Will Singapore be Asian Gateway for international issues and investors.

Singapore Exchange Ltd's new board, GlobalQuote, is beginning its operations Oct.22 with the american depository receipts of 19 Asian Companies, in the exchange's latest attempt to boost trading volumes and liquidity. The Singapore exchange is aggressively pursuing opportunities to become an Asian Gateway for international issues and investors. 

Depository receipts (also known as American Depository receipts or ADRs ) are shares of non-US corporations traded in the U.S (and denominated in dollars), while the underlying shares trade in the domestic market of the issuer. A depository receipt represent a specific number of underlying shares remaining on deposit in a so called custodian bank in the issuer's home market. A new DR can be created by depositing the required number of shares in the custodial account in the market. The dividends and other payments will be converted by this bank into US dollars and provided to the holders in the U.S. The process can simply be reversed by cancelling or redeeming the DR. In this way, an underlying stock can easily be transformed into a DR and vice versa.

DR provides, financial market integration, increases liquidity and hence better price discovery. For investors, DR's provide better diversification and access to other markets without going through the hurdle of currency conversion. The currency risk is managed by the custodian bank, who is better equipped to manage the risk.

However when trading in two different markets, if the financial market integration is weak,  leads to cross-market premium (or discount). Cross market premium reflects the deviation between the home market price of the stock and its price in the exchange where DR is being traded. It can be computed by converting the local currency price of the underlying stock in dollar prices, multiplying this by the number of underlying shares on DR represents, and then dividing their value by the DR price. 

When the domestic market and the host market is fully integrated, transaction cost are zero and the two markets close at the same time, arbitrage should be instantaneous and costless. The market would correct the prices in the two market instantaneously by trading the stocks and the DRs. In reality however, there does not exist instantaneous and costless arbitrage. There are transaction cost involved in converting the underlying stocks to the DRs like brokers fee and transaction fee to purchase the underlying stock or the DRs.Additional  transaction cost might be the cost of opening a bank account in the host country, or a tax that need to be paid for the transfer of funds back to the domestic market. Further since the settlement in equity market   typically takes place a number of days after the transaction, there is also foreign exchange risk unless the stock traded is matched with a forward exchange rate contract. In turn, these transactions cost can generate a no-arbitrage band within which price deviations are not large enough to induce arbitrage. Higher transaction costs induce the widening of the no-arbitrage band and thus, weaker integration.

A recent study on 76 stocks (out of 133 DR's that traded in NYSE of NASDAQ), has shown that the average premium is close to zero in all cases. For the pooled data, the mean premium is 0.15%, with a standard deviation of 1.65.  

 

Since Asian economy is growing with large number of investors within the region, there is a clear opportunity for DR's in the Asian market. Singapore can use its existing financial system to lead the financial market integration in the region. However there are many challenges to fulfill its ambition.The primary challenge for Singapore is to integrate the financial market in the Asia Pacific region along with developing necessary infrastructure required for DR issuance and trading. To lead the market, Singapore has to develop strong regulatory mechanism yet to allow the market to work without government interruption. Providing fungibility is also one more concern for the Singapore exchange.

Leveraging on its previous experience in developing energy market in the region, and its favorable attitude towards business, Singapore can definitely become the Asian Gateway for international issues and for international investors. It will benefit Singapore as well as other Asian countries.

Ref: 

Wallstreet journal Sep 15th

International Financial Integration through law of One Price,

Anchor pricing

How to make a successful negotiation....

The downfall of Veoh Inc.

With You Tube dominating the online vedio market and the economic downturn, the online video store, Veoh Inc, files for bankruptcy under chapter 7. Veoh is a revolutionary online video service that gave users the power to easily discover, watch, and personalize their entertainment viewing experience. Started in September 2005, the Internet video pioneer grew to a business with a run rate of $12 million and an audience of more than 28 million users per month. Nevertheless, its financial success and $70 million in capital from investors such as Intel, Time Warner, and Goldman Sachs were not enough. Online video sharing site Veoh Inc, filed bankruptcy, blaming the economic recession and the two year legal battle with the recording company Universal music group over the copyright infringement issue.
In the words of CEO of Veoh Inc, Dmitry Shapiro, “Unfortunately, great vision, a passionate team, tens of millions of users, millions in revenues and victory in court were not enough” "The distraction of the legal battles, and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy."
There are several reasons which led to the eventual downfall of this startup company which was flooded with the investment.
One of the primary reason for the downfall is the several copyright infringement lawsuits against the online video sharing site. In September 2009, a federal judge tossed out the music company's copyright-infringement suit, ruling that Veoh had met the requirements of the Digital Millennium Copyright Act in trying to keep illegally uploaded material off the site. Universal maintains Veoh hasn't done enough and has appealed the ruling.But It was both financially draining and distracting, and it choked off the ability for any significant strategic deals. In August 2008, Veoh prevailed in a similar case against adult entertainment company Io Group, which sued the site in 2006 for copyright infringement. A federal judge disagreed and dismissed the case, ruling that Veoh had made a good faith effort to remove Io content. During the legal fight, Veoh banned adult content from the site. Veoh is not the only online portal facing this issue. Google is currently having a legal battle with Viacom which filed $1bn lawsuit in federal court against Youtube in march 2007.
Another major reason is with Youtube dominating the online video market, Veoh and other web video providers have had to slug it out for what’s left. Other online video startups that have fallen include Instant media.
In addition, entertainment companies formed their own video sites, making it even more difficult for companies like Veoh to survive. One such company is Hulu, joint venture between News Corp and NBC universal owned by Comcast.
Major analyst have predicted that the only few companies will be successful in building a profitable company around online video sharing. Even Google has acknowledged that it is still finding a business model to sustain Youtube’s operation.
Now at the downfall of such a well funded startup, what are the learning’s from this failure.
Lets do an external analysis first:
The site, which had tried for years to carve out a niche by offering both user-generated content and professional shows, was eclipsed by rivals like Google Inc.'s (GOOG) YouTube and Apple Inc.'s (AAPL) iTunes. Veoh said it attracted more than 28 million unique users per month world-wide. Though it’s a blue ocean strategy at the startup, it could not able to create a unique and distinctive value proposition.
1. Competitor: Though at the start the competition was minimum, the competition gradually increased and many of the entertainment firms entered into this area. Many copied the same model,
2. Threat of substitute: Low.
3. Threat of supplier: Very high due to copyright infringement laws.
4. Threat of buyers: Buyers were actually advertisers. As internet advertising is becoming more popular there are many options for the advertisers.
5. Entry barrier: Without a strong network the entry barrier is very low for such a business model. Hence the business itself becomes very unattractive.
The investment of $70 million was not utilized properly either because of many lawsuits or loose company policy. At good times it spent lot of money without investing strategically for the growth of the business though the online users base was increasing. It failed to create a sustainable business model (though none of the online video sharing site has one). All these factors led to the evaporation of $70 million of investor’s money.

