Recently, the world was surprised when Rio de Janeiro was picked to host the 2016 Olympics, beating out Chicago, Madrid, and Tokyo. Following Brazil’s selection as the venue for soccer’s 2014 World Cup, one might easily conclude that Brazil is simply an ideal locale for global sporting events. But these selections, although made by international sporting authorities, are more reflective of Brazil’s growing economic muscle than its considerable athletic prowess.
Brazil’s economic promise is of much greater long-term, global significance than its selection to host a few international sporting events. Indeed, Brazil is a potential economic powerhouse. The country’s growth, strong capital markets and recent cross-border M&A activity all attest to it. While Brazil’s economic potential has been widely recognized in business circles for decades, many have questioned whether that potential would ever be realized.
To be sure, Brazil has been on shaky ground in the past. The country faced economic collapse as recently as 2002, when it had to borrow $30 billion from the International Monetary Fund (IMF) just to avoid default on its sovereign debt.
But for all the short-term woes, its long-term potential was never in question. Serious recognition of Brazil’s economic prospects came in 2001 when Goldman Sachs global economist Jim O’Neill coined the term BRIC (Brazil, Russia, India and China) for countries he identified as emerging markets likely to be among the world’s dominant economies by 2050. While China and India generally receive greater attention and have sustained higher rates of economic growth this decade, Brazil is an economic force to be reckoned with. Since it is the only BRIC in the Americas, Brazil deserves our close attention.
Brazil is clearly starting to take its rightful place on the global economic stage. Its sovereign debt, so close to default earlier in the decade, has been rated investment grade by Standard & Poor’s, Fitch, and Moody’s. Indeed, Brazil’s recent commitment to purchase $10 billion in IMF bonds is an amazing accomplishment for a nation which had to be bailed out by the IMF less than a decade ago. Brazil’s commitment to help fund the IMF is a clear sign that it has the financial firepower—and the willingness to use it.
Indications of Brazilian economic prowess are plentiful. For example, the largest initial public offering so far in 2009 has been the $8 billion IPO of Banco Santander Brasil (BSBR), the Brazilian subsidiary of Spain’s Banco Santander (STD), confirming the strength and potential of the Brazil’s capital and financial markets. While the nation’s selection as host of the 2016 Olympics is significant, developments such as this should be drawing even greater attention.
Brazil has tremendous opportunities to continue to grow its economy and increase the standard of living of its people. The country is already self-sufficient in energy, and huge petroleum reserves have recently been discovered offshore—dwarfing other recent discoveries elsewhere in the world. The latest Brazilian offshore field could ultimately yield up to 50,000 barrels of oil per day. And Brazil has the potential to feed much of the world’s growing population since it has so much of its land devoted to agriculture. Agriculture in Brazil means more than simply growing food for consumption. Increasingly, Brazilian agricultural production is being devoted to ethanol, the world’s leading bio-fuel.
Although growth in Brazil has, along with the rest of the world, slowed over the past year because of the global credit crunch and the consequent collapse in commodity prices, Brazil’s economy has been somewhat buffered. Its banking sector largely escaped the worst of the credit crunch because its banks are highly regulated, especially with respect to the extent to which they can become leveraged. The transparency of the Brazilian financial system, the country’s solid democratic base, its environmental power potential, and framework of social policies add to the equation, creating a scenario for consistent growth even in the midst of a global crisis.
Of course there are still many challenges which confront Brazil, including those underscored by violence in its major cities. In addition, there is still a great amount of investment needed in the infrastructure and social development fronts. Nevertheless, knowledgeable observers believe that Brazil has what it takes to succeed.
Participation in the global M&A marketplace is just another clear indication of the importance of Brazil on the global economic stage. For decades, Brazilian M&A has been a euphemism for North American or European companies acquiring assets in Brazil. Not anymore. Growing financial confidence and business savvy have allowed Brazilian companies to turn to the international M&A markets in order to become truly international and exploit opportunities for growth.
Brazilian companies now regularly consider acquisitions outside of Brazil and Latin America. As Brazilian businesses have become truly global, the size and number of M&A transactions involving Brazilian companies has been on the rise. Clear evidence that Brazil has moved beyond being merely an emerging market, is the broad nature of the acquisitions its companies have made in recent years.
