Wednesday, 26 October 2011

Merger and acquisition Indian contex


 Merger and Acquisition: Indian Context
India has been under wraps of British rule till 1947. Like UK it did not see any major merger and acquisition going on in pre or post independence. After freedom from UK it was under wraps of financial and monetary regulation that was strictest and was full of red taping. In wake of protecting public interest and at same time protecting domestic market no major M&A activity was seen and some giants like coca cola had to even leave the country in 60s.
In 1990s India decided to open its market and that is since then we are seeing certain mergers and takeovers. With time we have seen many Indian companies like Tata, Airtel, Infosys etc going global by acquiring firms. We will talk about certain mergers of significance in coming segments.  Post 1990s Indian M&A activity can be divided into two parts. From 1990 to 1995 when many companies found that in wake of inevitable MNE entrance to market they need to be larger to survive any Hostile takeover or stay alive in market. Post 1995 many MNE acquired local companies to tap ever increasing Indian Market.
The period saw cross border mergers and acquisition as a mean of entering the Indian market. In wake of increasing competition many companies consolidated to buckle and many company vanished over night. Pale agro sold its beverage division to coca cola. USHA leading fan brand vanished in wake of competition. Around 37.7per cent of the total Foreign Direct Investment (FDI) made by multinational corporations (MNCs) during 1991-1998 was financed through cross-border M&As activity, either through Acquisition of substantial equity stakes in existing ventures or through buy-out of real assets through asset-sales.

Manufacturing sector saw most of Merger and acquisitions. Out of 1000 acquisitions in 1990 to 2000 around 60% were of manufacturing sector. We will read with deals in details. Post 2000 we will see certain deals  later.

U.K and Merger Waves


Unlike USA which saw many waves of M&A UK was rather silent. Some mergers took place but it was never a significant wave despite having no serious anti monopoly laws. Most of the firms were held by government and UK was growing using colonization.
First significant but very small wave took place in UK in 1920 when mass production technology was introduction in USA post WWI. Increased productivity reflected in stock price which lead to mergers resulting in concentration of manufacturing industries.
In 1948 monopolies and restrictive policy act was passed and being vague it was of no use. First real merger wave came in 1960s when internationalization was happening and government realized that Firm needs to be larger to survive the impending competition. Based on that government created industrial reorganization committee (IRC) was formed to promote merger and organization. Of large 200 companies around 20 % were involved in M&A activity post IRC. Even though it was not large but still by UK history it was significant. Merger and monopolies acts and commission were created to check any merger and acquisition that is against public interest. Most of the Horizontal mergers were in the purview of MMC. However deals backed by IRC were waived from the check resulting in many mergers that could else have been in purview of MMC.
The office of fair trade was established to look in merger and acquisition taking place around and those that have to be recommended to MMC supervision. Most of these merger and acquisition were horizontal in nature but slowly it moved to conglomerate formation with time.
Another wave was post 1980s when most of merger and acquisition shifted their focus from increasing capacity or size of firms to use the asset and firms as commodity. Since MMC chose to ignore most or mergers that could have been under its purview many horizontal mergers continued. Financial service industry was deregulated, stock market was rising and balance sheet was growing and thus it was good for M&A. Merger and acquisition saw increasing hostility, use of leverage or debt and buy outs as an impression from USA. Even after stock exchange crash of 1987 there was continuous merger and acquisition till 1989.
As most of government owned firms were under deregulation and privatization in 1990 a new wave erupted when british telecom, british rail and british gas were being privatized. This resulted in major corporate restructuring at various levels of industries and thus merger wave occurred. 

