Tuesday, March 26, 2019
Some companies, like Alphabet, which has acquired 220 companies since 2003, are serial acquirers. Other companies, like McDonald's, make fewer acquisitions. However, McDonald's made a splash when it announced the acquisition of Dynamic Yield for $300 million. This is McDonald's largest acquisition since it bought Chipotle more than 20 years ago. Dynamic Yield is a technology company whose product will allow McDonald's to vary electronic menus. The new menus will vary depending on the time of day, the weather, and regional preferences, which McDonald's believes will yield increased sales.
Thursday, March 21, 2019
In 2016, there was a record $12.2 trillion in negative YTM debt worldwide. That amount had fallen, but in the last five months, more than $3 trillion more in debt has reverted to a negative yield, bringing the worldwide total back to. German government bonds are creeping close to negative yield territory, with yields of only .06 percent. It appears that at least some level of negative yielding debt will be around for a while.
Tuesday, March 19, 2019
So why don't all mergers and acquisitions work? Probably the main reason is that acquisitions are done based on assumptions about the future, and these assumptions may not be realized. A major assumption generally involves the synergies that are expected to be realized from the acquisition. A recent article argues that in failed acquisitions, the buyer pays too much, often due to dis-synergies. For example, GE has performed poorly because poor acquisitions over the past 20 years, which were often based on a poor analysis of synergies. And, athough we don't discuss the topic of corporate culture in Finance, many times a combination of two companies with dramatically different corporate cultures will result in a combined company that fights with itself. Although such an analysis is important to evaluate before an acquisition, and valuing a corporate culture clash is difficult, be aware that it does add to the risk of an acquisition.
Wednesday, March 13, 2019
Illusory superiority is a behavioral concept in which people believe they are above average in traits such as intelligence, relationship status, professional achievement, and driving. Obviously, everyone cannot be above average. But one area that many people do not believe they are above average is investing skills. As a result, investors tend to either hire a money manager, or invest on their own. Advice from money managers can be expensive and eat into your return. Additionally, if you go this route, you must be cautious as there are unscrupulous advisors and outright scam artists. We should note that there are also reputable money managers who can help you. By investing on their own, investors often find themselves chasing stock returns. Small investors often suffer from overconfidence, which typically involves a lot of buying and selling, racking up trading costs and taxes. We hope your education and this textbook has prepared you on your journey to becoming and educated investor.
Thursday, March 7, 2019
Generally, savings accounts are considered to be close to a risk-free investment. Given what you have learned about risk and return, you would expect a low return, and you would be right. Bankrate.com states that the current average savings account interest rate is .10 percent, although the highest rate offered is 2.35 percent. But what if you could get a 6.2 percent return on your savings account? You can with a BlockFi Interest Account. BlockFi allows you to deposit bitcoin or ether and will pay you a 6.2 percent APY (or EAR). BlockFi is regulated by the New York Department of Financial Services, but does not have the FDIC protection carried by most banks. As with banks, BlockFi depends on charging borrowers a higher rate than it pays to savers. Now the question remains: Is a savings account with BlockFi truly risk-free?
Wednesday, March 6, 2019
A question often asked by students is how to get projections for a particular company. One way is to listen to what the company itself says, and the analyst call is a good place to start. Publicly traded companies have analyst calls to disclose management's opinions on the current state and future of the company. You can actually listen to many calls online, and the information on the call is reported online if you can't listen live. For example, Chevron recently held its analyst call. A lot of information is available If you look at the Corporate Overview link, you will find, for example, that Chevron expects its capital expenditures to be $20 billion in 2019, $18-$20 billion in 2020, and $19-$22 billion per year for 2021, 2022, and 2023. The company also reports that it has the lowest breakeven oil price in the industry. In short, the company itself is an excellent place to start for projections. However, we should advise you that these projections are not set in stone, but a only a good place to begin your analysis.
Tuesday, March 5, 2019
If you win the lottery, would you take the annuity payments or a lump sum? The South Carolina winner of the $1.537 billion Powerball jackpot chose the lump sum distribution of $878 million. The annuity option would have been an immediate payment, with 29 more annual payments increasing at 5 percent per year. The first analysis is typically to calculate what rate is being offered, but we need to know the first payment amount to calculate the rate. However, real world factors, like income taxes and estate taxes, complicate the decision. The current income tops out at 37 percent, but some in Congress have argued that the top tax rate should be 90 percent, so the future income tax rate could be much higher, making the lump sum distribution even more valuable. Additionally, if the winner dies before all the annuity payments are made, whoever inherits the remaining payments would be responsible for estate taxes on these future payments immediately, not when the payments were made. In short, if you win a big lottery jackpot, we recommend you contact a lawyer and/or tax advisor because the decision is not as simple as a time value of money decision.