Friday, October 10, 2008

Housing Crisis: Begining of the end or the end of the begining?







If history has to be believed, we are in the recession/mortgage crisis for another year or two. One of the reports published by IMF today suggests, even though correction in house prices has started, it is still far from "bottomed-out". Solace is in the fact that correction is happening since last 18 months and it should be mid-way through soon. If the interpretation is correct, $700 billion bailout is not going to be of much help. It may save some companies on the wallstreet but for some families this winter is going to be harsh.

Original Report & a video on youtube explaining the situation in detail:

Video: http://www.youtube.com/watch?v=KgxiakcCfvc

News Story: http://www.imf.org/external/pubs/ft/survey/so/2008/NUM100808A.htm

Tuesday, September 23, 2008

Wall Street Meltdown: Just 26 or more?

As predicted in an earlier post on this blog, there are more firms involved. Initial report says 26 firms are under FBI investigation. Should there be more? "Speculation" is, yes!

Read the detailed story:

http://money.cnn.com/2008/09/23/news/companies/fbi_finance/index.htm?cnn=yes

Wall Street Meltdown: What we know and what we dont?

Facts of the matter are:

  • Lot of Americans have lost a sizable chunk of their retirement savings and they are really mad and concerned about this whole fiasco
  • The remaining two investment banks, Goldman Sachs & Morgan Stanley have lost their investment bank status and have been 'regularized'. Yes, they will have to start accepting deposits. Probably, they were forced to request a change in their status by the Fed.
  • Replicans and Democrats together(really?) are trying to finalize the details of the biggest bailout in the history
  • Value of investments in US by China, UAE & India have been wiped-out, almost

While possibilities exist that:

  • There are many more skeletons hidden in the Wall Street closet
  • Availability of capital in future will be scarce
  • If we do not see too many foreign countries helping with the bailout, that will signal that even after the meltdown, assets are overvalued. And that will be bad news!!! Need to dig further; why Germany said no to participate in the bailout?
  • As the capital will flow to foreign markets increasing the supply, it will decrease the threshold for even more projects in those markets. Majority of the capital would still be attracted by US owned businesses in BRIC or VISTA countries. Meaning? Buying the stocks of those companies which have global presence may present a money-making opportunity. Now, why is the bailout necessary?

Monday, September 22, 2008

Wall Street Meltdown: 2003 taxcuts are to be blamed?

Investment Banks knew that it was coming in 2008. How? Look at the systematic increase in the "Dividends Paid", in last few years, by the banks which failed/got bought out: Bear Stearns, Lehman Brothers, Merrill Lynch etc. Their financial statements tell the story. What does that really mean? Well, this is what economists call a classic Principal-Agent problem. As part of 2003 tax-cuts, one of the important change was, reduction in the tax rates on both dividends and capital gains. That gave incentives to all the CEOs to find means and ways to increase dividend payments. Dividend payments, of course, are dependent on revenues generated, meaning, to increase dividend payments revenue needs to be increased( Afterall, you should be able to justify, if you plan to play your game for few years). This is a triple whammy, on one side you need to increase the revenue so you can justify increased dividends, on the other side, less capital is available for next year because of cash being paid as dividends which could have been otherwise invested to generate more revenue in future. Apart from that, since you have less capital available to invest, you will take more debt to fund future investments.

As more and more dividends were paid, people looked for more and more ways to generate even higher revenues, of course, taking more and more debt along the way. With-in a few years, what you have is a huge number of companies on Wall Street with high debts and lower valuations. Question can be, why some companies failed earlier than others? Well, it really depends upon how fast they increased the size of debt in their pie of capital structure. Mortgage crisis was partially the result of this game, and ultimately helped in expediting the fallout. Why investment banks first? Because they can really take much-much more debt than other companies, so its not a surprise that the phenomena started with investment banks. Are there other sectors involved? I believe the answer is a big YES! Isn't that supported by the big figure of $700 billion? Well, they are trying to stagger it so that it doesn't look as bad, otherwise it is $1 trillion. Now the biggest question, why 2008? Well, think! the compromise to reduce the tax on dividends and capital gains to 15% is set to expire in 2008. Again, why 2008? Well, that is left to your imagination. For the time being, the world has a huge mess to deal with.