Kraft acquires Cadbury

After a fierce resistance for a month, Cadbury has finally accepted its sweetened takeover by Kraft Food Inc. An UK company got acquired by an US company. The friendly takeover marks the end of a prolonged and bitter battle for control of Cadbury, which is steeped in history and nostalgia -- and whose products are loved by millions of sweet-toothed customers worldwide. The new firm will create a global market leader with over 40 confectionery brands each with annual sales of more than $US100 million . The deal amounted to $ 19.6 billion (11.7 billion pounds) with 60% in cash and rest in stocks of Kraft. The acquisition took place at $13.78 per share. This deal made Kraft as the biggest candy company replacing Mars Inc and makes Krafts CEO Irean Rosenfelds, as one of the strongest woman in  United States of America. A takeover of Cadbury would end more than 180 years of history for the colourful maker of Dairy Milk chocolate bars and Trident chewing gum. The group began life as a small grocer's shop in Birmingham, central England, in 1824. To put this deal in words of Krafts CEO Irean Rosenfelds “this deal provides both immediate value certainty and upside potential”. But the share market reacted in opposite direction by dropping the Kraft’s share prices by 2.5 percent.

The deal, one of the largest transnational takeovers since the credit crunch, is further sign that food companies are seeking to gain scale by combining, after Mars bought William Wrigley Jr. Co. in 2008 for $23 billion.  The initial offer came in September valued at 10.2 billion pounds.  After Cadbury turning down the offer, Kraft reworked the deal by increasing the cash component by selling its Pizza division to Swizz rival Nestle for 3.7 billion dollars. Meanwhile, US chocolate maker Hershey had also been considering a counter-offer for Cadbury, the Wall Street Journal reported last week, adding that it planned to bid at least 17.9 billion dollars.

The Cadbury had total assets of $13 billion with the Current asset of $3.8 billion.  Of the total assets $ 2.57 Billion dollars were intangible assets. The total receivables amounted to $1.6 billion.  The total liability was $7.94 billion with long term debt of $2.34 billion.  The working capital was negative $3.4 Billion.  Though in the last quarter it showed some positive result, the company was underperforming for last couple of quarters. 

This deal gathered much criticism from investors, employees union and many others in Uk. The main question was will it be able to provide the same taste of Cadbury to all of its stakeholder.  Warren Buffet, whose Berkshire Hathaway Inc. is Kraft Foods Inc.'s biggest shareholder, said the maker of Oreo cookies paid too much to clinch a deal for Cadbury PLC. Mr. Buffett, on the CNBC cable channel, expressed confidence in Kraft Chief Executive Irean Rosenfeld but said, "I've got a lot of doubts about the deal….If I had a chance to vote on this, I'd vote no."  When asked whether he plans to sell his nearly 10% stake in Kraft, Mr. Buffett paused a moment, then said, "That gets expensive." He added: "If I don't like what's going on in government, it doesn't mean I have to leave the country." Billionaire investor William Ackman  joined Warren Buffett, Kraft's biggest shareholder, in saying Kraft risked diminishing the merits of a Cadbury takeover by issuing too much stock to pay for it. Earlier Kraft's takeover of Cadbury had also been criticized by British trade unions who urged the UK government and the EU to block the bid. Unite, the UK's largest union said a merger will destabilize the company and hit future returns to shareholders. Outside Cadbury's plant in the Birmingham suburb of Bourneville on Tuesday some workers expressed their fears about possible job losses.  One of the employee, added: "Nobody really knows what is going on or what this might mean in terms of job losses, but inside that factory there are a lot of people who are very, very worried about the future -- the future of the company and their own future, their jobs and their families. The deal was also criticized because this deal was perceived by many as ride of US companies over UK companies, taking most the job out from UK. 

Though it is assured by Irean Rosenfeld to preserve the values of Cadbury and to preserve the job of 45000 employees of Cadbury across the world, time will say how much value addition Kraft would make using the assets of Cadbury and how much return it can generate. Question is will the strongest women in US, Irean Rosenfeld, transform Cadbury into a milking cow for all its stakeholders?