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Dublin University’s financial newspaper
Bonus reform proposals at Lloyds
»» Cash bonuses may be discontinued »» Potential move motivated by public outrage and shareholder concerns »» Longer term incentives may be introduced By bishoy abdou Design Editor The banking group Lloyds is considering radically reforming its method of compensating bankers. The firm may propose to eliminate annual bonuses in favour of various longer-term incentives. The firm is 40%-owned by the UK government, after it needed capital injections due to impaired loans following the financial crisis. This comes on the heels of public outrage and shareholder dismay
at compensation structures that didn’t adequately reflect performance, and which were partially blamed for the financial turmoil of recent years. At many firms shareholder value was destroyed while employees received large payouts. It is a recurrence of this that many in Lloyds and the wider financial industry are determined to avoid. Many individuals and policy think tanks have advocated a shift away from cash bonuses to a different model, where bankers’ pay is tied to how the business performs
›› Lloyds Banking Group is the latest to seek to overhaul its remuneration structure over a defined period. This design is intended to better align the interest of bankers with those of the shareholders. There have been numerous attempts by banks such as HSBC in recent to alter how their employees are paid. In many jurisdictions these changes are now required by law.
Lloyds have denied that changes are imminent, stating “We keep our remuneration plans under review at all times but have no current plans to change our structures and do not expect to do so in the forseeable future.” It is speculated that the 2014 pay round could be affected by any planned modifications, however, it is also possible that the idea might
be set aside. Lloyds decision on this matter could be indicative of which way the industry is heading as regards pay. No financial institution has yet fully implemented an overhaul, suggesting there may be significant practical difficulties associated with ending traditional annual bonuses.
Out of print - Newsweek ends an era By cathal o’domnallain Deputy Editor
›› Newsweeks iconic cover - thing of the past
It was announced earlier this week that Newsweek, the iconic American political publication, will not live to see its 80th birthday, as the publication completes its transition to digital format by ending its printed edition. This switch will make Newsweek the most widely read political magazine to become a digital-only publication, portending a trend of how traditional news outlets are being forced to adapt by changing market trends. Since 2005, Newsweek’s circulation has plunged by approximately half to 1.5 million readers. Advertising dropped more than 80%, while the magazine’s annual losses had reached an estimated $40 million. These losses are rumored to have provoked a more aggressive mar-
keting policy by the publication, who recently featured controversial articles by Niall Ferguson and Ayan Hirsi Ali as their cover stories. Founded in 1933 by a former Time journalist, Newsweek has been a regular American coffee tables, having gained worldwide renown for its eclectic features and its ground-breaking stories. Two years ago Washington Post Co. sold the magazine for $1 to Sidney Harman, an audio equipment tycoon who later merged the magazine with the Daily Beast website. Last year, Sidney Harman’s family decided to pull its resources from the magazine, leaving it more reliant on its its own, steadily declining, resources. Tina Brown, the current Editor in Chief of the Newsweek/Daily
Beast, said she had long been exploring avenues towards ending the printed edition, stating that it was a matter “when” not “if.” By eschewing print, the magazine anticipates that it will save “tens of millions of dollars” in printing and distribution costs. Fears loom over the prospect that the move will not be as rational as they currently moot. Without guarantees that current Newsweek subscribers will switch over the their new web edition or that advertisers will continue to funnel funds into the enterprise, Newsweek are entering unchartered territory. It’s anticipated by the company that the magazine’s base rate of subscriptions, at $24.99 is going to lure many print subscribers. Experience of some online-
publications is mixed. US News & World Report, which went online in 2008, continues to be profitable, attracting 5.6 million unique users per month. The content, however, is largely free. Newsweek will have help of its conjoining website, The Daily Beast, as a promotional tool for its content. The Daily Beast’s traffic has grown 36% in the last year to 5 million unique users per month, according to statistics provided by the firm. Under Mrs. Brown, Newsweek has become known for its controversial covers, including one of how Princess Dianna would reportedly look at the age of 50. Brown insists, however, that “the cover will play the same role it always has as a wonderful marketplace of ideas.” 24 October 2012 Issue 2 Vol 2
Consumer Price Index
News & current affairs
The Bull 24.10.2012
EURO - DOLLAR
BP to sell TNK-BP stake to Rosneft BP’s board have approved a €20 billion deal with the Russian state oil company Rosneft to sell its stake in TNK-BP, safeguarding the British energy firm’s operations in Russia. The deal will mean end its currently troublesome partnership with Russia’s oligarchs, as they embark on a new operation with the country’s most powerful company – the Kremlin sponsored national energy champion. The executive team received “strong support” from the UK energy champion sell Rosneft its 50% stake in TNK-BP for a combination of cash and shares. This transaction should end the company’s joint venture that has been highly profitable for the company, but has proven highly controversial, with recent run-ins with the consortium of Russian-born
Windows 8 success make or break for Microsoft Microsoft net profit has fallen over a billion dollars in the last quarter as its latest versions of Windows and Office prepare to be launched this autumn. The drop from $5.74bn to $4.47bn represents a 22% drop. Microsoft shares fell 3% upon the announcement. The company hopes that Windows 8 can fill the shortfall and provide a boost to the company’s share price. The amount of resources thaT Microsoft has poured into their latest development means that if Windows 8 flops, the company could face more quarters in the red. However, the figures for revenue do not include the $1.36bn in revenue that Microsoft have deferred to the following quarter, where they hope the success of their new operating system Windows 8 will boost their shares. If this were added in Microsoft would have made a relatively small $9m profit. Nonetheless, the decrease in revenue is reflective of the sector as a whole, with the tablet market gaining ground rapidly on its laptop equivalent because tablets are viewed as more portable, lightweight and cheaper than the average laptop. It remains to be seen whether Windows 8 would help reverse this trend towards tablets in the future.
BALANCE OF PAYMENTS
McDonald’s shares drop 4.5% as latest profits hit by Antony wolfe
›› Joint at the hip - The Kremlin and Rosneft billionaires grabbing the headlines and dragging down BP’s share prices. The previous attempt by BP to secure a $16 billion swap deal with Rosneft was blocked by the AlfaAccess-Renova, a conglomeration of Russian oligarchs. Doubts persist over the question of whether or not the deal will be any less cumbersome than the former arrangement. The new partners, led by Igor Sechin, one of
President Vladimir Putin’s closest allies, Rosneft is still dominated by the state and some remain skeptical over the extent of BP’s influence in corporate decision-making. BP will receive approximately 12.5% of Rosneft shares that the company holds in Treasury, as well as the Russian governmnet’s shares in a state investment vehicle, Rosneftegaz. This is is on top of the 1520% of Rosneft shares, currently valued at €10 billion. That would
leave BP the second largest shareholder of the Russian energy giant after the Russian state. Company officials have urged caution, stating that important details had yet to be worked out over the deal. BP, which has owned approximately 1.4% of the Russian company since it was initially floated in 2006, could now get two seats on the company’s board to reflect its growing influence within the company.
Large US companies pay less than 1% tax on UK profits A spokesperson for eBay said that the company “works with tax authorities and complies fully with all applicable tax laws and regimes in Europe”, insinuating that their tax liability is payable to other countries in Europe. Facebook are just one example of a large US firm who have moved their headquarters
to countries like Ireland who provide a competitive tax regime, including a relatively low rate of corporation tax. However, a report by The Guardian newspaper in April found that Amazon have paid no corporation tax to the UK treasury in the last three years, despite UK sales of £7.6bn.
A strong dollar is being blamed for a drop in McDonald’s net income from $1.51bn last year to $1.46bn for the third quarter of 2012. The health risks associated with fast food and the increased competition in the sector could also be factors in the downturn. Sales actually rose 2% in Europe, as McDonald’s famously made the news during the summer for opening their largest ever store in the Olympic Park in London. The capacity reached 1,500 seats inside the store but has now been scaled down after the Games. Members of the public expressed concern that a fast food company could sponsor an event that promoted exercise and health, but controversy was averted as the store often had queues out the door during the Games. Despite this 2% increase in sales, operating income decreased by 7% due to an appreciation of the dollar. Without this appreciation the operating income would have in fact been a positive 3% profit. The rise in the value of the dollar ensures that repatriation of profits back to the US are worth less. McDonald’s CEO Don Thompson cut a relaxed figure, saying that he “remained confident in the underlying strength in our business model”.
CONTRIBUTORS An investigation by the Sunday Times has uncovered data on large US multinationals paying negligible tax rates on commercial profits dating back to 2010. Ebay, the online retain giant, is alleged to have paid only £1.2m tax on profits of around £800m in 2010, representing an average tax rate of .0015%. According to calculations they were liable for a corporation tax rate of £51m. In addition, coffee giants Starbucks are accused of having of £8.6m of corporation taxes over a period of 14 years.
Editor Ted Nyhan Deputy Editor Cathal O’Domhnallain Layout and Design Bishoy Abdou Special thanks to Damien Carr and Antony Wolfe for all their help during the production.
This publication is partly funded by a grant from DU Publications Committee and by Trinity Investors Society. This publication claims no special rights or privileges. For advertising, please contact email@example.com.
Serious complaints should be addressed to: The Editor, The Bull, Box 31, Regent House, Trinity College, Dublin 2.
News & current affairs The Bull 24.10.2012
Obama’s swing-state blitz With Romney closing in following his impressive debate performances, President Barack Obama will launch a round-the-clock, twoday campaign blitz through six battleground states in an attempt to halt Romney’s recent advances. Polls show that an improved debate performance had little or no effect on his polling numbers against the former Massachusetts governor with just two weeks remaining until the November 6 election. The pair and neck-and-neck as the election begins to reach its conclusion. Americans remain divided over the prospect of giving Obama more time to fix the economy, or putting a former private-equity executive
who argues that he knows how to create jobs at the helm of one of America’s most challenging times. Obama will hit Iowa on Wednesday, followed by Colorado, Nevada, Florida and Virginia, cast his ballot in his home town of Chicago, then stop in Ohio to end his tour. “As the President crisscrosses the nation, he will spend time on Air Force One calling undecided voters, rallying National Team Leaders and Volunteers and continuously engaging with Americans,” his campaign said in a statement. A Reuters/Ipsos poll on Saturday showed Mr. Obama commanding a tight lead, polling at 46% compared to Romney’s 45%. The poll has narrowed since Friday, when
Obama held a three point lead over his Republican rival, showing the limits of the bounce received following Tuesday’s debate. The key to the election appears to lie in Ohio, the Midwestern state where Obama has resiliently clung on to a narrow lead, with Romney making advances in Nevada, Iowa and Colorado. A RealClearPolitics average of polls showed Obama leading Ohio by 2.5 percentage points, and Romney ahead in Florida, another crucial swing-state by 1.5%. By Cathal O’Domhnallain Deputy Editor ›› Obama agressively intensifying his campaign
Spanish tests fail to relieve investor stress The heavily scrutinised Spanish banking crisis has seen increased criticism since the release of the results from the recent banking stress tests. The results were initially welcomed by investors as the principal sum of €59.3 billion needed for banking recapitalisation seems substantially less than the maximum request by the Mariano Rajoy’s government of €100 billion, but analysts have since questioned the basis of the estimates for this principal. The recapitalization results was met with mixed reactions from Spanish banks with Francisco González stated; “It is a very important step to restore confidence in the Spanish financial system.”
Banco Popular set to avoid the state hand-out has called the tests “confusing” and “weakening.” Banco Popular’s share price dropped 10 per cent as it was told it needs to raise €3.2 billion in fresh capital, €2.5 billion by November. It is expected that this funding will be raised by asset sales and share issues which are the predominant factors influencing the share price fall. The now colossal task falls on the Spanish government to implement economic reform and reduce budget deficits. Doing so is only the beginning of dealing with the volatility that is affecting the Spanish banking sector and eventually restoring investor confidence.
A new Irish Times/Ipsos MRBI poll published last week has shown that satisfaction with the current Irish government has dropped 6 percentage points since a similar poll last May. Satisfaction with the government now stands at just 21%, with 73% saying that they are dissatisfied. The government parties, Fine Gael (down 1 to 31%) and Labour (up 2 to 12%) will individually take solace in the fact that their support has remained consistent, but with December’s budget looming and likely to be as tough, if not tougher, than recent years, it is hard to know how long this can last. However it was Fianna Fáil’s support level which was the big surprise of the poll, rising 4 to 21%, once again making it the second most popular party in the state, the first time in well over two years. This bounce appears to have come at the expense of Sinn Fein, who dropped 4% down to 20%, just nar-
rowly behind Fianna Fáil in third. It’s difficult to pinpoint the exact reason for Fianna Fáil’s rise, with some highlighting their vocal presence in the Dáil during the recent controversies over Health Minister Dr. James Reilly and the resignation of Labour’s Róisín Shortall. Others have cited Fianna Fáil leader Miceál Martin’s performance in last month’s RTE Prime Time debate between himself and Gerry Adams, while the party itself has claimed the work of its new ‘Local Area Representatives’, are helping the party’s support base in Dublin where it no longer has a TD. However the real test for the party will come in December at budget time where they will seek to avoid being drowned out by fellow opposition party Sinn Fein as well as the Dáil’s large number of independents. The Greens struggled to make an impact without any TDs, continuing to languish at 2%.
