Internet – the new age marketing tool

Marketing experts have discovered the power of internet when it comes to advertising their products. Here are a couple of examples of such companies.

Microsoft's launch of Windows 7

Microsoft is using houseparty.com for the launch of its new operating system, Windows 7. Houseparty is used by many other companies like Tupperware, Barbie, cosmetic brand etc, for their product promotions. But it's a first for an operating system. Companies who want to launch their products, register people for throwing house parties in which, they will talk about the company's new product and the hosts will be compensated by giving free gifts or coupons of the product. These house party videos are then posted on various sites and thus serve as promotion tools.

Whether this will work for Microsoft remains to be seen. The verdict as I read on some famous blogs is a negative against Microsoft. Before the party, Microsoft released a YouTube video featuring the product and how to prepare about the party. This video has been termed boring and staid by bloggers and the move may backfire for Microsoft.

usocial.com

An Australian company called usocial.com, is offering a service that sells Twitter or Facebook followers to people at a set rate. Friends can be bought for varying amounts depending on how many you buy. Some of the figures that i came across are To get 5,000 new Facebook friends will cost 7.6 cents per "friend" for a total of $654.30 while Facebook "fans" are more expensive. For 10,000 Facebook fans, it will cost you 8.5 cents per fan for $1,167.30.

E.g., a restaurant who wants to advertise will hire usocial.com. usocial will search for profiles that reside in the locality and are foodies and depending on some characteristics shortlist profiles to whom they will send a friendship request from the restaurant's profile. Depending on the number of people that accept the request, usocial will be paid by the restaurant. It will help in promoting the restaurant to its target customers.

But the company faces a bottleneck. Facebook's terms of service prohibit the use of "personal profiles for commercial gain," so if uSocial is paying people to be their friends of fans, Facebook may soon ban members who bought information from them. In its defense, uSocial says that all it does is send friend requests on the behalf of the buyer and the receiver determines whether or not to accept the request. So it is not paying people.

Bharti-MTN marriage talks fail again!!

The MTN - Bharti deal that was revived in May 2009, has been called off again. The deal was supposed to be finalized by mid Sep2009 but it has failed yet again.

Theories on what caused the deal to break again?

• Demand for dual listing which means that the merged company will have a unified business operation structure but have their own set of shareholders. Indian laws don't allow dual listing but the government was ready to give its backing to the deal.
• South African government's stand that post merger firm should be a a South African firm. Many analysts may infer that the interference of governments cause the deal to fail.

(It's a case of how government interests over-rule business interests so that the nationality of the firm can be preserved. Ratan Tata during his acquisition of Corus too, faced similar hurdles from the respective government. Also, when Ranbaxy was taken over by the Japanese company Daiichi, there was a huge disappointment in the political circles about hurting the Indian pride, but there was no government opposition to the deal. Earlier too, South Africa has tried to block takeover deals by UK mining conglomerate Xtrata. India, too is often chided for its tight regulations which stem foriegn investment in many of its industries)

The two companies had an exculsivity clause that ended in September. This meant that they could not engage in merger talks with any other company during this period.

Other Losers

• Banks have also lost out on approx. $50 million merger & acquisition fees.(source:Reuters)
• Bank of America Merrill Lynch and Deutsche Bank, were advising MTN.
• Standard Chartered and Barclays, were advising Bharti

Going forward

• MTN and Bharti may seek to resolve the regulatory hurdles and once again restart the merger talks.
• The deal had to be ended because the exclusivity period ended but can be brought back on tack.

The back ground of the MTN Bharti deal was discussed in an earlier blog.

http://businessnewsmadeeasy.blogspot.com/2009/08/bharti-mtn-deal.html

One year after Lehman collapse are we back on our feet?

We just celebrated or should we say wept our hearts out on the ocassion of the anniversary of Lehman Brothers collapse, the trigger to the now omnipotent sub prime crisis and economic downturn. The word, subprime, should have been the word of the year as it was now understood by even the young and carefree amongst us who never cared about economics. Right from children, to housewives to your neighborhood 'kiranawala', everyone had to say something about it. Its surprising that one year back the newspapers were so full of gloom and today they are back with hopeful news of recovery, banks are back to paying obscene amount of bonuses and capitalism is back on its foot. Each G-8 country is trying different mechanisms to keep the banking greed in check but nothing substantial has been done to regulate the mammoth financial empires. All proposals for banking regulation are just that, 'proposals'.