The Brazilian multinational company has truly come of age and recent global acquisitions affirm it. Two huge unsolicited transactions are prime examples. InBev (BUD), a combination of Brazil’s Ambev and Interbrew, acquired Anheuser-Busch. And Brazilian miner Vale (VALE) acquired Canada’s Inco, besting North American rivals Falconbridge and Phelps Dodge. Deals such as these attest to the business savvy among Brazilian management teams and the financial firepower existing today at the companies which they lead.
The sale by UBS of Brazil’s Banco Pactual back to one of its original Brazilian owners, as well as AIG’s sale of its stake in Unibanco AIG Seguros to its Brazilian partner Unibanco, are indicative of the relative strength of Brazil’s financial institutions.
Of a smaller size, but equally important from a strategic standpoint, is the recently announced sale of Marfrig Frigoríficos e Comercio de Alimentos, Cargil’s Brazilian meat business, to Seara Alimentos.
The message is clear: Brazilian companies are leading acquirers both inside and outside of Brazil. With stronger balance sheets and liquidity positions, Brazilian acquirers will likely find further acquisition opportunities in stressed international markets.
As Brazilian President Luiz Inácio Lula da Silva recently proclaimed to the International Olympic Committee, “Our time has arrived. It’s arrived!” The economic evidence certainly appears to support Lula’s boast.
Tax Breaks Encourage Exporting Overseas
October 26th, 2009 | Posted by taxREEDY INTERNATIONAL, in Keyport, N.J. sells chemical additives that plastics makers use to cut costs and operate in an environmentally friendly way, said AimeMarie Reedy, who founded the company with her husband 20 years ago. The company makes all its products in the U.S., and about 15 years ago began exporting overseas.
“Exporting helps us to be more resilient,” Reedy said. “When the economy is slow here, it may be OK someplace else. It gives you a balance: Everything is not always good or bad everywhere in the world at the same time.”
As companies in New Jersey and across the country struggle with the recession, some have begun looking at exporting to make up for the revenue declines they’ve suffered in the U.S.
And for companies considering exporting, the federal government provides tax incentives designed to help domestic firms compete in the world market said Tfcnothy A. Burley, a partner with the accounting firm Weiser LLP, in Edison.
The simplest incentive is the DISC, or domestic international sales corporation, designation, Burley said.
October 26th, 2009 | Posted by innovOne of the most compelling examples in Roger Martin’s new book is a personal tale from his own days as a consultant. Asked by a Canadian bank to come up with a new strategy to cater to high-net-worth clients, Martin and his team came up with a bold plan they thought might revolutionize the bank’s entire business. The bank’s chief executive met the excited presentation with one question: Had any competitor already gone this route? “No!” Martin replied brightly. “You would be the very first!” And with that the meeting was over, the idea was killed.
The story, and others in Martin’s new book, The Design of Business: Why Design Thinking Is The Next Competitive Advantage, illuminates more than just the risk-aversion of so many members of the C-suite. Instead, Martin is calling for a new way of thinking to permeate business that embraces the tricky reality of executing innovation and in doing so transforms it into action. He calls the technique “design thinking” and argues that it provides the necessary balance between the poles of analytical and intuitive thinking that are commonly taught and nurtured in today’s professionals.
Dean of the Rotman School of Management at the University of Toronto since 1998, Martin has been a key figure in driving understanding of the concept of design thinking for some time now. Here he again outlines his theory that this perspective provides a new—to his mind, critically important—method of running a business in today’s fiendishly complex world.
With examples from companies such as Procter & Gamble (PG) and Research in Motion (RIMM), Martin shows the power of design thinking in action. He also makes the case that it can—and should—be adopted by any department within an organization.
Indeed, the most interesting insights within the chapter on P&G are not the well-trodden stories of A.G. Lafley and Claudia Kotchka shaking things up by holding mandatory hands-on innovation workshops. Instead, it’s the work of Filippo Passerini, head of P&G’s global business services, that emphasizes the potential impact of the technique. By applying design thinking within the traditionally uncreative corporate engine room of the organization, Passerini brought about radical transformation that could both support and spearhead the turnaround of the company at large. Without this in place, the flashier, more talked-about product introductions would not have had the strong foundation needed to flourish in the marketplace.
Design thinking has received more than its share of attention in recent years, not least from magazines such as BusinessWeek. Somewhat inevitably, a backlash has bubbled up, with designers grumbling that the concept detracts from the purity of the design discipline itself, and some executives skeptical of its worth outside of design agencies or creative consultancies.
