Tag: investment

You can’t buy cool

Yahoo!’s purchase of Tumblr in the pursuit of ‘cool’ is the latest example of Silicon Valley’s greater fool business model.

In many ways it was Yahoo! who pioneered Silicon Valley’s Greater Fool Business Model during the dot com boom of the late 1990s.

The Greater Fool model involves hyping a website, online service or new technology in the hope a hapless corporation dazzled by the spin will buy the business for an improbably large amount.

Fifteen years later many of those services are closed down or languishing and the founders who were gifted millions of dollars by gullible boards and shareholders have moved on to other pursuits.

The news that Yahoo! has sealed a deal to buy blogging site Tumblr for $1.1 billion dollars shows the company’s urge to buy in success remains under new CEO Marissa Mayer.

It’s difficult to see exactly what Tumblr adds to Yahoo!’s wide range of online properties except a young audience – exactly the reasoning that saw News Corporation’s disastrous investment in MySpace.

What’s particularly concerning is a comment made by Yahoo!’s CFO Ken Goldman at JP Morgan’s Global Technology Conference last week.

“So we’re working hard to get some of the younger folks,” Goldman said on a webcast from the J.P. Morgan Global Technology conference in Boston.

It’s all about trying to “make us cool again,” he said, adding that Yahoo will focus on content that’s “more relevant to that age bracket.”

So they are spending a billion dollars to “make us cool again” – it’s disappointing Marissa Mayer has allowed middle aged male executives to run free with the shareholders’ chequebook in a quest to rediscover their youth.

Like most middle aged life crises, it’s unlikely to end well.

For Tumblr’s founders and investors things have ended well. It’s time to buy those yachts and fast cars those middle aged execs covet.

In the meantime the quest for internet ‘cool’ – whatever that is – will move onto whatever online service teenagers and twenty somethings are using.

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Snapping out of Australia’s China Dreamtime

China analyst Patrick Chavonec has a wake up call for Australia’s business and political leaders

Australia’s leaders need to snap out of their China dreamland analyst Patrick Chovanec told the Australian Davos Connection’s China Forum two weeks ago.

What triggered this comment was a speech by Australian Treasurer Wayne Swan to the Financial Services Council in Sydney last September where the Treasurer compared China’s economic performance to sprinter Usain Bolt;

It’s like Usain Bolt easing off a bit at the end of the 100 meters because he’s 10 meters in front and has already smashed the world record.

“My response was that if that’s the way Australia’s leaders are thinking about China’s economy, if that’s the dreamland that they are in, then they need to snap out of it really fast,” Chovanec said in his keynote.

“Because China is facing a very serious and potentially disruptive economic adjustment. A realistic idea of where this adjustment is going is essential to countries like Australia.”

Chovanec’s view is that China cannot sustain current growth rates by “providing the fodder of the consumerist economy.”

This was borne out in the Global Financial Crises where exports fell from 8% of GDP to 2%. To make up for the drop the PRC government stimulated the economy and investment went 42% of the economy to half.

It was this stimulus that drove the soaring commodity prices in recent years and underpins the Blue Sky Vision of Australia’s political and business leaders.

The establishment view is that China will move from infrastructure spending driving the economy to a consumption driven society.

Moving to a consumption driven economy though means a very different Chinese society which means a different group of winners and losers, Chovanec warns.

He also doesn’t see urbanisation as the real driver of the Chinese economy, “If you look around the world, urbanisation has not always driven economic growth.”

“It’s based on a premise that moving people from a rural environment to an urban environment generates productivity gains.”

“Now for China over the past thirty years that has proven largely true,” says Chavonec, “but going forward most of that hanging fruit has been picked.”

“In order to realise productivity gains, China is going to have to discover new areas of competitive advantage.”

The biggest risk that Chovanec sees at present though is the level of bad debts in the economy and the rate of credit expansion with a trillion dollars pumped into the Chinese economy over the last quarter.

“You’re getting less and less bang for the buck from credit expansion.”

Chovanec doesn’t see China’s future as bleak though, “the China growth story doesn’t have to be over.”

“There are a lot of sectors in China where there’s real potential for true productivity gains – agricultural, logistics, health car, services, consumer branding, retail.”