FF support rises
4 Live Register decreases in September The Live Registere recorded a monthly decrease of 400 in September 2012, bringing the total number of unemployed to 435,000 according to a report released by the CBO. The standard rate of unemployment in September 2012 was 14.8%, unchanged from the monthly rate in August 2012. The survey found a monthly decrease of 100 males in September 2012, while females decreased by 300 during the same period. The number of long-term claimants on the Live Register in the month of September was 192,778. The number of male long-term claimants increased by 3,354 in the year to September 2012, while the number of females claiming for these benefits increased by 6,025. In September 55.1% of all Live Register dependents were shortterm claimants, down from 58.1% in September 2011. There were a total of 85,090 casual and part-time workers on the Live Register, representing 19.8% of total claimants. The total number of people under the age of 25 on the Register showed a steady decline from September 2011. These rates, however, may reflect increasing emigration rather than a better employment outlook.
News & current affairs
The Bull 24.10.2012
Quinn avoids jail By bishoy abdou Design Editor
Former property tycoon Sean Quinn avoided jail, despite being handed a two week reprieve by a Dublin court in spite of the emergence of new allegations of illegality made by Anglo Irish Bank. His son, Sean Quinn Jr., was also released from prison after serving a three-month sentence for contempt of court. Quinn, who was once Ireland’s richest man but has since declared bankruptcy, appeared before court in relation to his role in a complex scheme in relation to a €500m property portfolio beyond the reach of Anglo Irish. In June, justice Elizabeth Dunn judged that Mr Quinn, his son Sean Quinn Jr and his nephew Peter Darragh Quinn were in contempt of court and ordered him to reverse a scheme which aimed to strip assets from Anglo Irish. She said asserted that the three men had behaved in a “blatant, dishonest and deceitful manner” and consequently sentenced Sean Jr to a three month prison sentence. Quinn, who was given three months to purge his contempt, was said to have done nothing to revoke it, according to lawyers represent-
›› Sean Quinn exiting court ing Anglo Irish. There were also renewed allegations that he had taken actions in recent days to strip assets from the bank. Counsel for Quinn said he was cooperating with Anglo Irish in its efforts to safeguard the assets. They also contested that Quinn’s age and health conditions should be factored in prior to applying any puni-
tive measures. Justice Dunne said the new evidence was of “great concern.” She adjourned the court hearing for two weeks in order to give time a a Belfast-based legal team to prepare a new defence for the former billionaire. This past week over 6,000 people attended a public rally in Cavan
to support Quinn, who built a €6 billion property empire in Ireland over the past 40 years. His fortunes collapsed after he failed to hedgedmultibillion-euro bets on shares in Anglo Irish, the bank that caused the maelstrom at the centre of the Irish banking collapse.
Investors fearful amid fears of global slowdown Global stocks on crude oil fell on Friday, while investors maintained a bleak view of US corporate earnings after both General Electric and MacDonald’s stocks disappointed, while failure to stem the Euro-Crisis and ongoing fears of a global slowdown heightened fears investors’ fears. The dollar performed strongly against the Euro, primarily due to a perceived lack of progress on a Spanish bailout. The CBOE Volatility Index. VIX, the ‘fear gauge’, jumped 13.5% to 17.06, its highest level since September 5. Google and Microsoft also reported earnings well below analysts’ estimates, contributing to the S&P’s 1.7% loss - its biggest since June. European shares suffered because of signs of disagreement among EU leaders over how to help the Union’s peripheral banks. US stocks extended their slide to more than 1.5 percentage points as earnings from large multinational underscored the effects of the economic slowdown. The market is also expecting the Federal Reserve to to increase its benchmark interest rates in 2014 rather than 2015
technology & business The Bull 24.10.2012
Clare Dunne reports on Europe’s largest tech gathering
ith over 4,000 attendees reported to have passed through the doors of the RDS, the Dublin Web Summit (DWS) has come a long way from its humble origins in 2010 where just 600 people squeezed into the Chartered Accountants House to listen to various tech wizards speak. In similar fashion the Web Summit has not only exploded in Dublin, but internationally as well. It has been brought to London, New York and is Berlin bound in December. A trip to San Francisco seems inevitable. Among the 4,000 attendees this year were 200 incredibly inspiring speakers (ranging from Skype’s cofounder Niklas Zennström to Cindy Gallop of Make Love Not Porn) and over 250 start ups from all over the world who came to Dublin, many for the first time, to network, pitch, invest and keep tabs on the competition. Dublin it would seem is most certainly open and ready and means business. Integral to the summit’s pulling power is the Electric Ireland “Spark of Genius” competition which offers the tech titans of tomorrow the enviable opportunity to pitch their ideas to a panel of noted investors, entrepreneurs and media. The winning enterprise walks away with a handsome cheque for €100,000 and a rather awful looking blue haired award. In previous years, SPARK was an exclusively Irish affair though DWS’ accelerated global expansion has forced geography to become redundant – a common theme throughout the conference. The 2012 competition received over 1,000 entries that were shortlisted to just 100 across four product categories (social, mobile, customer
and enterprise). Each shortlisted company then pitched their business idea from one of two stages in the Main Hall on both days of the summit, with the sixteen semifinalists and four finalists pitching from the Main Stage in the final hours of the summit. Notably there were no Irish finalists in 2012, though their presence was certainly felt throughout the pitching process. The finalists came from Silicon Valley (Smart-
250 Start-ups from all over the world Things), Singapore (Vibrease), Finland (Ovelin) and Sweden (Tictail) – a feat which will inevitably boost the summit’s international reputation and could very well pay dividends for Dublin in the future as these incredibly diverse companies expand and look to establish international offices. SmartThings, a company that
enables everyday objects to become smart took home the hideous electric blue mohawk mannequin award. The company provides a platform that is (unsurprisingly) connected to the internet and other ordinary devices to sense and control real world things. They basically provide software to enable your smart phone to close the window you forgot to shut, turn off a light that has been left on and open doors you are too lazy to open yourself. Handy indeed. In collecting the award, Alex Hawkinson, the founder, remarked that when SmartThings looked to open offices abroad, Dublin would be a definite location. A moment that Cosgrave and the wider DWS team undoubtedly savored. Hosting Europe’s largest tech conference in Dublin has more than a few positive knock on effects. One of the most significant spin offs is the f.ounders event that kicked off when DWS officially wound down on Thursday. f.ounders is an event so influential in techie terms that Bloomberg describes it as resem-
›› Cindy Gallop, of Make Love Not Porn, was a speaker at the summit
bling a ‘Davos for Geeks’. And although it is probable that f.ounders will exclusively be held in New York over the coming years, the small fact that the ‘who’s who of tech’ originally and for the moment continue to converge in Dublin to talk, network and brainstorm is incredibly important for Ireland Inc.’s reputation and resilient commercial image. Whilst f.ounders attracts the heavyweights of cyberspace, START 150 is an exclusively startup focused event within DWS that brings together 150 of the most up-and-coming, ‘disruptive’ (a key buzz word within tech talk) startups. These uniform Converse wearing entrepreneurs are afforded invaluable networking opportunities at every corner, are wined and dined upon arrival and are never left standing out in the rain. Each would-be Steve Jobs and Victoria Ransoms (of Wildfire, the global leader of social media marketing recently acquired by Google for a small $300million) bursts with a passion so enthusiastic that at times can be overwhelming. But overwhelming in a good sense of the word – recession resembles an alien word in their vocabulary. A personal favourite START of mine was an English based company, Foodity, that allows hungry, app-enabled consumers to build online grocery baskets direct from published recipes on their smart phones/devices. Their idea was like many others discussed over coffee, conversation and cocktails during the conference – ideas so beautifully simple that you wonder rather annoyingly why you never thought of it in the first place. Take for instance another UK based company, Recite Me, which makes websites accessible to anybody, anywhere by
either reading aloud the content or adjusting the page presentation to facilitate those with learningdifficulties like dyslexia and those with visual impairments. Or the Irish company that turns boring and rather infuriating tasks, like proving to Ryanair that you are human when booking flights, into fun, engaging games. So simple, and yet so annoying that someone else got there before I did. For those attending the conference, one could only be inspired, excited, and where truth be told, rather relieved that jobs are available in Dublin and in Ireland for
Dublin...is most certainly open and ready, and means business graduates and experienced professionals alike. Dublin Web Summit has solidified its position on the global tech calendar and can only progress to continue to play an affirmative role in Ireland’s economic recovery. Every person I spoke with at the summit spoke of optimism and with enthusiasm. Those who were from overseas spoke with a sense of reverence about Ireland’s position within the tech sector – how encouraging is that? My only hope is that the infectious euphoria fostered in the RDS and Mansion House this week is able to filter into the mainstream media and to actually encourage a rehabilitation of our morale.
Technology & Business
Ending the patent wars
The Bull 24.10.2012
Jane Casey argues for the reform of America’s dysfunctional patent system.
In the past two years, $20 billion has been spent on a patent litigation and patent purchases in the smart phone industry alone. In 2011, Google and Apple spent more on this than they did on research and development of new products. Patents are designed to protect intellectual property, to give an inventor the sole right to make, use, or sell an invention. The problem is that patents are designed for an industrial world, to prevent others from copy-
corporations are using patents as weaponry...A hindrance to innovation ing machinery or tools. Now, in this digital age, companies are racing to patent concepts and abstract ideas before they even know how to physically create the concept. Corporations are using patents as weaponry, and buying out other companies solely to increase the number of patents they own. Patent law in the digital sector has come to be a hindrance to innovation, and needs to be reformed to promote growth and competitiveness.
Patents were designed for an industrial age, where inventors feared that their machine or tool would be copied, and that they would not receive compensation for the research, development, and investment that went into creating a product. Eli Whitney patented his specific cotton gin design, not the idea that a machine could remove a seed from cotton. In 2004, even before Apple created Siri or the iPhone, the company applied for a patent to use one interface to search through multiple databases, i.e. to search through the Internet, your contacts, and even your iTunes, all at once. Without stating how this would technically work or how the software would function, Apple was granted the patent that essentially gives them ownership to any search engine that searches more than one database at a time. In the technology sector, as soon as a startup creates even a moderately successful product, a patent holder will sue them and claim infringement on their patented concept. All basic technology for computers is patented, and there are companies just waiting to sue new entrants to the market. In August, Google announced that they were buying Motorola Mobility with the intention of acquiring more patents to use in this never-ending patent war. Edmund Phelps, Nobel laureate in Economics, remarked last
Facebook: It’s free and always will be? In spite of the many and abounding pseudo-legal disclaimers and copyright notices we see popping up on our newsfeeds of late, from concerned friends and acquaintances desperately attempting to restrict Facebook’s use of their “private” data, Facebook does own what we post on their site… so tough. We pay
for the myriad conveniences and social goods this free social network brings about by relinquishing relatively trivial private information. Most users would agree (in fact all users have, by virtue of signing up in the first place, already agreed) that this is a pretty good deal. However, developments this
›› The clash between Apple and Samsung is an example of a high profile patent conflict Tuesday in his address to The University Philosophical Society and the Student Economic Review that a start-up in Silicon Valley needs to employ more lawyers than engineers to protect themselves against patent warfare, and stressed the need for U.S. patent law reform. Today in the U.S., when a tech company takes out a patent, it is granted for 20 years, even if the patent is not used to innovate, but merely as protection. Many in the field are suggesting that patents are unnecessary and should be thrown out completely. Large, well-established corporations, like Apple and Google, argue that they need patents to be adequately compensated
for their research and development. This argument sounds unreason-
month may signal a shift in revenue model for the Social Media giant as it attempts to stabilise its recently floundering market value. The seemingly innocuous introduction in the US, of a feature allowing regular users to promote a post for somewhere in the region of $7,
introduction of this feature as a rather harmless and relatively cost effective way of promoting particularly important events in one’s life, such a wedding or charity drive, if we examine the potentially suspect economics behind the move, the implications are somewhat more ominous and far reaching. Facebook are wandering into the murky economic territory of artificial scarcity creation. For some time now the social network has been essentially reducing the average user’s visibility by arranging the newsfeed not chronologically, but according to an algorithm known as EdgeRank. While it can be argued that the algorithm throws up a more relevant, curated feed of news, it means however that a typical post is seen by only 16-18% of your friend. Even when arranged chronologically (a feature that is certain to be phased out), users report that only about 10-20% of their friends’ activities are actually showing up. Combining this trend with the introduction of promoted posts, Facebook are essentially retracting users’ visibility and then attempting to sell it back to them. With the network recently achieving a landmark 1 billion active users, is this a move in the di-
Facebook are wandering into the murky economic territory of artificial scarcity creation could be a signal of a profound shift away from the company’s original and founding premise of a service that is “free, and always will be”. Facebook claim in some examples, that the feature (a small “promote” button that is optional before publishing a post/photo) may increase a posts visibility on the newsfeed by as many as 3.8 times. While the company have downplayed the
a start-up in silicon valley needs to employ more lawyers than engineers able when one considers that Apple is making over a billion dollars a week from iPhone sales, making back the costs of invention as well as
a robust profit. Others are pushing for shorter patent terms in the technology sector, of three or five years, which would allow patent law to reflect the rapidly changing industry and encourage more start-ups to enter the market. Patent laws exist to benefit society, not just large corporations. They should incentivize innovation, competition, and new entrants into the market. For decades, the U.S. has been a leader in innovation and creation. In this digital age, the American economy largely relies on the technology sector for growth. In light of this, patent laws need to be reformed to prevent innovation grinding to a halt in this sector. rection of a more sustainable and realistic revenue model, one based on the “Freemium” model successfully employed by peers such as Linkedin? Potentially. Startlingly, if Facebook could convince each of
facebook are essentially retracting users’ visibility and attempting to sell it back its users to promote just one post a year, the company would almost double its revenue, a statistic the company’s currently discontented investors would welcome. However, to generate any revenue at all the company must remember, it needs to retain its user base, and, with multiple viable substitutes emerging, it’s questionable whether or not Facebook can maintain its monopoly of where we go for social visibility online into the future. By Gabriel Corcoran
technology & business The Bull 24.10.2012
The next productivity revolution
Andrew Winterbotham explores the potential of 3-D printing and its effects on industry and society
onsider the following hypothetical situation. Imagine you need a new pair of shoes. The usual way to go about acquiring these would be to purchase them, either online or in the traditional shop front. Instead, imagine this: you design a pair of shoes exactly to your preferred style, size and colour specifications on your computer or download an already existing design from the web and then simply hit the print button and wait for a device on your desk to print out your shoes. Herein lies the concept of 3-D printing, which is also known as “additive manufacturing”; products are built up by progressively adding material, one layer at a time, as opposed to the old, “subtractive” method of reducing the raw material to the final product . Rather than explaining the process of 3-D printing in detail (which would require a lengthy treatise and a PhD in mechanical engineering), it is more interesting to examine its current state and its likely implications for the future. The kind of technology that would enable one to print out a pair of shoes is not yet here, but it is getting close. Today 3-D printers are capable of using materials such as plastics, ceramic, glass and metals. However, they are not yet capable of producing multiple materials at once, so we are unlikely to see 3-D printed mobile phones or computers any time soon. This represents a significant hurdle that must be overcome if we are to see such complex items being printed. Yet, researchers are confident that this is a matter of ‘when’ as opposed to ‘if’. As with computing in the late 1970s, 3-D printing is currently confined to hobbyists and workers in academia and industry. But like
computing before it, 3D printing is spreading rapidly as the technology improves and costs fall. To put this into perspective, a basic 3-D printer now costs less than a laser printer did in 1985. Basic 3-D printing is now beginning to become more cost effective and affordable for the home user.
