New Haven - Congress is about to eliminate the legal walls that separate commercial banks, brokerage firms and insurance companies — opening the doors to a new wave of mega-mergers. Critics worry that huge banks will dampen competition and pay less attention to the average customer. But by itself, sheer size — whether in finance or in other industries — should not be a concern. The real problem could be the unchecked political influence of the new global goliaths.

In just the past few years corporate giants have emerged across all industries. Citibank and Travelers, Bank of America and Nationsbank, and Deutsche Bank and Bankers Trust are among the major mergers that have reshaped banking. In other industries, Daimler-Benz has linked up with Chrysler; AT&T with Mediaone; British Petroleum with Amoco; Aetna with Prudential Health. Still awaiting regulatory approval are some of the biggest combinations of all, including those between Exxon and Mobil, MCI Worldcom and Sprint, and Viacom and CBS.

We are likely to see much more of this. For starters, deregulation in Europe, Japan and countries like Brazil and South Korea is leading to many more possibilities for large acquisitions. In the past, a similar wave of mergers would have produced an outcry over mass layoffs, but with unemployment at 30-year lows, few today are complaining. Nor are many alleging today that competition is being eliminated. Because the markets are global, no company is reaching the size and scale that should cause concern about monopolies. If executives can manage these large entities effectively, Americans — in their roles as consumers, investors and even employees — ought to benefit from these new, competitive companies, receiving more and better goods and services at a lower cost.

related/bookmark it

(more…)

Integrating a new acquisition into your business is one of the most daunting challenges any management team can take on, but getting it right is actually quite simple – you just need to learn from your mistakes.

Yet according to research from the Conference Board, too few management teams spend the time to learn what works and what doesn’t when it comes to integrating new businesses, with the result that too many M&As fail to deliver their promised value.

The U.S study echoes a European poll published in March by consultancy Hay Group which suggested that more than nine out of 10 corporate mergers and acquisitions fall short of their objectives because business leaders too often got bogged down with finance and technology issues and fail to spend enough time integrating corporate cultures and management styles.

But management teams that put in place a set, formal process for integrating new acquisitions are much more likely to reap value from their M&As, the Conference Board argue.

Their survey of 86 mergers and acquisitions executives found that documenting and sharing M&A experiences allowed those employees responsible for integrating future acquisitions to learn what worked and what did not.

This simple approach is especially beneficial to “serial acquirers”, or companies that pursued planned, continual growth through M&As and many of these are developing specific management tools help them improve their integration processes.

related/bookmark it

(more…)

By understanding and applying the basic guidelines of Buffett’s investment approach to their own investing decisions, most long term investors can comfortably beat the returns of all but the best mutual fund managers.

Invest in Businesses, Not in Stocks

“Whenever we buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases), we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay.” — Warren Buffett

This is the cornerstone of Buffett’s investment style. Whenever he evaluates an investment opportunity he analyses it as a business and not as a stock. This makes him look closely at the company’s fundamentals, earnings prospects, financial health and management. Conversely, this style of evaluating a business prevents him from buying a stock just because it is going up even though it has dubious prospects. A lot of investors tend to buy stocks based on tips from friends, acquaintances or brokers. By adopting Buffett’s approach, you can save yourself a lot of grief later on.

Only Buy Businesses that You Understand

“Did we foresee thirty years ago what would transpire in the television manufacturing or computer industries? Of course not. Why, then, should Charlie and I now think we can predict the future of other rapidly evolving business? We’ll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?” — Warren Buffett

Buffett has a track record of generating 21 per cent annually compounded returns over a 50-year time frame, a feat matched by very few investment managers. Though technology companies delivered some of the best returns during this period, Buffet has never owned one for the simple reason that he could not understand the long term prospects of these companies and evaluate them thoroughly. So the next time you get a tip to buy a “hot” company that you do not understand, you should ask yourself: “If the greatest investor in the world will not invest in something he doesn’t understand, should I?”

Buy Companies with Defensible ‘Franchise’

“As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: ‘Competition may prove hazardous to human wealth’.” — Warren Buffett

Most of Buffett’s portfolio companies, such as Coca Cola, Gillette (now Procter and Gamble), American Express and Washington Post, are businesses which have a significant hold over their market. This is because they have inherent competitive advantages, whether it be a highly recognizable brand, or near-monopoly status in a geographic area. Such companies can typically raise their prices without fear that customers will walk away. This in turn produces fantastic earnings growth and, consequently, great investment performance. So, before you make an investment in future, try to understand whether the company you are investing in has a strong and defensible market position and whether it can raise prices if it needs to.