Smartly, Martin acknowledges the tension and he remains steadfastly nuanced in his own argument that balance remains the key. Sometimes Martin’s language reflects his long tenure as a university professor, but bushwhacking through the academic terminology is a worthwhile exercise. An accountant can learn to embrace the concept of validity, or leap-of-faith ideas, through the help and guidance of a more creative thinker. Likewise, structure and data can help the free-wheeling, blue-sky dreamer make a difference. Neither can exist without the other for long, and Martin’s is a clarion call for all parties to lay down their defensive weapons in order to move toward a culture of openness and acceptance that nurtures a culture of sustainable innovation.
And while Martin emphasizes that design thinking is of the utmost importance within the C-suite itself, he doesn’t let readers off the hook. Instead, everyone can learn to become a design thinker, and should try to understand the position of their colleagues.
As he explains, his own mistake as an excited consultant pitching a new strategy to that Canadian bank CEO was to speak in the language of validity when what the CEO really needed to hear was the language of reliability. Had Martin reassured the chief executive that while there were no direct comparisons, some well-performing European banks had employed a similar approach with some success, the CEO might have been persuaded to take the leap. The purpose of this useful book is to equip the reader with the tools needed to make sure that happens.
Earnings and Sales Continue Ahead of Expectation – Everything is Beautiful
October 23rd, 2009 | Posted by stockWith over half of the S&P 500 earnings reported(report)the numbers are coming in ahead of expectation, which considering two thirds of the issues historically beat their estimates, doesn’t say that much. Specifically 65% of the issues beat their operating estimate, with 44% beating last year’s earnings; 68% beat their sales, with just 29% beating their last year’s sales and 45% of the companies beat their As Reported number from last year. So far there have been few items and fewer major charges, as evident by the fact that the bottom line for both Operating and As Reported, at least so far, are the same. Several companies however have announced plans to do layoffs, which will result in those infamous year-end write-offs creating a GAAP between the Operating and As Reported earnings. Last year was a banner year for write-offs, write-downs and provisions, resulting in the only negative quarter for earnings in index history – both on Operating and As Reported basis. Based on the reported data the stats are improving, but they need to be viewed against the guidance, the easy comparatives from last year, and more importantly, measured against the perceived stage of the recovery.
The real story is in the cost cutting and the sales. This year companies have cut their way to the bottom line. While sales have dropped by a double digit number, which normally would devastate the bottom line, but aggressive cost cutting, prior layoffs and a lack of corporate spending has managed to limit the damage. The result is that margins have been improved. The concept is that eventual higher sales will produce much higher earnings; the reality is that we are paying 28 times current earnings for the belief in that concept. Q3 is giving a sign that support the concept. Sales for this quarter are coming in 3.65% ahead of estimates, with earnings ahead 7.60%, resulting in an above average margin of 8.17%. And while year over year sales are expected to decline 10%, that is significantly better than the 19.9% decline in Q2 or the 16.5% drop in Q1 – less worse is better has come to sales.
So the $1.5 trillion question is, $1.5 trillion is how much sales have declined over the past year, where will the sales come from? A smaller part will come from increased consumer and corporate spending, inspired by a more optimistic outlook and by the need to replace outdated items that can’t be put off any longer; a potential Accelerated Depreciation bill is on the table, but not the Floor yet would also help. The larger part however may come from M&A. In this case companies have plenty of cash and shares, and the market seems ready to get back into the grove for Monday Morning Merger Mania.
The Mad Dash Toward Touch Technology
October 21st, 2009 | Posted by innovBuried within the current mad scramble towards touch and multitouch technologies lies an important lesson in innovation: “God is in the details” (Ludwig Mies van der Rohe).
So while executives and marketers all seem to be saying, “It has to have touch,” I am more inclined to say that anyone who describes a product as having a “touch interface” is likely unqualified to comment on the topic. The granularity of the description is just too coarse. Everything—including touch—is best for something and worst for something else. True innovators needs to know as much about when, why, and how not to use an otherwise trendy technology, as they do about when to use it. Let me explain.
The photo above shows four watches in my collection. On three of them (a, b, and c), the entire crystal is a touchscreen. Three of them (a, b, and d) have built-in calculators.
Watch (a) is the Casio AT-550. Despite its conservative styling, it has some pretty amazing software. To put it into calculator mode, you push a button on the lower left side. To enter numbers or operators into the calculator, you just draw them on the crystal with your finger. So, for example, a downward stroke from 12 to 6 o’clock enters the digit one (1), whereas the same stroke followed by a horizontal stroke from 9 to 3 o’clock enters a plus (+) sign. The numbers appear in the main part of the LCD window, and the current operator as a kind of superscript, above them.