the 3D industry is on the verge of a break through Companies such as MakerBot are at the forefront of this change. While high end printers range in price from 25,000 to over 100,000 dollars, the hobbyist can purchase the MakerBot ‘Thing-O-Matic’ for as little as 1,300 dollars. The raw material for this is plastic and a one pound spool of plastic costs a mere 20 dollars. Such a machine is only capable of producing basic items including figurines and kitchen utensils, among others. MakerBot has recently introduced the Replicator 2, with CEO Bre Pettis likening its introduction to the “Macintosh moment” of the PC industry nearly thirty years ago, when PCs were machines that could only be used by programmers to machines that would come to enrich the lives of ordinary people. No longer do consumers have to go through the previously difficult task of designing the objects to be printed themselves. CADs (Computer Aided Designs) can now be easily made by the everyday user, or simply downloaded from the internet from sites such as Shapeways and Thingiverse. One can download designs for items such as a vase, an iPhone protective cover, board
game pieces and wall hooks. They can then be printed off at home by the end user. It should be clear at this stage that the 3-D printing industry is on the verge of a breakthrough, the implications of which for manufacturing, the economy and society as a whole are staggering. If 3-D printers are to become a common fixture in every home, just as the PC did, then the results would be economically “disruptive” to say the least. If one could print just about anything in their own home, then manufacturers would become obsolete. The manufacturer in this situation would be the designers. Factories, warehouses and shipping would no longer be needed. The concept of being able to produce anything at home is similar to the replicator in Star Trek. Yet this is within the realm of possibility and is in fact closer to reality than fiction. It has been posited that the proliferation of the 3-D printer will have as significant an effect as the Industrial Revolution. It has even been dubbed as “Industrial Revolution 2.0”. This is where the similarity ends. While the Industrial Revolution led to major economies of scale, 3-D printing will have the opposite effect. With 3-D printing, the marginal cost of producing a single unit is the same as for producing thousands of units. In this regard, mass production could give way to mass customisation, given that no extra cost is incurred. 3-D printing is far less capital intensive than traditional manufacturing. Thus, it now becomes comparatively cheap for an individual to produce a good. Producing prototypes for example has never been so fast and inexpensive. As a result, barriers to entry should be greatly reduced. This in turn should lead to
greater innovation. Not only is 3-D printing cheaper than traditional manufacturing, it also leads to less waste on account of its “additive” nature, which means that no more raw material than is necessary is used. It could also lead to a possible resurgence of Western manufacturing. Asian economies will no longer have the advantage of low labour costs, as labour becomes more obsolete the more advanced 3-D printing becomes. This argument is less than convincing however, as Asian economies will be just as able to take advantage of the new technology as their western counterparts. The commercial and medical applications of 3-D printing are limitless. For example, a Californiabased firm, Contour Crafting, has created a giant 3-D printing device for building houses. At the opposite end of the spectrum, two MIT students recently developed the PopFab, a 3-D printer that can fit into a small suitcase. On the microscopic
3d printing is far less capital intensive than traditional manufacturng scale, scientists have developed a process called “3D-photografting,” which can potentially be used to grow living tissue. This means that it may even be possible to print entire organs for transplant. Customised artificial limbs are already being produced using 3-D printing technology. Not only will the proliferation of 3-D printing change the nature of
manufacturing, but copyright laws will also quite literally have to be rewritten. For example, by scanning and then copying everyday items such as a mug, a lamp or even pieces of furniture, one is not necessarily breaking any copyright laws. According to Michael Weinberg, a senior staff attorney with Public Knowledge, a Washington digital advocacy group “if an object is purely aesthetic it will be protected by copyright, but if the object does something, it is not the kind of thing that can be protected.” There also exists the ethical question of what one can and cannot print. For example, all of the parts for a handgun were recently produced using a 3-D printer. The goal of distributing its design across the web has been stalled by the manufacturer of the printer, Stratasys. In an attempt to stops its product from being used for unlawful activity, it asserted that the individual in question did not possess a firearm manufacturing. This legal grey area has lead to controversy. The pace at which this technology will improve, and its effects, are almost impossible to predict. It has even been posited that the improvement in this technology may stall, and hit a trough in the Gartner hype cycle. More likely is that something similar to Moore’s law will come into play, which will dictate the pace at which the resolution of 3-D printers improve. One thing for sure however is that 3-D printing is here to stay (the industry is expected to grow to $3.1 billion by 2016 and $5.2 billion by 2020, according to research group Wohlers Associates). Being able to design and print a pair of shoes in your own home may someday- in the not too distant future- no longer be a mere pipe dream, but a reality.
8 EU proposes ring-fencing banking activities
markets & Finance
The Bull 24.10.2012
The EU appears set to follow in the footsteps of the UK after a report recommending the ring-fencing of trading from commercial activities within banks was published. The Liikanen Report is a result of the review of the European banking system by an expert group chaired by Erkki Liikanen, the governor of the Bank of Finland, ordered by the European Commission in November 2011. The proposal that has received the most attention is that if a bank’s trading arm exceeds €100bn or 15-25% of its total assets, it must be assigned to a separate legal entity, although it may remain within the banking group. This allows for the continuation of the universal
banking model that has been entrenched in the European banking system for decades. The report produced four other key recommendations, including the drawing up of ‘recovery and resolution’ plans to help prevent systematic disaster should a bank stumble into difficulty. The introduction of ‘bail-in’ debt instruments whereby bank executives and private creditors would bear some of the losses if a bank went into distress, more stringent capital requirements and adjustments to corporate governance rules to ensure a more amenable realignment of the interests of bank management, shareholders and consumers.
Much of the Liikanen Report reflects the well-documented Vickers Report put forward in the UK. Discrepancies between the two do exist, however, mainly in that Vickers suggests cordoning off retail banking instead of trading. Both, however, fall short of the Volcker Rule due to be introduced as part of the Dodd-Frank Act in the US. This rule proposes a ban on proprietary trading, implying that investment banks who trade for their own profits would be prohibited from lending to consumers. The key issue here is that the implementation of the three proposals will be problematic. Firstly, we now face the prospect of divergence in the structure of the
›› Darkness falls on the universal banks
banking industry in the US and Europe. This will be of great concern to the financial centres most affected by the changes, most notably New York, London, Frankfurt and Paris. As an industry that has seen sig-
NONE OF THESE FINANCIAL HUBS ARE KEEN TO LOSE GROUND nificant global integration and the harmonisation of the US and European systems after the repeal of the Glass-Steagall Act in the US in 1999, heterogeneous legislative reforms could have profound effects on banking. Banks are chiefly footloose enterprises and will be happy to pack up and relocate to the city with the least invasive regulatory requirements, and none of these financial hubs are keen to lose ground on the others in the race to attract firms. A major source of concern for the western financial world is the potential eastward shift of the industry, with Singapore, Hong Kong and Dubai all waiting in the wings. It may be that banks will in future cluster in the city with the most flexibility and conceivable loopholes in new legislation. Another potential grievance is the further uncertainty created for the banks as they process the implications of each rule on their practic-
es and balance sheets and seek new ways to adhere to all three while still generating profits. Not only must many major investment banks reform the way they do business, they must do in a climate of uncertainty caused by the implications of these proposals. Both the European Union and the British government are yet to draft legislation based on the respective reports. Given the significant lobbying that is likely to come, it may well be a considerably watered down version that eventually comes into effect. It is because of these issues that the unilateral implementation of these new proposals is urgently required. A coordinated legislative reform across continents would mean that although the shock to the industry may be great, it would be a one-time occurrence, after which banks could adapt and recover. The lingering uncertainty that can dismantle financial systems, such as the cloud that has been hanging over the Eurozone over the past year as politicians have hesitated instead of acting, could be avoided. This would also prevent significant geographical distortion of the financial sector. There is no doubt that the banking industry is set to undergo fundamental change worldwide and could see massive drops in profit margins. Whether this leads to an ignominious battle between the US and EU, and potentially spilling into Asia too, remains to be seen. By Cliona Nic Dhomhnaill
BAE-EADS proposed merger shelved following political stalemate Andrew Mulhair examines the international tensions which precipitated the merger’s collapse It was confirmed on October 10th that the planned merger of aerospace and defence manufacturers BAE Systems and EADS had collapsed.
it would have created a defence and aerospace giant
Disagreement between the UK, French and German governments has been cited as the primary reason behind the deal’s collapse. This was subsequently confirmed by a joint statement released by the two firms shortly after news of the collapse broke: “it has become clear that the interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger.” BAE shares fell 2% in London trading as the news broke, while EADS shares jumped 3%.
The deal was intended to combine BAE’s expertise in military and defence with EADS’ aerospace juggernaut, Airbus. It would have created a defence and aerospace giant to rival Boeing of the US. It would also have marked the final consummation of a union of the French, German and British defence industries that was originally mooted way back in the 1990s. The bosses of BAE Systems and EADS had issued a joint appeal for political support for their proposed $45bn (£28bn) merger. The UK government retains a “golden share” in BAE, giving it certain veto powers. The UK sought a deal where its counterparts agreed to limit their influence in the merged firm in order to maintain BAE’s strong working relations with the US Pentagon. The US were concerned about any deal that relinquished political control over BAE to the French and German governments. The French State together with aerospace company Lagardere jointly possesses a 22% stake in EADS. The French government had been concerned about potential job
losses in France, as well as protecting a European “champion” firm from any possible future takeover by non-Europeans. The German government holds substantial influence through the shareholding of the privatelyowned Daimler. The company owns 15% of EADS directly, but controls a 22% stake under an agreement with other German shareholders. The German government has confirmed that it is continuing to negotiate a buy-out of Daimler’s shares by the state-owned development agency KFW. It has been reported that the German government was highly
bae and eads had no choice but to cancel the proposed deal reluctant to allow EADS - owner of Airbus and therefore a strategically important manufacturer - to run itself in an arms-length and commercial way. Once the German position
›› Governmental opposition topedoed the deal became widely known, BAE and EADS had no choice but to cancel the proposed deal. The most significant bone of contention regarding the terms of the deal was the assertion by the UK government and the two company heads that directors appointed by the French, German and UK governments should not hold positions on the top board of the merged group. BAE’s board had expressed “an absolute condition for the transaction that the French and German governments should never own more than 9% each of the merged outfits, that they should not vote
as a bloc and that they should not have representatives on the holding company board”. This was required in particular to address the previously mentioned US fears about possible foreign government influence over BAE. The US is BAE’s biggest single customer, and the UK firm is involved in classified research and development projects for the US military. On a broader scale, this reflects tensions within the EU as well as US power over European business. Let’s hope that news of the EU’s newfound status as a Nobel laureate organisation is a positive omen for this uneasy relationship.
markets & finance
What if Greece exits? The Bull 24.10.2012
Conor Lawlor outlines the “Grexit” scenario
Greece is facing its sixth year of recession. The Greek people are at breaking point, as is their economy. We have seen the hard left and the hard right emerge from relative obscurity in Greek politics in a populist anti-austerity backlash, while questions are beginning to arise over whether a Greek exit from the eurozone, ‘a Grexit’, could be engineered, and if this outcome could be more favorable than the painful austerity measures currently being imposed.
