Bye Bye Nipper

To my generation, Nipper is an old treasured friend. Nipper is the dog you see on that immortal brand logo of His Master's Voice, better known as HMV. Most of us , in the good old days, owned a HMV Radio and certainly bought a few HMV records - or at least one or two, for the money would stretch only so much those days. In India, until Television really came to the country along with the Asian Games of 1982, HMV radio was the prime entertainment medium of the land. HMV has now gone into receivership and , I'm afraid Nipper will now be consigned to a dusty shelf in some museum.

Nipper, was Mark Barraud's dog and lived in the late 1800s in Bristol in England. On his death, a sorrowful Barnard painted the famous picture of Nipper listening to a gramophone with a puzzled expression and sold it to the Gramophone company. A marketing genius there called William Owen made it the logo of the business and thus was the immortal His Master's Voice born.

The Gramophone Company started sometime in 1902 manufacturing and selling LP records. In 1921 they started their first musical store, in London's iconic Oxford Street. In the 1930s they started making radios and the later televisions as the music and entertainment industry took off. They opened a number of music stores all across the UK. While their music stores were chiefly in the UK, their radios found their way all across the world, or at least in the British Commonwealth. The picture of a family huddled next to the HMV Radio  and amidst the crackle and the hiss, coming those famous words This is London and then the Lillibulero, was the classic picture in many parts of the world a  while ago.

Many of us, from a certain generation , who have had the opportunity to travel to the UK, will fondly remember browsing through the HMV store on Oxford Street. Maybe not to buy, but wandering around the store was one of the pleasures of life.  The last time I went there was 4 months ago, ducking into the store on a cold and rainy evening.

As music, increasingly became digital, and online, HMV was bound to fail. Its time in sun was over. Who buys records anymore ? And even if we did, who buys from a music store - we order it on line. Or more likely, we listen to our choices online for free and never buy anything. HMV struggled for many years and at last early this year went into receivership. His Master's Voice had been stilled. I fancy Nipper stirred in his grave.

Well, all we can do is shed a tear for Nipper. And ruminate that not too distant in the future, a blogger might write a post wistfully remembering the days of Napster or that the great musicians of the age had their own site on MySpace !

As I conclude this post, I marvel at the crappy post on nostalgia I wrote not so long ago. I must have been punch drunk when I wrote that !!

Farewell good friend Nipper.  Yelp Yelp !

The economics of an election

My state is coming into election time. The politics of it - who will win; who will lose, etc is beyond the purview of this blog. But this blog will certainly muse on the economics behind it.

I am foxed as to why anybody wants to stand for any election - for the economics behind this is akin to a Las Vegas casino. On a conservative estimate, each candidate would spend about Rs 15 crores in each assembly seat ( see this speech as evidence of such numbers). More than three quarters of it is not for campaigning, but to bribe the voters (shame on you and me). Traditionally it used to be just cash and liquor.  But apparently now even water drums, watches, sarees and T shirts feature, as evidenced by this photograph and this article from The Hindu today.

The number of assembly constituencies in Karnataka is 224. There are four political formations in the fray. So that makes for 900 serious candidates. At Rs 15 crores per candidate, that amounts to an expenditure of Rs 13,500 crores .  Karnataka's GDP is about Rs 4,60,000 crores. So, something like 3% of GDP will be spent by candidates - that by any stretch of imagination is a staggering sum.

As JP Narayan, says in the video I refer to earlier, you have to spend this money to stand a chance. Spending it does not guarantee victory, but not spending it guarantees defeat. So, if you stand, you have to spend.

Consider for a moment, the ability to have a sum of Rs 13500 crores created for spending. Since much of the spending is illegal, the money has also to be generated by questionable means. It is actually not so easy to siphon away 3% of GDP - even corruption has its limits. Add the problem of keeping Rs 13500 crores in cash. If it is all packed in Rs 500 notes, each crore weighs 34 kgs. So Rs 13,500 crores weighs 460 tonnes - that is 46 lorry loads. You can't brazenly transport 46 lorry loads around - some will be stolen, some will be seized by the Election Commission officials, etc etc. And consider the logistics of buying so much liquor (and water drums). Its a mammoth logistics exercise and all has to be done surreptitiously.

And there can be only one winner in each constituency. What about the three blokes who lost. They have washed Rs 45 crores down the drain. They will virtually be bankrupted, for there is no way to earn it back until the next elections and , even then, only if they win. For the winner, he has to recoup a decent return on his investment - let us say he must make Rs 60 crores - to recoup a return on his investment and to create the capital for the next election. That is also not easy -  each winner to make Rs 60 crores is not an easy task.  A few can make that, but for everybody to make this sort of an amount is a tall order, however brazen the corruption is. And this alone is not enough, for each of his hangers on wants to make money as well. 

If you put your money in a bank deposit you can make 50% in 5 years, virtually risk free. With a little more luck, in the stock market or in gold, you can double it in 5 years. So, why take such wild risks for relatively meager returns and the possibility of losing it all. Obviously economics is not the strong point of those who stand for elections.