Tuesday, 25 October 2011

Fifth wave Merger 1992-2000


Post 1990 saw best expansion of US economy and many firms were involved in M&A activities. This wave saw splurge in M&A activities and such was the magnitude of deals that 9 out of top ten costliest deals were sealed in this phase. This wave saw many cross border mergers, few hostile takeovers many horizontal merger and Most of these mergers were strategic in nature rather than blind lead. The merger deals were mainly financed by equity and most of these acquisitions were friendly with only 4% being hostile takeover.
The reasons that can be attributed to the wave were rocketing stock market which made raising equity easier and also pressured companies to take majors that will justify their heady stock price. The world was growing global and all of a sudden a large arena of markets like China, India was opening up. Companies realized that they will have to be really big to stay competitive. With time antitrust laws were also restrained. Post 1980 many corporate were well governed and this was the reason behind decreased hostility. Most of the managers were careful analyzer of if, when and how to enter market and thus looking into risk.
Going by numbers some of unthinkable mergers happened in the wave; Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time Warner, and Vodafone and Mannesmann. From a modest $342 billion of deals in 1992, the worldwide volume of mergers marched steadily upward to $3.3 trillion worldwide in 2000. The buzzword for the mergers was “Amongst the equal” but soon it was to satisfy ego and were blind number crunching Fad.
The year 2000 started with $165 billion deal of time Warner and AOL but soon it was all over. The boom in TMT(telecommunication media and technology) sector which all started in 1995 was all of a sudden halted and it impacted over all merger. Merger in TMT sector dropped from $346 billion in 2000 to $85 billion in 2001. The collapse of internet stocks, financial problem of telecom all signaled that bubble has burst. Stocks of TMT sector nose dived by 50%, junk bond were non existents, bank tightened lending standard
 The wave started on caution note but within no time stock market bubble made it mad rush, it became a fad and it has huge repercussion on investors and overall society lost $134 billion in the post wave crash. Moeller and Stulz found that out of 12000 mergers valuing $1 million or more, the merger before 2008 were mostly profitable. However, post 2008 investors acquiring lost $281 billion. Post 2008 around 80 deals lost $1 billion or more to investors.
One may wonder when it all started right; why all of a sudden it went wrong. Strong stocks made valuation lofty and P/E ratio were tempting. Most of the executives proclaimed higher valuation as their expertise rather than irregular and irrational wave of overvaluation. No doubt when it call crashed ripples were felt for long.

4th Wave 1981-1989


Whenever there is competition looming it takes drastic majors to propel you ahead.  Around the year 1974; when Morgan Stanley was facing challenges from its competitor in investment banking segment. Underwriting, which had constituted 95% of its business until 1965, had become less profitable as other investment banks challenged the traditional rela­tionships of the underwriting business by making competitive bids when securities were being underwritten. This attempt by Morgan Stanley to launch itself ahead saw the advent of first ever hostile takeover in 1974 when the nickel producing giant INCO acquired battery producing ESB by giving an offer for 3 hours using “Take it or leave it over “. Post 1981, merger waves saw many hostile takeovers.  This despite the fact that INCO ESB takeover was utter failure and it saw INCO breaking ESB in four parts in year 1981.
The waver merger also saw a new concept of debt financing to raise capital for merger and acquisition. While earlier most of mergers were financed by equity, mergers were financed by debt component also and we saw few billion dollar deals as well. This period saw popularization of concepts like Junk Bonds and saw increase in no. of LBOs. In over all sense this wave saw merger which were congeneric in nature and were hostile takeover popularly known as corporate raiding. Thus many investment banking firm took actively part in on behalf of these raiders as it was earning them more commission than friendly takeover.



One of the major characteristic of this wave was conflict between state government and central government. Most of the besieged companies took shelter in state government for anti takeover laws. Federal government felt that anti take over law was infringement in interstate commerce however state government thought it is right as per constitutional rights to them. Another characteristics were few international takeovers

One of the major reasons of the merger wave was inefficient management of many firms. Ineffective corporate governance and poor managerial incentives saw managerial inefficiency creeping in 1970s and 80s. Inefficiency in stock market to react in identifying inefficient firms and do away with it finally lead to new corporate control by efficient firm. Mostly once the firms where acquired their management will be renovated and profits will be withdrawn from it.

In Europe in the latter half of the 1980s companies sought to prepare for the Common Market through cross-border horizontal mergers. In the U.S. this was the period that saw corporate raiders like Boone Pickens run rampant with two-tier, front-end-loaded, boot-strap, bust-up, junk-bond, hostile tender offers until the playing field was leveled by the poison pill in the mid-1980s. However, even after the poison pill, merger activity increased through the latter part of the 1980s, pausing for only a few months after the October 1987 stock market crash. It ended in 1989-90 with the $25 billion RJR Nabisco LBO and the collapse of the junk bond market, along with the collapse of the savings and loan banks and the serious loan portfolio and capital problems of the commercial banks.


I will talk about Hostile take over, methodology and its remedy in coming sections. 