the troika... may opt to cut funding for debt servicing The European project of political, economic and financial integration, begun in the aftermath of World War II, is facing a defining moment. Even the most die_hard fans of monetary union cannot rule out the possibility of Greece exiting the eurozone. As discussed in this column last month, the Outright Monetary Transactions (OMTs) have gone some way to allay the possibility, but doubts persist. A possible Grexit scenario This is a summary of the four main steps Euro policymakers and the International Monetary Fund (IMF) could take. Step 1: Cut primary deficit funding to the Greek government. The European Union Commission forecast a primary deficit (income less expenditure excluding bond coupons, interest etc.) of 1% of GDP in 2012 and 2% in 2013. In a first
instance, the Greek government would try to issue IOUs to its suppliers and employees. Domestic economic agents may have little choice but to accept the IOUs, but they would naturally seek to convert these as quickly as possible to Euro (or another major currency), and most likely at a discounted rate. This would mark a first hint of a dual currency system. Step 2: Cut Greek Banks from European Central Bank (ECB) Open Market Operations (OMOs). A recapitalisation of Greek banks is currently underway, which should see the currently excluded banks readmitted to the OMOs. In the event of the Greek government refusing conditionality, bank runs and non_ performing loans could seriously erode the balance sheet of Greek banks, which would see them cut off from the ECB’s OMOs. Step 3: Stop payment on Greek debt. The Troika (IMF, EU Commision and ECB) may opt to cut funding for debt servicing and redemption of Greek government debt. This would then trigger default. Step 4: Remove the Central Bank of Greece from the Euro system. This would bring about a de facto Greek Euro exit. The government would have to rapidly establish the legal framework to create a new, credible currency to meet payments, and, crucially, to secure essential goods for the Greek people, such as oil and medical supplies. Investment strategies for the “what-if” scenario As the euro crisis has dragged out, resulting in global slowdown, it has become clear that a Grexit is partly “in the price”. The 2 year German bond yield is virtually zero;
›› Is a Greek exit the solution? there are record euro shorts in the FX market and European indices with Southern Europe exposure are significantly under-performing their US counterparts. FX strategy: Be short EUR/ USD if Greece leaves. A Greek exit would take the EUR/USD to 1.10. The EUR/GBP, EUR/NOK and the EUR/SEK have fallen some dis-
equity strategy: be long defensive stocks tance but can easily fall further if there is a capital fight from the euro. Rates strategy: Be long duration. The 10yr UST will reach historically stretched levels at 1.50%. Favour Gilts and Treasuries to Bunds.
Any solution to keep the eurozone together is going to require very accommodative monetary policy from the ECB for a long time. That anchors the front end of the European curve but the safe-haven flows out of the peripheral bond markets into Bunds has gone too far. Equity strategy: Be long defensive stocks. An orderly break away from the euro by a member state could cost the Eurostoxx 50 as little as 10%. A disorderly break up could see European indices drop by as much as 50%. The following is a good protection basket: - Eurozone- BMW, Sanofi, Adidas, Unilever, Paddypower, Publis, Akzo Nobel. Switerland- Roche, Nestle, Syngenta. - The UK- Tesco, Reckitt Benckiser, Royal Dutch Shell. SwedenVolvo, Eriksson. Emerging market strategy: Be tactically defensive on global
emerging markets. In rates, show preference to the front end of the curves in Hungary and Poland. Faced with the obvious realities of a Greek exit from the EMU, the most likely course of action is to stick with the status quo. Angela Merkel reminded the German parliament that the “EMU is not just a monetary project but a political one”. She also extended an olive branch to its country of origin, declaring that if Greece sought “a growth stimulus in the eurozone, which we could pursue in the interest of Greece, we’re open for this. Germany is open for this.” Draghi’s OMT’s go some distance to provide a stable future to the euro. The uncertainty pertaining to the eurozone woes has abated, but it is by no means over. Of course, the one thing we can be certain of is that this Greek tragedy has an unfinished script…
The M&A doldrums - Waiting for the upturn Merger and acquisition activity has been affected by uncertainty in the global economy, particularly due to the Eurozone-crisis, and the effect of this has been exacerbated by slowing GDP growth in the emerging markets and by virtually
non-existent growth in the developed markets. However, looking forward, the core conditions for a new wave of M&A activity still remain in the background and could come to the fore should current uncertainty abate.
As corporate bond yields decline financing deals becomes easier
The cautiously-optimistic outlook pertaining to 2012 M&A activity failed to materialise as attractive target valuations and large corporate cash reserves were outweighed by continued uncertainty surrounding the European debt crisis and weak global economic performance, with corporates reluctant to execute deals without being able to make predictions on economic trends. Nonetheless, there exists a set of underlying conditions which would suggest an upturn isn’t too far away. The tendency for M&A activity is to come in waves and research shows that a few factors are needed for such a wave to occur. Firstly, a shock, be it regulator-, technology- or demand-induced, disrupts the industry. The subsequent upheaval leaves some industry-players weaker than others, thereby creating a diver-
gence that allows the stronger firms to consolidate by merging or acquiring the weaker market participants. For this to take place, however, high levels of corporate savings or easily accessible credit must available for a large M&A wave to take place. Current conditions are aligned in such a way that it would imply an upcoming wave. Beyond the multiple shocks that have occurred since 2008, cash and credit are also becoming easier to obtain with large cash reserves on corporate balance sheets – S&P 500 companies’ combined cash totals reached nearly $1.1 trillion as of March 2012 – new lows on corporate bond-yields and improving lending conditions make an ideal environment for M&A. The macroeconomic implications of this would likely be positive overall. From a firm’s perspective, buying a rival provides instant capacity and
this is has been a key driver of corporate growth strategies in the recent past. While consolidation may not necessarily increase aggregate capacity in the industry, the tendency is for consolidation among more efficient players, leading to lower prices and raised output. In industries that have already consolidated or that have exhausted economies of scale, the benefits may be derived from economies of scope instead. The key benefit of a new wave would be the curtailing of excessive corporate saving and the reinvestment of untapped capital into the economy. Nevertheless, until such a time that corporates believe “uncertainty” has adequately diminished and the Eurozone problems are resolved, M&A is set to underperform. By Gary Finnerty
The Bull 24.10.2012
M&A off-cycle internship in Brussels Q: What can you tell me about your background? I studied Law for 5 years of (including a “Master,” it might seems that I am specialized in a certain field of Law. However, that isn’t the case. After your “Master” you’re a generalist and you can have access to the bar after those 5 years only). So it’s called a Master but it is actually a long undergrad (hope you got that!) Q: Certainly insightful. What can you tell readers about your internship? It was a one year internship: I worked in IT. I developed a startup, and used programmers in Pune and Shanghai Q: Excellent. And what course did you specialize in? I Did a Masters in Finance in TCD. Q: 5 Years of Law and 1 year of Finance? That must taken quite a long time Haha, it took 7 years to complete: I know, It’s a lot compared to UK profiles; however as I said earlier, anyone who studies a proper degree will need to do 5 years plus an additional one on top of that if that person wants a specialized masters. In my opinion, this long education system is a weakness when we compared our situation with UK/Irish fellows who are ready to begin their careers at 22 Q: Some pearls of wisdom right there. Can you give more specific details about your internship? I’m currently working in IBD and M&A in a leading Belgian financial institution. Clients come to us exclusively from the Benelux region. Teams are small in the M&A department, normally consisting of about 30 people. The Wealth Man-
agement division is huge. It has roughly 1000 people in 3 different countries. Q: What do you do as an Corporate Finance Intern? Same job as an analyst really; the only difference being that every piece of work must be verified by a senior colleague, while analysts can send things to clients directly. Q: Tell us about your typical Day. My day to day task is to support managers who are attempting to close hot deals. It’s impressive to see how much experienced people can deliver in one day! Q:Do you do much work with companies? I do a LOT of pitchbook, where I suggest potential targets to companies. Those presentations must be rigorously done in Power Point in order to make sure that the financials I computed are correct and that the information provided is accurate. Secondly, lot of people underestimate the importance of good visuals, which are very important in this aspect working. Believe it or not, this part of the pitch is actually proper marketing. I also do a lot of Valuation: I create Comparable Comp and DCF models in Excel. I adjust those models for the company that I am working on, the industry, the growth and the size. I particularly like this part since it is intellectually challenging and you learn a lot about how to read a company financial statement. A big part of my job is also to find information using different types of databases, Bloomberg, Mergermarket, Thomson Reuthers, Capital IQ. Q: What else can you tell us about Corporate Finance? Corporate Finance is wider than
just M&A; it also includes things such as bond issues project, where you also focus on companies analysis. Q: Are there many myths about the job? The “Financial Modeling & Excel Wizard” that a lot of people talk about is completely overrated. Interviews sometimes stress a lot about those very quantitative aspect of the job. Different models are used in to value a company, but as soon as you know them, you create Excel templates that you will eventually adapt to another company... but that’s it. There is no such things as quantitative guys modeling on Excel the whole day. In addition the valuation is a very small part of a project and the sales process. I think a lot of people exaggerate this technical aspect of the job. Q: What do you enjoy about the job? It’s one of the few jobs where you are actually intellectually challenged. When you work with industries you don’t know much about your clients or their expectations. The business knowledge you get is enormous and incredible. You compile different market studies every week. In addition in the selling side, you draft full documents with your clients which explains to the potential buyers their entire business processes, operations, strategies, etc. This part is gold. I really enjoy this part! Q: What would you consider the most important of placing a value on a company? The most important part of the valuation is to project the cash flow of the company in the future and assume a growth rate. This part is what will actually determine the intrinsic value of the company. You
make this projection based on a business plan, that you draft with the client-it’s actually business! Q: Many may find the technical part very daunting. What would you say to them? It’s not just a technical job. You do a lot of things. When you want to close a deal there’s a very important negotiation and human relations part. There are certain parts of the job that are highly technical, but it’s such a diverse industry that there’s something there for people of all backgrounds. Q: What appeals to you most about the job? It’s fast moving and has a very dynamic atmosphere. Q: What do you dislike about the job? The Long hours...
Diego Riera Diaz gives his account of working in M&A
Consulting and Audit summer internship Q: Please describe your background and your experience this summer. A: Well, I’m a third year BESS student studying Business and Economics, and I spent my summer on internship in Deloitte in Dublin. It was a 12 week rotation program where I had the opportunity to spend 6 weeks in Management Consulting and 6 weeks in Audit. The experience was fantastic and gave me a great insight into the work and level expected from a first year trainee. Q: What was your motivation to do this internship and how did you go about securing one? A: I was unsure about what I wanted to pursue as a career, and was very put off by the fact that most of the big companies I spoke to only took penultimate students for internships, as I wanted earlier experience to gain insight and start making future decisions. Deloitte was open to any student applying for their summer internships so naturally I decided to give it a shot.
The application process online is quite straightforward, although I would say to students interested to allow yourself time to think through the questions and not leave it to the last minute as you want to be 100% happy with the answers as it goes on file and can stand as a strength or a weakness if you go for a graduate position later on. Q: What was the typical internship day like? A: Consulting was very different to Audit. As it was the quiet season for Audit it was a bit more relaxed, 9-5.15 with the option of a half day Friday if you had worked up your hours during the week. Consulting was technically 9 till 5.15 everyday but as it was all project based work the day was generally longer. I worked on various different projects; some were only at the beginning stages where I would have to research the clients company and industry trends and put together a summary paper for partners and senior managers, other times I played a supportive role and spent
time editing excel spreadsheets or proofing proposals, mainly all the type of tasks you are asked to do in your first year of training after graduation. Q: Could you explain the group you were in and how it differed from others? A: I was part of the financial services team in Audit, and the only main difference is the types of clients in Audit. I was part of the CFO services team in Management Consulting. This area provided various services for CFO’s from a range of different companies and industries and dealt with any problem or issue a CFO came to us with, I also supported on the Deloitte quarterly CFO survey which questions CFOs about their business position and strength. Other areas in consulting focused on the implementation of different technologies e.g. SAP, and others areas are focused on the strategy and operations element to businesses. Q: I understand that you were offered a full-time position at the
end of your internship. What advice would you give to aspiring Consultants? A: Get as much insight as you can as early as possible. I knew what my skills were and knew I wanted project based work that was continuously changing and challenging me in different areas, however, I certainly didn’t know where I would find the right fit. Also, don’t settle. If you think you are more skilled for a particular place/career, then make sure you do everything you can to get it. Most companies, certainly Deloitte, respect that you are driven and aren’t afraid to push for what you think suits you. It will stand to you in any field. Lastly, keep your ear out for every opportunity you can, there are tons of talks, open evenings, and stands in college. Sign up and go to them, they give you a great idea of what is really needed to succeed and what companies expect of you after graduation.
