AT&Tmobile….Sorry I mean AT&T and T Mobile.

 

Disclaimer : Thoughts mentioned below are directly influenced by class discussion and reading different opinions about the case. 

The announcement of merger between AT&T and T Mobile USA is creating huge debate in US. Whether industry is moving towards duopoly where AT&T and Verizon will be only players and both using different technology. This merger is interesting because it means now there will be only one GSM player. Wow, so if you have a GSM phone then you are almost done. For my friends back home its like having only Airtel for GSM…Scary isn’t it.

So everyone firing bullets and bombs and everything they can find at AT&T and wanting government to disallow the merger. The merger process will take over a year and if Government disallows the merger then it will be advantage to no one. There are few reasons I am saying it.

When I see the telecom industry with huge infrastructure to manage it makes sense not to duplicate the infrastructure. AT&T and T Mobile both operate GSM services. So Synergies are huge. Cost saving will be tremendous and that saved money can be spent on upgrading the infrastructure. (I know mostly it will be distributed to shareholders rather than upgrading network). I don’t understand why people who are claiming that it will end competition accept Apple’s decision to launch Iphone and Ipad only on AT&T at the start. Was it not unfair play.

The ecosystem and devices are evolving at breathtaking pace. Devices are outsmarting the network. I believe the Industry is going towards utility approach. (I read about this in business week).  So AT&T and Verizon will be under heavy scrutiny all the time. As you have regulations, price controls in electricity industry similar regulations will start shaping in telecom industry. The biggest looser of this will be AT&T and Verizon and not consumer. You will now have 4 utilities instead of 3. Electricity, Water, Gas and Network. All other three industries are heavily regulated. Do you care who is your service provider for water? Not really as you are sure that regulations will make sure quality is in place similar thing is going to happen here. Regulation will play major role. So it is not bad for consumer but is bad for AT&T itself.

In short term of course they will gain market share, they will surpass Verizon in consumer numbers, synergies will create windfall for shareholders but in the long term that will cement its place as a Utility. That means even lower margins, no chance of innovation and heavy regulations. In the capital economy as soon as you raise the prices you will have alternatives popping up so we will have a next wave of silicon valley companies that will create new ways of communication.

So in all not allowing merger does not make sense. T mobile has already decided to sell so if you do not allow merger we will have stalemate, T mobile will start to see diminishing power and that will not help competition and infrastructure anyways. 

Signing off

Nikhil Parchure.

Future Problems……or Markets

 

Note: I read interesting article on National geographic website. The thoughts mentioned below are influenced by the article. Article talks about growing population, I thought of linking it to business.

Everyone talks about growing population of human race. Growing at astonishing pace the population of world will reach around 10.5 billion by 2050 (National Geographic study). We are already pushing available resources to its limit and this increase in population will strain the earth further. Oil, Metals, Food you name it and the prices are rising. Is it time to worry? of course it is but that does not mean you should not look for opportunities. 

Every problem presents an opportunity so which businesses will help in solving the problem but also profit from the situation. I think of three main businesses, Water, Food (Agriculture and Fishing), Environment. 

Now let me explain about that in little detail. Water, no question about it, we are already depleting ground water levels and using far more water than available. Also we are polluting large percentage of water available for use. So Water purification, water desalination, water conservation and technology to reduce water usage will be big potential. If you calculate amount of water needed to support growing population the number is mind boggling.  Changing environment, I don’t like to call it global warming, is bringing more droughts which means ever decreasing supply of fresh water. The challenge is huge and there is no clear solution in picture. Companies that come up with innovative solution in this field will succeed big way.

Food; after water, food is the second highest priority. Droughts are adding pressure on global supply of food grains. Also productivity of soil is going down every year due to excessive farming and use of huge amount of fertilizers. So companies that make organic fertilizers & new generations of seeds will benefit a lot. The world needs path breaking innovation in this field to feed all the human race. Another big source of food is fisheries. Again there is problem of excessive fishing and pollution. Amount of catch is reducing every year and that will put more pressure on food supply. Companies in the field of developing fast growing breeds of fish, fish with high nutritional values and developing breeds that can resist polluted waters will have big opportunity. Pollution control and mitigation companies will also play a major role.

Third major trend of course the environment. Pollution control, pollution reduction and pollution cleaning these three fields will be critical. Pollution control contains all activities such as waste disposal, recycling, purification and treatment etc. Pollution reduction contains developing new technology for more efficiency, you may consider clean-tech (but clean-tech covers many other industries too). pollution cleaning will also be a big industry. Considering the fact that we have already polluted air, water and other resources we will need to clean them some time.

People may argue there are many industries that will benefit from population growth. I agree but I wanted to highlight industries that can grow fast and also make a huge impact on resolving major issues.