2nd and 3rd Wave : Redefining corporates


2nd Phase 1916 to 1919
When the whole world was reeling under pain of 1st world war U.S was seeing a change that gave birth to new structure in USA industrial arena. This was largely different from 1st wave which was toward monopoly formation to an oligopolistic structure. This wave was due to booming stock market which made raising cash easier. At the same time being boomed by success against large monopolies like standard oil has lead to promote oligopoly. Thus Clayton act was passed which made anti-trust law stricter and anti monopoly which promoted oligopoly.  This wave was result of splurge in investment post WWI, rising stock prices and capital investment kept the investors upbeat.
This phase saw emergence of many automobile giant. Ford motors were formed by vertical merger from the finished car back through steel mills, railroads and ore boats to the iron and coal mines.  The wave ended suddenly with 1929 great depression when stock market crashed. It continued for long 13 years.  
3rd Phase 1965 to 1969
It took nearly 36 years for companies to come to came back to the terms of merger and 3rd wave was primarily the formation of big and large conglomerate. Most of these were diversified conglomerate merger. The amount of firms merged in 1968 was nearly twice the peak no. of firms merged earlier. From 1959 to 1966 nearly 1000 firms were absorbed every year. However in 1967 to 1968 there was sudden splurge in no. of merger when around 2400 mining and manufacturing firms merged and vanished. Many large firm were either acquired or acquiring firm. However, merger has taken signified tide since 1950’s.  
This wave synchronized with region of economic prosperity of USA and many firms got enough resources to acquire another firms. Major conglomerates like IT&T (Harold Geneen), LTV (Jimmy Ling), Teledyne (Henry Singleton) and Litton (Tex Thornton) were created. Messrs. Geneen, Ling, Singleton and Thornton were viewed as visionaries and heroes of the new concept of business organization.
With another anti-trust arsenal Celler-Kefauver act with Clayton and Sherman act third merger wave faced stricter anti-trust music. Johnson was stricter however in 1969 next president Nixon was relaxed.  However many of these conglomerate stock crashed and companies can’t take benefit from the diversification. However these stock crashes continued and this put a broke on the merger wave for the time being.  Many companies found that it is difficult to manage conglomerates which are spread over large market and large countries so many companies chose to divest or they failed miserably as there was no synergy in companies merged. 

Monday, 24 October 2011

1897-1904 The First Merger Wave


1890 saw a significant change in operations of industries in U.S. A. The introduction of Sherman act lead to proclaiming price fixing illegal. It managed to curb the price fixing however law was unclear on merger of companies via stock trading and shares. Thus the companies who were finding troubles cause of Sherman act decided to merge. This was also supplemented by crash of stock market in 1893 and financial uncertainty which lead to many companies to question their capacity to survive. Most of these firms were small and were managing to operate profitably by price fixing which meant to control supply and demand. However it meant to be anticompetitive and thus government wanted to control it.

However, lack of comprehensive implementation and will power by government lead to various mergers that transformed many industries Monopolistic.  Most of the mergers were horizontal in nature. Collated data suggests that in this period 78.3 % of mergers were horizontal in nature compared to 13% vertical merger. Rest 9% was vertical and horizontal merger.  Around 2900 companies were part of this wave.  1899 saw peek of all mergers when around 1200 companies entered the fray.  The wave finally ended in 1904 with certain mergers showing signs of failure, financial mishandling and Mr. Roosevelt antitrust campaigns and strengthening of Sherman law.

This wave saw maximum consolidation in industries like primary metals, food products, petroleum products, chemicals, transportation equipments, fabricated metal products, bituminous coal and machinery.  These mergers resulted in nearly monopolistic market structure. The out of these merger resulted in one of major Giants like U.S. Steel which grabbed market share of 75% on inception was result of around 785 steel operations. Some of today’s giants like DuPont, American tobacco, general electric’s, Eastman Kodak, standard oil and Navistar international. J.P Morgan played a key role in the wave by founding U.S Steel and overseeing the mergers that created general electric.

These giants were helped by scales, new technological invention and in some cases by doing away with operating units. For example Standard oil garnered revenue by operating three units only and it do away with unnecessarily plants and thus had better operational efficiency. Companies and manager focused on production process so to enhance their ability to engage in ever expanding mass production.