An interesting dual summer internship is described by Aideen Fennell
The Bull 24.10.2012
Audit summer internship
Damien Carr provides an account of his internship in Deloitte Audit
Q: First of all, please tell us a little about your background and your summer. A: I’m final year Economics as part of the B.E.S.S. course here in Trinity and over the summer I completed an internship with Deloitte Dublin. I was based in the Financial Services [FS] section of the Audit department but also spent a month working on a joint FS – Corporate Finance [CF] project and shortly after leaving I was offered a contract starting Autumn 2013. Q: What motivated you to pursue a career in Audit and how did you go about it? A: My pursuit of a career in Audit came about very much by accident. You’re greatly limited with the Big Four. My first preference had been CF with Audit coming in close second and so when I got the phonecall offering m e a n i n terview f o r A u dit I took it
without hesitation. Given that it hadn’t been my first choice I then had to do some additional research on the field – research which, I guess, ultimately got me the internship. Q: Describe your typical day at Deloitte. A: A pre-work run usually meant getting to the office at around 8:45am. This gave me time to check my emails and catch up on what was happening in the world before work which helped keep me up to date with market news. For instance if your client happened to be on the news some morning there was a pretty good chance it would impact your day. Over the course of the summer I worked primarily with three different clients and each one, while similar in some respects involved a different daily routine. Q: Could you explain the differences between the different sections of Audit and which you prefer? A: The two main areas of audit are Consumer and Technology Business [CTB] and Financial Services. Financial services deals with the audits and regulatory accounting requirements of Banks, Investment Funds and Special Purpose Vehicles etc. FS would also deal with any other projects these clients would like to run, usually in conjunction with Deloitte’s consulting arm. CTB is often considered the more fun side of audit – or at least the more diverse side. Whereas in FS you’re primarily based in the office, excluding the odd trip to London or the IFSC, in CTB you’re do-
ing practical audits. What do I mean by this? Well I mean that you can be doing everything from basing yourself in some mobile operators HQ to counting boxes in a factory in Kerry. Deloitte also offered internships in CF and Consulting. These are much smaller teams than CTB or FS would be and as such you get much more responsibility and client interaction from an earlier stage. Personally for me I had chosen FS above CTB and I am more than happy I made that choice. Q: What advice have you to give? That all depends on what year you’re in reading this. For any Bull readers in Second year my advice is simple - get involved [write for The Bull!]. In all seriousness though, while academics are important, unless you do something someone else doesn’t, have relevant team experience or already contribute in some way to the field you intend to work your C.V will drop to the bottom of a very big pile of other applicants. From three years of applications, interviews and work experience I can honestly tell you that prospective employers start at the bottom of your C.V. with your hobbies and interests, work their way up to your experience and then if they decide they like you and that you’re someone they could potentially work with in the future they’ll have a look at your grades. For those in Junior Sophistor you will hopefully already have something on your C.V. if not you still have time as most internship applications won’t close until December or January and some go as
late as February. Almost all firms hire on a rolling bases so don’t leave it until the last day. I’ve heard firms promise they don’t look at applications until after the deadline has passed only to receive a call a week before the closing date offering me an interview. I would also advise applying for as many internships as possible. For my fellow Senior Sophistors the milkrounds have just closed and most other graduate position applications will close in the coming weeks. It’s still important for your C.V. to stand out so if you haven’t been that involved in College life over the past three years think back to what you’ve done that shows skills your desired career would look for and emphaise those in both your C.V. and your cover letter. Research in depth the area and the company you have the interview with, most of the information you learn will be completely irrelevant in the interview, but it gives you an air of confidence that may prove vital. Lastly my internship with Deloitte gave me an insight into something I hadn’t before thought about but which I feel is important to take into your career choice. A degree today will not make you stand out. With 70%-80% of students going to third level a level 8 degree no longer gives you the edge it once did. While you would still hope a degree from an institute such as Trinity is an advantage, a masters and a professional qualification such as the ones provided through a lot of graduate training programmes are hugely important.
Internship in Silicon Valley
Bishoy Abdou recounts a summer spent in San Francisco
Q:Hi Bishoy. What can you tell me about your internship? Well, believe it or not, I was based in a small engineering start-up all the way in San Francisco, California! The company, called Prototank, deals in hardware prototyping and product development. Despite only having two years of engieering experience, I posessed the requisite knowledge and skills to perform successfully in the internship. Q: That certainly sounds interesting. Describe your daily routine? Unsurprisingly, this wasn’t your typical job. I arrived in every morning at 10 am. At this point I was briefed by my boss who would set out my tasks for the day. This could range from building robots to writing up instructibles online (instructibles.com) to helping to organise large corporate events. This was aided by the 3-D printer and la-
ser cutter in the firm’s offices, which aided productivity greatly. Q: Your range of tasks were certainly eclectic. How did this firm come into being? The firm sprung from a highly innovative concept – Super Mario lamps. It sounds incredibly simple, but all great ideas are. After this product took the market by storm, they gradually began to expand their operations. They placed an enormous emphasis on improving existing products and producing new hardware devices. The constant drive of the staff and ambition of the staff was what kept me so motivated. Q: Was there anything unusual about the firm? Believe it or not, though it’s an engineering firm, none of the members had any engineering qualifications! These guys came out of college with Arts Degrees, completey unrelated to engineering, but over the years they developed engineering principles and theories, and
began to develop an interest in developing and improving technology. Q: So, was there anything about the firm that you either liked or disliked? Firstly, it was an unpaid internship. Because the company was still in its embryonic phases, it was very difficult for them to provide me with a wage. On the other hand, I was paid for partaking in the bigger corporate events; namely coordinating and leading team-building exercises. Q: So, there were certainly pros and cons associated with your internship. How, precisely, did you get your intership? Applying for internships was the bane of my life during second year. I began applying for them in September, but with very little success. Believe it or not, I only got my internship completely by chance: I was working in a mechanical workshop in California, when a member of staff noticed that I was working on developing a prototype of the
Ironman suit. He explained what the firm he worked for did and he encouraged me to apply. I took his advice, hence why I’m speaking to you about my internship today. Q: That’s certainly an impressive feat for anybody – Well done. Can you give any advice to those currently applying for interships? It sounds cliched, but work hard and don’t give up. Searching for internships can often be very disheartening and incredibly stressful. I’m certain that the right internship program is out there for everybody, all you need to do is search hard enough. For example, my management pursued a goal that seemed beyond reach to them at one point in time (after they left college with Arts Degrees), but they continued to pursue their goals. I’d encourage all readers to follow their lead - if you work hard enough, you’ll succeed.
The Bull 24.10.2012
Doing business in Ireland: Spotlight on corporation tax Ireland benefits significantly from its low corporate tax rate, writes David Lally With the European cover of Time magazine hailing the ‘Celtic Comeback’, the triumphant Taoiseach now seeks the praise of his European counterparts. Many believe that Ireland is finally returning to growth and losing its affiliation with Europe’s troubled south. As the Kerry group announces 900 new jobs, the nation is brimming with optimism for a brighter future. For many, amidst the increasingly upbeat tones, the importance of Irish tax competitiveness has been forgotten as a fundamental driver of growth in the economy. More signs of encouragement can be taken from Ireland’s shift from the speculative property sector towards real growth. Foreign firms are vital for the Irish economy. A reading of The Irish U.S Economic Relationship 2012 highlights the continuing emphasis placed by multinationals on the need to retain our competitive corporate tax regime. The report, published by the American Chamber of Commerce Ireland, states “Ireland’s favourable corporate tax
rate remains highly attractive to US multinationals, although lower corporate taxes are becoming more common among states bent on attracting the attention and capital of multinationals.”
Pressures are again mounting from the powers to review our tax structures, and join a european effort What becomes evident from some basic research into the nature of paying tax in Europe is that what companies actually pay to the tax authorities is often a very different amount than nominal tax rates would suggest. Google’s Irish operation perfectly illustrates this
case. Last year the firm’s operations here generated €9Bn in gross profit and paid only €8M in tax. Given that Ireland’s corporation tax rate is still in the double digits, the revelation that a major firm such as Google pays only €1 for every €1000 in gross profit to the Revenue Commissioners is surprising. It raises the prospect that Ireland might be an appealing place to do business less because of the low corporate tax rate and more because of how easy it is to avoid. While disillusionment with the effectiveness Irish tax policy is no doubt justifiable, the case for maintaining Ireland’s low tax rate becomes stronger when taken in a European context. In a World BankPWC report on European tax policy, it was found that the long-held perception of Ireland as some form of tax haven is largely unfounded. When one passes by the nominal corporate tax level, and looks beyond to the final real company tax, Finland comes out just above Ireland’s 11.9% at 15.9%, France at 8.2% and Belgium at 4.8%. Given this trend, the misgivings about Ireland’s corporate tax rate appear to be entirely unjustified. Pressures are again mounting
›› The IFSC is largely a product of Ireland’s favourable tax regime from the powers to review our tax structures and join a European effort towards tax harmonisation. The newly formed European Power Elite (Von Rompuy, Manuel Barosso, Juncker, Draghi), are intent on introducing proposals to be ratified early next year in a report called Towards a Genuine Economic and Monetary Union. Facing terms of credit dictated not by market forc-
es, but by Troika, the government may soon find itself between a rock and a hard place. Deciding between retaining our trademark businessfriendly tax regime and a burdensome interest rate on our credit injections from abroad might mean disaster as multinationals uproot and leave, or Irish citizens are burdened by yet another exorbitant tax increase.
The hidden strengths of the UK economy With exports falling, the debt burden rising even higher and public morale at record lows, Britain seems to be in an inexorable state of decline. Few are sanguine about the nation’s prospects. The usually upbeat David Kern, Chief Economist at the British Chamber of Commerce, called the UK’s economic performance both “weak and inadequate”. Even official figures appear to be against Britain. During the last three quarters, HM Treasury estimated that GDP fell by 1.3%. In
Britain’s economy shows many underlying strengths that are highly encouraging to the casual observer addition, Britain’s total economic output is only modestly higher than when the Tories initially took office in the Summer of 2010, prompting the International Monetary Fund to downgrade its growth forecasts for the UK. Yet delving beneath the surface
of underperformance and hopelessness, Britain’s economy shows many underlying strengths that are highly encouraging to the casual political observer. Though the IMF forecasts that the UK’s economy will shrink by 0.4% this year, there indications of growth. Inflation is falling, output is rising and the job market is proving surprisingly resilient. Retail sales have risen sharply during the year, particularly on durable goods, while new car registrations are up 1.3%. This contrasts favourably with 2011, when tax hikes and rising inflation depressed consumer sentiment. Thankfully, the government’s tax increases were front-loaded in 2011, meaning that further increases are likely to be modest and have a less detrimental effect on the economy. Any naive observer would squawk at the current rate of unemployment of 8.1%. This is the normal reaction during ordinary times. In 2008 the unemployment rate stood at 5.3%. However, these are far from ordinary times. When compared with the European average, Britain’s employment figures appear incredibly buoyant. Moreover, Britain’s rate has declined because many of the previously unemployed are beginning to find work again, not because workers are dropping out of the labour force - as is the case in America. Sceptics may attempt to refute these figures by pointing out that many of the newly employed are finding only part-time work or
are entering jobs that they’re unsuited for, thus preventing firms from truly harnessing their skills. Yet historical precedence teaches
the nation’s growth is slow and feeble us that this is normal when an economy is beginning to emerge from a severe recession. David Cameron’s policy of rebalancing the economy in favor of the private sector is also coming into
fruition. 700,000 net private sector jobs have been created in the private sector, more than compensating for the job losses in the public sector. Fortune has rewarded the Tories for the bold moves they have made vis-a-vis the economy. Business surveys continuously show more signs of confidence than you’d normally find in an economy that has contracted as much as Britain’s has. The lead that the Labour Party currently commands over the Conservatives may very well be attributable to the Party’s Conference earlier this month. Labour’s leader, Ed Miliband, displayed further signs of poor stewardship and socialist na-
ivete during his speech, which was long on compassion and solidarity, but failed to mention the word ‘deficit’ once during its 65-minute span. Though applauded by a rapturous media in its aftermath, he failed to address Britain’s greatest challenge. The nation’s growth is slow and feeble, China’s growth is slowing, and Europe continues to be caught in the economic doldrums. In spite of this, however, Britain’s underlying strengths are more apparent by the day. With employment rising, inflation declining and output increasing, the future is looking bright for the UK. By Cathal O’Domhnallain
13 Reducing the public debt: Lessons from history Economy-debt
The Bull 24.10.2012
Sean Tong warns of the dangers of repeating historical mistakes when framing economic policy. A key feature of the Great Recession has been the alarming increase in the indebtedness of countries around the world. Of particular concern are those countries that have breached the crucial debt-to-GDP ratio of 100%. While all agree that the reduction of this burden should be addressed as a matter of priority, there is some debate about the policies that should be implemented to achieve this. Lessons can be drawn from a recent IMF report published in their World Economic Outlook. Data gathered between 1875 and 1997 was analysed to identify 26 episodes during which the debt-to-GDP ratio
the fed is pursuing expansionary policies of advanced economies breached the 100% threshold, and the outcomes of the policies implemented over the subsequent 15 years was recorded. Important lessons can still be drawn from the consideration of
the examined countries. The United Kingdom’s experience in the aftermath of WWI, for example, serves as a cautionary tale against combining tight fiscal and monetary policies. The public debt had reached 140% of GDP and prices were double pre-war levels. The government of the time implemented severe fiscal austerity to redress the public finances, while high nominal interest rates were also introduced to return to the gold standard. Though the country recorded a primary budget surplus of 7% throughout the 1920s, growth was stunted by the extraordinarily high real interest rates that arose during this period of deflation leading to ever-increasing debt levels, taking Britain on the verge of bankruptcy. Japan’s debt problem arose in the 1990s primarily as a result of the bursting of stock market and real estate bubbles, which created weakness in the financial sector and the economy as a whole. The Bank of Japan found itself constrained by the zero percent lower bound to nominal interest rates and weakened transmission of monetary policy due to structural flaws in
the banking sector. Interest rates were raised prematurely and fiscal stimulus was attempted, neither of which eased the burden of debt or redressed the public finances. It was only when structural weaknesses in the financial sector were addressed, through bank re-
weaknesses in the financial sector have largely been addressed capitalisation and writing down bad loans, that quantitative easing was successfully introduced. Helped along by a depreciating exchange rate and favourable external environment, the debt-to-GDP ratio stabilised at 185%. This point is reinforced by considering the policies pursued by the US following WWII, in circumstances very similar to those facing the UK as described above. Though they also moved their primary budget from deficit to surplus, the monetary policy pursued was decidedly more expansionary. Influenced by the Keynesian revolution at the time, and fearing deflation more
than inflation, the Federal Reserve kept interest rates low by maintaining a cap on government bond yields. This encouraged investment and led to high inflation which reduced the debt-to-GDP ratio by almost 35%, while strong growth and primary budget surpluses cut an additional 2% per annum. A few broad lessons can be drawn from these and other cases. Firstly, fiscal consolidation should only be attempted once an appropriate monetary policy is in place. The contrasting outcomes of the British and American policies are particularly supportive of this lesson. Unless austerity is accompanied by measures encouraging growth, the policy will be self-defeating. This must be coupled with a well-functioning banking system so that policy decisions are effectively transmitted. While it is arguable that this is currently the case in the US, where the Fed is pursuing expansionary policies and weaknesses in the financial sector have largely been addressed, it is less clear in the case of the European periphery. Caution must be exercised, therefore, when pursuing fiscal adjustments in this context. Secondly, it is important that any fiscal consolidation takes the form of permanent rather than temporary measures. This was par-
ticularly evident in the reforms introduced by Belgium and Canada in the 1980s, as was the importance of a supportive external environment. It is unlikely that such an environment will present itself in the near future, as slow growth and contractionary policies are pervasive around the world. Perhaps the most sobering finding was the length of time required to reduce the public debt. Belgium achieved the greatest peacetime improvement in its budget balance, but it still took a decade to move from a 7% deficit to a 4% surplus. While it seems that the Euro-
fiscal consolidation can be pursued pean periphery will struggle to ease its debt burden in the face of slow global growth and the costs of domestic deflation, it seems that there is still hope that sharp fiscal consolidation can be pursued in a supportive monetary environment. History suggests, however, that the latter is a prerequisite of success in the former, and highlights the importance of the ECB in navigating a safe path through this crisis.