References:

Preliminary proof of this phenomena:
http://elsa.berkeley.edu/~saez/chetty-saezAEA06.pdf

Economists were concerned about it:
http://www.heritage.org/research/taxes/wm594.cfm



Disclaimer: I really dont know if this is the true reason. I would not have been sitting here writing this blog, if that would have been the case. So, use your own judgement! :-)

Sunday, August 24, 2008

Company Valuation: The Best Multiple

Ever wondered, while doing company valuation using multiples, which multiple to use? As per a study which analyzed historical data, the multiple of Enterprise Value to Total Assets is the winner! Which is not surprising, as in the past, the total assets owned by a firm were a key value driver. Is it going to be true even in future? Doesn't seem like! As an economy becomes more and more service oriented, for the firms involved, total assets will become less and less important to valuation. Will it be the case for every firm? No. Will it be true for majority? Yes. So which multiple will win this race? Dont get surprised if the winner will be the ratio of Enterprise Value to OIBD (Operating Income Before Depreciation). OIBD is better than its frequently used cousin EBITDA because, it is less susceptible to one time fluctuations in net income.

Happy Valuation!

Monday, July 14, 2008

The Ladders - Job board with a difference!

The news is, one of the Harvard professor has written a case on The Ladders, a job board for which both recruiters and the applicants pay a fee. What is the difference? How The Ladders did what Monster, Dice, Careerbuilder and other free job boards could not do? Answer is simple, The Ladders moved up the value chain by adopting the strategy of differentiation! They post only 100K + jobs. A rigorous validation process ensures that only the "high quality" jobs are posted on the board.

Change the paradigm, beat the competition by moving up the value chain!

Disclaimer: The only affiliation I have with The Ladders is, I was its customer once.

Wednesday, July 2, 2008

Starbucks closing 600 stores in the US

Starbucks is doing what was suggested in my earlier post. Refer to the post, "What startbucks can do?" on the same blog. Although it is a step in the right direction, they need to do more. Read the original blog for details. Strategy is right as the stock market reacted positively to the news.

Original post:

http://managementchitchat.blogspot.com/2008/02/what-starbucks-can-do.html

Monday, June 30, 2008

Bush names SBA chief - or is it a strategic move for upcoming elections?

When my economics professor was teaching Game Theory last year, I was not aware that that knowledge can help explain political moves too. What do you think about the latest naming of Sandy Baruah as SBA chief? A president who is blamed for not taking care of small businesses in last 7 years, will he do something to help them now? Well, even I dont know the real reason, but here is something that may make sense:

1. Sandy Baruah is an Indian-American
2. In the past Indian-Americans have generally supported democrats. Even this time Obama is supposed to get majority of those votes
3. In the Democrats controlled congress, Democrats will face the tough choice of supporting or not supporting the nomination of Sandy Baruah as SBA chief.
4. If Democrats do support Sandy's nomination, because Republicans nominated Sandy, they will gain some popularity among Indian-American voters which should help in the upcoming elections.
5. If Democrats dont support Sandy's nomination, Republicans got what they wanted, yeah, some more votes from Indian-Americans.


Bottomline, I am not sure whether this move is good or bad for small businesses, but it looks like a great strategic move for Republican party. They are set to gain either way.

Do you still think it was about small businesses?

Tuesday, April 29, 2008

50 satellites and counting...

No business discussion is possible these days without bringing India and China into the discussion in terms of effect of or on one of the two countries. Latest increase in coverage of the business happenings in India and China confirms the viewpoint. Yesterday's story was amazing! India successfully launched 10 satellites with one rocket. One one side it proves the technical provess of the country, on the other side it is interesting to find out that 8 of the 10 satellites launched belonged to countries like Canada, Japan, Germany etc. And India changed $6 million for one, that is $48 million straight!

It is not a new news that launching sattelites is becoming a lucrative market. But there are very few countries who have the launching capability. India has the cost advantages on its side as it has ample supply of "cheap labor" which can successfully design and launch satellites. Isn't the last statement self-contradictory? Cheap labor and satellite design seems like opposite ends of a pole. What's bringing them together in case of India? Looks like soon the discussions on blogs will replace "cheap labor" with "highly educated work force". It will be interesting to see how the story unfolds after the already proven trackrecords in IT, Space Technology, and Bio-Technology. What's next?

