Category Archives: Asian economic development

Google’s proposed new class of common stock

April 13, 2012 By in Current Market Thoughts, Industry Analysis, internet, Japanese development, Stock ideas, Stock options, Stock Splits Tags: , , , , , , , , , Leave a comment

the C class announcement

Yesterday, in conjunction with its release of 1Q12 earnings, GOOG published a letter to shareholders on its website.  In it, Larry Page and Sergei Brin outline their plans to create a new class of stock–C shares.

On shareholders’ approval, the new C shares will be distributed as a stock dividend, on a one-for-one basis, to all holders of A and B shares.  C shares will be publicly traded on NASDAQ, using a different ticker symbol from the “GOOG” the A shares use.  As will continue to trade, though.

no voting power

The sole difference among the share classes will be in voting power.  Each A share has one vote; each B share, held by corporate insiders, has 10.   C shares will have no votes.

Since holders of B shares–principally Mssrs. Page, Brin and Eric Schmidt–wield over 70% of Google’s voting power, shareholder approval is a mere formality.

Google intends to file full details of the issue with the SEC next week.

why do this?

…to keep voting control of Google in the hands of the current B shareholders.

How could control be lost?

…through a combination of sales by B holders, issuance of new A shares through stock options or acquisitions for stock.

current shares outstanding

According to the company’s 2011 10-K filing, 67.2 million class B shares, representing 672 million votes, were outstanding on December 31st.  258 million As, representing another 258 million votes, were also out.  Employee stock options on just under 10 million new A shares had been granted and remained to be exercised.  (Notably, I think, the stock option count is growing very slowly.  Google only granted options on 718,000 new shares last year.)

Therefore, assuming all stock options grants are exercised, A shares represent 28.5% of the total vote.  Bs represent 71.5%.

implications of the Cs

control structure frozen

The most obvious is that the new class will provide a way for the company to issue potentially large amounts of new shares without altering the current control structure of the company.  Google has already said future employee stock option grants will be for Cs.  Bs continue to rule.

price of the Cs vs. Bs

It’s not clear that the Cs will trade at the same price as the Bs.  Arguably, voting power should be worth something.  But in this case, as the company is currently constituted, the Bs’ votes basically have no value.  So you’d think the two prices should at least be pretty close.

stock options

Stock options don’t seem to me to be a big deal–or any deal at all.  Here’s what I mean:

If we assume all outstanding stock options are exercised, the company currently has a total of 940 million votes.  Bs have 672 million, with 268 million more for the As.

For the moment, let’s ignore the possibility that insiders sell a significant number of Bs to get walking-around money.  Yes, company rules require that Bs be converted into As before being sold, so no outsiders can end up with the super-vote shares.  Bs, therefore, can–and in the past have–disappeared.  And, yes, Mssrs. Page and Brin are halfway through a modest (for them) sell program that goes into 2015.  But put these thoughts to the side.

As things stand now, A shares can only achieve a voting majority if over 672 million are outstanding.  That’s an extra 404 million shares.  At the 2011 stock option issuance rate, the As take over in the year 2575, or 563 years from now.  At the 2010 issuance rate of 1.7 million, the As grab the reins in a mere 238 years, in 2250.

Suppose B holders sell 10% of their stock–because they need a loose $4.4 billion.  That would imply that the Bs outstanding shrink to roughly 6 million and As expand to 275 million.  In this case, the As still need 325 million more shares to take over.  That would happen, at the earliest, toward the end of the next century.

Even for long-term thinkers like Google, dealing with stock options worries can’t be a pressing issue.

stock-based acquisitions

This is the only reason I can see for the C share move.

True, Google has $44 billion+ in cash; operations generated $14 billion+ last year.  But a seller may well prefer stock to cash.  And, of course, a potential acquisition could be very large.  It could also be very large and very sick, needing a big infusion of cash after the purchase.

Yes, the founders’ letter says  “we don’t have an unusually big acquisition planned, in case you were wondering.”  I’m sure that’s true.  But I’d emphasize the word “planned.”  It seems to me that Google may well have decided it needs to make an acquisition of a certain type over the next couple of years and have developed a list of possible candidates. The next step is figuring out how to pay for it–which is what I think Google is doing now.