On the brink
With the United States teetering on the brink of the “Fiscal Cliff”, enacting a plan to bring the crushing debt of the US under control seems essential. As its national debt as a proportion of GDP is beginning to reach unsustainable levels, the Federal Government needs to reduce the deficit, whilst not sapping growth. It needs a comprehensive tax reform that will close loopholes, while at the same time simplifying the tax code. The programme
a “grand bargain” is required to avert sequestration needs to be amenable to both parties, with revenue enhancers and sharp spending cuts and structural reforms. A “Grand Bargain” is required to avert sequestration - a programme of spending cuts and tax increases due to come into effect on January 1. How did the United States get into this predicament? When the economy was booming in January 2001, the Congressional Budget Office projected that the Federal Government would run a budget surplus of $3.5 trillion through 2008 if the policies of that time remained
unchanged. Alas, when that time came the national debt was beginning to skyrocket due to enormous deficits. How did this happen? The answer is simple. Two unfunded wars and a prescription medication programme, coupled with two tax cuts, lead to exploding deficits. The Republican Party believes that tax cuts stimulate the economy whenever prescribed. This belief is predicated on the belief that individuals, when left to their own accord, are capable of spending their money more rationally than the government. In turn, they invest their money into the economy leading to a higher revenue due to more robust growth. The history of the nineties, however, proves that this isn’t always the case. In 1993 Bill Clinton introduced a big tax increase that every Republican in Congress voted against. Yet the economy boomed. It grew at a rate of 4.1% that year, and continued to grow strongly during his Presidency. Spending restraints were also introduced through Paygo rules, meaning that taxes could not be cut unless offset by spending cuts. This created the stability for prolonged growth. George W. Bush’s tax cuts in 2001 and 2003, on the other hand, had the opposite effect on the fiscal situation. The economy continued to languish after the 2001 recession as the Treasury began to haemorrhage revenue, which fell to 17.5% of GDP
›› The IFSC is largely a product of Ireland’s favourable tax regime in 2008 from 20.6% in 2000. CBO figures show that when the Bush Presidency ended that tax cuts cost the Federal government $1.6 trillion, while slower-than-expected growth further reduced revenues by $1.4 trillion. There are important lessons to be drawn from this episode of US history. Tax cuts don’t always succeed in stimulating the economy as Reagan’s Tax Reform Act of 1986 did. There’s absolutely no guarantee that Paul Ryan’s plan of cutting rates to 20% and 28% will enhance revenues. The Bush experience shows us that they can have the effect of perpetuating the cycle of debt. His plan is a product of Republican insouciance on debt. While
he has set some targets, he fails to outline which programs he would cut and which loopholes he would close. The Bowles-Simpson report, on the other hand, makes very specific proposals on how the target of cutting federal debt by $4 trillion over 10 years is achievable. This plan reduces marginal rates of taxation and specifies the popular loopholes that would be closed. Mortgage interest would no longer be tax deductible, while rates on capital gains would fall in line with income taxes - codifying the ‘Buffet Rule’. Another source of revenue would be the 15-cent-per-gallon increase in the federal gas tax alongside a steep reduction in discretionary expendi-
ture. The tragedy of this situation is that neither party has chosen to embrace the findings of the proposal. House Republicans chose to ratify the Ryan plan as a blueprint for future fiscal policy, while Obama distanced himself from its findings in spite of having commissioned it. This is likely to prolong uncertainty about the capacity of the Federal Government to service its debts. Both parties need to make every effort to break this gridlock. Obama must stand behind the proposal to prove that he’s the change you can believe in, while the Republicans need to end their cognitive dissonance on debt. By Cathal O’Domhnallain
The Bull 24.10.2012
‘One unit of currency, one vote’ Earlier this year, formal records were released under the Freedom of Information Act which revealed the intertwined relationship between the Irish Government and the Irish Financial Services Centre (IFSC). These records become known to the general public on Monday October 8th in an article by The Irish Times. The relationship between the two parties has been, and continues to be, played out within the IFSC Clearing House Group, a lobbying group, chaired by Martin Fraser, the secretary general of Government. The group comprises of civil servants from state agencies like the IDA and Enterprise Ireland, as well as representatives from the principle financial corporations in the country; JP Morgan, Citigroup, State Street, Barclays, KPMG, Bank of America, Bank of Ireland, among others. Meetings between the two parties take place in Government Buildings, so it is no surprise that Government policy bears striking resemblance to the Group’s position in two related areas: tax incentives for the financial industry and the stance on the EU’s proposal of a European-wide financial transactions tax (FTT). Not only did the Government’s position exactly match that of the financial industry’s lobbyists, but there is no evidence that they consulted any other representative group in Irish society before hold-
ing a final view. It follows quite naturally then that the Government is opposed to the implementation of a FTT and that “a total of 21 changes to the Finance Act were made to accommodate the sector including a contentious incentive that allowed foreign executives with companies based in Ireland to pay tax on only 70 per cent of income between €75,000 and €500,000”. In our ‘democracy’ it thus seems that the quantity of currency in one’s pocket has replaced the passport as the legitimate means to participate in public policy decisions.
Does this not constitute an imposition by the financial sector on Western democracy? But this perversion of democracy is not unique to Ireland. In Washington DC, the interests of the financial sector are thoroughly represented by the Financial Services Roundtable, a lobby group employing 3,000 lobbyists; which is more than five lobbyists for each member of the US Congress. Charles Fer-
China’s new economic direction
By James Nugent
China’s economic performance over the last three decades has been nothing short of impressive. GDP growth averaged 10 per cent a year and over 500 million people were lifted out of poverty. It could be argued government intervention in the Chinese economy has been a catalyst of this growth. Investment in cheap city housing for rural migrant workers, controlled
this points toward a liberalisation of the economy interest rates, a pegged currency and the prioritisation of capital intensive growth over labour-intensive growth have all been features of China’s stunning economic rise. China’s economic course changed following the global fi-
nancial crisis of 2008. Europe and America are the biggest buyers of Chinese products and their travails have plunged many manufacturers into despair. In 2008, approximately 20 million migrant jobs were lost. Although China stemmed the affects of the crisis through a 4 trillion yuan stimulus programme, the overall consequences of the crash are clearly seen through the anger and protests of the Chinese labour force. Last November thousands of employees at a shoe factory in Dongguan took to the streets in protest against salary cuts and sackings. Protestors overturned cars and clashed with police. Residents of Wukan in Guangdong drove out party hacks and police a month later in response to the seizure of agricultural land by local officials. The villagers gave up their protest on December 21st after a rare, high profile intervention by the Guangdong party leadership, which promised to look into their complaints. These sorts of events have been common
›› Lloyd Blankfein, CEO of Goldman Sachs, has survived the financial crisis guson, in his award-winning documentary Inside Job, reveals that financial corporations spent over $5 billion in lobbying and campaign contributions from 1998 to 2008. Since the crisis the Financial Services Roundtable are spending even more money trying to fight reforms like the FTT. Likewise, the City of London, amply represented in David Cameron’s government, has vetoed the proposal of a FTT or comparable financial controls. The City, being Europe’s most important financial centre, can afford the votes that grant it veto power. In addition, exfinanciers from major investment banks, like Morgan Stanley, UBS and HSBC, occupy key positions in Cameron’s government. James Meyer Sassoon, who was former vice-president of UBS, is one example. Lithuania provides a further illustration. After the crisis of 2008 struck, the Lithuanian government had to choose between removing its peg with the Euro, damaging the balance sheets of Swedish banks that previously flooded the country with credit, or choose an internal
devaluation; in other words cutting wages and the public sector budget in general. Lithuania chose the latter option. Since then it is known that the two Lithuanian ministers heavily involved in that decision both held prior employments with Swedish banks. The ‘Great Recession’ that ensued in 2008, primarily from the activities of the financial industry in the preceding years, has actually strengthened the political hand of the financial sector. Since 2010, at least 10 of the 27 EU governments have appointed ex-bankers or fund managers to positions in their respective ministries of finance or central banks. In Italy and Greece, two unelected technocrats were brought into power in 2011. In that year also, President Obama appointed Gene Sperling, a former advisor to Goldman Sachs, to lead the National Economic Council. The governments of four of the five biggest European economies (UK, France, Italy, and Spain) that governed in the years prior to 2008 have been, since the crisis, removed by their respective electorates. However, there has been no change
in the governance of four of the most powerful financial firms in the world. Even though Goldman Sachs was fined $550 million for engaging in fraudulent activities prior to the downturn, Lloyd Blankfein continues to be the bank’s CEO. Jamie Dimon continues to preside over JP Morgan, Brian Moynihan over Bank of America and (until very recently) Vikram Pandit over Citigroup; all key players in the lead up to the crisis. Does this not constitute an imposition by the financial sector on Western democracy? There is a mainstream belief that austerity policies are a remedy for the irresponsible management of public finances by governments in the past. This makes us forget that, with the exception of Greece, public finances have been drastically degraded due to the crisis in the financial sector; the same sector whose representatives have been promoted to direct Government economic policy on both sides of the Atlantic. The subsequent ‘reforms’, or lack thereof, speak for themselves and for the state of our democracies. By Marc Morgan
in China since the crash and have contributed to the main mouthpiece of the party in Beijing concluding, remarkably, that it needs to stop treating citizens as adversaries. Labour market disturbances, as well as a slowdown in economic growth, have encouraged the establishment of a new growth programme called “China 2030”, which was launched by a government commission in conjunction with the World Bank. The report
urges China’s government to stop meddling in the market and has suggested ways to increase private consumption in the economy. The authors are confident that China is on its way to becoming the world’s biggest economy and a high-income country if the criteria are met. The Chinese government seem to have acknowledged the merits of the programme and can be seen to be embracing a change in economic direction if one looks at recent de-
velopments. The People’s Bank of China (PBOC) earlier this year released a potential timetable for easing Chi-
›› Foxconn is one of the manufacturers propelling China’s economy
Labour market disturbances... encouraged... a new growth programme na’s extensive capital controls over the next ten years. China’s trade imbalance is reducing back toward normality. Jobs are being created in the interior parts of the nation. Recent figures show retail sales rose 14.4%, accelerating from the 14.1% rate for the first half of the year. All of this points toward a liberalisation of the economy. If China gets through its 18th party congress this November unscathed and continues to gradually open its economy, one can expect the dragon to soar to the highest peak of the global economic order in the not so distant future.
