How helpful is hedging for Eurozone now?

The Greece debt crisis have been around for a quite long time now. While this crisis is well documented, major deficit has led to huge borrowing cost and enormous bailout from the European Financial Stability Facility (EFSF).  This have an effect on euro foreign exchange movements. While the stories develop, how will this effect the eurozone companies' on their currency hedging strategies?

As reported by BBC the background of the Greece crisis is caused due to heavy spending beyond their limits even before adapting Euro. Nevertheless, this debt crisis has lead for a bailout loan of 110bn euros in May 2010 to help overcome the crisis. Further in July 2011 it was earmarked to receive another 109bn euros. Greece has won a 53.5% reduction in its debt burden to private creditors.

The future of the Euro is affected due Greece debt crisis and also due to debt issues in Italy .This single currency is at 52 week lows against the pound and 17 month lows against the US Dollar. Changes in the value of currency in such a major region obviously have an important effect on companies operating in the zone.

As reported by David Goodman for Bloomberg, after 17 month low the euro has appreciated 5% against the U.S. dollar. This is due to the billions of euros put in to the banking system, to support stimulate the economy.

On the other hand as reported on Financial times this eurozone crisis and the uncertainty, have lead small and medium-sized enterprises (SMEs) to become more sophisticated in their use of currency hedging strategies. 

There are different strategies a firm can adapt to avoid foreign exchange risks. Such as; insisting foreign customers to pay in company’s home currency, netting, matching the inflows and outflows in different currencies caused by trade, leading and lagging, forward market or futures hedge, money market hedge or even currency option hedge. Also, firms could even do nothing and simply take the risks, hoping for favorable foreign exchange rate movements.

The essential element of forex hedging is for risk mitigation, and it helps to keep the cost stable. However, survey conducted last year by American Express FX International Payments revealed that around 55% of all UK SMEs still do not use hedging strategies. Why is it even with a highly volatile forex some companies don't use this as a benefit. It could be probably due to the complexity and inflexibility. Nevertheless while the eurozone inject more money into the banking system and the further steps on bailouts is more likely to increase the rates. Hence this appreciation could be best for some companies to do nothing even they adopt a spot or forward rates, hopefully Euro will be back to its position and that appreciation could be taken as an advantage.  


Source:
www.ft.com
www.bbc.co.uk/news
http://realbusiness.co.uk/news/the-greek-crisis-and-what-it-means-for-uk-plc, 

Facebook's path to IPO

"Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected"  Mark Zuckerberg, CEO of Facebook Inc

CEO of Facebook ,Inc. Mark Zucketberg made prospective shareholders aware that the Facebook business is different to other businesses by a form of a  letter.  The prospectus of the company declares their intention to go on public to Security exchange control (SEC), Washington.

It is a big step for a company to 'go public'. As a result company need to undertake major legal requirements and the board holds a great responsibility as the company step on official listing. Directors are required to prepare prospectus or listing particulars about the firm, including accounts, details of property valuations, details of major contracts and risks. Additionally, investors demand regular dividends and this may put pressure on directors. There is also a possible loss of autonomy within directors as investors become important. On the other hand  the quality of the company is also measured by its suitability, such as stable management team, having the necessary range and depth. Also, timing of the flotation, healthy balance sheet with sound financial control mechanism is vital. (Arnold, 2008)

We all know what Facebook is. Uses of Facebook form as its main products. Its revenue is mainly generated by advertising, hence the time users spent on Facebook, and their likes and dislikes, interests will be targeted for more specific advertising. Last year Facebook revenue was $3.7billion with a $1billion profits. As a private company it has raised $1.5billion of venture capital. This has been reported as one of the largest amount raised by a private company.

Facebook Inc. filed for an initial public offering (IPO) has been valued between $75 billion and $100 billion, while Facebook hoping to raise $5 billion when it begins selling shares.The company ticker is "FB". As per reports it has a high probability to trade on the New York Stock Exchange over Nasdaq Stock Market. According to US law once a private company have 500 or more shareholders, the company will have to publish detail financial data, and this has led Mr. Zuckerberg to realized that in 2010 it would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that the company start publicly reporting financials. However it has now decided to go public and to gain financial benefit from an IPO.