The whole screen is used for entering each character, thereby bringing the scale of the action well within the bounds of normal human finger motor control. Less obvious but just as important, the technique enables “heads up” data entry—the equivalent of touch typing. In other words, I can input numbers without diverting my gaze from you or the document from which I am copying a number.
Watch (b) is the Casio TC-50. To put it into calculator mode, you also push a button on the lower left side of the watch. In this case, however, a graphical representation of the familiar calculator numerical keypad appears on the watch face. To enter a number, you touch the desired digit on the virtual keypad. To enter an operator, you touch the appropriate icon
(÷, x, -, +) permanently marked just below the LCD at the bottom of the watch crystal. The design is intended to take advantage of your previous experience with calculators. However, while this all seems clear, it does little to make the calculator usable. The watch is a victim of what happens when fat fingers meet small targets—even when accompanied by high concentration. As for touch typing, forget it.
Watch (c) is a Tissot Touch. While the crystal is touch-sensitive, this watch does not have a calculator. To activate the touchscreen you push and hold the watch stem for a couple of seconds. Different functions are enabled by touching the crystal at particular places. For example, if you touch at the 6 o’clock digit, the hands of the watch align and point north, converting the watch into a compass.
Watch (d) is a third calculator watch, a Casio Data Bank 150. This one has a physical, mechanical keypad rather than a touchscreen. While the physical keys are small, they can be accurately used, but not without looking.
What I like about these watches is their power to teach us, using relatively simple existing products, important lessons about products that we might be dreaming about. Take watches (a), (b), and (c). Even though they are all just watches, and all use a touchscreen to gain access to their functionality, knowing how to use any one of them buys you pretty much nothing in terms of knowing how to use the other two. Even if you know how to use two of them, you still don’t know how to use the third.
In fact, isn’t it interesting to note that there is a closer affinity between the touch interface of (b) and the non-touch interface of (d) than between the two touch ones? In light of this, what in terms of user experience is conveyed by specifying that a product requires a touch interface? Very little. Yet how many of those insisting on a touch interface know about products such as these, much less the lessons that they have to teach?
As with almost any suddenly hot technology, touch and multitouch are decidedly not new. They are a textbook example of my notion of the “Long Nose of Innovation. ” For example, multitouch was first discovered by researchers in the very early 1980s, before the first generally available PC using a mouse was commercially released. It has been gradually mined and refined ever since. The companies whose products have initiated the current buzz just happened to recognize the latent value of touch, and believe in it enough to take on the risk and investment required to effectively exploit its potential.
Significantly, these companies neither invented the underlying technology, nor were they the first companies to exploit it commercially. This is not a criticism, by the way, but rather a respectful commentary on the nature of design and innovation—one that counters the myth of the genius inventor, and gives appropriate recognition to those who laid the foundation that enabled this to happen.
Finally, consider the following: Casio released the AT-550 in 1984 for under $100. That’s the same year that the first Macintosh was released. Working Moore’s Law backward, that means that wonderful “heads up” character recognition was created using only one 131,072th of the computer power that would be found on an equivalently sized chip today.
There is a serious lesson here for those would-be innovators who, on seeing the great success of one company’s use of some technology or another, scramble to adopt it in the hope that it will bring them a share of that wealth as well. Such behavior is more appropriate for lemmings than innovators.
Rather than marveling at what someone else is delivering today, and then trying to copy it, the true innovators are the ones who understand the long nose, and who know how to prospect below the surface for the insights and understanding that will enable them to leap ahead of the competition, rather than follow them. God is in the details, and the details are sitting there, waiting to be picked up by anyone who has the wit to look for them.
Sleepy Interviewer? Here’s How to Follow Up
October 20th, 2009 | Posted by innovDear Liz,
I had the most frustrating experience last week. After pursuing a certain prospective employer for months, watching the job boards for openings and the news for business events that might create a need for my services, I finally got a break. I met a woman who knows someone who knows someone else, and I got an interview. I was thrilled.
When I got to the interview at 8 a.m., the interviewer told me she’d been at work until 2 a.m. the previous night. She had barely slept, and it was obvious. She was bleary and disconnected for the whole conversation. The poor lady looked in dire need of sleep. I doubt that she retained more than 10% of what we talked about. It’s been a week, and I haven’t heard anything. I don’t know how to proceed. Any suggestions?
