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Term of the Week: Management Buyout
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Company In Focus
January 06, 2013
Cover Story : The Fiscal Cliff
INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD
Dear Readers, Greetings from FinNiche! FinNiche team wishes all the readers a very “Happy New Year”. Either leaving of the exchange students or exponential drop of temperature has left the campus deserted, especially in nights. We wish all the best to them for their new semester, and for you guys,”start preparing your III term projects”. In this edition of FinXpress, we have Google Inc. as the ‘Company in Focus’. The ‘Term of the Week’ i.e. Management Buyout will also discuss about its pros and cons. There are some insights about the “Fiscal Cliff” and its comparison with Euro crisis in our “Special Page”. Investors are speculating good returns from the market in another two months. We sincerely hope that the readers will find the content engaging. We would appreciate feedback and suggestions for improvement. We hope to bring to you more information in the future thus keeping you updated and adding to your knowledge base. Till then, “Enjoy Reading”! Yours Sincerely, The Editorial Board FinXpress
January 06, 2013
COMPANY IN FOCUS
Google Inc. (NASDAQ: GOOG) is an American multinational corporation that provides Internet-related products and services, including internet search, cloud computing, software and advertising technologies. Advertising revenues from AdWords generate almost all of the company's profits. The company was founded by Larry Page and Sergey Brin while both attended Stanford University. Together, Brin and Page own about 16 percent of the company's stake. Google was first incorporated as a privately held company on September 4, 1998, and its initial public offering followed on August 19, 2004. The company's mission statement from the outset was "to organize the world's information and make it universally accessible and useful" and the company's unofficial slogan is "Don't be evil". In 2006, the company moved to its current headquarters in Mountain View, California. Rapid growth since incorporation has triggered a chain of products, acquisitions, and partnerships beyond the company's core web search engine. The company offers online productivity software including email, an office suite, and social networking. Google's products extend to the desktop as well, with applications for web browsing, organizing and editing photos, and instant messaging. Google leads the development of the Android mobile operating system, as well as the Google Chrome OS browser-only operating system, found on specialized netbooks called Chromebooks. Google has increasingly become a hardware company with its partnerships with major electronics manufacturers on its high-end Nexus series of devices and its acquisition of Motorola Mobility in May 2012, as well as the construction of fibre-optic infrastructure in Kansas City as part of the Google Fibre broadband Internet service project. Google has been estimated to run over one million servers in data centres around the world, and process over one billion search requests and about twenty-four petabytes of user-generated data every day. As of December 2012, listed the main U.S.-focused google.com site as the Internet's first most visited website and numerous international Google sites as being in the top hundred, as well as several other Google-owned sites such as YouTube and Blogger, Google also ranks number two in the BrandZ brand equity database. The figure below shows the performance of google on NASDAQ for the last year.
January 06, 2013
TERM OF THE WEEK : Management Buyout
A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company from either the parent company or from the private owners. In most management buyouts the management group is required to borrower large sums of capital in order to afford to payout existing shareholders, which as a result, leads to the firm holding a greater amount of debt on its balance sheet. In the majority of MBO cases, management will buy out all the outstanding shareholders and take the company private, under the belief that the management group has the expertise to lead the business successfully if it controls ownership. Quite often, management will team up with one or more private equity firms to buyout the business due to the buyout experience required to facilitate such a transaction. Management buyouts are fraught with peril, and the reasons are fairly obvious. Management not only has superior information about the business, but studies have also found that managers can time a bid opportunistically to pay a lower price. Executives can also use their positions to push a board to favor their bid. Shareholders have to wonder why managers cannot make the same money for a public company that they are proposing to make by taking the company private. Creating value for shareholders is management’s job, after all. Typical MBO Candidate Businesses Corporate Seller— Non-core business unit or division desires to exit the business but wants to maintain confidentiality until the transaction is complete or is concerned that exposure to competitors would be too risky. Private Owner— That wants retirement and is considering a sale of the business to the existing management team. Distressed situations— Where speed of transaction and management’s familiarity with the business makes them the best buyer.
