Summary of business news and analysis

Highly relevant article of Megan McArdle on the demographic shift in the US - a problem which also other Western civilizations face:

The Daily Beast: Our Demographic Decline, by Megan McArdle, Dec. 4, 2012

Birthrates are falling. Will the economy follow

....... "Start with a simple equation: economic growth equals the growth in the workforce plus the growth in the productivity of that workforce. If the workforce shrinks, then productivity growth needs to be higher, in order to compensate; otherwise your economy shrinks. In theory, we can compensate for the coming demographic shift with higher productivity. A shrinking population, after all, means a higher capital to worker ratio.


But this doesn't quite work, because our population will not simply get smaller; it will also get older. If everyone was going to suddenly die at 45, we might be able to get the requisite productivity boost. But as the population ages, it will change dramatically, becoming less innovative, more risk averse, less physically capable. Just as we desperately need productivity to speed up, it is probably going to slow down.".... Source: Excerpt of Megan McArdle article

Keywords: Population, Western Economies, Economic Growth, Demographics

The answer seems to be clearly No, as a new study shows:

Bargeron, Leonce, Schlingemann, Frederik P., Zutter, Chad J. and Stulz, Rene M., Does Target CEO Retention in Acquisitions Involving Private Equity Acquirers Harm Target Shareholders? (December 5, 2012). Charles A. Dice Center Working Paper No. 2012-026. Available at SSRN: http://ssrn.com/abstract=2185574

Abstract:

"While there is widespread concern that target CEO retention by the acquirer harms target shareholders when the acquirer is a private equity firm, CEO retention can also be valuable to private equity acquirers, and hence potentially benefit shareholders. We find that CEO retention does not harm target shareholders when the acquirer is a private equity firm. In fact, we show that, in acquisitions by private equity firms, better performing CEOs are more likely to be retained and target shareholders gain an additional 10% to 23% of pre-acquisition firm value when the CEO is retained compared to when the CEO is not retained. In contrast, shareholders of targets acquired by operating companies do not benefit from CEO retention. Finally, we find no evidence that the target’s value is artificially depressed ahead of a private equity acquisition where the CEO is retained."

Keywords: Private Equity, CEO Retention, Acquisition Premium

Just How Wise is the Sage of Omaha? by Megan McArdle, Dec. 6,2012

Say you have a million people stand in a row and flip coins a million times. Each time they get heads, you give them a dollar. Each time they flip tails, you take a dollar from them.


On average your total payout should be zero*: the tails should cancel out the heads. But that doesn't mean everyone ends up with nothing more than what they started with. Some people will be horrific losers, mortgaging the house to cover what they owe you. Others will be rich. And at least one will have a run so phenomenal that you'll think it can't be luck. He must have some sort of secret skill--the Warren Buffett of coin flippers. read more on The Daily Beast

Keywords: Return on Investing, Value Investing

Keywords: US Economy, Regulation, Fiscal Uncertainty

Study: At most a third of us show a consistent approach to financial risk; Empirically rich new study finds most people alter their risk-management approach depending on the type of financial decision, by Peter Dizikes, MIT News Office

Take a moment to consider some of the financial choices you’ve made in recent years. Do you have a consistent approach to your money, either by playing it safe or having a willingness to take risks? Or do you not have a set philosophy, and instead make your financial decisions independently of each other? read more on MIT News

Keywords: Risk Behavior, Financial Decision

Randy Komisar, Partner at Kleiner Perkins, explains that market forces and current opportunities play a big role in whether or not an entrepreneur succeeds.

2009

Keywords: Skills of Entrepreneurs, Taking Advantage of Opportunities

Year end is the time for (not often very competent) stock market predictions.

It could be wise to challenge such predictions with more fundamental considerations of proven cracks in the field of value investing.

Such as Warren Buffett:

This "value investing checklist" is also quite useful.

40 Point Stock Checklist

Keywords: Value Investing, Fundamental Company Value

Opp, Christian C., Learning, Active Investors, and the Returns of Financially Distressed Firms (June 14, 2012). Available at SSRN: http://ssrn.com/abstract=2181441 or http://dx.doi.org/10.2139/ssrn.2181441

Abstract:

"I develop a dynamic asset pricing model to analyze expected returns of financially distressed firms in the presence of learning about firm fundamentals and endogenous information acquisition by active investors that acquire large stakes in distressed firms via private investments in public equity. The model reveals that learning and information acquisition critically affect risk exposures close to default and can rationalize low and even negative expected equity returns for firms with high default risk. Similar to Schumpeter's (1934) argument that recessions have a positive, cleansing effect on the economy, the model reveals that equity holders may benefit from the increased speed of learning about insolvent firms in downturns, which increases the value of their abandonment option in these times. Equity holders' option value is further enhanced by the ability to partially free-ride on active investors' acquisition of information on firm fundamentals. Both information channels are shown to affect equity betas, and may account for striking, momentum-type dynamics in risk premia." Source: SSRN