However the monopolies created spurred a backlash and justice department charged many monopolies with violation of Sherman anti -trust act. The act was itself actually a response of anti rail road protest when some of hostile takeover actually turned violent judiciary system was highly corrupt. The then president Roosevelt (Known as trust Buster) and this successor focused on enforcing the act.  The major success came when in 1904 when northern securities merger was deemed illegal by court. With time standard oil was also divided into entities like standard oil of New Jersey (Exxon now), standard oil of New York (Mobil now), standard oil of California (chevron now) and other entities which became major players in the industry. However more than the court room preceding the wave ceded cause of failure of many companies to acquire efficiency, irregularities in attaining finance ,stock market crash of 1904, weak banking system etc. 

Sunday, 23 October 2011

Merger and Acquisition Vol. 1


Nothing is sweeter than sharing. Nothing is more fruitful than converging and nothing rules the world more than cooperation. Our Indian culture had taught us the story of fighting cats and monkey and we are the perfect example of being divided and ruled. However any coordination without meeting of mind and soul is useless. And sometime being separate can be better than living together. The concept of Merger acquisition and corporate restructuring derives it life from the basic culture of being together or being separate.
It was year 1838 when of the first few merger of World’s history took place. It can easily be first ever merger but I don’t have convincing data to support that. The first merger of Rail Road industry in 1838 was between Wilmington &Susquehanna and Baltimore & port deposit which lead to the formation of Philadelphia, Wilmington and Baltimore.   This merger even though small in nature; led to beginning of an era and concept which lead to many mergers and establishment of monopoly in many established industries.

The world’s history of merger and acquisition has been divided into six phases or six waves. During these periods we saw immense surge in the M& A deals. You can attribute these waves to many factors or many time combinations of economic, technological and regulatory shocks.  The economic shocks, like recession and economic slowdown tends to make certain companies redundant. Sometime over competitiveness in industry and price wars make certain companies less financially viable. However, more often these shocks lead to horizontal merger than vertical merger.  The merger wave in 1897 was result of Panic and mild recession post 1896. Such economic shocks challenges ability to run business on own and this merger and acquisition are sought to ease operational constraint and increase profitability.

The regulation shocks or easement is also a factor calling for merger as waves. Many a time many probable merger and acquisition are in abeyance cause of regulatory pressure and is simulated once these regulations are quashed with time.  Earlier US Banks were not allowed to cross state lines or enter other industries. One it was eased out we saw many banks spending their fins. Citi Bank had been one of the largest banks across globe by around more than 150 M&A deals since inception.
The technological shocks which makes many products outdated in sudden turn has been one of the causes of M & A. recent time has seen landline being redundant and spurge in popularity of smart phones. Some similar shift or shocks which make cost of production cheaper may make many companies redundant and thus we see a surge in M&A.


Wednesday, 19 October 2011


Cash Flow Statement

Widely known as CFS it accounts for the amount of cash entering and exiting any company in the span of accounting period. It’s an add-on to the balance sheet and income statement and is widely used by investor s to analyzed loan paying capacity and short term liquidity and viability of the firm. The cash flow is broken down and analyzed as operating, investing and financing activity which helps us in determining health of the company.

The Cash Flow in these activities had different implications for the firm. Most important is the operating cash flow because it signifies the core strength of the company. It includes: 
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Other Current Assets
Notes Payable
 
(generally due within one year)
Accounts Payable
Wages Payable
Payroll Taxes Payable
Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities
It depends on the business model. Investment companies or banks will have different kind of operating asset which will include loans, interest earn as it will be part of their operations. The biggest take away from operating cash flow is by comparing it with income statement. If operating cash flow is more than income it means company basic operation is good and its getting into better shape, if operating cash flow is net than income statement then somewhere down the line operations is facing certain problem and one should look into the matter.
Investment cash flow is the investment that the company is doing in acquiring certain assets, plant and machinery, giving loans, buying security, lands and R&D. such investment has future implication and it is one of the core reason behind the difference between operating cash flow and income statement. It includes
Financing activating or financial cash flow includes how the company is financing its activities. It talks about the debt and equity of company.  This cash flow thus gives guideline about current state of the company. It includes holders' equity accounts, such as:

A change in balance sheet will be shown in cash flow statement as such


A change in this 
balance sheet category
...is reported in this section 
of the cash flow statement
Current Assets*
Operating Activities
Current Liabilities
Operating Activities
Long-term Assets
Investing Activities
Long-term Liabilities
Financing Activities
Stockholders' Equity
Financing Activities
      *This refers to current assets other than Cash.

For details on How to Prepare one can visit the link.