 

Disclaimer : Some facts are taken directly from national geographic study. I am not endorsing any industry, brand, company. The effort is to express my opinion on the future markets. There are many assumption made which are not explicitly mentioned in the post. In case you do not agree, I respect it. You can post comments with your feedback, suggestions.

Signing off

Nikhil Parchure.

Valuation of human capital

 

After an interesting discussion regarding how to do valuation of companies and how to analyze financial ratios of the companies very interesting discussion regarding valuing human capital came up. Professor rightly pointed out that the financial statements are designed to capture assets such as plant and machinery, land, inventory and liabilities such as loan payable, accounts payable etc. But what about the human capital. Peter Drucker said 40 years ago that World is moving towards knowledge economy where people will be most valuable assets of the company. And he was spot on we are living the world where people make or break companies. Software giants such as Microsoft, Google, Facebook do not have assets in form of huge machineries, land and equipment but they have human talent, brightest engineers from across the world working for them. How to value the company with such assets then.

The world has changed a lot, few people from basement office can create company with sales of more than billions of dollars so balance sheet of these companies will be asset=negligible, liabilities= negligible, revenue=astronomical and profit=you can’t believe. So if you do the same ratio analysis that you do for say steel company, airline or big retail company then you will never invest in other companies. That is a big problem and often causes overvaluation of technology companies.

So how to value human capital. I can think of only sport to look for answers. Footballers are sold and bought by clubs and valuation is done based on goals scored, previous performance, merchandise selling potential etc. But still they can not put that value on the balance sheet as accounting rule do not allow it. Some other form of statements have to be started some parameters to be defined for such companies. I was thinking of Human capital index or Human resource index a measure of IQ of the employees or Standard test scores, something to tell potential investor what they are buying.

I can not think of any perfect solution as beauty of we humans is that each one of us is unique. So it’s a big challenge to all accountants to value the company correctly.

Signing off

Nikhil Parchure

Disclaimer : The thoughts above are directly influenced by Class discussions at Drucker school MBA class. Examples used are directly taken from class discussion. Company names used are only for the sake of example.

Electric Car : Hybrid or Full electric Which suits the time.

With launch of Chevy Volt and Nissan Leaf EV market is about to explode. Higher gasoline prices and government incentives for EVs means good business for next few years. But is the Complete electric vehicle way to go forward?. It sounds a perfect solution but not in near term. Maybe once technology in battery evolves and allows to store more energy in less space then we can think of 100% electric cars. Till then we have to live with hybrids. Toyota Prius and Chevy Volt. Many others like Ford, Honda driving in with their plug in hybrids as well so 2011 will be exciting year for auto industry.

I prefer Toyota Prius like hybrid and one that they will be launching in 2012. Hybrid which can run up to 10 miles on electricity and will have full gasoline engine is wise solution for current market. The cost of such vehicle will be less as you will be having less amount of batteries and it will also help in improving overall efficiency. I believe full electric is the way to go ahead but in stage manner.

Chevy Volt is a having engine but it is used to charge the batteries and not drive the car. It is good concept but due to that the overall price of the car goes up very high. I think hybrid car that can be used as normal car will be good success in short term. Car that can run on gas even without charging will give comfort to people to shift from their existing cars to such hybrids. The cost of such cars will also be less as battery which accounts for 50% for electric car’s cost is small in size.

At low speeds and traffic situations electric motor is the best option and at highways gasoline works fine. Car that merges these two (like Prius) will be very helpful in attracting masses to such cars. (Still hybrids are less than 3% of total vehicles). Nissan claims that 100% electric is the only car which is actually totally green. I think Green and eco friendly differently. Considering cost of Nissan leaf and Chevy Volt very few will actually buy these cars. And many buyers will be second car buyers. So this will not help environment directly. A car which can improve efficiency of gasoline engine by 25% and is affordable will be far more eco friendly on sheer numbers.

Jury is still out and experts have different opinions. So let us see how 2011 brings changes in Auto and EV market.

Sources: News about Chevy Volt, Nissan Leaf and Prius from different websites, Bloomberg report on EV market, Car reviews by CNN.

Signing Off

Nikhil Parchure

Happy New year and starting 2011 series

 

Dear All

Wishing you a Happy and Prosperous New year. May 2011 bring joy and success to you.

Also I will like to thank all of you who are reading my blog and contributing via comments and feedback. I really appreciate your efforts. Thank you very much for all the encouragement.

I have complied all my blog posts of 2010 in one pdf file. you can see or download the file from below mentioned link.

http://www.box.net/shared/9secr21vo7

Once again thank you for your contribution and looking to get similar support in 2011.

Post date: 1/1/11 …wow

Signing off

Nikhil Parchure