Okay that was Business Week’s description of the current feeding frenzy of private equity firms stripping assets out of acquired companies.  Consider how three gourps collected $1 billion just six months after buying Hertz form Ford for $15 B.  with the dividend the trio earned back almost half of the $2.3 B they put up in cash. 

You will recall the simplest capital budgeting tool is payback, the cost divided by the returns to determine how long to recover the investment.  Well if you can get half your money in six months, who needs to worry about the time value of money, gee it’s there for the taking, let’s take it!   You can read the story, at least for now at that hyperlink for the Oct 30 issue of Business Week.

In a somewhat related story, we discussed whether You Tube was worth $1.65 B in stock that Google paid.  Well it turns out the total market capitalization (number of shares time share price) went up $5B right after the deal was announced, now that’s a quick payback!

Another stunt is to assume control of the firm and then make  a first mortgage loan to the firm. Since it is a first mortgage secured by all the assets, the lender jumps to the top of the creditor list. Then strip cash by paying yourself a big dividend. Then when the firm can’t pay the loan, make the trip to bankruptcy court having cut in line in front of the unsecureds.  Bingo, you get all the assets by putting the firm in a postion such that it could not pay the loan. Hello Ethics Class!

DLE

Okay we have talked about all the problems Ford has, declining market share, legacy costs, too much emphasis on gas guzzler vehicles, too slow a turnaround, so what’s Ford to do? 

Welcome to Ford  Bold Moves . Com  hmm, shall we try the truth for a change?  Well judge for yourself.  this site shows the warts and all.  Videos show workers being laid off, dealers worried about their future, Wall St Analysts saying to sell the stock, and Ford is paying for this?

Yep Ford is paying for it.  Apparently Ford believes that finally honesty is the best policy.  One assumes that the ad agency sponsoring all this has convinced Ford that by ‘telling it like it is’ they will gain more credibility with their doubters.  Numerous analysts have criticized Ford as being too slow and not coming to grips with its problems.  Apparently this is Ford’s way of saying, we get it. 

All of these woes are what we are studying in the cost class about benchmarking and process re engineering, not to mention earnings per share in the intermed class, or  shall we say, lack of E/X and how that eventually affects the Owner Equity Statement.

Will this warts and all campaign help?  What do you think?

DLE

Oscar Hernandez asked a good question.  Why build an inland port with all the necessary unloading of a ship, cross country transport, unloading, storage, and then loading again only to finally unload at the end destination.  Doesn’t cost accounting teach up that Just in Time seeks to minimize setups (okay Oscar didn’t go that far but I am trying to tie this to accounting after all.

Point is, great question Oscar. In fact one hundred years ago an alternate canal route was put forward through  Nicaragua.   Click on the link to read about the history and, gee guess what,  in 2004 Nicaragua proposed it again! This time the Canal would be big enough to handle the ships Panama cannot.  Panama can handle up to 65,000 tons, this proposal would go to a Refrigerator Perry size of 250,000 tons!  This of course would run about $25 B or 25 times the N. annual budget. And of course the environmentalists are fearful a snake might be harmed in the process. 

Indeed this has been the subject of an Oct 22 article in Business Week.   This article contains a lot of detail about the various plans and current constraints. 

Question, if this were in Qatar, would they build the Canal, answer, you bet.

If You Tube with no earnings is worth $1.65 B, would a canal that would as Oscar points out eliminate the need for inland ports be worth 15 times that, hey, get Dubai on the phone, we need a loan!

DLE

You have three choices

Sell assets and raise money

Declare Bankruptcy

Falsify the reports and problaby go to jail

‘Surely someone knows where the money is?’

Okay sounds like a ex parte conversation between Skilling and his lawyers, but nope, it’s the start of the new series on ABC, Brothers and Sisters.  Seems Dad has died and no one can explain the loss of funds in the pension account.  Like Dallas and so many other night time soaps, the plot follows a family intertwined in the family business. Much of the action is who is ‘dating who in classic soap style. But the fact that the plot begins with an accounting problem speaks to the writers’ perception of the difficulties a family business can face today.  Such detail was never a feature of Dallas or Dynasty, another sign of our times.  Things are more complex and the plots are reflecting at least some real world concerns. As always, the rich and famous have tough times, giving solace to all the rest of us watching.

DLE

PS Thanks to increasingly vigilant Guadalupe Barraza for putting me on to this new series!

I have previously mentioned that market tops are inclusive, we see lots of mergers.  The two Chicago Exhcanges could never get together because individual memebers opposed it.  Now that each has gone public, a merger was possible. This proves that it took a special happening to make this inclusion happen.  And inclusive it is. The combined exchanges trade 9 million contracts a day for a notional $23 Trillion dollars in contracts A DAY! 

