM (formerly known as Reliance InfoComm) is India’s largest private sector information and communications company with a subscriber base of over 48 million subscribers. Founded in 2002, RCOM has established itself as a dominant service provider in the CDMA segment. The company is now looking to grow via acquisitions and expansion of service offerings under the wireless and non-wireless service offerings. The next 12-18 months will see the introduction of plenty of new growth drivers for the company. Below is a brief look at some of the drivers:

1) Wireless Segment:

RCOM is gearing up operations to commence with one of the biggest roll-outs of GSM operations, aiming to achieve 90 percent population coverage within 12 months of the launch in India. The company is confident of rolling out its GSM services from the fourth quarter of 2008. The company has already established its presence in the CDMA segment and its dual-SIM enabled CDMA handsets will aid the company in retaining subscribers as well as easing the switch from CDMA to GSM. The company has secured a loan of $750 million China Development Bank for this purpose.

The company is also planning to introduce a net-enabled phone at a price of only Rs. 480/- per handset. This marks a steep discount to the currently available internet browsing phones at a cost of Rs. 1,400/-! The company intends to place an initial order for 12 million handsets. It will target the 600 million rural population and expects to sell around 1 million pieces a year in the rural and semi-urban areas. The company is also looking at roping in the labour ministry that is looking at digitisation of communication technology and making mobile phones affordable to farmers.

Reliance Infratel, RCOM’s tower arm, currently has 37,000 towers. Infratel is looking to increase to tower count to 60,000 by 2009 and 70,000 by 2010. The increase in the tower count will result in a higher transmission capacity. The increase in the tower count coupled with the GSM launch will drive higher revenue from the company’s wireless segment. Additionally, RCOM is seeking possible listing of Reliance Infratel on the Indian stock markets. Infratel has received the SEBI approval to proceed with the IPO which will witness the dilution of 10% stake in Infratel for a sum of Rs. 50,000 crore – Rs. 60,000 crore. Listing of Infratel’s IPO will result in significant unlocking of value for RCOM’s shareholders.

2) Non-wireless segment:

One of the most significant components of RCOM’s non-wireless segment is Reliance Globalcom. After Reliance Infratel, I believe that the company stands to gain significantly from the significant expansion activities being undertaken at Globalcom. From increasing the private undersea cable system to 137,000 route-km (r-km) (at an estimated cost of Rs. 1.5 billion) and landing ports to 64 to presence in 60 countries in 2010, Globalcom will enable RCOM to not only post strong margins (since a major part of expansion will take place in emerging markets) but it also help the company to maintain a higher growth rate compared to national as well as global peers. The expansion in the undersea cable network is expected to address the global connectivity needs of 90% of world population. Some news report also state that Globalcom is in talks with banks and mobile operators for setting up a global backbone to enable interbank money transfer on mobile platforms.

RCOM is also ready to begin with the roll-out of its Direct-to-Home (DTH) services, known as Big TV. I expect the company to corner a significant share of the DTH campaign based on its superior service offering (over 240 channels) and presence in over 4000 towns. The higher market penetration will in turn enable the company to derive higher revenue from the non-wireless segment.

RCOM is looking to increase its presence in Wimax with the acquisition of a majority stake in eWave world in April 2008. The company will invest $500 million in this service by 2012. RCOM estimates the revenue potential in emerging markets at $10 billion; the company expects to capture 10% of the market share in the next 24 months which will translate into revenues of $1 billion by 2010.
RCOM is also aiming to double its market share in the US in managed Ethernet. Acquisition of Yipes in July 2007 provided the company with 5% market share in the US in managed Ethernet. By 2010, the company has guided to revenues of $200 million - $250 million with a market share of 10%. In the Internet Data Centre (IDC) space, the company has set itself a target of being among the top three providers by March 2009. Additional expansion into the area of global conferencing will lead to further upside.

My entire argument for an investment in RCOM is based on the factors listed above. I’ve purposefully not taken the company’s base business (the CDMA segment) into consideration. I’ve also deliberately made an attempt to stay away from discussions on the company’s cash position or the net debt on its balance sheet. I believe that while the underlying business of the company’s remains strong, the next wave of growth could be derived from one or more of the above factors. But I must sound a note of caution: Although the company is very confident of delivering on its promises, I believe that the company is exposed to significant execution risk. Most of the company’s plans are highly ambitious and aggressive and require significant upgrade in operational efficiencies. Additionally, changes in government regulations may hamper the company’s plans and possible slow-down the execution ability of the company. Another concern is the amount of financing which the company will need to successfully carry out these expansion activities.