15 The relevance of F.A. Hayek
The Bull 24.10.2012
By BenRogers Friedrich August von Hayek (1899-1992) is perhaps the best known of the Austrian School of economic thought with his radical approach to free-market thinking, which involved governments intervening less than is seen in a freemarket economy. One would think that in today’s world, with constant financial un-
The Nobility of Peace
Matthew Taylor defends the decision to award the European Union with the Nobel Peace Prize So the EU won the Nobel Prize. And everyone complained. For these bemoaners, 70 years of European peace, harmony, prosperity and growth unprecedented since... well, ever, is unworthy of recognition. Everything has been questioned, from the right of the Norwegian committee to grant it solely to an institution as opposed to an institution and a representative individual, which has previously been common practice, to the timing and the appropriateness. We, the constituents of the modern mob are all too ready to forget previous benefits in the face of new challenges. The burdens placed upon us are the fault of our domestic government and not of the EU. Our national debt is somewhere in the region of €136 Billion, and were it not for the intervention of the EU one can be sure that we would be a failed state. Europe has been in a state of more or less constant warfare since even before the founding of the Roman Republic. Historians such as Niall Ferguson have argued that the patchwork of warring nationstates that have peppered the face of the European continent since 476 AD created a system of competition, which fostered innovation, expansion and wealth. It is also true, however, that this diversity produced conflict, and this conflict produced hardship for generation after generation of our ancestors in purely human (material and emotional) terms. It had reached a point by 1914 that Europe had developed into factions of super-states, walking the line of direct conflict. From 1900-1945 almost 100 Million lives had been lost due to war. The economies of Europe’s powerhouses were ruined. The cataclysm of the Second World War led to the realisation among Europe’s leading statesmen that structural changes
were needed to ensure peace. And so the European project was born. The EU, as it has become, has succeeded in opening dialogue between its members, using economic co-operation to foster friendly relations and prevent violent conflict. Peace has created security, security has created prosperity and prosperity has created development. It successfully created a buffer between the powers of NATO and the USSR, preventing a Third World War, fostered democracy following the collapse of the latter regime and welcomed with open arms these new states, cementing their place as equal partners in the European project. All very well and good, but what has the EU done for Ireland? Since membership, Ireland has been transformed from a superstitious agricultural country into one of the world’s leading centres of finance, scientific innovation and technological advancement. We have prospered beyond our wildest hopes to the extent that we are consistently ranked one of the best countries in the world for quality of life, income and business-friendliness. The financial support of the Union has proved pivotal to all of this, building roads, subsidising agriculture and education and generally throwing money at whatever problem we had and getting it fixed. Perhaps more importantly, the EU has created a framework for dialogue with ‘the old enemy’, the United Kingdom. In 1973, it was inconceivable that there would be a time without bombs and bullets, or that the British Monarch would set foot on this Island, not as a ruler, but as a friend and an equal to lay a wreath in memorial of those who gave their lives to destroy everything which she represents. What do we want from the EU if wealth, stability, and a lasting peace are not enough?
we tend to habitually lay the foundations of our future economic downturns certainty, the spiraling debt crisis and increasing unemployment that mankind’s faith in the freemarket has been shaken to its core. However, despite this there is now an increasing interest in Hayek’s theories. A large part of this is due to the propagandist review given to Hayek’s book “The Road to Serfdom” by Glenn Beck a few years ago, which made the book a renewed best seller in the United States. Two comedic viral videos on YouTube, showing him in a rap battle with his archrival John Maynard Keynes, have also fuelled the public’s resurgence of interest in Hayek. In asking the relevance of Hayek today we should ask what he would think of the current situation. Hayek would argue that the current financial crisis, as with all busts in the economy, sowed the seeds for its own downfall with the low interest rates and cheap availability of credit, which caused the over-investment in the property sector. Of course, nowadays every economist is saying this. Hayek would argue that governments and central banks, such as the US Federal Reserve and the European Central Bank should not have set rates so low. If the market had been free to set its own rates, they would have been higher, which would have reduced excessive borrowing. This message is supported by influential Hayek advocates, such as Ron Paul. Hayek would see the market as a kind of natural phenomenon, which had evolved over the period of human history constantly driving civilisation forward. The market is an organic communication system processing information on all of our needs and desires. According to Hayek, the market is most productive when it is completely free and government interference only distorts market signals that are sent to buyers and sellers. This is clearly relevant to us today as government intervention does seem to be deleterious. Of course, what would be the
›› F.A. Hayek has had a lasting impact on economic thought Hayekian answer to this economic mess? Hayek would argue that the economy would need a period of cleansing to clear the bad investment in order to allow the strong-
the European Central Bank should not have set rates so low est businesses to survive. However, it would seem difficult to allow the
fittest to survive in this world of domino effect debt crises. Therefore in asking the relevance of F.A. Hayek, mankind should seriously take into consideration his fear of economic booms and how we tend to habitually lay the foundations of our future economic downturns by leading the market down a yellow brick road. As for further liberalisation of the market and allowing it to self-cleanse, it would seem that most politicians would be unable to take that last step away from the economy and allow it to function freely, without at least some governmental steering.
The Bull 24.10.2012
DEAD AID: Why Aid Is Not Working and How There is Another Way for Africa
hy is it that in the 1970’s less than 10% of Africans lived in dire poverty whereas today over 70% of subSaharan Africans live on less than $2 a day? This book argues that the direct bilateral aid that accounts for 90% of the aid given to Africa fuels corruption, makes democracy less likely, reduces local savings, causes inflation and makes African exports uncompetitive. Now, in this time of extreme economic upheaval, it is more pertinent than ever to ask whether this policy has been effective. Dambisa Moyo, an Oxford and Harvard educated Zambian is of the opinion that “foreign aid is not benign – it’s malignant”. She points to developmental aid’s effect on her native Zambia and notes that it was only once her homeland adopted a free-market, self-dependent approach that any real ground was gained. This is not to say that all aid is bad, of course emergency and humanitarian aid are essential but they only account for 10% of the aid funds transferred to Africa. A top to bottom approach cannot, has not and is not working for Africa. It results in the continuance of poor governance and the conflict it engenders seriously threatens any chance Africa has at growth. It also massively disrupts local markets effectively destroying them and replacing them with welfare. Why have we adopted a development-aid policy in relation to Africa when it continues to yield no results and in some cases makes the situation worse? According to Moyo, we must first take a closer look at the Marshall plan which rebuilt a wartorn Europe as it is the inspiration for the large-scale systematic cash transfers that are at the root of the African problem. The Marshall plan was different in two distinct ways; first, it was for a specified time period of two years and secondly, and more importantly, the distribution systems were already in place to distribute the funds correctly and transparently. It was short, sharp and finite. Aid to Africa is fundamentally different in that it is often given to corrupt governments and it is perpetual. This results in dependency, stagnation of local markets and wide-spread civil war as controlling the purse-strings becomes highly attractive as these cash-flows are so easy to misappropriate. It
is also suggested, rather cynically, that aid is a self-perpetuating industry and on the facts given this assertion is hard to ignore. Throwing money at the problem in Africa is not going to work because the money simply does not reach its intended target and even when it does it skews local markets to the point where tangible growth is nigh-on impossible. The unintended consequences of the policy have been more war, more famine and more widespread desertfication. Moyo uses the micro-macro paradox as evidence of this. For example, if there is an African entrepreneur making mosquito nets and he employs 10 others in a rural village what happens when an NGO arrives and floods the market with mosquito nets? The business fails. Sure, in the short-term the infection rate will go down but the growth that was there has now been lost. Then when new nets are needed who is there to produce them? This process is repeated time and again in this process of “developmental” aid. Aid is almost always well intentioned but well-intentioned and effective are two very different things. Moyo belabors that the West’s attitude to Africa are massively disenfranchising to the point where Africans themselves are uneasy about the West’s involvement in their affairs. A recent survey showed that less than half of Africans approve of the West’s influence whereas 72% approve of China’s influence. That is because China is implementing
the same economic policies that worked for them; large-scale foreign direct investment and increased exports. “Development is no mystery,” Moyo argues. Let’s not forget Malawi, Burundi and Burkina Faso were economically ahead of China a mere thirty years ago. Change is possible. The Chinese have also avoided the neocolonial, paternalistic, patronizing attitude that those involved in developmental aid exhibit towards Africa. They don’t regard the Africans as children who need to be minded. They give Africans the gift of self-determination which is proven to be a much better approach then fobbing them off with money to assuage their guilt as we do. China will have invested as much in Africa by 2015 as the West has given to Africa in the past 50 years. Both sides are benefitting and with increased prosperity comes increased democracy. Surely, there are alternative solutions that we can adopt. What are they and how do we go about implementing them? Moyo outlines 4 main catalysts for growth. First, African countries must access the bond markets. This has been hugely successful for South Africa who raised $1.5 trillion in bonds, which were 6 times oversubscribed, and in doing so became masters of their own destiny. It also created confidence in the market and increased investment domestically and from abroad. Thirteen of the 50 African nations now have stock exchanges which are highly competitive rela-
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tive to Western markets. Liquidity is increasing year on year. Second, foreign direct investment works. It has worked in Ireland and it is working for China. Investment as opposed to aid appeasement is the way forward. Third, if the EU and US want to help Africa as much as they profess they have to allow truly free trade. This doesn’t mean the removal of quotas and duties it means the removal of indirect barriers to trade such as subsidies given to farmers. For example, over half of the EU budget is taken up by the Common Agricultural Policy. How can we say we are giving the Africans a fair deal when we refuse them access to our markets and simultaneously dump our excess on their’s? Finally, micro-finance, a bottom to top solution, as opposed to bilateral aid agreements needs to become the norm. The Kickstarteresque web-interface Kiva where lenders can give loans directly to those in developmental countries is a brilliant example of the innovative thinking necessary to tackle this problem and is well worth a look. This book is a must read for anyone with an interest and the future of African development. Endorsed by Kofi Annan as “a compelling case for a new approach to Africa” it simply is a must read. The reader will want a lot more Moyo, and a lot less Bono. By Peter Martin
The Bull 24.10.2012
Use it or lose it: private equity has a high-class problem
itt Romney’s candidacy for the Presidency of the United States has shone light on the press-shy world of private equity. Mitt Romney, who was a principal and CEO of Bain Capital, a successful private equity firm, has precipitated intense analysis on the social worth of this industry. Firms, such as the Carlyle Group, KKR and Blackstone, have been variously accused of destroying viable enterprises, offshoring operations and needlessly culling jobs, all in the myopic pursuit of short-term returns. As Peter Rose of Blackstone laments,“Private equity is under unprecedented assault.” Defenders of Mr. Romney, and proponents of private equity, have pointed to the disruptive effect buyout activity can have on entrenched, cosseted managers, as well as the efficiency and discipline it can impose on bloated, spendthrift companies. The Bull believes that private equity firms are of societal value in-
sofar as they rationalise inefficient businesses, provide capital for expansion and reinvigorate ailing organisations. If this results in the closure of factories, outsourcing of non-core processes, downsizing or the asset stripping of firms with broken business models, then so be it. Productivity will be increased and living standards will be raised. Private equity not only benefits the economy, through injecting dynamism, but also can reap impressive returns for investors. Although returns are very volatile and procyclical, and have endured a long secular decline as competition has intensified, private equity firms have performed well for their limited partners historically. However, since the late 2000’s internal rates of return have plunged from over 50% in 2004 to under 5% from 2007 onwards, as massive inflows into funds directly preceded the financial collapse. This recent deterioration in private equity performance is primarily due to the exorbitant asset prices prevailing at the market peak. Nevertheless, the prolifera-
tion of buyout funds, has also meant that appropriate acquisitions have become much more expensive and more sought after. Unfortunately, even as executing high quality deals has become more challenging, so too has the pressure to become fully invested mounted. Private equity funds are awash with funds, amounting to approximately $1 trillion, mostly committed by investors just before the turbulence of 2008-2009. This capital is referred to as“dry powder.” $200 billion of this money, pledged by a range of institutions (particularly pension funds), is only available for the next twelve months before it has to be released. Until now the likes of KKR have engaged in few takeovers, preferring to exercise patience in the wake of the credit crunch and the ongoing economic uncertainty. But time is running out. Private equity executives are anxiously chasing transactions, and consequently overpaying. Multiples on acquisitions announced this year are above those of the peak of 2006 as a plethora of firms bid for suitable targets.