January 06, 2013
MARKET THIS WEEK SENSEX SENSEX gained 1..74% from last week and ended at 19784.08 this week .
Simple Moving Averages 30 Days
Returns â€“ BSE Sensex YTD
NIFTY The Nifty rose 1.82% from last week and ended at 6016.15 this week .
Simple Moving Averages 30 Days
January 06, 2013
Returns – NSE Nifty YTD
3 Months 3 Year
Overview Exchange Rates vs. INR Currency Symbol Rates % Change US Dollar $ 55.07 0.58% Euro € 71.97 -0.89% Dirham AED 14.99 0.26% Japanese ¥ 0.62 -3.125% Yen Chinese CNY 8.84 1.49% Yuan LENDING DEPOSIT RATE Base Rate
Savings Deposit Rate
Term Deposit Rate
Rs. / Unit
10gms. 1 Kg.
0.64 % 0.62 %
RESERVE RATIOS CRR 4.25% SLR 23.0% POLICY RATIOS Bank Rate Repo Rate Reverse Repo rate Marginal Standing
9.00% 8.00% 7.00% 9.00%
Indian shares edged higher on Friday to touch two-year highs, posting their strongest weekly performance since the end of November, as oil companies such as ONGC rose on hopes a proposed change in the government's pricing formula would boost gas prices. Software services exporters such as Tata Consultancy Services also rose on expectations upcoming October-December earnings results would beat expectations and that the sector would guide for an improved outlook in 2013. India VIX, also considered by some investors as a fear gauge, is just 2.5 percent away from its all-time lowest close. Shares in upstream oil and gas companies rallied on hopes that the pricing formula recommended by a government-appointed panel that looked into oil and gas exploration contracts would be approved by the government. The proposed changes would sharply raise the prices of domestic natural gas, analysts have said.
January 06, 2013
NEWS OF THE WEEK Ratan Tata gives way to successor Ratan Tata, who led the transformation of the Tata group from a conventional corporate house into a $100 billion global conglomerate with high-profile acquisitions abroad, retired on 28th December ending a 50-year run in one of India's oldest business empires. Marking a generational change, Tata, will hand over the reins of the group to 44-year-old Cyrus Mistry, who was chosen his successor last year and formally appointed Chairman earlier this month. Tata is hanging up his boots after steering the group for 21 years as its Chairman, when he succeeded the legendary JRD Tata. While JRD made Tata the Chairman out of the blue in 1991, Mistry of the Shapoorji Pallonji group and whose family owns 18 per cent stake in Tata Sons, was chosen by a five-member selection committee. During Tata's tenure, the group's revenues grew manifold, totaling $100.09 billion (around Rs 475,721 crore) in 2011-12 from a turnover of a mere Rs 10,000 crore in 1991.
Indian Rupee Drops Most in Two Months on U.S. Stimulus Concern India’s rupee fell the most in two months as concern the Federal Reserve will scale back policies that boost the supply of dollars hurt demand for riskier assets. Minutes of the Federal Reserve’s last meeting, released yesterday, showed policy makers expect to end their $85 billion monthly bond purchases in 2013. The rupee also weakened after data on Dec. 31 showed India’s current-account deficit widened to a record $22.3 billion in the quarter ended Sept. 30. Foreign funds poured almost $25 billion into Indian stocks last year. The currency, which weakened 3.5 percent last year after plunging 16 percent in 2011, lost 0.5 percent this week. One-month implied volatility, a gauge of expected moves in exchange rates used to price options, rose 10 basis points today, or 0.10 percentage point, to 9.80 percent. The rate fell 20 basis points this week after a 190 basis point drop in 2012.