You can read the press release about the merger of the Chicago Mercantile and Chicago Board of  Trade here. I put the Wed Oct 18 issue of the WSJ on reserve in the library. There is extensive coverage of the merger as well as interesting historical articles about the exchanges. From a purely accounting standpoint, futures contracts are not subject to Sarbanes Oxley, unlike corporate reports. Hence there has not been any holding back due to SARBOX. After the dot com collapse and NASD meltdown of 80+%, the futures exchanges surged ahead in volume with hedge funds leading the way. And the new bull markets in commodities have also increased trading.  I have been a licensed commodity trader and been on the floor of the CBOT a couple of times, very exciting to say the least.  I will post a summary of futures trading on WEB CT for the various classes.  The new exchange trades under the symbol BOT, the NYSE trades under NYX. Take a look at how they are doing on www.stockcharts.com.

Those of you wanting to relax and learn a bit about futures might check out the Eddie Murphy movie Trading Places.  There is a good explanation of trading as Murphy is introduced to futures trading and at the end Akryod and Murphy run the market the other way, in the expiring month there are no limit moves on contract price.  Learn more at www.cme.com.

DLE

Everything is going well at your firm which has expanded into using internet customers to move away from traditional stores. Indeed, some 10,000 orders are coming in a day keeping your network of servers and telecom folks busy 24/7.  And then it happens.  Later investigation reveals that a hacker outside the USA, typically Eastern Bloc, has sent a virus to some 50,000 different computers having obtained their e mail addresses from various sites. By sending a keyword to those 50,000 computers, they all send messages containing a virus to your server network at precisely the same time.  The result, first one then another then every telecom agent you have is screaming that they have lost all customer contact.  Orders got to zero. Chaos reigns.  Then the phone rings.  A voice on the other end asks if you are aware of what has happened.  It is all your CIO, Chief Information Officer, can do to keep a civil tone in her voice.  The caller informs that for $50,000 everything will be made right again, rejecting the request will certainly result in much greater expenditure and who knows how much time the caller notes.  The $50K needs to be wired to various bank accounts in the Far East which in turn will of course be sending the money on quite a journey to various numbered accounts in countries that do not have extradition treaties or any other cooperation with the USA legal authorities. 

What do you do as the CIO? Pay up of course, the hacker is smart, he knows it is more economical to just pay and get back to work. It would not have been realistic to ask for millions, that would likely bring in INTERPOL and retaliation.  For this amount of money, can one hold up thousands of orders? This is the downside of the internet and why firewalls will be more important in the future.  While I was in my PhD program at UT Austin, a hacker retrieved thousands of Social Security numbers.  They claimed it was a hacker prank, but it could have been otherwise just as easily. 

A new James Bond Movie will debut in November. The future real Bond will likely need to know a good deal more about Java script than whether the martini should be shaken, not stirred.

My student in San Antonio, Gerry Herrera, posted a comment asking how GAAP can justify carrying costs forward, ie turning a fixed cost into an asset. I agree.  Actually cash basis accounting prevents managers from pulling such stunts.  The wonder is also how Gillette could do this for years with something as simple as razors and all these ‘analysts’ would not start screaming about it, much less the bank analysts that loaned Gillette money.  We also noted in class that razors stored in a warehouse do not become more valuable leading to inevitable write offs when it finally comes time to move the goods.

Studying accounting can help de mystify such management stunts and starts us on the road to becoming forensic accountants.  Check out becoming a Certified Fraud Examiner  here.  Interestingly CFE is located in Austin, TX.  We had an excellent presentation by  KP MG rep on Internet fraud at the TS CPA Educator Conference I just attended . HM sounds like another post in the making.

DLE

Okay I am interested in your feedback.  I am in the process of updating my stereo system. And so the whole digital thing dawned on me, much easier to load everything up digitlally on one player than hunt for Cds, etc.  In this process I am trying to decide on a player and music source.  Iam familiar with iTunes and have used it.  And so I tried http://www.music.msn.com, gee no wonder this company is going nowhere. With Apple setting the pace you would think msn would at least equal Apple,  while I am writing this msn.music cannot even seem to get a page loaded to describe an album.  Has anyone else encountered this problem?  Apparenlty Jobs set up iTunes to just work with iPods as other devices like archos 604  which boasts a much larger screen do not work with iTunes.  But I must say I am not impressed with msn music and one cannot even examine rhapsody’s site without joining and it costs whether you buy the music or not, though I admit you can play all you want for 15 bucks which is not a bad deal.

Your thoughts on all this?