Who know what such an acquisition might be?  I wouldn’t care to bet on anything.  But I do have a guess, however   …somebody like Sony.  But that company has been such a train wreck for such a long time that I don’t see any percentage in speculating that Google would rescue them.  There are also severe legal obstacles that Tokyo has erected to deter foreign takeovers of its domestic firms.  On the other hand, Sony is a post-WWII upstart, not part of the establishment.  And the company does have TV technology, cellphones, tablets/PCs and the Playstation in tens of millions of homes around the world.

 

 

 

 

Macau gaming in March 2012: an okay, but not eye-popping, month

April 4, 2012 By in Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis Tags: , , , , , , , , , , , Leave a comment

March results

On Monday April 2, the Macau Gaming Inspection and Coordination Bureau published on its website monthly results for March in the SAR.  Here they are:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%

Source: Macau DICJ (Gaming Inspection and Coordination Bureau)

what they say to me

Yes, it’s the strongest non-holiday month ever in Macau.  Only last October (with Golden Week) and this January (New Year) had higher monthly win for the casino industry.

On the other hand, we don’t see anything like the almost manic surge in the size of the market that we experienced throughout 2011.  We may see some upward bounce in the April and May figures, as the new Las Vegas Sands casino on Cotai opens this month.

There isn’t enough evidence yet to draw firm conclusions.  However, if the right way to read the current figures is that the market is plateauing for the moment around the MOP 25 billion level (this is my guess), year on year growth comparisons should begin to narrow as the second half starts.

Although, again, there’s no clear evidence, I’m reading this potential growth slowdown to be the result of economic slowdown on the mainland.  If so, as the current expansionary measures Beijing is enacting bear fruit, I’d expect the growth rate to begin to expand again.  Timing is the only question.

It’s possible, though, that the plateauing I see is being induced by the leading casinos having reached full capacity–in which case, second-choice casinos should enjoy their day in the sun over the coming months.  And the Macau government should accelerate the pace of its approval of new casino permits.

One other point:  prior to the mammoth overcapacity the Las Vegas casinos by aggressive new construction during the past five years, only about half of that industry’s profits came from gambling.  The rest was food, lodging and entertainment.  One would expect that at least the American-owned casinos would follow the same development model in Macau–a move the Macau government is strongly encouraging.

Over the next five years, then, one could expect the gambling market to grow by at least the rate of Chinese GDP, or by close to 50%, and the industry’s profits to expand by a minimum of another 50%–and maybe much more–as non-gambling businesses expand.

Over the next five months, on the other hand it’s less clear how much there will be to cheer about.  I don’t see any need to sell the stocks;  I just don’t think they’ll run away to the upside.

 

 

a revealing insider trading ruling in Japan

March 28, 2012 By in insider trading, Japanese development, Trading Tags: , , , , , , , Leave a comment

insider trading in Japan

Yesterday’s Financial Times outlines a judgment made last week in a Japanese insider trading case.  The newspaper misses what I think is the main story, however.

the recent verdict

An institutional portfolio manager at Chuo Mitsui Asset Trust and Banking was found guilty of receiving, and acting on, insider information about an upcoming issue of new stock by a publicly listed company.  The PM made ¥14 million ($170,000) for his clients by trading on the tip.

penalties?

They were:

–the PM’s employer, Chuo Mitsui, was fined ¥50,000 ($600)

–there was no requirement of forfeiture of profits illegally made

–no penalty of any type either for the portfolio manager who received the tip or the broker who gave it.

The article goes on a bit about how, in the mysterious way Japan works, the nominal fine may have sent a powerful symbolic message that therefore the penalties may be more severe than a foreigner might suppose.  I think the nominal penalties do send a message, though not in the way the FT believes.