What happened back then?

• The US banks had lend home loans to all and sundry without bothering for their credit worthiness. The Banks had taken short term loans to fund these long term loans that went bad when the borrowers could not pay them back. Hence the short terms loans too went bad triggering a circle of events.
• The black September as it is called, started with the Lehman Brother collapse, which was the biggest in the US corporate history.
• It was followed by a sharp fall in US house prices that wiped off the value of mortgage based securities ( the securities which had the houses as collateral. As the price of houses fell, the value of these securities fell.)
• A chain reaction was triggered as the big financial giants had bet highly on these MBS and had further insured them against complex financial instruments. The economy went into a spiral downfall with one big wall falling after another and share prices taking a beating.
• Merill Lynch was bought by Bank of America, Goldman Sachs and Morgan Stanley were turned into a commercial bank. Insurance major AIG was given big bailout packages.
• All of this unfolded in a matter of just 2-3 weeks.
• In the following months, big corporations like the US auto majors GM and Chrysler bowed down to bankruptcy. Many banks including the world major Citibank had to be rescued by the US government.
• The world was flooded with companies going to the government with a begging bowl and government playing the knight in shining armour, rescuing them one after another.
• There was no liquidity in the market, companies were going bust and people were losing jobs and their homes. It looked like the end of the era of capitalism.

What seemed to have restored the economy back on track?

• Governments of major economies, led by USA, drilled out huge stimulus packages to push money back into the system. The fiscal deficit of countries was hit as countering recession took prime stage.
• The money from the government is flowing into world markets with the major indices showing a recovery.
• Big financial instiutions like JP Morgan Chase, Goldman Sachs are rising high on billions of dollars received by the US fed and are again seen gambling on bonds and exotic financial instruments.

So, with ample of money back in the system, are we on our way back to road of recovery or to another cycle of banking greed taking over fiscal prudence and a bubble waiting to be burst?

Top Deals of the week

Ebay to sell Skype

Internet auction house EBay Inc plans to sell a majority stake of 65% in its online phone unit Skype for $1.9 billion to private investors including Silver Lake, Netscape co-founder Marc Andreessen venture firm, London based Index Ventures, etc.

Valuation

The deal valued Skype
at $2.75 billion but it was below the $3.1 billion eBay spent in acquiring Skype. Shares in eBay fell more than 2 percent after the news.

Why is eBay selling?

• EBay want to focus on its auction service and its electronic payment service (PayPal). EBay's chief executive, John Donahoe, has stated that,"Skype is a strong stand-alone business, but it does not have synergies with our e-commerce and online payments business."
  
• Skype's core business is to offer free Internet phone calls between two PCs or from PC to handset and it has a subscriber base approaching half a billion users. But, most of the calls are free and doesn't generate profit for the company. (This has been seen as a cause of worry for the new buyers too. They need to figure out how they can convert the huge subscriber base in revenues by using avenues such as Internet advertising.)
  
• The buyout of Skype by eBay had puzzled the investors when it was bought in 2005 as both the companies had a different profile.
  
• It plans an IPO for PayPal in 2010 and wants to limit its risk by bringing in other investors.
  

Walt Disney to buy Marvel Entertainment

Marvel Entertainment is the parent company of Marvel Comics which is the owner of famous characters like Spiderman, X-men, Fantastic four, Captain America.

Valuation

The deal is valued at $4billion. Marvel shareholders will get $30 per share in cash plus 0.745 Disney shares for every Marvel share owned.Marvel shares rose 25% and Walt Disney shares fell 3% in the trading on 31-Aug after the news.

(Generally, the shares of the firm acquiring falls and the firm being acquired raises after the deal announcement. This is because of the perceived burden the finances of the acquiring firm will take because of the acquisition.)

The Synergy

(As Marvel is the owner of characters like Spiderman and X-men and Disney of Donald Duck and Mickey Mouse, I came across this funny site which list mash ups of the characters owned by both of them. Check it out.)