While the Indian Telecom industry is recording one of the fastest growth rates in the worldwide telecom market, the growth path is not without its share of obstacles, with the raging war between the CDMA and the GSM operators over spectrum allocation being one of them. However, despite the likely hurdles in its path, I expect RCOM to reap the benefits from the aggressive strides that the company is looking to make in both the wireless and non-wireless segments. The company is looking to drive incremental growth in India with the roll-outs of the GSM operations and Big TV while internationally, Globalcom is expected to provide a major thrust to the company’s top- and bottom-line growth by 2010. Besides the incremental revenue from these expansions, IPOs for Globalcom and Infratel will also unlock significant value for shareholders. Given the current market conditions, I believe this is the right time to accumulate shares of RCOM.

This article does not recommend any investment decisions. Readers are strongly urged to do independent research and make their own conclusions. Desicritics does not review or verify any of the information presented by our authors. The article is presented for your reading pleasure only.

Hedge Funds vs. Charities

Dr Bhaskar Dasgupta — Thu, 27 Mar 2008 00:16:49 EDT

I first read this article where the Bishop of Rochester, Michael Nazir-Ali, told off hedge fund managers for not being charitable enough and I quote:

“The turmoil in the markets is almost certainly the result of amoral forces,” Nazir-Ali told his flock. “Those with power need to ensure that the poor are not disproportionately affected.”

“From possessiveness we need to move to gratitude for what we have,” he added. “When that happens, hedge fund managers and directors of companies can indeed go into the kingdom of heaven ahead of the chief priests and elders.”

I was quite amused by this statement. Are you really sure that hedgies and directors are motivated by the possibility of entering heaven earlier than priests and elders? I don't think so, Bishop.

Then, it got me thinking.

Let us compare them with a charity, ok? A charity generally spends about 13-14% on management and administration fees. In other words, out of £100 it gets in contributions and grants, on an average, it manages to spend £86 on the objective (on food, orphans, animals, starving rare dung beetles, or what have you). I have not heard of charities investing their own funds so I am presuming that whatever comes in, goes straight out, less admin fees. (If they do invest, say in gilts, assuming 1.2% return, you are looking at perhaps a quid or two more maximum).

But look at hedge funds. Hedge funds generally charge 2% management fee and 20% of the return. Last year, the average hedge fund return after fees was about 13%. So lets apply those figures to a theoretical £100 investment in a hedge fund. £100 less 2% management fee =£98. A return of 13% gives me £12.74 and I take away 20% from it leaving me with £10.192 return. So I withdraw £98 as my principal, add £10.192 and I end up with £108.192 compared to £86 from a charity.

Assume tax equalisation happens and even if charities are tax free and hedge fund returns for charity taxed, taxation is not that much. So if you consider that the return is taxed at 20%, we will still be quids-in compared to a charity.

So, basically, if the objective was value addition and giving the maximum possible benefit out of contributions, then you will be better off giving money to a hedge fund and getting that money to the ultimate recipient. I know this is very simplistic, and you cannot really invest say a typical £10 donation into a hedge fund, but that's just logistics. A collection logistics system can be easily established which feeds small sums of money into the fund.

This reminds me of the day when I was asked by somebody to advise on investment opportunities around the world while their cost of capital was about 10% and expected return was about 14%. They particularly wanted to invest in Russia and my suggestion to them was to forget about setting up a manufacturing plant in Russia and to invest their cash in Russian Government Bonds, which were, at that time, providing over 35% return....

As a matter of fact, the Bishop should consider his own backyard. His pension fund is £125 million in the deficit with assets of £325m (as at 30/9/05). The actuarial letter of 15th of February 2006 was predicting that they are working on the assumption that the current return would be about 1.2% (if invested in index linked gilts) or 2.2% (if invested in equities) (See here for details of the Anglican Church's pension fund from where I am quoting these figures).

So actually, I would rather suggest to the Bishop that he doesn't moan about the hedgies but take his £325 million and quietly go to a fund of funds fund and ask them to, pretty please improve his pension otherwise they are looking at a massive gaping hole of almost a third of assets. And you can't really sell off the Rochester Cathedral to fund pensions, can you?

But that said, hedge funds are massive philanthropists. Take for example, The Children's Investment Fund. A very large proportion of its profits are given to The Children’s Investment Fund Foundation, one of the largest charities in the UK. (Disclosure: I am currently working in an institution which is linked to this hedge fund) (Take a look at some of the external links on the charitable activities on the wiki page here). So before he takes off and blames hedgies, he might want to rethink the benefit of hedge funds!

Technorati Tags: Financial Institutions, Christianity, United Kingdom, Financial Markets, Charity

Microsoft + Yahoo = Microhoo: Can it beat Google?