Oddly enough, the newspaper contrasts this fine with the ¥1.15 billion ($14 million) fine levied against Yoshiaki Murakami for trading on inside information about a half decade ago.  But it doesn’t realize that this contrast is the real story.

the Murakami saga

Mr. Murakami is a naive former civil servant who believed traditional Japanese corporations badly needed restructuring.  He formed an asset management company about ten years ago.  Its purpose was to be a gadfly that could prompt corporate/social change, while making money for clients at the same time.  One of Mr. Murakami’s targets–his last–was Nippon Broadcasting System.

Mr. Murakami bought a very large position in NBS.   He approached the company with suggestions about how to improve very weak corporate results.  He also asked for a board seat.

Management ignored Mr. Murakami.  It called on the “usual suspects”–suppliers, customers, domestic institutional investors–for support by buying NBS stock themselves, or at least by refusing to sell to Mr. Murakami.  Effectively isolated, Mr. Murakami approached a somewhat sketchy internet entrepreneur, Takafumi Horie of Livedoor, for aid.

Livedoor told Mr. Murakami in a private meeting that it intended to build a stake in NBS itself.  The declaration made Mr. Murakami an insider of Livedoor.  Despite this–he later claimed he didn’t understand the implications of his inside knowledge–Mr. Murakami bought more NBS.

Livedoor subsequently launched a hostile bid for the company.  It failed.  During the battle, Mr. Murakami realized that traditional holders of NBS wouldn’t tender their stock, so he sold his for a ¥3 billion ($36 million at today’s exchange rate) profit.

Mr. Murakami was charged with insider trading and found guilty.

penalties for Mr. Murakami?

They were:

–a ¥1.15 billion ($14 million) fine

–forfeiture of all profits from selling NBS, which amounted to ¥3 billion ($36.5 million)

–two years in jail, later commuted to three years of probation.

why the sharp differences in the two cases?

Why should the punishment for insider trading be so startlingly different in these two cases?

Two factors stand out to me:

–the lesser one is that the Murakami case involved much larger amounts of money–although that doesn’t explain why there was no censure of the Chuo Mitsui portfolio manager or of the broker, and no forfeiture of illegal profits.

–the real difference, I think, is that Mr. Murakami was not part of the establishment.  Worse, he was a critic of the traditional social order.  By exposing its failings, he threatened the status quo.  In contrast, both the broker and the Chuo Mitsui portfolio manager were working within the shadow system of favors and obligations that the establishment uses to feather its own nest and keep itself in power.

the real story

That’s the real story here–stubborn defense of the traditional economic order, even after two decades-plus of resulting economic stagnation.

playing the Japanese stock market today is harder than it seems

March 22, 2012 By in Current Market Thoughts, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , Leave a comment

how so?

No, it isn’t the frequent market holidays.

It isn’t the semi-visible, semi-not, zaibatsu/keiretsu business links that tie firms together with amazingly strong (to me, anyway) emotional bonds that foreigners find difficult to assess.

It isn’t the fact that for many Japanese company managements–to say nothing of institutional investors–one foot remains in the samurai world.

None of this helps a foreign investor.  But learning a market’s quirks is arguably part of the price of entry a newbie pays everywhere he goes.

the market structure…

No, the biggest problem for a foreigner today is the structure of the market–the selection of stocks available on the Tokyo Exchange.  Despite the fact that Japan is a wealthy nation and the second-largest advanced economy in the world, its market is dominated by the export-oriented manufacturers, plus the suppliers and distributors that support them, whose heyday (ex the autos) was thirty years ago.

…makes Japan look like an emerging country

The market structure is more like what you’d expect from China or India.  It’s also a little like the US circa 1980.  In the US since then, however, junk bond and private equity barons have taken many older, low growth firms private.  Conglomerates have broken up, or spun off their more glamorous parts, in strategies calculated to maximize their value.  Venture capital has brought a host of new firms into the public arena.  Not so Japan.  There are counterculture exceptions:  Uniqlo and the social networking firms come to mind.  But still…

None of this is exactly news.  But it’s the genesis of the dilemma foreigners now face in the Japanese stock market.

today’s problem:  a weakening yen

Newly initiated quantitative easing in Japan is weakening the yen.  That’s making life more difficult for domestic firms that use imported materials.  And it’s also a lifeline for exporters, who use yen-denominated inputs and sell their products abroad.  So Japanese institutions have been selling the former to buy the latter.  Again, no surprise.  It’s what they always do.