“The challenge for China is not that the growth story is over but the engine of that growth story is going to have to change.”

Dealing with those changes is also a challenge for countries like Australia who have staked all on the current growth story.

Chovanec’s wake up call to Australia’s leaders is timely – the question is how quickly they can wake up to the changes in China.

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Doing social media right

Whoever runs your social media feed is an official spokesman, it’s important to choose the right person and give them authority.

After last week’s Associated Press hack and the stock exchange fallout, regulators are struggling with implications of social media and informed markets.

In a speech delivered last week the Australian Securities and Investments Commission’s Deputy Chair Belinda Gibson and Commissioner John Price gave some refreshing commonsense views on how businesses should handle public information.

The continuous disclosure advice given by Price and Gibson is aimed at meeting the requirements of Australian corporate law, but it’s actually good social media advice.

  • Having delegations in place for who has authority to speak on behalf of the company – whether in response to an ASX ‘price query’ or ‘aware’ letter, or when they become aware of information that needs to be released to the market, perhaps in response to speculation.
  • Ensuring that there is a designated contact person to liaise with the ASX, who has the requisite organisational knowledge and is contactable by ASX.
  • Have a clear rapid response plan and ensure all board members and senior executives are fully appraised of it. Give it a practice run every so often – a stress test of sorts.
  • Have a plan for when you will consider a trading halt appropriate.
  • Have a ‘Request for trading halt’ letter template ready for use.
  • Have guidelines for determining what is ‘material’ information for disclosure, tailored to your company.
  • Prepare a draft announcement where you are doing a deal that will
  • likely require an announcement at some time, and a stop-gap one in case of a leak

Having a nominated contact person with requisite organisational knowledge is possibly the most important point for any organisation.

Even if you think social media is just people posting what they had for lunch or sharing cute cat pictures, it isn’t going away and those Twitter feeds and Facebook pages are now considered official communications channels.

The intern running your social media is now your company’s official spokesperson. Are you comfortable with this?

A good example of where this can go wrong is the Australian Prime Minister’s Press Office where an immature staff member has been put in charge of posting messages. The results aren’t pretty.

prime-ministers-office-twitter-feed

The funny thing is the Prime Minister’s office would never dream of some dill getting up and saying this sort of thing on her behalf, yet allows an inexperienced, loose cannon put this sort of material in writing on the public internet.

Here’s Twenty Rules for Politicians using the Internet.

On a more mature level, the ASIC executives also have some good advice on writing for social media.

Don’t assume that the reader is sophisticated or leave readers to read between the lines. Companies need to highlight key information and tell it plainly.
While the ASIC speech is aimed at the specific problems of complying with company law and listing requirements, it’s a worthwhile guide for any organisation needing to manage its online presence.
Don’t be like the Prime Minister’s office, understand that an organisation’s social media presence is an official channel and treat it with the respect it deserves.

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What is a fully informed market?

Controlling how a stock market receives information is becoming a huge task in the modern economy.

Given the stock market movements following last week’s Associated Press Twitter Hack it may be time to reconsider the way exchanges and listed companies share and control information.

One of fundamental principles of modern stock exchanges is that the market is fully informed – that everybody buying or selling security gets access to the same information at the same time.

In an Australian context, this is covered by a term called ‘continuous disclosure’, should a company’s management become aware of any issue that could affect they must advise the market immediately.

What’s interesting with this principle is the way that information needs to be made public, specifically clause 15.7 of the ASX listing rules.

An entity must not release information that is for release to the market to any person until it has given the information to ASX and has received an acknowledgement that ASX has released the information to the market.

This puts the Australian Securities Exchange, a private company with an almost monopoly position in the Australian investment community, in the position of being the ultimate gatekeeper of knowledge.

While there’s good regulatory and probity reasons for having a central clearinghouse – that the clearinghouse itself has some serious conflicts of interest is another matter – one has to wonder how long its position can be retained in a world where information is moving fast.

It may be however that we’re in a passing phase as the financial of the global economy has reached a stage where no stock exchange, futures market or clearinghouse can manage the data that’s flowing through it.