Thanks,
Laurent
Dear Laurent,
That is a tough blow—to get all the way to the interview and then have the opportunity for a substantive conversation yanked away from you! I am sorry you had to go through that. I’d proceed almost as though you hadn’t interviewed at all (but with the advantage of having a solid contact inside the company—namely, Miss Sleepy herself).
Here’s what you do. You can’t very well call or write her and say, “You were a mess when I met you. Let’s do it again.” Instead, you’ll call her and leave the world’s most pleasant and upbeat voice message, and say “Hi, Ellen! It was tremendous to meet you last week, and as you suggested, I’d love to continue the conversation by phone—perhaps early next week?”
O.K., maybe she didn’t actually say, “Let’s continue this conversation by phone” when she met you, but it sounds like she was so exhausted that she’s unlikely to recall much, if anything, about the conversation.
As an alternative, you could write to her and say, “You mentioned that Audrey Smith would be a good person in the organization for me to talk with next. Shall we set that up?” If she mentioned any names of people who are close to the job that is open or who would be in the interviewing roster, do not hesitate to suggest meetings with those people. Sometimes, we need to help nudge the interview process along, and you have certainly earned the right to do that by undergoing the sort of interview you did.
You will be playing your sleepy-interviewer advantage, and in my opinion, that’s a perfectly appropriate thing to do. After all, it’s not right that you should be denied a shot at the job because the interviewer stayed too late at work the night before.
Perhaps it goes without saying that the leave-at-two-and-return-at-eight shift is not for everyone. You may need to think twice about this employer if that sort of work schedule is par for the course in this shop.
Best,
Liz
The end-of-the-year sales push is in full swing. Planning for 2010 is under way. And between all the meetings, memos, and conference calls, your summer vacation is now just a distant memory. We all could use a break. So, just for fun, let’s take a look at seven of the most common and deadly sins of the innovator. We’ve seen all of these cause failures of Biblical proportions.
1. Lust: Innovating in a space you have no business being in. Trying to innovate outside your operational expertise or brand footprint creates incredible inertia internally. “Should I be working on the things I should be working on or the harebrained scheme that someone else higher up on the org chart has conjured up.” It also causes unhealthy confusion externally. “Wait,” the customer says. “My longtime supplier of plastic molding injection equipment is now making iPhone (AAPL) accessories? What gives?”
Most successful innovation involves complementary products, services, and business models because they are readily accepted by your team and make sense to your customers. Unless a solid business case proves otherwise, “Stick to your knitting” is excellent advice.
2. Gluttony: Trying to create too many initiatives with too few resources. Innovation takes emotional and financial capital and focus. Venture capitalists can afford to back 10 companies, hoping the payoff from one or two will cover the expense of having the other eight or nine investments fail. But those odds won’t work for you. Instead of making a number of small bets, focus your team and resources on one or two initiatives that have the greatest probability of hitting it big.
3. Greed: Taking short-term profits at the expense of long-term growth. The stock market demands a high rate of return, which naturally results in safe bets like line extensions. Line extensions are fine, but they leave you at risk of being blown out of the water by an industry-changing idea. The solution? Create two teams. Put one in charge of evolution and the other in charge of revolution. You’ll get both short- and long-term growth.
4. Sloth: Taking short cuts—not doing the hard work, not following the proven process. Too many otherwise brilliant leaders have made the mistake of thinking that speed and short cuts are the only way to successfully innovate. While we agree that being overly cautious—”Let’s test the idea for the 83rd time”—is also potentially fatal, there is a happy medium. Think big, quantify, qualify, refine, and launch. This should take no more than 12 months. If you can do it in eight, great! If you can do it in three, then you have left something out or you have a very, very tired staff on your hands. Remember: Just because it takes one woman nine months to have a baby doesn’t mean nine women can produce one in 30 days.
5. Wrath: Being so focused on your competition that you miss the same opportunities your rivals are missing. You can’t read the label when you are sitting inside the jar.
Remember, your competitors are in the same jar you’re in. If you concentrate on what they’re doing, you’re both going to get kicked to the curb by someone outside your industry who is rightly focused on the consumer (and not either one of you).
6. Envy: In the context of innovation, envy means launching a “me too” product instead of finding a space you can own. An example of envy is when your sales team comes to you and demands that you launch a product to compete with the “hot” new offering they just saw from the competitor. Don’t take the bait. Chances are, that product is going to fail. Instead, use your sales team to find out what other needs your customer or consumer has, and then attack them with your own novel product, service, or business model.