DLE

One of the concepts we will study in cost accounting is that of a sunk cost-if the commitment has been made and the cost cannot be recovered, it has to be ignored. This concept is sadly lacking in the current national debate, or lack thereof, about Iraq and North Korea.  Eliot Cohen takes a look at our options  on page A 12 of the Friday Oct  20, 2006 WSJ.  Adjacent is a WSJ editorial on our shrinking defense budget.  A couple of weeks back I read a story about a 52 year old woman, an Army reservist, whose job was standing on a box to reach the machine gun in the back of her Humvee.  She and the driver were killed by a sucide bomber.  This does not strike me as the sort of ready defense force that Rumsfeld had in mind. 

Cohen makes the point that we have  sunk costs in Iraq though he does not call them that.  This and North Korea, as Tom Sowell  notes, are no small matters. I was in college during the draft years of Viet Nam.  It is clear that we do not have a large enough army (read Cohen’s column as well as the front page article in Wed Oct 18 WSJ) to continue what we are doing.  Without question, the reason Iraq is not a bigger issue with all of you is that there is no draft and the military does not want one, but this is not going to work as is.  Where is the rational debate instead of all the finger pointing?  This is not political science class but part of a university education is getting a better grasp on the larger world, Take a look at these articles.  This comes amid Eastwood’s movie about another War which was apparently not as ‘popular’ as we might think.  It is all worth a rational discussion.

From the accounting sense, all this ties in too.  Right here in Lancaster we are building an inland port to handle all the goods from China.  China is negotiating with North Korea.  Yet China realizes our impasse with North Korea and is playing the game both ways so to speak. Meanwhile, Russia, still wincing from its departure from the international stage, wants to use its oil power in the same way. They  do business with North Korea and Iran, block us at the UN, yet also sell us needed oil.  Gee, what a mess. We want their goods yet they want us off balance internationally particularly as it suits China and Russia’s ability to become larger on the international stage.  I believe it was George Washington that warned against dangerous alliances….some while back……IN fact I just looked it up, seems George was concerned with the ‘intense polarization of the country’ and the necessity of staying out of wars between France and England.  Notably his successor Tom Jefferson would be fighting the Barbary Pirates on the African coast.  Read a summary of  what George had to say in his
final address.   Two hundred years, same issues.

DLE

The Oct 18 WSJ reports that in a role reversal, parts supplier Collins and Aikman cut off parts supplies to Ford, forcing Ford to shut down an assembly line.  Note to Ford, one cannot push on a string of wet spaghetti and get results.  C and A is already in Chapter 11, this is a sign that thinking there will be more cost cutting from suppliers is a lost hope.

My Space users climbed 170% from a year ago, Google is up 25%, Yahoo is up 6%.  Yet another article explains that NBC is on a massive cost cutting adventure.  Do you see the connection?  With other choices of things to watch people continue to abandon network tv, indeed, You Tube is now a sort of free Tivo for television. How can network tv compete with someone that offers up just what you want when you want it?

Blockbuster rentals continue to fall and Netflix readies for downloading movies instead of using snail mail to deliver them.  More content delivery wars….

We study  the calculation of E/S and its effect on P/E ratios.  Last Thursday Apple reported that financial results were preliminary, a 27% increase in Fourth quarter profit, and might be significantly adjusted because of a likely restatement of past financial results.  The company sold 8.7 million iPods in the last quarter.  But backdating stock option grants may result in some restatements.  Okay, how would this leave you as an Apple investor or analyst?   The stock moved up 4% in after hours trading. Do you see how all these stories have a common thread?  Apple is successful because the iPod offers users exactly the content they want when they want it in video or music.  That is exactly the problem at network tv that offers commercial laden shows when they want to show them to you.

Just when you thought they were dead, H P re gained the number one spot in the world in numbers of personal computers.  This is an example of what one observer calls SWIRL, the fast changing environment of the modern business world. I quoted an Eastwood interview in cost class yesterday where he mentioned it was never good to keep doing the same thing, playing it safe never results in anything new. He mentioned that at 76 he was still challenging himself with new takes on movie making.  Failing to see the return to store fronts by Apple and H P led to slowing sales for Dell.

Speaking of a mature life product cycle, WMT employees could now fill every Major League Stadium in the US.  With upscale fashions not taking off as previously mentioned here, looks like they are more of a reflection of the economy itself than a growth engine anymore.

Mortgage delinquencies are the highest since the end of 2003.  Wall Street has boosted the DOW to a new high while ignoring the collapse in the housing market, how long can that go on?

Part of my motivation for this Blog is to try to tie events together.  As a business major you need to learn to connect the dots to try to get a better sense of the bigger picture-ie, what is going to happen next.  One good way to do that is to learn more about accounting and financial reporting so that you can understand just what makes a company tick!

DLE