Hold for the Long Term

“We are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate . . . we do not sell our holdings just because they have appreciated or because we have held them for a long time.” � Warren Buffett

Buffett’s companies have generated enormous returns for him. For example, his investment of $10 million in 1973 in the Washington Post Company had grown to more than $1 billion by 2003. While a lot of us may be able to do this occasionally, Buffett has generated such returns with startling regularity. One of the reasons he is able to do so is because he holds for the long term and is not quick to enter or exit businesses. In fact, he stuck with WPC for two years even though its price fell below his purchase price because he understood the fundamentals of the business and believed that it was undervalued. Even once it became profitable, he was not quick to exit because he believed that it had greater potential. He held it through several bull and bear markets and no greater proof is needed than the return he achieved to show that he was right in holding it for so long.

related/bookmark it/readit

(more…)

The rupee hit a nine-year high of Rs39.875 against the US dollar on Thursday, breaching a psychological barrier of Rs40, fuelling government concerns about India’s continued ability to export and the potential to hurt key sunrise sectors, such as technology services.
So far this year, the rupee has gained 9.7% against the dollar, rising a hefty 67 paise in just the past three days after Thursday’s 32 paise rise. The last time the rupee was under Rs40 was on 13 May 1998, when it had ended at Rs39.85 to a dollar.

After the US Federal Reserve cut US interest rates by 50 basis points, causing the Bombay Stock Exchange’s Sensex to break through the 16,000 mark on Wednesday—it gained 25 points to reach 16,347.95 on Thursday—expectations of higher capital flow into India have surged.

The interest rate differential between Indian rates and those prevailing in the US, of around 300 basis points, is also providing an arbitrage opportunity, triggering a further step-up in foreign inflows.

“This is a new situation and needs a new response,” said commerce minister Kamal Nath. “Export is the engine of growth and we have to ensure that growth is not affected. We are going to look at it immediately.”

Nath had previously indicated that the $160 billion (Rs6.4 trillion) export target for the current fiscal may have to be scaled down.

Despite the Sensex’s rise, shares of sofware and tech services exporting companies fell as investors bailed out of companies such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Technologies Ltd.

Exporters have already been complaining that the rising rupee was eroding their margins, especially in some traditional services such as gems and jewellery and textiles, as well as new growth segments such as software services.

“It does impact our margins. It will be felt in the subsequent quarters,” said R. Rajesh Ramaiah, corporate treasurer for Wipro, India’s third largest information technology firm by revenue. According to him, Wipro had covered for fluctuations of the rupee against the dollar, the currency it bills many of its customers in, for the second quarter to September, but would see margins affected with the Indian currency dropping below Rs40.

Indraneel Ganguli, vice-president, global marketing and communications, Satyam Computer Services Ltd, said the rupee appreciation would not have a significant impact on the company’s financials since it has been efficiently hedging its dollar earnings.

related/bookmark it

(more…)

MUMBAI: Stock markets on Wednesday gave a thumbs up to the decision of the U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark 30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at 16322.75. By staying well above the 16000-mark, it outperformed most Asian peers and it was the biggest single day gain.

Manika Premsingh, Economist, Edelweiss Capital, said the move by the U.S. Fed chief itself was a bit of a surprise. The street was expecting a 25-basis point cut. The 50-basis point cut was, therefore, a surprise for the market. The Dow reacted sharply as soon as the announcement of the rate cut. Global markets were firm due to this event as well. India was no exception to this, Ms. Premsingh added.

On the National Stock Exchange (NSE), the 50-share Nifty was up by 186.15 points or 4.09 per cent at 4732.35. The BSE Realty Index was one of the biggest gainers. It opened at 8188.73 and touched an intra-day high of 8491.49 to close the day at 8464.54, up 461.43 points or 5.77 per cent from its previous close of 8003.11. It touched an intra-day low of 8188.73.

“Given strong inflow of fund from foreign institutional investors (FIIs) and India’s inherent economic strength, further cuts by the U.S. Fed will only positive for Indian markets,” Ms. Premsingh said. According to her, these developments prove three points: it suggests to the market that U.S. Fed is to address the liquidity crisis if it should occur; it implies that the U.S. may not slow down as much as implied by the recent correction in the housing market and the U.S. Fed is fighting recessionary risks to the economy: and it becomes cheaper to borrow from the U.S. and invest in emerging markets.

PTI reports:

The rally was so strong that all sectorial indices led by realty, banking and oil and gas ended with a sharp surge.

Marketmen said the rate cut might compel foreign investors to invest in high yielding assets in emerging markets such as India and China.