An Example of cash Flow



Tuesday, 18 October 2011

HISTORY OF UAE- The Truce Oman

The Truce Oman/The Trucial States
The history of UAE goes long back. But critical turnaround started in 1820. The east India Company was being bogged down pirates in Middle East affecting their trade routes. As a result they forced the shaykhs on the coast to stop piracy. This whole story started in 1798. The history maintains that The Qawasim were arch-rivals of the Al-Busaids who were based in Oman and who also sought to assert their control over this part of Arabia. In 1798, the British signed an agreement with the Al-Busaids in an elaborate attempt to keep the French out of the area and so strengthen Britain's claims to paramountcy in the Indian sub-continent. However, this deal with the Al-Busaids made Britain part of the enemy as far as the Qawasim were concerned. This meant that British East India Company ships were fair game and were attacked and pillaged at every opportunity by the Qawasim. This stretch of coast soon came to be known in Britain, India and beyond as the Pirate Coast and the Royal Navy reacted accordingly by launching campaigns and raids against the Qawasim in 1805, 1809 and 1811. Unfortunately for the British, the locals knew the area too well and could quickly escape only to regroup elsewhere.
In 1819, the British decided to try and end the piracy in this area once and for all. A large fleet was dispatched from Bombay and by 1820 it had destroyed and captured every Qawasim ship that it had come across and occupied all the major forts in the area, even going so far as occupying Qawasim hideouts in Persia itself. With the successful outcome of this operation the British imposed a General Treaty of Peace on nine Arab sheikhdoms in the area and installed a garrison in the region. The sheikdoms included:


The treaty did not prevent these princes and sheikhs from continuing to attack each other, which they did with gusto and much to the consternation of the British. In an attempt to reign in the worst excesses of dynastic and tribal rivalry the British imposed a new treaty in 1835. It was named the Maritime Truce and its intended aim was to keep traffic moving in the Gulf region. It was revised in 1839 to include the forceful banning of slavery. In 1853, the truces were upgraded still further to become the Treaty of Peace in Perpetuity. Under which, the British assumed all responsibility for arbitrating in any disputes between the Sheikhs of the area. It was this final truce that gave this part of the Gulf its name for the next 120 years.
The sheikdoms permanently allied themselves with the United Kingdom by the Perpetual Maritime Truce of 1853, upon which they were administered as princely states of British India. The treaty signed between the shaykhs and the British. The region is given the name of 'Trucial Coast'. The treaty involved a maritime truce, and British assistance to cooperation between the shaykhs. But, finally in 1873 The Trucial Coast became administered by the British.
In the 1890's the British sought to formalise many of their agreements made with Sheikhs and rulers throughout the Gulf region. The reason for this was a way of forestalling renewed interest in the region by the Russians and the French. It is unclear how serious these intentions would have been followed through but for the British their links to India were to be maintained at all costs and the Trucial rulers were to be no exception to this rule. The British would provide protection for the Sheikhs in return for promises by these rulers that they would have no dealings with any foreign rulers without the express permission of the British.
This promise of protection served the rulers in one crucial aspect just after the end of The Great War. At this time in history Ibn Saud was busy uniting the interior of Arabia and sweeping all before him. The British promises of protection made Ibn Saud hesitate and ultimately bypass this region from his series of conquests. In return, this part of the British Empire was to be an extremely quiet and peaceful one. Exactly the way the British wanted it to be.
Despite the formal protectorate status of this stretch of coast the British didn't make much of an effort to control the domestic and commercial activities of these sheikhdoms. As far as the British were concerned, as long as the lines of communication with India were secure, this area was of little strategic or commercial importance. They therefore left the rulers to themselves without any British Political Agent being appointed until the outbreak of the Second World War.
British stakes and interest in the area were to be increased with the discovery of oil. It also had the effect of renewing competition and rivalry between the various sheikhs of the area as they each tried to maximise their territories in the hopes of receiving more wealth from oil.
One interesting anecdote is the way the British tried to resolve these border difficulties by sending a British diplomat out on his camel to ask local village heads, tribal rulers and Bedouins which sheikh they owed allegiance to. However, even this attempt failed, so the British set up a Trucial States Council in 1951 under the direct chairmanship of the British Political Agent in Dubai. This council was the direct ancestor of the present day UAE Supreme Council.
British links to the coast were to remain extremely limited for most of their history with one another. The Indian based British Steamship Line served British, Indian and local traders in the region firstly by serving Linagh but after 1903 transferring their port of call to the up and coming hub of Dubai. The only official British facilities were not to be built in the area until 1932 when Imperial Airways built a rest house in Sharjah for passengers and crew en route between London and India.

