Tuesday, May 27, 2008

Ka Ching drives the bus for Al Gore

Ok. So there is this new buzzword “Ka-Ching” - and is meant to depict the sound of a 'cash register'.

I found that in a cheeky aside [“Al Gore and Climate Ka-Ching”] on why Al Gore is so consumed on greening the earth. Sounds like a logical observation if it is not from the anti Global Warming theorist. Some excerpts –

“So why the hype? Well, global warming is a growth industry designed to keep Earth and some bank accounts green.

Gore himself joined the venture capital group, KPCB just last September. On May 1, the firm announced a $500 million investment in maturing green technology firms called the Green Growth Fund. The group announced another $700 million to be invested over the next three years in green-tech startup firms. But if the green technology business cools down, there will be no return on that investment. There would be no need for such investments if global warming wasn't a threat. So Gore just launched, among other things, a $300 million on an ad campaign to convince us it is so.

Speaking at a conference in Monterey, Calif., on March 1, the former vice president admitted to having "a stake" in a number of green investments into which he recommended attendees put money rather than "subprime carbon assets" such as tar sands and shale oil. He also is co-founder and chairman of Generation Investment Management, which sells carbon offsets that allow rich polluters to continue polluting with a clear conscience.

We have a prediction all our own — that disastrous global warming will not occur. Then the greenies will take credit for preventing it and ask us if we're glad we spent trillions in fighting it. Al Gore will be laughing all the way to the bank.”

"Ka-Ching!" It has a nice ring to it, yeah! Go, catch it.

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Monday, May 26, 2008

Responsible tourism is ok - how about responsibility to tourists?

I am all for responsible tourism anywhere. Tourists are people that enjoy a place, its people, culture and tradition. They have to act responsibly and make sure that such attractions are preserved for posterity – for them to come again and for others to share the joy and beauty. So I support all public initiatives that condemn reckless destruction of the environment by callous visitors that leave waste food, plastic bags and other used stuff.

But what embarrasses me more is when a tourist is treated badly by the host country. The primary responsibility is for offering sufficient protection to tourists that are alien to the language, tradition and culture. They should enjoy their stay and go back as ambassadors to the host. But I feel horrible as I read more and more news of molestation, rape and murder of foreign tourists that betrays a gradual cultural decadence among people.

You need tourists to land before you can expect them to be responsible.

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Wednesday, May 21, 2008

Can the Fed beat a bubble?

Hardly. Says Dan Gross in Slate.

"….So how could the Fed stop bubbles? One way might be for Federal Reserve chairs and other officials to use their credibility to talk down investors from making poor bets. But even on its best days, the market doesn't listen to reason. During a bubble? Forget about it. A bespectacled jargon-dispensing economist standing astride the rails and yelling stop isn't likely to have much effect on a runaway locomotive. Alan Greenspan gave his famed irrational exuberance speech on Dec. 5, 1996. But the Dow Jones Industrial Average and the NASDAQ ran up 82 percent and 288 percent, respectively, in the three years after the speech—before popping….

…..The Federal Reserve is an organization much like any other—run by human beings with fallible judgment, driven by consensus, and less than congenial for ontrarians. In bubbles, skeptics are always marginalized while the promoters are anointed as seers. And when a bubble gets loose, it infects every institution: banks, the media, and, yes, the Federal Reserve. The Fed, in the person of Alan Greenspan, failed to diagnose the Internet bubble accurately, and it misjudged the housing bubble, too. The Fed, in the person of Ben Bernanke, failed to see the credit mess coming. And once that crisis hit, the Fed failed to accurately gauge its scope and depth. When the party really gets going, we all drink from the same punch bowl…."
Bubbles occur because no two minds think alike, yet are easily influenced. Everyone abhors herd syndrome but has it ever stopped? Accept bubbles as natural phenomenon like rain or sunshine. Perhaps it's a bit like life itself that has ups and downs. Attempts to regulate nature have only met with disaster. So the best way to deal with a bubble is to acquire stronger defenses when the storm rages. We will have casualties, but it will leave some scope for faster rehab - in preparation for the next one.

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Monday, May 19, 2008

Economic Xenophobia?

The French are paying through their nose. Inflation is at a 17 year high. They could do with lower prices; yet they don’t want competition. Could it be termed as an economic xenophobia?

Christine Lagarde, the finance minister, is promoting a new law to let in more competition into retailing to make it easier to build out-of-town hypermarkets, scrapping a rule stopping retailers from selling below cost. In many places, hypermarkets have de facto local monopolies, and so are protected from competing with each other or with the big discounters, which account for only 13% of food retailing, next to 30% in Germany. Nor can hypermarkets negotiate freely with suppliers, which retailers say allows big brand-names to impose high prices.
So why are consumers not cheering on the new law? The Economist has this view.
"The Socialists say the fringes of historic towns will be destroyed. Deputies in Mr Sarkozy's own party, lobbied by food producers and small shopkeepers, want to dilute the text. Scepticism about competition has deep roots, ranging from a lingering influence of Marxism to a fear of American capitalism trampling the French way of life. Above all, voters see competition through the eyes of producers—as a menace to jobs and factories—rather than consumers."
But the French should do something about inflation soon if they don’t want to look like Zimbabwe. To me it reads like the opposition by small shop keepers in small town India that stalled the efforts of big retailers like Reliance Fresh. Flat world, it is.