Kiran Dhanwada — Sun, 3 Feb 2008 00:57:59 EST

Microsoft announced on Friday that it would offer $44.6 billion for Yahoo, the ailing search giant. The offer of $31 a share represents a 62 percent premium to Thursday's closing share price. Yahoo shareholders could elect to receive either cash or stock. Microsoft's announcement was unsolicited and its premium unusually high, marking it as an aggressive bid that could turn hostile - a classic case of a buyer overbidding to keep any potential competitors out of the race.

There are four central ideas that surround this deal -

1) Search engines are crucial tools because they have become a central hub in hugely profitable ad networks. Advertisers around the world are expected to double their spending on the Internet during the next three years as more people get their news and entertainment on the Web instead of television, radio, newspapers and magazines.

The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year. Google already controls 58-62 percent of the worldwide search market, and has been widening its lead. By combining, Microsoft and Yahoo would have a 16 percent share of the worldwide search market.

To put that in perspective, if the deal goes through, the No. 2 and No. 3 companies would merge to create a larger No. 2 that's still only about half the size of Google in terms of search. Google's dominance in search, its soaring overall traffic, its incredibly efficient ad service and its acquisition of online advertising company DoubleClick has created an entity that either Microsoft or Yahoo couldn’t tackle alone.

2) At first glance, Microsoft's proposed acquisition of Yahoo for $46.6 billion is only about growing its consumer advertising and portal business to better compete with Google. However, another piece is also how the acquisition would help Microsoft execute its software-plus-services strategy for delivering business apps over the Internet faster and better – a strategy that would at least allow Microsoft compete with Google's own business-apps initiative.

Google Applications (pure web-based apps) might pose a real threat to Microsoft Office in the long-term and Microsoft needed to accelerate its move in online services (where Yahoo’s engineers would play a pivotal role) to prevent this or atleast have a defense to protect its turf.

3) The common wisdom is that neither Microsoft nor Yahoo is a real force in social networking. Both companies own multiple social media properties, and the only resounding success among them is Yahoo's Flickr (and Microsoft’s foothold in Facebook).

Social networking, in addition, will be a tasty slice of the Web for a hypothetical Microsoft-Yahoo because it's also one of the few niches of the Web on which Google doesn't already have a stranglehold. Its OpenSocial developer initiative isn't ready yet and its Orkut social network has only gained traction in a few regions of the globe. Yahoo and Microsoft have a huge asset in e-mail address books and instant-messaging buddy lists, which are essentially a social graph – a critical success factor in the Social Networking world.

4) Culture – which is totally different between Microsoft and Yahoo. Most experts claim that for any acquisition to be successful, there needs to be a cultural fit between the two companies – and majority of acquisitions fail due to this precise reason. Time Warner – AOL is a typical case in point. Microsoft being the uptight, blazer-tie, essential product based company and Yahoo being the outgoing, cool, web-based company. Opposites attract, but not in mergers definitely.

If Microsoft dreams of achieving its stated target of $1 billion savings after acquisition, the way it is going to handle the clash of cultures is going to be critically important.

There is, however, no guarantee that Yahoo would be willing to sell to Microsoft. What would Yahoo exactly derive out of this deal except for the premium it is about to receive on its depressed stock? It doesn’t help their brand (Microsoft is bound to kill it somewhere down the line), it doesn’t give better access to search technology (Yahoo’s is already better than Microsoft’s), it doesn’t give them access to better online advertising sales force – so why would Yahoo sell itself to Microsoft?

On the other hand, Yahoo has a ton of interesting web properties like groups, finance etc. which Microsoft can only dream of. A better fit in terms of content advertising, value-add and culture would be NewsCorp (the media behemoth, owner of MySpace), which I think personally would be the white knight in this deal.

The anti-trust departments in U.S and Europe claimed that they would look at the deal closely. However, given Google’s dominance in the search market – the deal might be given a go-ahead in the next six months after the usual talk and furor over competitive and regulatory issues. The only issue that might cause delay is that Microsoft and Yahoo combined would be cornering 95% of the email market, which flies directly in the face of anti-trust issues.

Watch out for the privacy groups too which might oppose the deal in a big way. This acquisition, if it goes through is going to take atleast a year to materialize.

However, one thing struck me as most poignant: in many ways, Microsoft has become exactly what Bill Gates used to fear the most — sluggish, bureaucratic, slow to respond to new forms of competition — just as IBM was when Microsoft began its ascendence. A typical case of Déjà vu – Google’s ascending and Microsoft is clearly struggling to come to terms with it.

Microsoft Bids For Yahoo! Will Google Go For Apple?