7. Pride: You won’t give up on your favorite idea—even when the numbers prove you’re wrong. “Hey boss, this one is for you.” Nobody wants to tell you that you are wrong, which means that when it comes to your ideas, you must take a long, hard look at the data. Unless the data are overwhelmingly in favor of your idea, drop it and work on the one the team secretly knows is better.
Religion tells us the seven deadly sins are fatal to spiritual progress. We will let you debate that thought with the theologian of your choice. But we can tell you they are definitely fatal if you want to innovate successfully.
Should Bond Powerhouse Pimco Jump into Stocks?
October 19th, 2009 | Posted by stockPosted by: Lauren Young on October 19, 2009
News reports from Bloomberg and Pensions & Investments say that fixed-income giant Pacific Investment Management Co. is considering a move into equity investing.
Pimco may hire an existing management team with a track record, according to unidentified sources. But this isn’t exactly new news: In September, Kiplinger’s ran a profile of Pimco, in which Pimco’s bond guru Bill Gross as well as Pimco CEO Mohamed El-Erian talk about potential expansion into equities.
Expect to see Pimco introduce more stock, or quasi-stock, mutual funds. “We’re currently interviewing stock-fund managers from various firms — looking to start from square one with a new product and apply our philosophy to new areas,” Gross says.The firm won’t say whether it plans to start offering funds for which managers buy stocks, a move that would mark a profound shift. “I would be nervous if Pimco hired managers” to pick stocks, says Morningstar analyst Lawrence Jones. “That would be departing from their long-standing traditions and approaches.” El-Erian says the new stock funds would indeed differ from existing Pimco stock funds, which purchase options and futures contracts on stock indexes but stash the bulk of their assets in bonds.
Pimco Total Return, Pimco’s flagship fund, is the biggest mutual fund of all, with more than $186 billion in assets. So why would Pimco, arguably the most powerful of all fixed-income shops, branch out into stocks? And why should you care? I posed these and other questions to Russ Kinnel, director of research at Morningstar, the Chicago fundtracker. Here are his thoughts.
According to Morningstar’s data, Pimco has just 5% of its assets in equities. Why do you think Pimco would expand into equities?
Pimco’s parent company, Allianz, does have some equity expertise already. Its RCM unit offers some terrific stock funds. (Morningstar recommends the Allianz RCM Technnology fund.)
Pimco also has some stock-plus strategies, essentially letting a bond manager run a stock fund. The basic idea is that you buy futures in a stock index and combine them with a short-term bond strategy overlay. It may be they are picking up mortgages or short-term high quality bonds instead of Treasuries. If they beat Treasuries, the funds will beat the stock index. It’s their way of running equity funds without equity expertise.
An Allianz unit, incidentally, got in trouble with the market timing scandal a few years ago. Pimco was unhappy because their name was slapped on a mutual fund. So you can be sure that if Pimco does branch out into stock funds, it will be part of the Pimco operation as opposed to some branding campaign.
Another thing is that Pimco seems to be very aggressive about growing. Just look at how many new fund launches they are doing—it seems like they are coming out with a new fund every couple of weeks. They keep finding a new wrinkle on bonds or asset allocation. Some of these funds are cool, but it seems like there is an aggressive goal there.
Is this a good time to be launching stock funds?
Pimco has done a pretty good job of sticking to what they do well, so I see that as a positive for investors. Given the massive inflows they are having, they could be buyers of equity teams when others are forced to be sellers. We’ve seen some fund shops sold or cutting staff recently. And very few places are hiring. It’s a decent time to be hiring equity managers, or a doing a boutique lift out. The wrong time to do that is when the market is raging, and you have pay obscene prices for every analyst and manager.
One criticism I’ve seen of Pimco is that its fund are expensive.
We give Pimco good ratings as a fund family, but it’s true that Pimco funds are expensive. Now, they offer a reasonable value in institutional shares, as well as funds they subadvise for Harbor and other places.
But the retail share classes, such as Class A shares, are pricey. That’s partly the fault of Pimco and partly the fact that you have to pay up to have distribution in fund supermarkets and through brokerage channels. If you look at the Schwab or Fidelity supermarkets and pull up bond funds, the only good low price bond funds you’ll see are the proprietary funds from Fidelity and Schwab who don’t have to shell out a lot for to get onto their own platforms. Pimco is not giving retail investors a lot (of deals), other than the funds they subadvise.