The co-lead underwriters role has been taken up by Morgan Stanly while Goldman Sachs being the third underwriters. However In my opinion hopefully the underwriters would not have to purchase the shares while this IPO is becoming popular in the market.  

Nevertheless, the time line of  the full prospectus to be published on impact day will take around 3-6 months. (Arnold, 2008). The Impact day will reveal the Facebook valuation.

However, apart from the process of going public, I bring another argument on this IPO, regarding its overvaluation.  According to professor Jay Ritter, major companies have on average of 1:1 over IPO valuation and sales. However Facebook is at 26:1, which is comparatively high. Nevertheless in 2004 Google IPO was at 8.7: 1 .

So why did Facebook didn't raise money to finance the company by debt. Possibly it could be that Facebook, do not have assets to keep as security to borrow this huge amount. If CEO has a good plans to grow the company by acquiring other business and invest in major projects, going public is the best option where an  web based company to raise funds at its extreme popular time.   

Source :
Facebook prospectus: available at: http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
The Wall Street Journal
The private company financial data authority, available at :http://www.privco.com ;
Forbes.com, Available at: http://video.forbes.com/fvn/inidaily/forbes-markets-desk-facebook-road-to-ipo

An Efficient market hypotheses seems not fair for Amazon investors.

The online seller Amazon has reported a revenue of $17.4 billion in its Christmas quarter , which is a 35 percent increase from a year ago. Yet the investors of Amazon are not happy as the company did not met analyst expectations. It was $800m bellow  than estimated.  Hence the share price has fallen by  nearly 9 per cent in after-hours trading.

However though the sales were high by 35 percent, the operating income of Amazon has decreased by 45 per cent to $260m from a year ago. This  shrinking profit margins earlier last year has been endorsed by the company’s argument that it was making investments that were yielding faster sales growth. These investments included development of Kindle fire tablet computers. The company mentions the picking up on Kindle fire computers has dragged other sales down.

However Amazon had warned investors about a potential operating loss, but Amazon has managed to avoid it.   Nevertheless the major attention by analysts was the sales growth percentage.

Couldn't be that the analysts were really wrong? Amazon has managed to avoid the operating loss, though it as not satisfied analysts in terms of sales growth. Market efficiency does not mean that  the share price  are equal to the true value at every point. Amazon share price has been undervalued. In this situation more than the company financial data, its the peoples emotions that has dragged to make Amazon investors unhappy. Isn't that, an efficient market should consider all available data in the market but in this situation it seems the market has considered only the analyst view point.

Source: Ft.com and http://finance.yahoo.com

RBS bonus and shareholder wealth

State owned Royal Bank of Scotland (RBS), which is a 82% taxpayers owned; has decided to hand over £1 million bonus to its CEO Stephen Hester on 26^th January 2012.  This bonus was highly criticized by the public and the controversy build up during the week turned the Labour to force House of Commons a vote calling for this. Consequently this led  Mr. Hester to turn down the bonus.  There were different arguments against this huge bonus, as it seems a reward for failure.  RBS share price has fallen and has failed to meet its lending targets. 

However, there is no possible comparison between the match of dividends and bonus payouts with Mr. Hester and RBS, as RBS last paid a dividend in May 2008. Five years ago, RBS shares were worth around 700p each but now they trade at 27p, down from 46p over the past year. 

According to corporate objective of shareholder wealth maximisation, the agency cost approve any incentive scheme for managers to encourage the pursuit of shareholder wealth maximisation (Arnold, 2008).

As shown in the above graph, it is clear that since Mr.Stephen Hester's appointment in December 2009, there is no much of a share price increase or decrease. It is clear that there is no noticeable value creation or destruction by Mr. Hester during is leadership since 2009.  

 Managers take decisions in a market mechanism. There could be other pressures from the market where managers are unable to create a significant value, but they attempt to enhance even at a bad environment. Shareholders need to look at the broader  picture before deciding to punish managers for not creating value. Since, Dec 2009 RBS share price has been quite stable and there is no value destruction. Thus, it is not fair to stop Mr. Hester's bonus who has attempt to maximise share holder value in a complex market mechanism.

Source: Ft.com , 
 Telegraph, Available at : http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8460639/RBS-graph-from-part-nationalisation-to-now.html