The issue for a foreigner is this:

Ex the autos, the exporters are not a particularly attractive picture.  Historically, they’re a pretty sorry lot in terms of making money.  They face intensifying competition from lower-cost rivals in emerging economies.  By and large, managements are hide-bound and unable to commercialize higher tech products they have.  Law and custom defend dysfunctional incumbents against any shareholder attempts at change .  (Think:  Olympus …or Sharp  …or Pioneer  …or Sanyo   …or Casio   …or Sony).

In addition, for a dollar-oriented investor, at least a part–and probably most–of any yen-denominated gains will be offset by currency losses.  Although my general rule is not to get involved in forex hedging, this is an exception.  Whether you like or not, you probably won’t make much money on your Japanese stocks unless you sell the yen.

…which brings up another potential worry.  Exporters usually run substantial currency hedging operations.  In my experience, they’re pretty good at it.  Nevertheless, it’s always possible that exporters have zigged when they should have zagged.

my bottom line

For a long time, I’ve regarded Japan as a special situations market.  Find an outstanding company; buy and hold.  Enduring the current flight from quality is just a cost of doing business.  I have no desire to chase export-oriented names, although while the yen is softening I think exporters will continue to be market stars.  If I were managing dedicated Japanese money, however, I’m sure I’d find myself under performance pressure to do just that.

emerging markets: political risk in India

March 19, 2012 By in Asian economic development, emerging markets, Wireless Tags: , , , , , , Leave a comment

the home field advantage

No company ever goes into a foreign country expecting a level playing field.  There are always going to be rules–written and unwritten–that favor the home team.  This is the flip side of the belief that you’re always going to have at least a slight advantage over a foreign company in your domestic market.

One exception–if you’re hoping that the foreigner will buy your domestic business.  Chances are he’d be willing to pay over the odds.  But it’s equally likely the government will force a sale to a domestic competitor.  Around the world, that’s just the way it is.

in sports

We see this all the time in sports.

Olympic judging.

Your favorite baseball team plays an away game.  You can be sure the field will be manicured to minimize the home team’s weaknesses and your strengths. The visitor’s dugout in San Francisco is, unusually, on the first-base side of the field?  Why?  It faces right into the frigid wind off the bay.

The home town timekeeper will make the game clock in basketball or hockey run fast or slow, as the home team requires.

Even the referees will exhibit a home-town bias, perhaps influenced by crowd noise.

what’s not cricket

Some actions are beyond the pale, however.  One such appears to be happening right now in India.

In 2004, when Vodafone was still intent on ruling the world, it entered the Indian cellphone market by buying an interest in an existing player from Hutchison Whampoa.  Aware that if the transaction were done in India it would trigger a capital gains tax of around $2.9 billion, the parties did the deal offshore.

The Indian Tax Department ruled that the tax was still due.  Vodafone refused to pay and lengthy litigation ensued.

Two months ago, the Indian Supreme Court ruled in Vodafone’s favor–that no tax was due.

proposed retroactive tax law change

On Saturday, the Financial Times reported that in its annual budget the Indian government proposes to change the tax law, retroactive to April 1962, to make offshore transactions involving multinationals and Indian subsidiaries subject to domestic capital gains tax.

Although the proposed change, if implemented, will have much wider implications than for Vodafone alone, it is being widely seen as aimed directly at the UK telecoms company.

The issue of course, is that Vodafone has played on the home field and won–but the losing side is trying to change the basic ground rules five years after the fact, in a way that turns victory into defeat.

I think it’s ironic that this situation is arising just as the Indian government has decided to try to woo foreign portfolio investors for the first time.  If the budget documents are not just bluster and parliament makes the retroactive tax law change, that would seem to me to dim substantially the appeal to foreign investors of India’s large domestic population.  The negative effect could last for many years.  For emerging markets investors, then, I think the Vodafone situation bears close watching.

 

 

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