“It is a milestone indeed, but considering the way the market has gained the last 600-800 points, it makes us believe that something is wrong somewhere,” Arun Kejriwal of Kejriwal Research and Investment Services (KRIS) told PTI.

This trend shows that global cues had an influential effect on our market. “We should be growing on our own strength,” Mr. Kejriwal cautioned, adding that the “sub-prime issue is not resolved, not sorted out, it has just been postponed.”

When asked whether Wednesday’s rally signalled an end to sub-prime woes, JPMorgan AMC CEO Krishnamurthy Vijayan said, “Indices tend to rally or fall on news, and we recommend that investors ignore short-term movements in the markets. The Indian stock market has seen numerous ups and downs, and these do not reflect on the intrinsic worth of the underlying businesses nor do they affect our outlook on the country.”

related/bookmark it

(more…)

Many investors fret they’ll miss the next big thing because they have no access to the IPO market, but study after study has proven that IPOs historically underperform the broader markets.

This fact should come as no surprise considering that new issues are high-risk, high-reward investments. Pick the right stock and you could score big, but the more likely scenario is that your hot IPO will be languishing below its offering price in a few years.

The ground floor
Obviously, one of the the best ways to invest in an IPO is to buy shares from one of the banks managing the deal at the offering price, before the stock starts trading. New issues are usually reasonably priced by the lead underwriter, which typically hopes for a 15-percent premium above the offering price when the stock starts trading.

For your average retail investor, however, buying shares at the offering price before the stock starts trading is a difficult task. But it’s a bit easier now that banks have made an effort to reach out to the retail investor community through alliances and mergers.

To buy an IPO at the offering price, you’ll need to have an account with a broker that has access to that deal, meaning one of the banks that are part of the selling syndicate. The names of the banks on the syndicate for any given deal can be found by looking at the “Underwriting” section in a company’s SEC registration.

Tell your broker
Then, it’s just a matter of letting your broker know how much you would like to invest in the IPO. Whether you’re successful depends on many factors: how many shares are being offered in the deal (the more, the merrier), how large an allocation your broker’s bank is getting (the lead underwriter will have the largest allotment), how large your account is, how much trading you do, how close your relationship is with your broker, how well your broker knows the business, how successful your broker is, etc.

Many brokers, especially the greener ones, don’t even realize they could get IPO allocations for clients. Brokers get fat commissions for selling shares in new issues, so they’re usually reserved for the best, most industrious salespeople.

If you want to invest in an IPO but don’t have a relationship with one of the managing banks, you can also try to start an account, making it a condition that you receive some shares in the new issue you’re interested in, but you may not have much luck with this tactic. IPO shares are saved to reward a firm’s biggest, most active and longest-standing customers.

With an electronic brokerage that’s participating in an IPO, the allocation process is more objective, although no less difficult. Some firms only give shares to customers with a certain account size; others allocate shares based on statistics such as trading frequency to reward their best and most profitable customers.

Wit Capital uses a quasi-first-come, first-serve system, allocating shares via a random lottery to all investors who respond to their solicitation e-mails within a certain time frame.

Of course, even investors able to get shares in an IPO will not be able to sell those shares right after the stock starts trading, a process called flipping that is often employed by institutional investors to boost returns. Try to flip, and you’ll probably never get an allocation in an IPO again, at least not from the same broker.

Patience is a virtue
If you can’t get in an IPO at the offering price, what’s the next best time to invest? Analysts have differing opinions on this, but most agree on one fact: Be patient.

It may be incredibly exciting to watch a stock like Netscape or Theglobe.com soar on the first day of trading, but it’s a potentially dangerous way to invest, especially if you’re planning to be in for the long-term.

When a stock first starts trading, its price will nearly always rise to an artificially high level. First of all, investor demand is often unusually heavy because of the hype surrounding an IPO and the strong selling effort employed by the syndicate

In addition, the lead underwriter is legally allowed to support the stock price of a newly public company, either by buying shares in the open market or buy imposing harsh penalty bids on brokers who return shares in a new issue.

While this early momentum can last for several days or longer, it ALWAYS ends, at least temporarily. “Within three months or four months the stock price (of an IPO) will usually sag,” said Kathy Smith, an analyst at the Greenwich, Conn.-based Renaissance Capital, an IPO research firm that manages the IPO Fund (IPOSX: news, msgs). “A wait-and-see approach can really pay off.”

For example, Amazon.com’s stock gained a bunch on its first day of trading but was actually trading at less than its offering price a week later. Amazon’s a bit of an unusual case, but most new issues will show some significant price weakness within the first six months of trading.

related/bookmark it/readit

(more…)