Wednesday, April 23, 2008

Leadership, Strategy and Change Management

Keep watching this blog for entries on Leadership, Strategy and Change Management. Leadership is one area which is highly talked about in today's corporate world but very little understood. Right strategy and effective change management are the key to 'enabling' leadership.

When a stock goes up...the 22 rule

As an investor what should you do when a stock goes up by 8-10% of its value? Look at the timing. If it happened 4 days before a major announcement is expected, buy it. Watch it for 2 days(inclusive of the day you bought the stock), if the value still goes up, hold it, if the value goes down even by 2%, sell it.

How do I know? I really dont know. Please do not share this rule with anyone else.

Disclaimer: Use the information on this blog at your own risk.

Saturday, April 12, 2008

Quick Response IT - frustrated Business and IT managers are you listening?

Quick Response Information Technology, yes! that's it! That is the solution to the problems currently faced by Business and IT managers all over the world. Let me elaborate on the concept before I go bragging about it :)

I was going through Zara's case, yes the fashion apparel company, learning how its supply chain works at the lightning speed bringing new fashion to the market in less than 10 days! Zara uses Lean and JIT concepts to manage its supplychain starting right from its design process. And then it struck to me that this concept is so much applicable to IT function of an organization too.

Imagine you have 10 project managers working on 3 projects each. Each team these project managers have have some shared resources, say the Business Analysts and the Architects. Since in majority of the big corporations IT organizations dont do a good job of 'line balancing' which people on shoop floor does, atleast since the TOC became popular, these business analysts and architects become 'bottlenecks'. Does that sounds familiar? On top of that these bottlenecks deal with changin priorities and the end result is a total mess. Business managers complain that IT is not delivering what was promised on time and IT managers complain about changing priorities and insufficient resources at their disposal. This situation along with the game of fingerpointing continues for years. Is there no hope?

Quick Response IT (QRIT) has just that to offer. Using Lean concepts IT managers can create balanced lines of resources to work on projects. Business managers need to put 10 projects on the plate in place of 30. With the right implementation this arrangement will be cranking much more projects than what is possible through the regular arrangements.

Putting this in terms of numbers makes it even more interesting. For majority of IT projects, say business expects $100,000 of savings per month. Delaying such a project by 6 months has impacted the company's bottomline by $600,000 straight, simple concept of opportunity cost. So speed is really very very important, YES! EVEN FOR IT PROJECTS :) So imagine what QRIT could do for you? I understand, you may be skeptical a little bit... let me assure you, it will work. It is counter-intuitive but it is true, IT operations and not much different from floor operations, fundamentally. Have you started thinking about your first 'monument' already?

Sunday, March 9, 2008

Why Business School?

This sounds like an old topic but every potential MBA student still asks this question. Why business school? What I am going to get out of it? I have some friends who believe a business school will teach them great tools which they will be able to apply immediately in the real business world. Well, this is true, but, is that it? Some say, you can find all these tools in books like "MBA in 21 days", so why business school? Basic concepts like Marginal Analysis are getting published since 1954 or earlier, but as one of my professor said, people in the real business world still dont get it or the usage is limited to a few. Ok, the point is well taken. A Business school can teach you 1091 different tools which will have applicability in the real business world, but, which one to use? When? In response business schools increased the amount of case based study. A step in the right direction, but these cases are far from real world situations. What are you going to do when you will face those 'moments of truth?' When there will be no case at point, only reality and you? Which tool will you use? Is there one single tool to find the right tool among those 1091?


There is. Its called intuition. Perhaps, business school helps in refining the intuition. Perhaps, those cases in a way provide an opportunity to utilize that one tool and reduce its 'crudeness'.


BTW, 1091 is just an arbitrary number.

Friday, February 29, 2008

Overloaded Star Performer

How many of us did get their performance targets moved-up as part of the last appraisal? Undoubtedly, all of us. How has that impacted our drive to achieve the new stretch targets? If you had put X amount of your ability(for the lack of one single factor) and T hours last year to achieve previous target, these are the options you have for this year:

I) X+ Delta(X) Ability and T hours
II) X Ability and T+ Delta(T) hours
III)X+ Delta(X) Ability and T + Delta(T) hours
IV) X Ability and T hours - Missed the target!