Time will tell, but the markets themselves are finding other ways to inform themselves.

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Why Australia needs foreign ownership

Foreign investment is making up for the lack of Australian interest in local assets.

Such are the vagaries of radio that I’ve been asked to comment on ABC Radio South Australia about foreign ownership based on an article that was picked up by The Drum 14 months ago.

That article was written shortly after Dick Smith came out grumbling about the prospect of Woolworths selling the electronics store chain named after him to foreign interests.

My point at the time was that foreign owners would be preferable to some poorly managed, undercapitalised local buyer as the Australian retail industry – even in a declining market like consumer electronics – needs more innovation and original thinking.

As it turned out, Dick Smith Electronics was sold to Anchorage Capital, a private equity turn around fund with an interesting portfolio of businesses.

In the meantime, the argument about foreign ownership of property and businesses, particularly farms, has ratcheted up as opportunistic politicians and the shock jock peanut gallery that sets much of Australia’s media agenda have found a cheap, jingoistic issue to score points from.

So why is foreign ownership of businesses like farms, mines and factories important for Australia?

A fair price for hard work

The main reason for supporting foreign buyers for Aussie businesses is it gives entrepreneurs a chance to get a fair price for their hard work.

A farmer or factory owner who builds their business shouldn’t have to accept a lower price because Australians don’t want to pay for the asset.

It’s not a matter of being able to pay Australians as have plenty of money to invest – a trillion dollars in superannuation funds and three billion dollars claimed for negative losses in 2009-10 show there’s plenty of money around – it’s just that Aussies don’t want to invest in farming, mining or other productive sectors.

We’re already seeing this play out in the small business sector as baby boomer proprietors find they aren’t going to sell their ventures for what they need to fund their retirement.

Access to capital

Should the protectionists get their way then the businesses and farms will eventually be sold to undercapitalised Australian investors at knock down prices.

This is the worse possible thing that could happen as not only do the entrepreneurs miss out, but also the factories and farms decline as they are starved of capital investment.

Cubby Station

A good example of both the lack of capital affecting investment and finding a fair price for ventures is Queensland’s Cubby Station.

While I personally think Cubby Station is an example of the economic bastardry and environmental vandalism that are the hallmarks of the droolingly incompetent National Party and its corrupt cronies, the venture itself is a good example of why the agriculture sector needs foreign investment.

Having been converted from cattle to cotton in the 1970s, Cubbie grew as successive owners acquired water licenses from surrounding properties.

Eventually the company collapsed under the weight of its debts in 2009 and the property was allowed to run down by the administrators until it was bought by Chinese backed interests at the beginning of 2013.

At the time of the acquisition, the company’s former chairman told The Australian,  “on reflection, I would go into those things with an even stronger balance sheet — in other words, with less gearing.”

In other words, the company was under-capitalised.

Competition concerns

Another reason for encouraging foreign ownership is that Australia has become the Noah’s Ark of business with duopolies dominating most key sectors.

Bringing in foreign owners at least offers the prospect of having alternatives to the comfortable two horse races that dominate most industries.

The property market

An aspect that has excited the peanut shock jocks has been the prospect of Chinese buyers purchasing all the country’s property.

For those of us with memories longer than goldfish, today’s Chinese mania is almost identical to the Japanese buying frenzy of the late 1980s.

Much of what we read about the Chinese buying homes is self serving tosh from property developers and real estate agents and what mania there is will peter out in a similar way to how the Japanese slowly withdrew.

This isn’t to say there shouldn’t be concerns about foreign ownership – tax avoidance, loss of sovereignty and Australia’s small domestic market are all valid questions that should be raised about overseas buyers, but overall much of the hysteria about foreign ownership is misplaced.

What Australians should be asking is why the locals aren’t investing in productive industries or buying mining and farming assets.

The answer almost certainly is that we’d rather stick with the ‘safety’ of the ASX 200 or the residential property market.

We’ve made our choices and we shouldn’t complain when Johnny Foreigner sees opportunities that beyond negative geared investment units or an tax advantaged superannuation fund.

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Australia’s economic Hari-Kari

As the cheap credit era comes to an end, the Australian economy acts as if the party is never going to end.