The EBITDA multiples paid this year have been well over 10X. Profitable buyouts have typically been in the 6-8X range. This reflects the demand-pull inflation in the market for corporate control (although the overall M&A market is weak, companies that lend themselves to leveraged buyouts command a premium). Investors might be consoled by the fact that financing costs are at record lows, but there is further bad news. Private equity firms are offloading previously acquired firms to their peers instead of attempting to take public companies private. This is a negative development that bodes ill for value creation, both from the perspective of investors and of society at large. These hurried and forced purchases are likely to generate very meagre returns for investors, but protect private equity fees going forward. This suggests that the interest of investors and private equity employees are starkly misaligned. Whereas investors would undoubtedly rather not have their money deployed gratuitously, pri-
vate equity firms have a strong incentive to embark on a spending spree, even in the face of a small number of potential deals. This will further place upward pressure on valuations, diminishing returns in the process. Once fees of 20% of the capital gain and 2% of assets under management are factored in then investors can expect derisory yields on their private equity investments. This is certainly a sub-optimal outcome and one that raises questions of the ethics of private equity professionals. As undesirable as these circumstances are, The Bull is sanguine that they will be ephemeral, and hence not worth fretting about. Hopefully, once these artificial pressures on private equity firms dissipate, they will once again be free to bring their expertise to failing firms and stagnant industries in a more measured fashion in the near future. With activist governments stifling business across the globe, the last thing we need is malfunctioning private equity firms..
verse concept? Whether American-style inequality’s costs outweigh the benefits remains up for question. Too many accounts of inequality today assume that it must be inherently bad - that the gains made by top earners will come at the expense of the middle-classes and those at the bottom. High inequality, in common language, is synonymous with diminishing relative opportunities for the mid to lower earners. It has stunted growth, led to financial collapse, or has turned the US system of democracy into a ‘plutocracy’. There is, however, very little evidence to validate these claims. CBO data indicates that the median household income - the income of the person in the middle of all US households - increased by 46% between 1979 and 2009 . The average income of bottom fifth rose by a similar amount during this time. Contrary to modern-day electoral verbiage, the middle classes and the poor have not been doing worse over time. Granted, male earnings have not increased by very much over recent decades, but their pay rose disproportionately during the first three postwar decades because unionbased advantages sent pay levels beyond what productivity gains would have dictated. Female earnings have risen considerably during this time. As a matter of fact, the poor and the middle classes in America are doing far better than their counterparts during the Gilded Age, and far
better than the median earners in the rest of the world. Nor is it that inequality can be blamed on endogenous factors. A cumbersome tax code may be a driver behind inequality, but it is by no means the main one. Through the creation of global labour pools as a result of globalization, workers in Third-World countries are capable of fulfilling the demands of American companies, undercut wages and tolerate more dire working conditions than American workers. Cross-national comparisons are also tricky, but the evidence from a Luxembourg income study shows that if you compare the richest and poorest in America to their equivalent earners in Europe and other English-speaking countries, that Americans are at every point in the richest 80% of households. This pattern breaks down among the poorest fifth of households, but there is little evidence that conclusively illustrates that inequality is to blame for this trend. Firstly, inequality between poor and middle to the upper classes has not seen any tangible increase since the 1980s. Secondly, changing social conditions and the rise single-parenthoods since the early 1970s have been a major part of the story. While there is very little to worry about vis-a-vis inequality, the lack of upward social mobility in America remains a greater cause for concern. Socio-economic gaps in the college-going populace are going to rise, test scores between the rich and the poor will begin to show
enormous disparities. But alleging that you can increase opportunities for the poor by diminishing the earnings of the top 1% is a facetious claim to make. Research done by Christopher Jencks shows that inequality in rich countries does not lead to lower growth. Further research pointing out that inequality leads to financial crises has also proven inconclusive. Similarly, the empirical data cited by various scholars indicating that inequality leads to less democracy focuses entirely on developing rather than rich countries. There has been very little research done indicating that the United States is on its way to becoming a banana republic. Social policy can indeed lead to increased opportunities for the poorest through various initiatives such as improving education and through the establishment of government-sponsored internship programs. However, there’s very little evidence out there which shows that that the gains made by the top 1% have reduced the opportunities of the poorest in America. Between 2007 and 2009, average income-levels of the top 1% fell by 37% while the median household income fell by 2% for the medianincome and the poorest families. The rich and the poor have suffered during the crisis. Instead of demonizing the rich, we should revert to the principles of the ‘Davos Consensus’ - we must encourage upward social mobility.
The unequal society
It’s almost universally regarded as a truism that the US has become the most unequal country on earth. Income levels among the top earners have risen sharply over the past 30 years, leading many commentators to dub this era the ‘new long gilded age’. Originating from Mark Twain’s 1873 classic The Gilded Age: A Tale of Today, a tale in which Twain decried that the epoch of technological innovation and the mass mobilization of public and private resources had engendered a new age of inequality and social unrest, modern-day analysts belabor that the same conditions are harnessing the same conditions that resulted in the Great Depression. The share of the nation’s wealth
belonging to the to the often maligned 1% has more than doubled during this time, increasing from 10% of the nation’s resources at the beginning of this period, to 22% in 2011, according to the Congressional Budget Office. On the flipside, the working classes of America seem to have gained very little over the preceding decades. Though output growth exploded during this time, median family income fell by 3.8% from 1999 to 2004. Former Treasury Secretary Henry Paulson bemoaned this trend, noting that many Americans simply didn’t feel any of this benefits of this age of prosperity. But is anything really wrong with this? Is inequality really such a per-
Student managed fund The Bull 24.10.2012
Performance report Since our last update the fund has performed solidly, gaining approximately 1.5% in the face of an earnings season that was fraught with uncertainty and concerns about a global slowdown. Markets rose strongly in the third quarter on the back of what appears to be a co-ordinated effort by central banks to support flagging global growth rates. Likewise OPEC, and more specifically Saudi Arabia, have essentially placed downward pressure on oil prices to offset the impact of QE, announcing its intention to employ more of its spare capacity to aid growth in the world economy. Risk appetite returned as the US Federal Reserve, the Bank of Japan and the European Central bank announced monetary policy measures in Sep-
tember as expected. Also contributing to this is what appears to be a greater appreciation on the part of investors of the hurdles facing growth in a global economy that is still struggling to de-leverage after a financial crisis that happened fours ago. The fact that the latest slowdown in global activity indicators have not led to a stream of significant downgrades to GDP growth, supports the view that investors are looking at the bigger picture. However, in the last week, mixed company results have not boded well for equity markets, especially considering the majority of profit expectations had been lowered. Q4 results may be telling. Are monetary policy actions actually aiding the underlying global economy or simply inflat-
ing asset prices? With equity markets performing well, it was a pity we were unable to better capture this ascent, further highlighting the need to be fully invested and to increase the pace at which this is currently conducted. As alluded to in the last report, a new streamlined investment process should allow us to reach our current capital investment goals of 50% invested by Q1 2013 and 60% by Q2. All ten sectors are set to complete their first investment proposals under the guidelines of our investment process by early December. This should leave us well placed to enter positions in the run up to the US fiscal cliff deadline of January 1st 2013. If one looks back to the August debt ceiling dispute
of last year, decisive Congressional action was only taken in the final days leading up to the deadline, with considerable consolidation and volatility characterising market performance during this time of political uncertainty. With no preelection (November 6) discussions taking place and congress set to return on the 13th, the ideologically divided parties have left themselves with just six weeks to avert a fiscal cliff that would undoubtedly lead to 3-4% fall in GDP and throw the US back into a recession. Bipartisanship and compromise havenâ€™t come naturally to the current congress, being one the most unproductive in recent decades. Constructive action from both sides only appears to have been adopted when prompted
by severe market consolidation and a looming deadline. We are of the belief that a compromise will be reached but in much the same fashion as the events of August 2011. It is therefore our intention to utilize this political impasse and expected equity consolidation to our advantage, acquiring stocks that trade at a discount to their intrinsic value. With each sector now operational we look forward to what looks set to be one of our most productive years to date within the investment division. William Grassick Chief Investment Officer, Trinity SMF
Investment Process Screening During the initial stages of our stock selection process we employ numerous screeners to identify stocks that trade at low multiples relative to their respective fundamentals Fundamental Research Covering a range of criteria that require both qualitative and quantitative analysis Value determination To determine a companyâ€™s intrinsic value, each sector team is expected to employ discounted cash flow models during the course of their stock pitch Trade execution Finally we employ technical analysis to maximise our potential returns in the short term where applicable
Industry Insight The Bull 24.10.2012
Asset management in review Ian O’Connell is bullish on asset managers despite new regulations The tempestuous global economic and regulatory environment since the financial downturn has asset managers reconsidering their growth strategies. Uncertainty surrounding monetary returns and overall growth are being mirrored by the reality of a slow economic recovery and an indeterminate financial and regulatory environment following the 2008 market correction. Notwithstanding the turbulent times, the forecasts for the asset management industry are positive largely due to the performance and operational efficiencies achieved during 2011. While intensified regulatory inspection generally has negative connotations, the increased transparency and sturdier risk management practices resulting from this scrutiny are helping the industry restore investor confidence and spur innovation in the new economy. However, given the fact that 2012 is an election year, cautious optimism is well advised. The Dodd-Frank regulations, an act that made changes in the Ameri-
can financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry, has polarized the asset management industry. For the first time, private investment advisers and funds lie within the jurisdiction of the SEC. Asset management groups are moving to anticipate, gauge and administer these alterations as they occur. The act conflicts directly with progressing investor expectations leading to a divide between large institutions and small and mid sized asset managers. The implementation of a number of reform measures has been delayed due to Congressional budget cuts, adding to the insecurity among fund advisers. Forecasted compliance costs are compelling fund advisers to reconsider their growth strategies, particularly advisers of smaller funds that may be unable to survive costs of conforming to the new regulations. Fund amalgamations may accelerate in years to come as small firms merge to achieve better economies of
scale. Despite the impending extra costs from a heavier regulatory burden, the smaller asset managers have ingeniously carved out a strategic function that is even attracting the large institutional investors. They can offer more attractive riskreward balances for investors’ requirements only attainable as a small flexible asset manager. In addi-
tion, they still embrace a philosophy o f compliance and have checks that are applicable to their size. On the other end of the spectrum, large institutions with vast resources, technology and assets under management can effortlessly comply with expensive guidelines
and accommodate more vigorous investor requests to execute due diligence on their operations and service providers. Investors are redefining and expanding their definition of risk in response to the f i -
nancial turmoil. Subsequently, investors have realized a new level of sophistication in their demands that mostly the larger asset managers have been able to respond to. With the general slump in returns, experienced investors have become savvier about
management and incentive fees and are more apt to negotiate for tiered fee structures or other provisions that lower management and incentive fees. The larger asset managers have more wiggle room to accommodate lower incentive and management fees. Stakeholder demands for greater fund transparency are also putting pressure on asset managers to improve the reporting accuracy of and governance controls over the funds they manage. Larger fund managers are increasingly relying on technology and outsourcing to support the institutional-level reporting and compliance processes that are mandated by today’s stricter regulations and demanded by investors. These technologies and outsourced consultants represent additional costs that the smaller and mid-size managers cannot afford. Pre-Dodd-Frank, many of these behemoth organizations already had fairly sturdy governance as well as operational and risk management infrastructure. So far, these well-equipped organizations have been reaping the greatest benefit of investor uncertainty – when in doubt go for the large, sophisticated, well-managed manager.
New burdens for ship operators Edward Teggin explores the recent developments in the Shipping Industry.
When the Maritime Labour Convention 2006 comes into force it will replace 40 existing conventions and 29 regulations. It will provide seafarers with fair terms of employment and guarantee them safe, secure and decent living standards and working conditions on board. Shipowners are set to benefit from having a clear, consistent set of standards with which all must comply. Once the Convention is in force all ships which trade internationally must meet its requirements, whether their flag States have ratified it or not, ships will be subject to inspection and if necessary, detainment, if there is a failure to comply with the points outlined in the convention. The convention has come about due to the work of shipowners, representative bodies, governments and seafarer’s unions over the past number of years. The convention was initially adopted in 2006 at an International Labour Conference involving about 1,000 delegates from the relevant sections of the industry. The necessity of bringing the Maritime Labour Convention into effect was the widely recognised disparity between seafarers operating under a wealthy ‘flag’, and those working under a comparatively less
wealthy ‘flag.’ The flagging of a ship denotes which country the vessel is registered in, and hence which country’s employment regulations are most likely to be adhered to. Of course there are many cases of vessels from all around the world being registered in places such as the Bahamas and the British Virgin Islands so as to exploit the favourable business conditions present in these states. The obvious comparison to cite when discussing living and working conditions on board is that between seafarers from the East, and those from the West. It is no secret that some countries are more inclined to be safety conscious than others, particularly in the western world. Where the Maritime Labour Convention will impact in this instance is that inspectors will have the power to board vessels they suspect of non-compliance and to impose fines and/or detain the ship if it is found to be in serious breach of the convention. These powers are almost identical to those already used by the International Safety Code and the MARPOL marine pollution protocol. From the shipowner’s perspective, the convention can be seen as both positive and negative. On the positive side it will provide ship-
owners with a clear set of requirements to fulfil and will collate all of the existing documentation so as to make it easier for guidelines to be followed, rather than the previous system of having to continually refer back to the 69 existing documents. This increase in the conduct and understanding of safety codes at sea by the shore staff will also benefit seafarers in that a clearly defined procedure for grievance as regards conditions will be laid out. On the negative side of things the implementation of the MLC 2006 will be a costly one for employers. Members of staff are required to participate in a twelve week MLC training course, costing both time and resources, and staff will have to be convinced of the merits of the change. There is also the question of wages to be considered; many crewmen are provided by various crewing agencies and as such would not be paid a uniform wage as they, or their vessel, may hail from a different country to that of their colleagues or sister ships. The MLC 2006 will ensure that all of the crewmen sailing for a specific shipowner would be guaranteed equal wages, and if one considers the high minimum wage in Ireland, Irish shipowners could soon face a hefty wage claim. To come into effect the convention must be ratified by at least 30 member states with a total of the
world gross tonnage of ships of 33 per cent by August 20th 2013. As of today 30 member states have signed up, with these controlling 59.85 per cent of the gross tonnage, so as it stands the MLC will be implemented. It should, however, be noted that close to home neither Ireland nor the United Kingdom have ratified the convention; in fact the only major world player in terms of gross
tonnage to ratify the convention is Panama. Though it is more than likely that MLC 2006 will pass, its terms have not been agreed upon by many of the world’s seafaring nations, and such apathy towards the MLC could lead to issues with implementation, particularly among the richer and more powerful shipowning countries.
›› Shipping companies face increase costs
The Bull 18.09.2012