Pimco Total Return, which is a bond fund, is the top-selling fund so far this year. Do you think the firm can grab equity investors, too?
Pimco is taking in a lot of money this year, so it seems to make sense that the business plan would call for branching out into stock funds. Pimco has massive, massive amounts of inflows, but most of that money is going into the institutional share classes of Pimco Total Return. Some of the Pimco asset allocation funds run by Rob Arnott are doing well. Overall, it’s stunning how much money Pimco is taking in.
The Death of Risk in Silicon Valley
October 18th, 2009 | Posted by innovI was recently at a Silicon Valley conference where one of the debates that raged into the wee hours centered on Silicon Valley’s increasing aversion to risk: Is it a good thing, and who’s to blame for it?
Less risk-taking by entrepreneurs means less outright failure. A lot of burned startup founders and investors see this as a plus. But any macroeconomist will tell you it’s the rare home runs—successful, innovative companies yielding high returns—that create jobs and capital that keep the Valley humming.
But today I am more interested in who or what is responsible for the death of risk in Silicon Valley. Obviously, the recession has played an important role. Stock market declines and surging unemployment have done a number on everyone’s appetite for risk. But other parties deserve some of the blame. Herewith, my list of prime suspects:
Angel Investors
They’re not as angelic as the name implies. Angel typically refers to investors willing to park $50,000 or less of their own money in a startup. Often, angels are the first money into a company. The best ones invest based on gut feeling; and because they’re investing only their own money, they don’t have other investors to answer to. And most have been through it before.
But there are few substantive professional barriers to entry. So alongside savvy angels you have morons throwing around money they can’t afford to lose.
This was especially true in the late 1990s, as tech companies were going public in droves and the Nasdaq was soaring. Paper millionaires saw seeding companies as a sure thing; they hung out the angel shingle and began funding deals. And why not take their money? Dumb money can buy servers and pay salaries, too. The problem with dumb angels is they have no reserves and evaporate as soon as times get tough.
Verdict: The angels have probably committed the fewest offenses against risk, but as the first money in, they can do big harm early in the life of a company.
Venture Capitalists
The VC is everyone’s favorite villain. What’s not to hate about a group of investors caricatured as heartless hoarders of billions of dollars who take all the returns when you win, or hang you out to dry when things founder?
In defense of VCs, no one is forcing entrepreneurs to take their money. Anyone who thinks he or she can get millions of dollars that don’t have to be repaid—with no strings attached—is probably too naive to be building a company. VCs have their own pressure from investors, and it has intensified recently as endowments have sold stakes in illiquid assets like venture capital firms.
A venture capitalist’s greater crime against risk isn’t closing down a startup that’s not going anywhere. Rather, it’s not funding ambitious, risky new ideas in these slow times. Every VC will tell you the biggest hits from Silicon Valley come from downturns, when copycat companies are few and only die-hard entrepreneurs have the guts to go for it. Examples include Sun Microsystems (JAVA), Cisco Systems (CSCO), LinkedIn, and Facebook.
Verdict: The VC is only the startup’s enabler. VCs don’t innovate and they are hedged against several other deals. But the VC is the only part of the ecosystem that is paid to take risk. And it has the least skin in the game. There’s little excuse not to tolerate a higher degree of risk than they do.
The Entrepreneur
Entrepreneurs are taking less risk partly because they have less reason to. Internet and communication technology has so reduced the costs and compressed the amount of time needed to get a new product out that entrepreneurs need less money.
That means they’re more likely to sell for $5 million, $15 million, or even $30 million. They’ve put less blood, sweat, tears, and years into that product. And, if they’ve raised less money, a much smaller deal makes them rich.
But when it comes to Silicon Valley’s macroeconomy, these small deals don’t create jobs or mass wealth. They don’t foster that change-the-world ethos that lured smart coders to the Valley in the first place. No one gets on a magazine cover for selling a company for $5 million.
Verdict: Small deals for small exits are great. But don’t fool yourself: You’re not building a business here and you probably shouldn’t be raising venture money in the first place.
The Blogosphere
Bloggers have become supporters and champions of startups that big publications won’t cover unless it’s clear the company will be a “winner.”
And those bloggers have been rewarded. People ask how TechCrunch gets an astounding 7 million unique visits a month. It’s because TechCrunch was the only site that covered every Web startup and still covers nearly every product launch and demo.
