Happy New Year!

Happy New Year! Lots to say, but little time.

In the meantime, a quick tidbit from the Associated Press

Full Article here

In their New Year's poll, among other unremarkable facts (e.g., 80% of people believe the minimum wage will be raised in 2007), this tidbit is buried:

25% of people expect the Second Coming of Jesus Christ...in 2007.

This is a higher percentage than I expected.

Now, in the same poll, 35% predict cancer will be cured in 2007 and 70% predict a major national disaster in the US in 2007, so I think we are looking at the tendency of people to overestimate the likelihood of rare events (and risks in particular) and underestimate the risk of more common events. One of these polls should ask the following two questions:

1. How likely is it that I will die in a natural disaster this year

2. How likely is it that I will die in a car accident this year

I am sure the former will be viewed as more likely though it is at least 2 if not 3 orders of magnitude less likely...

but there is no need to be morbid in the beginning of the new year!

Best wishes to everyone, may our minimum wages all be raised, cancer be cured and if your personal savior comes this year, so much the better!

I WISH YOU ALL A HAPPY AND HEALTHY NEW YEAR!

vodka, vodka everywhere

in news that unites two of my interests, we learn today that vodka.com sold for $3.0 million to the Russian Standard vodka company, the largest vodka producer in the world. See their site at: www.vodka.com

I am certain this is worth more than $3M of incremental earnings for them over time since they are pretty unknown in the West...

Romania

I was in Romania last week as some of you know. What I learned in a nutshell:

1. Romania is still less developed than I expected. 20 minutes outside of downtown Bucarest, horse and buggies are still common. I have not seen that in Europe before in a meaningful way. Ahead of India, but still 15-20 years of development to get to mid-European norms is my guess, at least in the countryside.
2. Change is coming fast according to my friends who have been there for several years. It is far more developed than it was 3-5 years ago. They are more optimistic than me about the growth path in #1. They would guess 10 years.
3. Romanians (basically) consider Moldova to be part of their country that was split off by outside forces. Moldova is where Romania was 10 years ago in terms of development. I did not go there.
4. Like all offshore locations, software talent is now more difficult to find. This is a change that has occured in the last 3 years due to the BPO boom and it is consistent with my experience in India. It is a big, meaty topic worthy of further discussion
5. As cliche as it sounds, Romania really is a great place to film a Dracula movie. When the fog rolled in as we went to see where the Danube split Romania and Bulgaria on rural roads with burned out factories, it was spooky. I can only imagine what the Carpathian mountains look like in the fog!
6. Like Cyprus has stray cats, Bucharest has stray dogs. What sends one city to the cats and the other to the dogs, I have no idea!
7. Food is expensive which is bizarre given low land costs, low unskilled labor costs (150-200 euro / month + 60% social taxes), plentiful water. Likely culprit is the breakup of Communist era agriculture into highly fragmented and inefficient producers. Bet on consolidation and outside investment here.
8. CeauÅŸescu liked his buildings big. The presidential palace is the 2nd largest building in the world after the Pentagon and giganticism is probably the best word to describe the governmental architecture.
9. I will be back - 3 days was not long enough

Thank you Nicolas K for hosting me and Alex L & Simona L for putting up with me during the day!

I will post some pix in a subsequent email when I have them off my camera.

Remembering Conglomerates

Remembering Conglomorates

For quite a few years, the conglomerate stocks rose and rose, and to this day I don’t think anyone knows exactly why. What tempted investor psychology appears to be that the mother company seemed to promise new types of economies of scale, called synergies in those days. The conglomerate was said to borrow at lower cost than the companies it purchased. It was reputed to spread its operational knowhow to its benighted purchases. It would efficiently allocate capital internally among them, investors were told. It could bring name recognition through a corporate brand. It could purchase large amounts of advertising more cheaply. Sometimes the head of the company was thought to be a genius, a new King Midas, who could turn a zinc smelter into a household name. These were the hopes and dreams. They made some sense as all such stories do. How much sense, no one knew. There was, as is usual, uncertainty. But the market was a bull, and uncertainties evaporated before the winds of optimism.

Meanwhile there were realities. The conglomerates were paying big premiums over market value when they bought out companies. If there were to be economies, the selling company shareholders of the target firms were getting the lion’s share. The sellers were receiving handsome premiums up front because the conglomerates were operating in competitive buyout markets. They bought companies at auction. Buyers bid up prices at auctions. Most of the gains, if they were real, were going to the target companies that were selling themselves to the conglomerates.

How one company could create value for its shareholders by paying a big premium over market value to buy another company in an unrelated industry was a mystery, then and now. When the conglomerate sold at a price/earnings ratio of 20 and bought a company with a price/earnings ratio of 10, the combination seemed to fetch a price/earnings ratio of 20! This financial legerdemain (or was it ledger-demain?) created value, for a while. It was not permanent. By 1970 the days of reckoning arrived and the conglomerates crashed along with many other stocks.

Full article here: http://www.lewrockwell.com/rozeff/rozeff89.html

Read and discuss.

Tip comes from Going Private