Keywords: Learning, Financial Distress

Keywords: Venture Capital, Entrepreneurship

Keywords: Media, Information Business

Pimco: Today’s Global Credit Markets: Where Is the Value? Nov. 2012

...."For example, the Barclays U.S. Credit Index yielded just 2.57% in mid-October. With inflation expectations, as reflected by the breakeven inflation rate on 10-year Treasury Inflation-Protected Securities (TIPS), hovering between 2.5% and 2.6% as of mid-October, investors are barely being compensated for inflation risk – let alone default, liquidity or term-structure risk. So while there are many opportunities out there, being selective – and well-informed – is critical."...

read the whole interview with Marc Seidner, head of PIMCO’s global credit team, here

Keywords: Credit Markets, Inflation Risks, Quality of Projects

Startup Genome Report Version 2.1

Cullen O. Roche of Orcam Financial Group, LLC describes very well the Fiat monetary system, focusing on the US system. A must read for non financial experts to get a better understanding of the system.

Roche, Cullen O., Understanding the Modern Monetary System (August 5, 2011). Available at SSRN: http://ssrn.com/abstract=1905625 or http://dx.doi.org/10.2139/ssrn.1905625

Abstract:

"This paper provides a broad understanding of the workings of a modern fiat monetary system that is applicable to countries that are autonomous issuers of currency in a floating exchange rate system. The paper is broken down into 6 sections which I would recommend reading individually for ease of digestion and understanding." SSRN

Keywords: Monetary System, Fiat Money

Related:

National Bureau of Economic Research

Borisov, Alexander, Ellul, Andrew and Sevilir, Merih, IPOs and Employment (July 6, 2012). Available at SSRN: http://ssrn.com/abstract=2178101 or http://dx.doi.org/10.2139/ssrn.2178101

Abstract:

"This paper studies the relation between the going public decision and employment growth experienced by IPO firms. We find that a typical IPO firm in our sample hires twice more employees around its IPO than during its life as a private firm. The number of employees increases by 31% during the two-year period around the IPO. Evidence shows that the most likely channel through which IPO firms increase their employment levels is the relaxation of their financial constraints, allowing firms to access both equity and debt markets resulting in better funding of their growth opportunities and an increase of the firm’s human capital. We also examine the relation between employment growth and firm performance: IPO firms with greater employment growth exhibit better performance and lower delisting probability. Overall, these results highlight the importance of the IPO event and access to public capital markets for job creation by US firms." Source: SSRN

Keywords: Initial Public Offering, IPO, Employment

Keywords: US Economy, Immigration

Keywords: US Economy, US Debt, US Indebtedness

Bloomberg: Most Americans in Decade Project Economy Will Get Better, Nov. 22, 2012

..."The share of households projecting the economy will get better rose to 37 percent in November, the highest since March 2002, according to a survey accompanying the Bloomberg Consumer Comfort Index. That propelled the survey’s monthly consumer expectations gauge to 4 from minus 7. Jobless claims fell last week, while the index of leading economic indicators advanced in October, other reports showed"...read more

Keywords: US Economy, US Consumer Confidence, US Housing

Keywords: Investing, Speculation

Braegger, Stefan, Private Equity - Accessing China Through Private Markets (July 16, 2012). Available at SSRN: http://ssrn.com/abstract=2132623 or http://dx.doi.org/10.2139/ssrn.2132623

Abstract:

"The re-balancing of China's economy will offer opportunities in various sectors and benefit small-and medium-sized enterprises. However, direct access to SMEs for international investors is often difficult. Private equity is well placed to benefit from this opportunity, and provides access to small companies (70% of deals were done were < usd 50mn in the last 5 years) not available through public equity markets." Source: SSRN

Keywords: Private Equity, China, Chinese Private Equity Market

Further China PE market information:

Homepage of the China Venture Capital Association

Businessweek: Chinese Private Equity Firms Flex Their Muscles, by Kathy Chan, May 31,2012

The Economist: Private equity in China, Hony ahoy, Hony Capital wants to help Chinese firms go global, Sept.1, 2012

Ernst & Young: Private Equity in China

China Europe Mergers & Acquisitions:

PWC: China Deals, a fresh perspective, October 2012

A prominent transaction example:

The Corporate Finance Group AG: Sale of Eterna to China Haidian