Cell Phone Deal-Making Frenzy Pushes Consumers Aside

MEHYAR AFKARI

Maneuvers by American cell phone companies to acquire one another are threatening to erupt into all-out war. Not only am I wondering which will survive, but also whether the survivors will be destroyed by the prey they're rushing to eat up. The war began in 2011, when AT&T made a bid to acquire T-Mobile U.S.A., the American subsidiary of Deutsche Telekom, which had been looking to sell it for some time. Considering the well-known antitrust concerns, AT&T’s move was quite brave.

It was a terrible move for AT&T. Regulators blocked the deal, and the provider walked away with a $6 billion loss: the $4 billion required to pay over the failed acquisition, combined with the estimated value of the broadband licenses it was required to grant T-Mobile.

With recent M&A news in the cell phone space again, we are heading in the direction where three big wireless companies will dominate the US market, and not many more. The big will continue to get bigger as they scoop up telecommunications companies with access to excess broadband spectrum.

I wonder whether the wireless industry will be in danger from its own deal-making frenzy, similar to what occurred during the dot-com bubble. When faced with an uncertain competitive landscape that changes as quick as this one has, executives spend billions because they believe they have no other choice. The cost to the company, shareholders, and consumers can be immense. Is excessive executive confidence and the need to be the biggest on the block clouding reason?

SoftBank’s chief, Masayoshi Son, told Jim Cramer on CNBC after the announcement of his company’s investment in Sprint: “I am a man, and every man wants to be No. 1, not No. 2 or No. 3.” The deal would make SoftBank only the third-largest global wireless carrier.

The rush to complete deals is an investment banker’s dream, but the hunt may lead these companies to not only overpay, but to acquire companies that are underperforming or otherwise don’t fit well with the acquirer's core business. Finding a way to sustain their profitability can be a major task in the future.

For consumers, there will probably be less choice as wireless carriers disappear. Does this mean improved service? I doubt it. The government, meanwhile, is likely to stand aside from smaller deals, instead arguing that AT&T and Verizon need a bigger third competitor. Albeit we have yet to see if that will hold indefinitely true, cell phone executives believe there is no choice but to race to acquire one another. In this war, it's all about making a deal. Consumer interests come after.

Good Men Who Do Bad Things

            Rajat Gupta, former Goldman Sachs Group director, was convicted of insider trading and sentenced to two years in prison. Usually, a case convicting someone of leaking corporate secrets and gaining an illegal, unfair advantage, would be one of triumph. However, in the case of Mr. Gupta, it was an unfortunate reality.

            Mr. Gupta’s rise to success from modest beginnings in India had been an example of unrelenting hard-work and fierce determination. When he was a teenager, he lost both his parents- his father, a follower of Gandhi, was jailed in the fight for independence from the British and died in prison of tuberculosis; his mother, a schoolteacher, died two year after[1].Despite this tragedy, Gupta continued his schoolwork, was accepted to and excelled in India’s most prestigious school - Indian Institute of Technology. From there, he rejected what was then considered a highly respected position from Indian Tobacco Company and, instead, decided to attend Harvard Business School. His intelligence was soon recognized within and around the school, and Gupta was able to secure a job with McKinsey. Even there, he rose through the ranks quickly and became (at the age of 45) the first Indian-born chief of a U.S. international corporation. He continued the good-will and spirit of his parents by working to create leadership roles at the Indian American Foundation, and by serving as the chairman of the Global Fund to Fight AIDS, Tuberculosis and Malaria and many other charitable organizations.

            In fact, Judge Rakoff, who delivered Gupta's sentencing, had received hundreds of letters from people such as Bill Gates, Deepak Chopra and former U.N. leader Kofi Annan, speaking of his immense contribution to philanthropic causes and stating that he deserved leniency. Acknowledging these appeals, Judge Rakoff stated, "But the history of this country and the world, I'm afraid, is full of examples of good men who do bad things"[2].

So why did Gupta, despite having a prosperous, highly-respected life and career, commit such an act? Many claim it was due to the influence of former Galleon Group chief Raj Rajaratnam and the Wall Street Journal reasoned that it might be because Mr. Gupta was just looking for an exciting, challenging opportunity to head the Galleon Group. Whatever the case might be, Mr. Gupta’s conviction was definitely seen as “a fall from grace of Greek tragedy proportions” [3].

Written by Ritika Gawande 

           Photo Credit: http://en.wikipedia.org/wiki/Rajat_Gupta

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[1] http://online.wsj.com/article/SB10001424052970203400604578075291193560764.html

[2] http://dealbook.nytimes.com/2012/10/24/rajat-gupta-gets-2-years-in-prison/ 

[3] http://dealbook.nytimes.com/2012/10/24/rajat-gupta-gets-2-years-in-prison/

Manipulation: China's currency or American voters?