Oil and the New Beginning
The discovery of oil was to change the strategic and economic significance of this imperial outpost. The first oil concession was from the poorest of the sheikdoms, Abu Dhabi to the British owned Iraq Petroleum Company in 1939. However, the Saudis would lay claim to the area of this first concession and relations between these states would sour considerably. It was only when Trucial Omani troops, commanded by British officers, drove the Saudis out of the disputed area that the matter was settled. This held up production for some years in this sector, but the importance of these fields were to be eclipsed when an enormous reservoir of oil was discovered off the shore of Abu Dhabi by an Anglo-French consortium. Exports began in 1962 and Abu Dhabi quickly became the leading sheikhdom in the region. Dubai was also fortunate enough to discover some oil, however the other sheikhs were not so lucky and they quickly beat a path to their oil rich neighbors.
The newly found wealth was beyond the financial understanding of the sheikh of Abu Dhabi as he spent his money foolishly and unwisely. In addition, he openly admitted that he did not trust banks and, most worryingly of all for the British, that he distrusted foreigners and foreign companies. The British conspired with his brother and the other sheikhs to have this troublesome ruler removed in 1966. This bloodless coup was to be the last major political undertaking by the British in the area.
In 1968, the British announced that they would completely withdraw from the Gulf region by the year 1971. This sent the Trucial rulers into a frenzied series of negotiations with each other and with the other British protectorates; Qatar and Bahrain. The British tried to join these areas into a single autonomous country but the respective rulers could not agree on boundaries or political representation in the new grouping. Bahrain and Qatar were particularly aggrieved and left to become independent nations. The Trucial sheikhdoms were prepared to enter a federation with Abu Dhabi and Dubai (in that order) as having the heaviest political weighting, representation and most importantly of all for the smaller sheikhdoms, the heaviest financial obligations. With this formula the United Arab Emirates was formed in December 1971.
Overall Timeline
1820: The British force the shaykhs on the coast to stop piracy.
1853: A treaty signed between the shaykhs and the British. The region is given the name of 'Trucial Coast'. The treaty involved a maritime truce, and British assistance to cooperation between the shaykhs.
1873: The Trucial Coast becomes administered by the British.
1892: A new agreement, the shaykhs gives the British effective control over foreign matters. The British offers military protection in return.
1931: Oil is discovered, and national consciousness increases. Bahrain later joins the neighbouring Trucial States and Qatar in the Federation of Arab Emirates.
1952: The seven emirates establish a Trucial Council.
1960's: Emerging problems between the British and the emirs, connected to the interests of developing the oil industries and preserving traditional culture. Shaykh Shakbut of Abu Dhabi was the most conservative in this matter, and also in control of some of largest oil reserves.
1966: Shaykh Shakbut is overthrown, and Zayed bin Sultan an-Nahayan becomes new ruler of Abu Dhabi.
1967: The Trucial States Council is formed, aiming at better coordinating matters between the shaykhs.
1970: Independence is given to the emirates.
1971 September: Bahrain and Qatar becomes independent states.
— December 2: Abu Dhabi and Dubai forms a independent union, inviting the other shaykhs to join. All remaining but Ras al-Khaimah accepts.
1972 Ras al-Khaimah joins the new federation of United Arab Emirates. 

An Interesting Fact
Until 1969, the Indian Rupee remained the de-facto currency of the Trucial states as well as the other Gulf States such as Qatar, Bahrain and Oman until these countries introduced their own currencies in 1969, after the great devaluation of the Indian Rupee.