Aaman Lamba — Fri, 1 Feb 2008 13:44:04 EST

Microsoft has made a hostile takeover offer to buy Yahoo! Inc, whose shares have fallen over 46% since their 2007 peak, and has offered to pay $44.6 billion. Microsoft had attempted to enter into takeover talks a year ago, which broke down. Competitive prospects at the time had probably led Yahoo! to rebuff the offer. The reported price offered by Microsoft then was $90 billion, thus Microsoft might be glad to have waited the year out.

This move is evidently intended to counter Google's online dominance, and make the game more head-to-head than it has ever been before. The scope of the deal and the lack of significant other players in the online marketplace will doubtless bring close regulatory scrutiny, both in the United States and in Europe. Microsoft is already under government observation in the United States, a term extended for another two years this week.

The offer was at a significant premium (62%) over Yahoo! market price, and Yahoo! stock has jumped over 45% on the news. This would be one of the largest acquisitions ever in the technology industry. The takeover approach will avoid protracted negotiations, and the constant risk of leaks. The cash-or-stock offer makes it possible to add sweeteners and difficult for most companies to counter, if there are really any that might have the stomach to go up against the Redmond behemoth.

Google was downgraded to a hold from a buy by an analyst from Jefferies and Co, citing an increased risk profile, and their stock was down over 8% on Friday. Google has reported a significant decline in margins in recently reported quarterly earnings, and mentioned 'some difficulty' around AdSense related earnings, characterized by Google as problems in their 'social networking inventory'.

Microsoft will likely leverage the strengths Yahoo! has in messaging, media and music over search. Google's search platform remains unassailable for now. It seems impossible to dislodge, not just because of search stickiness, but more so because of the quality of results. Google might have to respond by filling its own gaps in the media space, and what better way to do this than by acquiring/merging with Apple? The two companies already have much in common, and Apple's access to media companies and markets, besides computers, would enable Google to get off the online platform into the real world, as it were.

Monetary Policy - Will the Reserve Bank of India Cut Rates?

Ramki — Fri, 25 Jan 2008 12:23:08 EST

I was only partly successful in my predictions last time on whether RBI would cut rates or not (Oct/07, when RBI held rates steady as predicted but hiked CRR by 50bps) but here I go again, predicting what the RBI would do on 29th Jan.

Let us look at the current economic scenario. The Fed cut rates by 75bps on 22nd Jan, before its planned meeting on 30th Jan. My personal opinion is that such moves by a central bank create more panic than anything else. Consider this - the central bank is supposed to have been taking measured considered decisions and they have all along been saying that the primary problem is the subprime crisis. But now, the problems have spilled over to defaults in corporate lending, car loans, credit cards, insurance bankruptcies, etc. Analysts are even predicting that the Fed would cut another 50bps in the 30th Jan meeting.

The Reserve Bank of India is a much saner central bank that way and they have acted very responsibly so far. They have maintained the repo and reverse repo rates at the same level since March '07. But the problem that RBI is facing is becoming more acute day by day. Simply because the US has cut rates by 125bps in the last 4 months (25bps in Oct/07, 25bps in Dec/07 and 75bps on 22/Jan/08) with a possibility of a cut (as mentioned above) in the 30/Jan meeting.

A lot of people are now of the opinion that the RBI would cut rates on 29/Jan. This is also fueled by Finance Minister's statement that the Fed rate cuts would influence RBI's policy action next week.

Is that required? There are two factors that one should look at - the factor on widening interest differentials and the domestic growth/inflation status.

Let us take the first factor on widening interest differentials. This, as mentioned earlier, is definitely a problem. But this time around in Jan/08, would we see a glut of funds that would come in? That may not be the case. There is already a P-Note curb that is on to start with. To add to that, I think the recent volatility in the global markets has led to some amount of risk aversion in the markets. So, I doubt if a whole lot of foreign money would start chasing Indian stocks - at least they have not done so far in Jan as the figures clearly show that FIIs have been net sellers. So, on this parameter, there is a potential for funds to come in but a call on that should be taken after observing the same in the next 2/3 months.

Now to the second factor on domestic growth/inflation status. Though there has been some slowdown in growth, the economy is still expected to grow at a rate of 8.0 to 8.5%. As far as inflation is concerned, the latest figures show that inflation for the week ended 12/Jan is at 3.83% (up from 3.79% of the previous week). This may be within the tolerance level of 5% set by RBI but as everyone knows, this is suppressed inflation due to not passing on the oil price hike to the end consumer. So, at this point in time, the domestic growth has not significantly slowed down, and at the same time, the risk of inflation has not completely gone away.

Given the above, my guess is that RBI would hold rates steady on 29/Jan. The rates would start trending downward for sure but my guess is that it is not before Apr/08 and that would surely depend on what the other central banks around the world do at that time.