Recently, the Romney campaign issued a statement pledging to label China as a “currency manipulator”, claiming China is cheating. First off, to understand what he means by that on a broad level, he means that China is intentionally undervaluing its currency – because it is able to as a socialist market economy – and this undervaluing in turn hurts the US economy. This artificially low Chinese currency impacts the American economy by making Chinese goods comparatively cheaper in the US and US goods far too expensive for China. A further implication is that due to this price disparity, Chinese laborers are cheaper to hire and manufacturing factories are cheaper to export to China.

So given his plan, what does this mean for both economies? Well mainly, the US will have to set tariffs or other trade barriers in order to allow the dollar to fall relative to the yuan (because right now, its relative price is very high due to this “currency manipulation”). But then what about the long-term repercussions? China won’t be too happy, for obvious reasons, so trade will definitely slow between the two countries. But beyond that, as much as we import from China, China is also still a developing (and quickly, at that) market. So long term, this trade standstill might reduce the global market for the new US exports, since China will become a big part of it.

Now, will Romney actually follow through with his bold trade proclamation? In accordance with the very nature of political success, Romney is a master of telling people – in this case Americans – what they want to hear. Of course Americans would love the assurance that not every manufacturing job will be outsourced to China, thus costing the US manufacturing industry jobs and money. But assuming he does follow through; will it make us better off?

Well, according to basic international economic theory, both countries are better off and have the potential to grow more if they specialize in their respective comparative advantages. Let’s say China has cheap less-skilled labor, and the US has high-skilled labor (to simplify), and we specialize in each. But this is assuming competitive markets and pure free trade! China, as we know, doesn't fall into this category. At the same time, import barriers could also hurt Americans by reducing American price competition among producers – thereby raising US prices – and alongside, the US would then be allocating resources to things that are not necessarily our comparative advantage. Yet, the current solution is technically costing the American manufacturing industry and particularly, workers – so that’s not optimal either. Thus, as with most political issues, the real question is preference. Do we want to hurt the US producers or consumers more in the long-term?

By: Nona Makaveeva

Blasting Off Into the Private Sector

The United States has achieved some pretty amazing feats in space exploration. When Neil Armstrong first landed on the moon, it not only showed America's technological abilities, but also unified the nation as a whole. Since then, America has continued to expand its knowledge of outer space, completing more and more missions. However, as the costs of space research piled on, the US government pulled back funding for NASA and significantly limited its space travel programs. What does this mean for the future of space travel? Will America no longer shine as the leader in this effort?

Have no fear, SpaceX is here. Space Exploration Technologies Corporation (SpaceX), a privately-held space transport company represents privatization at its best. Tonight, it successfully completed another cargo launch sending vital supplies to the Space Station. SpaceX became the first private company to get a commercial space craft to the Space Station last May and has since been gaining momentum. It has secured numerous contracts with the United States government, and is undoubtedly pushing a new frontier in space exploration, one led by private business.

SpaceX did not start out this way. In fact, it faced many struggles just as most businesses do when they start off. Between 2006 and 2008, SpaceX faced public failures as its missions failed. Founder Elon Musk even considered ending the company. However, after 2008, the company launched it first craft into orbit, and a later mission finally reached the Space Station. What started out as an uncertain venture has now seen great success. Founder Elon Musk estimates that he will have his first manned mission in 3 years, and have his first man on Mars within 10 years.

Imagine that. In 10 years, a corporation will be representing America as we send our first man to Mars. The proud legacy that began with government sponsored missions will live on through the efforts of the private sector. In light of recent events highlighting corporate greed and bad business practices, it is amazing to think that private business may be what propels America forward to achieve its greatest feats yet.

-Smit Purohit

"Big Bang Reform"

India recently enacted policies to allow overseas investors to hold a larger stake in companies in various industries including airlines, insurance, retail and consumer. This news caused the rupee to cross a five-month high and the benchmark Sensex to rise 1%, as markets received a glimpse of the policy reform they have been seeking. The Department of Industrial Policy and Promotion (DIPP) stated that India received FDI of approximately US$1.33 billion this May. This makes the cumulative FDI inflows for the months April-May 2012 US$ 3.18 billion. Keeping with its reformatory trend, the government stated that it would sell 10% of its stake in Oil India, 12.5% of its stake in Nalco, an aluminum maker. This push towards privatization will likely be seen as a positive one by foreign institutional investors.  

