Blog 8:Risks in making investment decisions

There are a wide range of factors need to be considered by companies if they want to invest in a specific business project. Indeed, apart of some financial indicators, other investment appraisal tools like NPV, IRR, ARR and payback period need to be taken into consideration. These tools can be divided into two groups; NPV and IRR have already considered time value, while ARR and payback period are not. After analyzed all these four factors, NPV is the one which owns the biggest popularities. The reason to this fact is primarily due to NPV’s goals, as it has the same goals of companies, which is maximizing shareholder wealth. However, should managers only concentrate on NPV but ignore other factors when doing investments? Absolutely not!

The failure investment in Microsoft by Nokia is a typical example. As I have already explained such investment in blog2, which I have estimated that

Nokia’s share price may increase due to these two technical giants’ merge. However, an astonished fell of 14% in Nokia’s share price have occurred after Stephen Elop announced the deal (Financial News, 2011). It seems that both Stephen Elop and I have underestimated the potential risks behind this investment. According to Nokia’s estimation on their return in this investment, their market ratio will reach 18 times and payback period are estimated as 3 years (BBC News, 2011). Ironically, let alone those unreliable figures, Nokia even don’t get the basic exclusive right to using Microsoft’s operating system and they are still required to pay royalties to use it. Hence, Nokia have already been regarded as the biggest looser in this investment deal. From my opinion of view, it is unwise for managers to isolate financial figures and investment appraisal tools alone when they make investment, as there are still so many potential risks need to taking into consideration. More specifically, those financial assessment are taken from uncertain estimation, what was worse, people are more likely to transfer those unreliable data into evaluators on their investments. However, those data’s feasibility only builds on some certain assumptions but ignore some practical business performance like whether it can create synergies or not.   

    

Blog7 Chinese companies are less influenced by credit crunch

 Credit crunch are regarded as a worldwide financial fiasco in 2008. People always related terms like sub-prime mortgages, CDO and credit rating with credit crunch. Now let me give a brief introduction about what are these terms mean and the reason to why Chinese companies didn’t suffer such a big lost during this crisis compared with US and other European companies.

Credit crisis is caused by two groups of people, the first is house owners which refer to their mortgages, and the other is investors like pension funds and investment banks. Here is how it works: a family who wants for a house should save money for their down-payments and contact the mortgages broker, then the broker will contact a lender who provide mortgage, hence family own a house after they received the mortgage. This is great for families as the price of house will rise forever. But how can the lender get money? They will sell those mortgages to investment banks; this means that every month investment banks will receive the payment from those house owners. Investment banks packed those mortgages into a box know as collateralized debt obligations (CDO), which will be divided into safe, OK and risky apartments based on their credit ratings. And then investment banks sell the safest CDO to the investors who only want safe investments. Therefore, those investors make a big fortune form these CDO and they ask the lender for more mortgages, but the worse thing is lends can’t find any home owners. Therefore, in order to find home owners, lenders changed their requirements which is people who need house do not require to pay down-payments and no proof of documents at all; the only thing they need to do is pay mortgages monthly. So instead of lending to responsible home owners, they choose sub-prime mortgages. This is the turning point; those sub-prime mortgages defraud their mortgages. What was worst, investment banks have no money to pay for those investors. That is why there are so many investment banks like Lehman Brothers announced bankruptcy at that moment.

But why Chinese companies seem did not seriously affected by this serve crisis? This can be due to government’s bail-out policies. Actually, the policy used by Chinese government is in the same theory of “Keynesian” (BBC News, 2010). This theory is mainly about teaching you how to spend money. It reminds me thinking about a metaphor: Chinese government spend 100 RMB to employ ten people dig a hole, while they spend another 100 RMB to employ other ten people fill out that hole. It sounds strange, isn’t it? Some people may think this is a waste of money. But are you ever consider the subsequent influence of using these amounts of money? People who gain money from government can buy bread for themselves, which will protect those bread factories from bankruptcy, and protect factories which made bread machines against bankruptcy as well. In reality, Chinese government spends more than four trillion RMB to protect companies from bankruptcy in that serious credit crisis. These amounts of money are used to construct railway and highway during credit crisis; it is not only benefit for the public afterwards but also stimulates the whole production sectors.        

Blog 6: Whose shareholder is the biggest beneficiary? The Bidder or the Target?