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Tuesday, May 13, 2008

Stay on cash; use it wisely.

In times of turmoil in the stock markets, companies with tons of cash in their balance sheets wake up to smell the coffee. They see acquisition opportunities abound and zoom in on assets going on the cheap. HP’s acquisition of EDS for $13.9 billion yesterday is a case in point.

So do activist investors like Carl Icahn, who was instrumental in Oracle's takeover of BEA Systems, has been buying Yahoo stock since Microsoft withdrew its offer May 3. Icahn reportedly owns about 50 million Yahoo shares, or about 4 percent of the company. The news comes just weeks after negotiations between the two faltered on price, after a protracted dance between Microsoft and Yahoo that started with the Redmond software giant's unsolicited offer on Feb. 1 for $31 a share. After the deal fell through because of Yahoo CEO Jerry Yang’s tough postures, Yahoo's shares have slumped as low as $22.97. That’s when Icahn moved in with gusto.

The HP deal means that companies with strong balance sheets - HP had nearly $10 billion in cash at the end of its most recent quarter - will be able to take advantage of the market's turmoil and snap up companies trading at steep discounts. Even with the premium HP is paying for EDS, the $25 per share price tag is still 17% lower than where EDS' stock was trading at about a year ago.

I look at a rough map of cash rich companies that could stir the hornet’s nest. The list includes not just the tech giants like Google, Oracle, Microsoft, Intel, Cisco or Apple, it also has companies having tens of billions of $ of free cash such as Exxon Mobil, Royal Dutch Shell, Chevron, Pfizer, Roche, Wyeth and Novartis. So far they’ve been using the cash for dividends, stock buyback or plowing it back in business. But when current businesses are shaky or as in the case of these Pharma majors where their drugs are about to go off patent, it’s prudent for them to look at biotech acquisition ops.

Makes sense.

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Sunday, May 11, 2008

From 4 P’s in marketing to 3 C’s of lending

A good marketing manager would be bent on having something to offer to his customers than desperately trying to get rid of what he has. When Neil H Borden published his article “the concept of marketing mix” in 1964, he may have figured future marketers to have all those ingredients in the mix – that E Jerome McCarthy later grouped into 4 categories that are known today as 4 P’s of marketing. Product, Price, Place and Promotion.

The alpha numeric model seem to have worked since most marketers start with defining their 4 P’s. Now this is being adopted by lenders that got badly mauled in the recent subprime fiasco. They are now beginning to realize some old fashioned lending values and bottling them up in alpha numeric concepts so that there will be less billion $$ write downs in future.

They call it 3 C’s of lending. They are Character, Capital and Capacity.

But I see a problem here. When you have these three traits present in you, you won’t normally go to borrow. You live within your means, preserve capital and limit your desires in tune with what you can afford. Old fashioned, indeed. Result : Banks will have fewer customers and large swathe of idling funds. Now the pressure of holding that capital will force them to follow aggressive marketing practices that recommend relaxed norms and adoption of softer lending criteria that over a period of time build bubbles.

The way forward should be a proactive lending model where banks move closely with a customer and lend him money when he needs it for genuine purposes. Not to stuff wads down his throat when all that he needs is some fresh air and force him to repay when he can hardly get by.

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Wednesday, May 07, 2008

PE firms after the credit crisis - chic or brawny?

Whatever happened to the large $100 billion plus “club” deals that PE funds were talking about? With the credit markets drying up, the only constant is the high valuation expectation of sellers.

The consensus seems to be that rising cost of capital will reduce asset prices and the diminished role of securitized debt will influence PE buyouts. In this turmoil, there is also the dilemma that what constitutes “change in material terms” that might trigger a break-up fee (a charge on the seller if he walks away from the deal before it is closed). Could that be a 10% drop in earnings? How about reverse (a charge on the buyer) break-up fee? Well, those are some of the issues the industry (and some Courts) is now wrestling with.

So it calls for PE firms to build up in-house operating expertise besides fundraising skills. Return to fundamentals would mean facilitating exits through walking with portfolio firms during times of distress, handholding managements to weather market cycles and help consolidate market share and preserve earnings growth. Leveraged buyout / taking private financing will give way to operational financing that helps companies ride out short term liquidity imbalances.

When PE firms came to India, initially they were mostly IT/Telecom focused. Then the sector became over crowded and their focus blurred and soon they embraced sector agnosticism. Now it is the same PE firm that invests in IT, Real Estate, Aviation, Financial Services, Gems & Jewellery and Pharmaceuticals. My question - will they continue to look like lean, chic fund houses (operating from boutique hotels), with just one or two General Partners and a few analysts (sharing the fees and carry) or soon will they resemble a barrel chested, square jawed corporation from outside, sweating it out all the more?

Significantly more meaningful work than having to just spend hours shuffling management deck or reading research reports ;)

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