Many of the citizens are disgusted with those who would like to be our elected representatives. The best way to give them a big knock on their head is to vote such that the government will fall every year and elections are needed. Three elections in three years is enough to bankrupt them all. And then, maybe fresh air will emerge.

Barbarians at the Gate II

Barbarians at the Gate is the name of the scintillating book that detailed the leveraged buyout of RJR Nabisco in the mid 1980s. It was made into a movie as well and for a long time it was the biggest M&A transaction in the world. I strongly recommend the book, if you have an interest in business. ( or if you like thrillers !)

 

Take 2 seems to be happening in the goings on with Dell. The resemblance to what happened with RJR Nabisco is uncanny.

 

The Dell story started with Michael Dell, the founder teaming up with Silver Lake, a private equity firm,  and announcing a bid to take Dell private at $13.65 a share (a 25% premium over the closing price of $ 10.88 prior to this announcement). When rumours of this started to surface in January, people thought it was not a doable deal. Dell after all is a struggling PC maker in an industry which is declining with the onslaught of tablets. In any case its a fiercely competitive and somewhat commoditized industry. Whoever wants to pay top dollars for that.

 

As soon as the announcement was made, there were many murmurs that this was not a good deal for the shareholders - never mind that the stock was languishing at 35% below the bid price until rumours started to float. Carl Icahn, a famous Wall Street tycoon wanted to get in on the act. So did Blackstone, perhaps the world's largest private equity fund. Blackstone offered on Friday to buy the whole company for not less than $ 14.25 a share. Carl Icahn offered to buy 58% of the company for $15 a share.

 

Every investment bank in town is on one side of the deal or the other. So are many lawyers. Whatever happens, they will all pocket handsome fees. Money, greed, egos and insane optimism will now decide the direction of the deal. None have said what they will do with the company to realize value from what they are paying for it. Some form of stripping it and selling off pieces while keeping the rest would be inevitable. But still, how can the ugly duckling magically transform into a swan. What of Michael Dell himself. If either Blackstone or Icahn win, he will most likely be out.

 

Exactly the same thing happened with RJR Nabisco then. The book beautifully portrays the actors, their egos and their insanity. KKR "won" then, but then time proved how much of a dud deal it was as they had wildly overpaid. Now RJR Nabisco as a company does not exists. Various bits and pieces are in various places although the tobacco company RJ Reynolds still exists making Salem, Camel and Winston cigarettes. 

If you like thrillers, follow the Dell saga. And if you work for Dell, maybe its time to polish that CV.

A Cypriot Tragedy

Tragedies are usually associated with Greece - a tribute to the richness of its theatre in the 5th Century BC. Over the weekend, you could be forgiven if you changed your tastes to a Cypriot tragedy. For that's exactly what has happened - albeit in the more prosaic world of economics.

 

These are the facts. Cyprus is another Eurozone country in deep trouble. It needed a bailout. So far, nothing unusual. A bailout was duly announced over the weekend. It was the terms of the bailout that sent a jolt reverberating through the world of economics. The EU is bailing them by about €13 bn (chickenfeed by the standards of bailout). But the conditions of the bailout are that all bank depositors would be levied a tax of between 6.75% and 9.9%. That means on Tuesday when banks opened, all depositors would lose that amount instantaneously.

 

The genesis of the problem is, alas, not new. Cyprus is a very small country. In boom times, it went berserk pushing its financial industry, positioning itself as an island finance centre. That's fine, but it just went way over the top. Cypriot banks had made loans to outsiders equivalent to 8 times the country's GDP. Worse still, a lot of those was to Greece its neighbor. When Greece began to go under, Cyprus was given an almighty whack. The bailout was then a question of when, and not if.

 

Another actor muddling the issue is Russia.  Of the € 68 bn bank deposits which are going to get a "haircut" (the tax referred to above) , a full € 21 bn comes from Russian companies. We shall not speculate where from this close affinity of Russia came from - let us just say that the word "money laundering" comes to mind. Now the Russians will instantly lose € 2bn. Enter Vladmir Putin. He is howling against the "$%^&* Germans who are the orchestrators of the bailout.

 

What about Joe Public in Nicosia. Even if you had say € 100 Euros in the bank, tomorrow it is only € 93. If ever there was a recipe for street riots, this is it.

 

And what about nervous bank depositors in other troubled countries - say Spain or Italy. Tomorrow it might be their turn. Only an idiot will keep his money in a bank anymore if you are an European. Take it out IMMEDIATELY. Dig a hole and bury it in your backyard. Keep it under the pillow. But don't deposit it in a bank even if a gun was pointed at your head.

 

What a mess. The world badly needs a new economic order. Fire all economists. Go back to the basics of countries balancing their budgets. Living within their means. Curbing the excesses in the banking and finance industry ruthlessly. It will be a prolonged period of pain. But when the clouds disperse, it will be a saner and fresher world. 

 

This, of course, is a Utopian dream - which leader is going to tell the truth to his voters. And even if he did, which voter is going to accept it. We shall stumble along from one crisis to another.