Friday, 18 February 2011

When The Desert Speaks: Part-1


Today I would like to write about UAE, the land which has a diverse and multicultural society with large expatriate population. In my 3 months of tenure at Dubai I have seen variety of things like Skyscraper, belly dancing, malls, auto fests and sand storm.......which has invigorate me to write about UAE.
Some of Key findings of UAE:
  • Full name: United Arab Emirates
  • Population: 4.8 million (UN, 2010)
  • Government Type: Federation with specified powers delegated to the UAE federal government and other powers reserved to member emirates
  • Head of state: President Khalifa bin Zayed Al-Nuhayyan
  • Head of government: Prime Minister Muhammad Bin Rashid Al-Maktum
  • Capital: Abu Dhabi
  • Largest city: Dubai
  • Per capita GDP: $38,900
  • Population: 19%Emiratis, 81% Foreigner
  • Major Export: crude oil(45%), natural gas, dried fish and dates
  • Major Imports: Machinery and transport equipment, chemicals and food.
  • Area: 77,700 sq km (30,000 sq miles)
  • Major language: Arabic
  • Major religion: Islam. 95% muslims, 5% others
  • Life expectancy: 77 years (men), 79 years (women)
  • Internet domain: .ae
  • International dialling code: +971
  • Border: Sharing land borders of 867 km with Oman and Saudi Arabia
  • Sea Border: Sharing sea borders of 1318Km with Iraq, Kuwait, Bahrain, Qatar and Iran
  • States: It consists of seven emirates, which are Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain
  • Unemployment rate: 4.2%
  • Inflation : 3.9%
Political Analysis:
  • Strong implementation of policies, but relations with Iran over disputed Gulf islands, remain problematic.
  • Nuclear deal with the US.
  • Improving foreign relationship will increase growth in business.
  • Absence of democracy may become an issue.
Economy & Business:
  • The UAE economy contracted by 0.7% in 2009. The economy is expected to expand by 1.3% in 2010. Bilateral trade between UAE and china can give further growth opportunity to UAE. As per prediction two country will trade around $100billion by 2015.
  • The UAE has high quality infrastructure; however, restrictions remain for foreign investors.
UAE has present itself as business friendly nation and it does not levied any tax on capital gain or salaries and corporate has shown immense interest for corporate relocation and investment. Free trade zones have also been legalized in multiple locations to reduce trade laws and allow new markets to take hold. However, foreign investors do not receive the same treatment as national companies. Complete foreign ownership is restricted under the country’s laws. At least 51% of a business must be owned by a UAE national, and projects must be managed by a UAE national or have a board of directors with a majority of UAE nationals. This restrictions affects the FDI Inflow of country.


While the country has a strong market for telecom related services, its poor level of science education is a problem.
The UAE has a high mobile penetration rate of more than 212 mobiles for 100 people. Till 2008, Etisalat is the only player and there was a monopoly in the market. Du just entered in 2008 and in a year it has market of 15%. Even though having high penetration of mobiles the level of education system is hinders the growth of mobile segment. Due to liberalized labor policies, the country has a skilled workforce from all parts of the globe. Dubai has seen a major rise in the influx of foreign labor due to the growth opportunity in UAE.

In 1st part of “when The Desert SpeaksI have touched some of the aspect of UAE. In my second part I will do the PESTEL analysis of UAE to find more about mysterious desert land. C

Tuesday, 15 February 2011

Rating Stocks : A summary

We are always fascinated with rating things around us. Ratings give an overview that helps us in making critical decisions. In finance while dealing with stocks we use rating systems to help stakeholder’s in deciding their future actions. A Rating system may be three-tiered: "overweight", "equal weight" and "underweight", or five-tiered: "buy," "overweight," "hold," "underweight," and "sell".

On Suggestion Of Siddarth,Making language crispier 
The whole story below can be further summarized as:
Buy: You should Buy the stocks
Overweight : I will suggest you to Buy the stocks
Equal Weight : I cant suggest you anything actually
Underweight: It's not a good proposition, My advice will be to sell the stocks
Sell : You should sell the stocks

For details and better understanding, Read Further
The term underweight has been defined as a situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and under weighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark.
If a stock is deemed "underweight" the analyst is saying they consider that the investor should reduce their holding, so that it should "weigh" less. For example, if an investor has 10% of their stocks in Retail, 25% in Manufacturing, 50% in Hi-Tech, and 15% in Defence, and the broker says that Retail is "underweight", then they are implying that a smaller percentage of the stocks should be in Retail.
The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
The term overweight has been defined as a situation where a portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so will allow the portfolio to achieve excess returns.

Overweight is an over sophisticated method of saying 'buy'. It gets its roots from portfolio allocation theory, which theorizes that you can increase your return and decrease your risk by allocating your assets among various types of assets. Investment advisers have usurped the term to make themselves become sophisticated investment advisers in tune with the latest buzz words so to speak.
If a stock is recommended to be "overweight", the analyst opines that the stock is a better value for money than others. For example, an investor holds 15% of his/her investment in Technology stocks then, the investor's stock portfolio is 5% overweight in Technology stocks. Suppose further that the investor is advised by his broker or financial advisor that Technology should be "overweight" then, the investor is being advised to hold more investments in Technology, as a percentage, than the weight of that asset in the index/market. i.e., more than 10% by value of Technology shares in this example.
A type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.