The world’s market seems saturated with consolidations recently, after D Borse announced to merging with NYSE, a consolidation between LSE and TMX in Toronto has began, together with cooperation between News Corporation and BSkyB. From these merges talked above, it is easily for people identify that almost all the merges and acquisitions occurred in the same sector. This is primarily due to their shareholders unwilling to buy shares from a different industry. Indeed, it is reasonable for thinking that every company runs their business in the interests of shareholders. However, people maybe question about who is the biggest beneficiary among these merges?

We are instilled about the concept that shareholders in the target company will be the biggest beneficiary, in that their company always has been bought with a high price, hence they can enjoy the share premium. A classic example is the merge between D Borse and NYSE recently. After this merge, D Borse shareholders holding 60 percent in a new company, while NYSE shareholders holding 40 percent. However, in order to acquire NYSE, D Borse gave a 10 percent share premium to NYSE (Financial Times). It seems that share premium act as a lure to attract target companies agree with the merge. However, put this fact alone, not all target shareholders are the beneficiary. Occasionally, merges and acquisitions may fall into a destructive situation. It is possible for companies choose merges because they have no choice or run out of ways to grow “organically”, David Lis, head of UK equities with Aviva Investors, says that “when companies want to keep the wolf from the door, the only choice for them is to have a friend”. If the target company merge with the acquirer in this situation, it is possible for them to be lost in a severe business environment. The acquisition between News Corporation and BSkyB is a typical example. As a rule of thumbs, News Corporation’s proposed bid for BSkyB is good for News Corp. After a scandal of “phone hacking” in News Corp last month, this company’s share price are serious been affected and set back Murdoch’s effort to takeover the full ownership of BSkyB. However, from BSkyB shareholder’s perspective, News Corp’s original bidding price of 700 pence per share turns out an underestimation of BSkyB’s share price (820 pence). Even though the final bidding price is 800 pence a share, it seems that BSkyB shareholders acted as a looser in this acquisition. Moreover, from BSkyB employees’ perspective, the merge still like a disaster for them, as BBC reported that Murdoch fired editors from “The Times” and “Wall Street Journal” after he acquired those newspapers, ironically, Murdoch even promise that he will remain editors’ independence before the merge. Hence, no one can guarantee that Murdoch will keep all of BSkyB employees even though he find his company no longer need those employees in synergy.

References:

http://www.reuters.com/article/2011/02/15/nyse-deutscheboerse-idUSWEN777320110215

http://www.ftchinese.com/story/001036883/en

Blog5: Country's agreement and disagreement on FDI

Foreign direct investment (FDI) enjoys more popularity recently. It focus on investment around the whole world, there are three main formats to explain FDI. First of all, one domestic country invest money in build factories and land aboard, which is also called “Greenfield Investment”. Secondly, companies taking a majority of a foreign company’s shares, hence, control that company. Last but not least, companies reinvest their profits, which gained from the original direct investment, into the same foreign company.

One of the successful FDI case recently is from Europe’s cross-border fund industry. Figures from the European Fund and Asset Management Association show that their assets under management of the Greek fund industry decreased by two-thirds during last five years. However, Europe’s cross-border fund industry, whose large foreign investment in Luxembourg, experienced a significant rise on its assets (Financial Times). The reason to this prosperous foreign investment may primarily due to the low cost for running business in those developing countries, for companies need to switch their focus from technology monopoly to products’ low price when it comes to a mature stage during Product Life Cycle. However, with an increase number of FDI, local government becomes worried about their financial resources. Italy government began modify their tax legislation, which reduced their tax rate to the same level with cross-border ones, in an attempt to stop the outflow (Financial Times). Honestly, I don’t think it will help local government to reduce FDI. Indeed, people could be forgiven for thinking that companies in Italy choose doing business aboard because of its high tax rate in its own country. However, if companies’ main market is in aboard, therefore, the main reason for them to do FDI may not rely on tax rate, as a rule thumbs; it is the high cost on transportation and impediments on export that let companies domiciled in another country. Hence, it is advisable for Italian government to reduce its cost on transportation especially on those products with low-profits but need to charge a high transportation cost. Moreover, in order to reduce the FDI as Italy wish, the essential part is to stimulate export policy, one of the main reason to companies prefer FDI is they want direct control of their foreign subsidiaries instead of franchise their operations to overseas companies, after gain the direct control on aboard, they will earn a high priority in the foreign competitive market. However, if Italy government release their export policies, like reduce tariffs. Is it seems much better for companies to do business within their home country than going aboard?