Banks reject NOC, talks remain inconclusive with Kingfisher Vijay Mallya owned Kingfisher Airlines (KFA) is yet to get a clean sky free from clouds to start flying. The meeting between the core group of bankers and the debt ridden Airline Company held on Friday late evening remained inconclusive. The next meeting is scheduled on January 18 to get more clarify from the management. However, banks are hopeful that Mallya is closely working on a scheme of revival wherein he may sell stakes to any foreign airline. The company has already submitted a presentation of short revival plan to the Directorate General of Civil Aviation (DGCA) and a copy of which was also sent to lenders. State Bank of India (SBI) is already treating its KFA account as doubtful asset, the second level of non-performing asset wherein provisioning requirement is 30% and above. When a borrower fails to repay its loans for more than one, it slips from sub-standard to doubtful category. For other lenders, the status is likely to slip to doubtful category soon. Meanwhile, banks have rejected to issue any NOC (no objection certificate), a kind of assurance from lenders, in favor of KFA. Earlier, DGCA, the regulator for the aviation industry asked for NOC from the company to renew its airline operating license, which was cancelled by the former. Some bankers feel, NOC is nothing but an indirect form of assurance of extending fresh funds to the company.
January 06, 2013
Obama signs bill warding off fiscal cliff President Barack Obama has signed into law a bill to avert the fiscal cliff, a day after the House and Senate approved the much-debated legislation. But new battles over taxes and spending await Washington in the next few weeks. Congress averted that self-built precipice late Tuesday when the House voted to stave off widespread tax increases and deep spending cuts by accepting a brokered Senate compromise. It makes permanent the Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000. It raises rates on those who make more than that from 35% to 39.6%, bringing back a top tax bracket from the Clinton administration, and will raise roughly $600 billion in new revenues over 10 years, according to various estimates. The bill also extends unemployment insurance and delays for two months the threat of sequestration -a series of automatic, across-the-board cuts in federal spending.
Govt. considers Kelkar report; diesel, LPG rates may go up Diesel, kerosene and cooking gas LPG prices may be hiked soon as the government considers Vijay Kelkar Committee recommendations on cutting fiscal deficit. The Kelkar Committee, which was appointed by finance ministry to suggest a roadmap for fiscal consolidation, has suggested immediate hike in fuel prices and complete deregulation of diesel prices by start of 2014-15 fiscal. It also suggested raising kerosene and LPG rates. The panel had in September recommended "immediate increase in Petroleum prices. This should be continued in the next year in such a way that the prices of diesel are fully deregulated by the start of 2014-15. The prices of kerosene and LPG also should be revised regularly to keep the subsidy levels at affordable levels." Price of diesel, which currently costs Rs 47.15 per liter in Delhi, was last revised on September 14 when it was hiked by a steep Rs 5.63 per liter. Kerosene rates have not changed since June 2011 and it currently costs Rs 14.79 per liter in Delhi. State-owned oil companies currently sell diesel at a loss of Rs 10.16 per liter, kerosene at Rs 32.17 a liter and LPG at Rs 490.50 per 14.2-kg cylinder. Moily said the government was also considering raising the cap on supply of subsidized cooking gas (LPG) cylinders to 9 per household in a year from current limit of six.
January 06, 2013
COVER STORY Fiscal Cliff
America’s European Movement President Barack Obama has signed into law a bill to avert the fiscal cliff. It makes permanent the Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000. It raises rates on those who make more than that from 35% to 39.6%, bringing back a top tax bracket from the Clinton administration, and will raise roughly $600 billion in new revenues over 10 years. The bill would also: Raise taxes top earners pay on dividends, capital gains and inherited estates. Permanently stop the alternative minimum tax from raising levies on millions of middle-income families. Extend expiring jobless benefits. Prevent cuts in Medicare reimbursements to doctors. Delay, for two months, billions in budget-wide cuts in defense and domestic programs slated for this year. America’s economy may not be in as bad a state as Europe’s, but the failures of its politicians—epitomized by its 11th-hour deal to avoid the calamity of the “fiscal cliff”—suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s in three depressing ways. For the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. There has been incredulity that Europe’s politicians were so incompetent at handling an economic problem; so addicted to last-minute, short-term fixes; and so incapable of agreeing on a long-term strategy for the single currency. Those criticisms were all valid, but now those who made them should take the planks from their own eyes.