The Rydex S&P Equal Weight Exchange Traded Fund, for example, provides the same exposure to the smallest companies in the S&P 500 as it does to corporate giants such as General Electric and Exxon.
Equal weighting differs from the weighting method more commonly-used by funds and portfolios in which stocks are weighted based on their market capitalizations. Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds and, as a result, they usually have higher trading costs.

Carrying forward the above example will mean in case of equal weight the broker advises that Technology should be "equal weight" in which case, the recommendation is to hold 10% by value of Technology shares.

Buy and sell are stronger word than overweight and underweight. Buy has an exact definitions varying by brokerage, but in general this rating is better than neutral but worse than strong buy. Same goes for sell whose exact definitions vary by brokerage, but this rating is generally worse than neutral, but better than strong sell.

Monday, 31 January 2011

Bull Became Bear: What’s next??

Once a sanguine country it seems INDIA is moving to a zone of uncertainty.  The uncertainty is about the economic condition, Inflation, profits of companies driven by corruption, attempts of global recovery and foreign investor having bad experience at INDIA. A recent survey that concluded India to be most over regulated country and poor infrastructure apart from 7 cities is INDAI is finding it difficult to be an economic aphrodisiac anymore.  Despite having an increased per capita income that touched $1000 marks (Rs 46,492) India has seen its propensity of consumption decrease to 0.6 resulting in many MNC wondering what they should do to make INDIA consume more.
The mood is evident from the recent slump in INDIAN Sensex. Sensex fell by 10.6 % in month of January, 2011 and slipped to its lowest since Oct 2008 to a figure of 18327. Weak global market and anti-government protest in Egypt is being attributed to be major factors along with common concerns about Inflation end below expected performance of key companies like Infosys. One of the major reasons that can be added to this is dip in FDI by 26 per cent during January-November 2010 to about USD 19 billion from USD 25.5 billion in the year-ago period.
The market that was rising like a star has slumped like anything. One may wonder why this sudden mood of change. Why FDI is dropping down and why all of a sudden there are doubts about us. I read economic times regularly and found various notions suggesting two entirely different view points on INDIA.  When BofA/ Merrill lynch suggested that sensex will remain flat; Goldman Sachs take is that Even as some investors are turning their backs on, and high inflation emerging market will manage to attract investors. In totality we are confused what’s next for us.
I read once that many investors found it difficult to cope up with Indian infrastructure. As a result few investors are still keeping their finger crossed. Recent CITI bank fraud, Satyam embezzlement has lead one to wonder will corruption engulf INDIAN private sector as well. No wonder Sensex is diving down.
I am wondering whats next. I will try to make a prediction and comeback.

P.S : Dubai market fell 6% cause of anti-government protest in Egypt and market across the world is reflecting the sentiment.


Saturday, 29 January 2011

SLR (Statutory Liquidity Ratio) : A summery

SLR (Statutory Liquidity Ratio):
It refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India.
The main objectives for maintaining the Statutory Liquidity Ratio are the following:
1.       Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion.
  1. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.
  2. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds.
However the one theme behind SLR is to force banks in investing less returning securities of government.  In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes and in an emerging economy interest rate change is a common activity. 
The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.
Determination
It is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on their anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities.
Thus SLR Rate = Total Demand/Time Liabilities x 100%
The maximum limit of SLR is 40% and minimum limit of SLR is 24%.  The RBI as per need can ask banks to maintain SLR between these two. At pres the SLR rate of INDIA is 24%.
SLR and G-Sec(Government security)
While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.
These include:
1.     Interest rate increases.
2.     Changes in the prudential regulation of banks’ investments in G-Sec.
Most G-Sec held by banks is long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.
Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporate and resolve liquidity crisis; providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporate.

Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank.
The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.
SLR and News
In November,2008 when RBI reduced the SLR rate by 1% to 24% then economic times reported “A cut in SLR means that the home, car and commercial loan rates will go down. It also means that banks will now have the option of selling Rs 40,000 crore of government securities that until now formed part of their statutory investments. It was increased to 25% in 2009 and then was again reduced to 24%.