Among the four options, IVth is dangerous for your career and IInd and IIIrd will create stress. If you are really smart, you will go for option I. You will still be able to spend the same amount of time, as you did last year, with your family, at the golf course or wherever you like to spend those extra hours(?). But its not easy!
How many people could actually do that?

A recent article in Harvard Business Review titled, "Manage your energy, not your time" touches on the exact same points. Its not that the message is new but the use of term "energy" is actually very interesting since it is fundamental to whatever happens in our universe or beyond. Question is, how energy is tied to your ability to do something? One way to define ability is, trained energy. Its like switching on a light bulb. You know electrical energy is there and once switched on it will result in lighting the bulb.

Manging energy is the key. It is different from managing physical health. It has more to do with mind than body. Yes, a healthy mind lives in a health body, but healthy body doesn't necessarily guarantees healthy mind. Why? What else is needed?The answer may help you ace the common job interview question,"what keeps you going?"

More in subsequent posts...

Wednesday, February 27, 2008

What Starbucks can do?

Ok. The whole world now knows that Starbucks is having issues in managing its growth. Yesterday's shutdown of stores for few hours for re-training employees proves the fact that company understands the challenges it is facing. First one is, "How to make good coffee?" Wasn't it surprising for Starbucks which is supposed to be selling "Coffee Experience" ? Or it is acceptance of the fact that the unprecented growth Starbucks had in last few years impacted both, the quality of the coffee and the experience? How Starbucks is going to respond to the recent threat from McDonald's coffee? Was the company right in experimenting with $1 a short-cup of coffee? What kind of signal it sends to its customers and competitors? How stock analysts and investors are going to view it?

Lets see if we can explain this situation with a "new" performance measure called "GPAIPAD". This measure was the result of serendipity while valuing another company of similar business structure. This will be explained in more details in future posts. The measure shows that as of 30th Sep'07 the company is leaving 39 cents per dollar of investment in Assets to cover operating expenses, other than interest expenses. The same measure was 41 cents per Asset Dollar in 2006. In a way, it equates to Return on Assets Starbucks is producing per store. The same measure shows GPAIPAD of 27 cents for McDonald's. But the stock price of McDonald's is way above than Starbuck's. So what is the difference? Difference is, the future outlook. There is something which McDonald's is doing right but Starbucks is not. What is that?

Starbucks really need to get back to its original strategy of Operational Excellence and Customer Intimacy. It is the "experience" piece it needs to work upon. Copying a product and selling it at a lesser price is easy, copying an experience is not. Defining exactly what "Starbucks experience" means may be a good starting point and go from there. Things as simple as giving discounts to groups can be very effective. Isn't that what Starbucks should be really after? Group Experience! How nice... Look at this line in Starbuck's mission statement,"Contribute positively to our communities and our environment". Try to answer how Starbucks can contribute positively to communities? Isn't a group discount an obvious thing? Why just discount, shift your focus to providing a great experience to groups. Understand that, bad economy means less individual customers...but ...same number of groups, because groups tend to stay together, have discussions, both about good and bad things. Think, what may encourage groups to come to Starbucks? Casual meetings? Enahance the experience of those. Think, what may discourage groups to come to Starbucks or reduce the number of members in a group? Unavailability of health drinks? Provide those. May be, create new health drinks. Be inclusive while being exclusive! Its like providing one veggie meal option at a Sushi restaurant.

Increasing per store contribution will be the key to success of Starbucks. Lets see how the story unfolds.

Sunday, February 24, 2008

Executive MBA Pros and Cons

As more and more companies are realizing the value of MBA, experienced managers who do not have an MBA are flocking business schools to get a degree. The biggest questions these managers face while deciding on an executive MBA program are:

Is it worth the time and effort?
Top business schools vs the closest school available?
Stop-buy-fly EMBA programs versus the "full-time" EMBA programs?
Learning opportunity versus networking opportunity or both?
Return on Invested Capital?

Here are some great information resources which may help prospective candidates:

http://www.emba.org/index.htm

http://www.embaworld.com/