Can-kicking is a transatlantic sport The euro crisis deepened because Europe’s politicians serially failed to solve the single currency’s structural weaknesses, resorting instead to a succession of temporary fixes. America’s problems are different. Rather than facing an imminent debt crisis, as many European countries do, it needs to deal with the huge long-term gap between tax revenue and spending promises, particularly on health care, while not squeezing the economy too much in the short term. This week’s agreement eliminated most of the sweeping tax increases that were otherwise due to take effect from January 1st, except for those on the very wealthy, and temporarily put off all the threatened spending cuts. Like many of Europe’s crisis summits that staved off complete disaster: rather than squeezing 5% out of the economy (as the fiscal cliff implied) there will now be a more manageable fiscal squeeze of just over 1% of GDP in 2013. Markets rallied in relief but for how long. The automatic spending cuts have merely been postponed for two months, by which time Congress must also vote to increase the country’s debt ceiling if the Treasury is to be able to go on paying its bills.
January 06, 2013
And the temporary fix ignored America’s underlying fiscal problems. It did nothing to control the unsustainable path of “entitlement” spending on pensions and health care (the latter is on track to double as a share of GDP over the next 25 years); nothing to rationalize America’s hideously complex and distorting tax code, which includes more than $1 trillion of deductions; and virtually nothing to close America’s big structural budget deficit. (Putting up tax rates at the very top simply does not raise much money.) Viewed through anything other than a two-month prism, it was an abject failure. The final deal raised less tax revenue than John Boehner, the Republican speaker in the House of Representatives, once offered during the negotiations, and it included none of the entitlement reforms that President Barack Obama was once prepared to contemplate. The reason behind this lamentable outcome is the outsize influence of narrow interest groups—which marks a second, unhappy parallel with Europe. The inability of Europeans to rise above petty national concerns has prevented them from making the big compromises necessary to secure the single currency’s future. America’s Democrats and Republicans have proved similarly incapable of reaching a grand bargain; both are far too driven by their parties’ extremists and too focused on winning concessions from the other side to work steadily together to secure the country’s fiscal future. The third parallel is that politicians have failed to be honest with voters. Neither just as Chancellor Angela Merkel and President François Hollande have avoided coming clean to the Germans and the French about what it will take to save the single currency, so neither Mr. Obama nor the Republican leaders have been brave enough to tell Americans what it will really take to fix the fiscal mess. Democrats pretend that no changes are necessary to Medicare (health care for the elderly) or Social Security (pensions). Republican solutions always involve unspecified spending cuts, and they regard any tax rise as socialism. Each side prefers to denounce the other, reinforcing the very polarization that is preventing progress.
Fixed today, hobbled tomorrow Optimists will point out that America is unlikely to face a European-style debt crisis in the near future, but the slow-burning fuse is itself a problem. One positive side-effect of Europe’s crisis is that it has forced euro-zone countries to rise their retirement ages and rationalize pensions and health-care promises. America, which has the biggest structural budget deficit in the rich world bar Japan, will become an outlier in its failure to deal with the fiscal consequences of an ageing population. Its ageing is slower than Europe’s but, as its debt piles up and business and consumer confidence is dampened, the eventual crunch will be more painful. The saddest thing about the deal is how unaware Messrs Obama and Boehner seem to be of the wider damage their petty partisanship is doing to their country. As it has failed to deal with the single currency, Europe’s standing has crumbled in the world. Why should developing countries trust American leadership, when it seems incapable of solving anything at home? And while the West’s foremost democracy stays paralyzed, China is making decisions and forging ahead.
January 06, 2013
CAN YOU SOLVE IT? FinQuiz 1. 2. 3. 4. 5.
India’s financial budget is presented every year on which day? what is the theme of recently proposed 12th five year plan of India? SEBI has recently launched a portal to enable investors to lodge and follow up complaints they may have. What is the name of the portal? What is the current limit of FDI in India in Insurance sector? According to the new norms by RBI, What is the required minimum worth any NBFC should have to set up the white label ATM’s?
LAST WEEK’S ANSWERS: 1. 2. 3. 4. 5.
Y C Deveshwar Bill and Melinda Gates Foundation Lalgudi Jayaraman InterContinental Exchange 73%
Winner: Ajay Maheska
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January 06, 2013