“The Golden Era of Credit is Now Over” writes Maximillian Walsh in the Australian Financial Review today.

Max’s story relies mainly on the April edition of Bill Goss’ monthly newsletter where the founder of investment firm PIMCO writes about the talents of today’s market wizards;

All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

The credit boom of the last fifty years created many winners – investment bankers, property owners and those who sell things funded by easy finance.

One of the best examples of a fortune made through easy credit is Australia’s Gerry Harvey. Here’s one of Gerry’s ads from 1979.

Hurry into Norman Ross. You can use Bankcard or our easy credit system. You can even use cash!

Three years later Gerry was sacked from the business he founded and he set up Harvey Norman, promising John Walton and Alan Bond “I’m going to beat you.” By the end of the 1980s he had.

Gerry’s success is built on easy credit and the rise of the consumerist economy. From the hire purchase plans of the 1960s, the introduction of credit cards in the 1970s and the banking deregulations of the 1980s, Gerry was able to sell goods to eager consumers who could worry about paying later.

In the 1990s and 2000s a happy coincidence of easy credit and cheap Asian manufacturing – note the prices of electrical goods in that 1979 commercial – saw businesses like Harvey Norman grow exponentially.

Mao promised the Chinese a chicken in every pot, Gerry delivered a plasma TV in every Australian bedroom.

Today, as Bill Goss says, the credit party is over. Last drinks were called with the failure of Lehman Brothers on September 16th, 2008.

However this hasn’t stopped the Aussie economy, as the Sydney Morning Herald reports today Sales growth cheers Gerry Harvey.

In the same edition the SMH reports the government science organisation, the CSIRO, is cutting hundreds of staff. Notable in that article is a comment from the organisation’s CEO;

Dr Clark said more than 2000 companies collaborated with CSIRO but that industries were reducing the amount spent on research.

So at a time when the Australian economy is struggling with the effects of a high currency and exhibiting all the symptoms of the Dutch Disease, consumers are spending more on TVs and sofas while business cuts investment in research and development.

Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold, Australians have a bunch of Harvey Norman branded credit cards for their financial seppuku.

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Should Amazon focus on shareholder returns?

Is Jeff Bezos the digital Nelson Bunker Hunt as Amazon continues to gain value while not making any money?

“Shareholder returns” has the been the mantra for the modern manager – particularly when justifying fat salaries and bonuses.

Amazon though is very different – despite the company’s massive market position it doesn’t make profits, founder Jeff Bezos claims he prefers to focus on customer needs.

On a fundamental level Bezos is right – the business that delivers what customers want will succeed. The market doesn’t give a fig about shareholders’ returns or management’s KPIs.

Although making a profit is helpful.

That Amazon is spectacularly unprofitable should worry shareholders, it’s fair enough for a startup in its early days to incur losses but Bezos’ baby is nearly 20 years old and it still isn’t capable of walking on its own.

Yet this doesn’t deter shareholders. Comparing Amazon’s stock price against Apple’s and Microsoft’s is instructive.

Amazon-Apple-Microsoft-share-price

Microsoft currently trades at a Price/Earnings ratio of 15.8 while Apple’s is 9.7 – Amazon trades at an infinite P/E.

A school of thought is that Amazon will reap monopoly profits once it conquers the world’s online retail and owns a big chunk of the cloud computing market.

However these are big markets and its unlikely any one company can ever dominate them. Indeed Amazon has failed to do so for nearly two decades despite undercutting most competitors and buying out nimble new rivals.

It’s tempting to think of Jeff Bezos being a modern day Nelson Bunker Hunt.

Bunker Hunt and his brother William spent most of the 1970s trying to corner the global silver market. At the peak of their attempt, silver prices went from $11 an ounce in September 1979 to $50 an ounce in January 1980 only to crash back down to $11 by Easter 1980.

The brothers were bankrupt by the end of the 1980s.

It’s doubtful whether Amazon’s shareholders want to follow that example, so it’s going to be interesting to see how long Jeff Bezos can continue to see the story of putting customers before owners.

Image by By The Cuba Company, New Jersey [Public domain], via Wikimedia Commons

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