The services industry received the majority of the April-May inflows followed by the pharmaceutical, metallurgical, construction, housing and power industries. The retail and consumer industries, however, have been the ones subject to the most controversy in the midst of the inflows. This is because India’s economy constitutes millions of small shopkeepers and farmers, and most neighborhoods are used to local “sabzi-walas” (vegetable sellers) and retailers of such sort. A decision to allow huge retailers such as Wal-Mart and IKEA threatens the livelihoods of these small businesses and could cause drastic changes to India’s economy. Although the Prime minister, Manmohan Singh, says its time for “big bang reform,” the policies have so far caused a big backlash from local politicians who believe the entrance of these giants will hurt India’s economy. Mr. Balpit Punj, spokesman for the Bharatiya Janata Party (one of India’s two major political parties) stated the party is completely against the changes and will do everything in their power to stop them. However, others including Indian billionaire Vijay Mallya, have been pushing the government to attract greater foreign direct investment. The influx of foreign capital could directly benefit Mr. Mallya’s airline Kingfisher, which has been the subject of mass strikes, negative income and is in desperate need of capital injection.

In my opinion, attracting foreign direct investment is a necessary step for India’s future economic development. Hopefully, the influx of capital through industry will have a positive impact on India’s infrastructure and contribute to its future development.

Written by Ritika Gawande 

Photo Credit: www.ibnlive.in.com

Obama v Romney: The Economy

President Barack Obama and his challenger Governor Mitt Romney recently participated in the first of three presidential debates. The two debated a variety of issues, but one topic that came up more than any other was our economy.  Romney called out Obama for essentially dropping the ball in his first term as President, citing increasing unemployment and a stagnant economy.  Obama spent nearly $800 billion dollars in stimulus programs but still failed to keep the unemployment rate below 10 percent.  Furthermore, Romney discussed how Obama’s 4 years as president consisted of multi trillion dollar deficits and projects to borrow nearly a trillion dollars next year.  Governor Romney, for the first time since he received the nomination, seemed strong.  He persuaded Americans that his solution to revitalize the economy, focusing on energy independence, fiscal consolidation, and lowering tax rates will decrease our national debt and consequently stimulate our economy.  Pointing to the fact that Obama has added $5 trillion to our national debt in the past 4 years, Romney assured American’s that because he comes from a business background he will not let this happen.

Obama, for the first time since the race started, seemed weak.  Unable to defend his actions during his first term, he simply repeated the fact that he “wished” to create jobs and cut the government deficit.  The simple fact is that we all know what needs to be done.  The main thing we as voters need to understand from these debates is the differences in policies between the two candidates and the reasoning behind them.  Romney did his job, Obama didn’t.  Don’t get me wrong; I’m in no way supporting Romney in this post.  I’m simply stating the facts – Romney came prepared and articulated what he needed to. In the next debate, we all need Obama to do the same.

- Vivek Shah

Bring Back the Replacement Referees?

Lance Easley is a Vice President of small business banking for Bank of America in California. Just over a week ago, he was merely a little well known employee in the financial services industry. After last week’s Seattle Seahawks/Green Bay Packers game, however, he has infamously become a celebrity almost instantly overnight. Yes, we are talking about the same Lance Easley who served as a replacement referee for the game, signalling the highly controversial touchdown on the Hail Mary pass by the Seahawks.

No doubt we have all read our fair share of Facebook statuses and Tweets from angry NFL fans wishing for the quick return of locked-out referees. As Yashwant pointed out in an earlier blog post, the NFL is a clear loser in this situation due to compromise in the integrity of both the brand and the game. Believe it or not though, there is a hidden winner: the television networks. In fact, it can be argued that Lance Easley is merely fulfilling his duty as a member of capitalist America: providing the supply for the endless demand for professional football.

The controversial calls made by the replacement refs have created some of the most buzz in televised sporting events in recent years. ESPN has gone so far as to describe the popularity of current games using a concept we have all learned in the first few weeks of Microeconomics class: inelastic demand. Football is so heavily integrated into the American culture that demand will remain constant regardless of changes in price or perceived value. It may surprise many to know that viewership for ESPN’s Monday Night Football program drew a 29% year-over-year increase in viewership for the Seahawks/Packers game. Consumer behavior experts have claimed that the controversial calls have increased interest in the NFL by creating awareness among new spectators and building support for league teams among existing fans.

So as Stephen Colbert cleverly point out, “The free market has spoken.” Dare I say it? Could there actually be a reason which might justify bringing back the replacement referees?

- Yannan Qiu