But blogs have hurt startups and innovation, too. The speedy, seat-of-your-pants style of reporting can build a company up or tear it down—not over years but weeks, days, or even hours. Real businesses never materialize as fast as investors and the public hope. And today’s round-the-clock coverage makes people fatigued with Web startups before they even have a chance to stumble.
Verdict: Blogs that cover startups need to remember what made them popular in the first place: They filled a news hole in the business market and provided sage, insider analysis of companies that may seem crazy to the mainstream, but could also be the next Google (GOOG). Nobody needs dozens of posts a day on the latest Twitter turn of the screw, or piling on about a minor product glitch.
Public Companies
Yahoo (YHOO), Google, eBay (EBAY), Microsoft (MSFT)—these silent killers of risk are all the more insidious because they used to be those same scrappy startups. They know firsthand how a company that seems crazy can become a titan, so in a move of easy self-preservation, they just take these smaller companies out before they can get to that point. And don’t expect it to end: Google said on Oct. 15 it plans to bulk up through acquisitions, and Microsoft executives have made similar remarks recently.
A lot of people defend the practice, saying it’s a smart way to outsource R&D and give cutting-edge technologies a wider audience. That’d be great if the companies and products didn’t frequently get killed in the process. Yahoo has done a great job supporting photo-sharing site Flickr, but what about the many others it’s shut down, including most recently the e-mail service Zimbra, which Yahoo bought for $350 million in 2007?
Others will argue that a quick sale can encourage entrepreneurs to take more risk on their next companies. The common example is PayPal. Within a few years after eBay bought the company, PayPal founders and former executives were starting companies like Yelp, Slide, LinkedIn, and YouTube, and funding companies like Digg and Facebook. But that says more about the risk profile of a particularly talented group of entrepreneurs than it does any great move by eBay.
Verdict: Public companies have played a big role in curtailing risk. They have to. Otherwise, they’re the Goliath in the crosshairs of David’s slingshot.
Wall Street
Wall Street hasn’t played as direct a role in Silicon Valley since the late 1990s, when analysts like Mary Meeker and bankers like Frank Quattrone knew as much about new startups in the Valley as the VCs did. That’s part of the problem.
Startups have to want to go public in order to go for the home run. And most entrepreneurs today just don’t. Blame it on bankers and analysts who no longer care about a company with a sub-$500 million capitalization; blame it on Sarbanes-Oxley; blame it on activist hedge funds who don’t give CEOs the leash to innovate; blame it on scars from companies going public in the 1990s that had no business going public and paid the price.
But too many great entrepreneurs sell early not because they’re lazy, not because they want a quick buck, but because the idea of running a company all the while trying to meet quarter-by-quarter Wall Street estimates is antithetical to risk-taking.
Verdict: There’s got to be a reward for all that risk, and until the public markets become a place great entrepreneurs aspire to get to, that risk-reward equation is hopelessly lopsided.
Pfizer Loses Its Triple-A Credit Rating
October 16th, 2009 | Posted by stockThe Triple-A credit rating is disappearing before our eyes. On Oct. 16, Standard & Poor’s yanked drug maker Pfizer’s (PFE) AAA-rating, the best rating the agency can give out to credit-worthy companies.
The move was no surprise. Pfizer sealed its fate when it launched its $66.9 billion acquisition of rival pharmaceutical firm Wyeth, a deal that was completed on Oct. 15. Buying Wyeth required borrowing $22.5 billion.
S&P credit analyst David Lugg said in a statement that Pfizer’s new, lower “AA” rating reflects:
… the challenge to realize earnings and cash flow benefits in light of pending patent expirations in the midst of a currently difficult market as well as the significant additional borrowings needed to fund the [Wyeth] acquisition.
As S&P’s managing direction Nicholas Riccio told me in March, the AAA credit rating is “almost extinct at this point in Corporate America.”
General Electric (GE) lost its triple-A rating in March. Only four firms still have S&P’s top credit rating: ExxonMobil (XOM), Johnson & Johnson (JNJ), Automatic Data Processing (ADP) and Microsoft (MSFT). In late 1994, 14 compaines had triple-A ratings.
It’s easy to blame the disappearance of the top rating on economic hard times. But it also reflects shifting priorities for CEOs, corporate boards and investors. Pfizer execs knew the Wyeth deal would hurt its sterling credit reputation, but they completed the deal anyway — obviously for strategic reasons they see as more important than the recommendation of the credit rating agencies.
(S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)
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