For Walt Disney's channel

• Marvel mainly has superhero like characters that have large young male following and Disney which is perceived to have more female following will win over the young male audience by its current acquisition. It will try to attract boy focused advertising of video games and action toys on its channel. Disney has recently branded its Toon Disney channel as Disney XD to make it more attractive to boys.
  
• Disney XD's main rival is Time Warner's Cartoon Network whose audience is more than 70% of boys and Viacom's Nickelodeon.
  

For Walt Disney Company

• Disney will increases it exposure in the DVD market but the DVD market is on decline
  
• Disney will look forward to using Marvel characters in its theme parks but Marvel already has a tie up with other theme parks like Universal studios, merchandisers and movie studios which will take some time to unwind. Like, Paramount Pictures has the right to distribute the next five Marvel superhero films.
  
• Disney will also gain from the merchandising rights of Marvel characters like Spider Man and Iron man.
  
• There are worries that Disney acquisition may affect the creativity freedom of Marvel as Disney has done in its previous acquisitions.
  

Bharti MTN Deal

In the backdrop of domestic major Bharti Airtel and South Africa's MTN hoping to finalize the merger deal by mid September 2009, let's have a look at what has transpired between the two until now.

Background of the deal

Bharti and MTN were in talks of a merger since mid 2008. However, those talks collapsed as supposedly, MTN wanted a bigger stake in Bharti. Later Anil Ambani's Reliance InfoCom too tried for a merger with MTN but the talks stalled after brother Mukesh Ambani's Reliance shot a mail in June 2008, claiming it had the rights of first refusal in the event of a change of management at RCOM.

The current valuation of the deal

The deal was again revived by Bharti in early 2009 and as of May 2009, the deal was worth USD 23 billion. This is much lower than the USD 45 billion, at which the deal was valued at when the talks had initiated in 2008. Bharti will acquire a 49 per cent stake in MTN, which in turn would buy 36 per cent interest in Bharti. The deal involves about USD 10 billion worth cash transaction and remaining USD 13 billion in shares from the two sides. It may become the largest cross border acquisition by a domestic company after the $12.7 billion Tata-Corus deal.

About MTN

MTN is a telecommuications company bassed in South Africa and active in 21 countries, operating mainly in African and Middle Eastern companies.

What's in it for Bharti

Major benefit for Bharti is expanding its subscriber base. Today, Bharti has over 100 million subscribers in India and has a small overseas presence in areas like Seychelles, Jersey Islands and Sri Lanka. MTN, which has 100 million subscribers across Africa , Middle East and Asia, will catapult Bharti to the top five in the global pecking order.

Current Scenario

Both parties are hoping to finalize the deal by mid-September 2009. Their major point of contention is over the valuation and management rights where MTN is supposedly bargaining for more and Bharti may have to loosen a bit. But, both are hopefully close to resolution and sealing the deal. Also, Bharti has shortlisted 8 banks for a 5 year offshore loan up to $4 billion. Barlcays Bank and StanChart are the coadvisors. Deutsche Bank and Merill Lynch are advising MTN on the deal.

India sent back by Swiss Banks

Currently, we read a lot of news regarding Swiss Bank's refusal to share confidential account details with India even though, USA has reached an agreement with Switzerland, under which Swiss Bank UBS AG agreed to hand over details of  more than 4,000 secret accounts worth 18 billion dollars. Many are trying to project this as a power issue, wherein USA being a super power can get what it wants while India cannot. But this may not necessarily be true. There is another point of view on the issue.

US went to Swiss Bank with a list after it spent years in investigating the suspects and collected sufficient proof against the tax evaders. The US revenue service filed a case against UBS AG in an American court and UBS gave way because the case that US built was very strong. In contrast, India went to Swiss banks with a list of people and asked details about them without doing their homework properly. The Indian authority didn't have a strong case against the people whose information they were seeking to acquire. The Swiss law does not permit such fishing expedition.

Indian and Switzerland have signed a double taxation treaty under which the Swiss Banks will have to share information with India, if India can prove that the suspects are tax offenders. The US also achieved its purpose using the same agreement. The Swiss Banks Association has asked India to submit solid proof about the suspects being tax offenders.

About Swiss Bank (source: Wiki)

The secrecy tradition of the Swiss Bank is more than 300 years old. The Swiss government views the right to privacy as a fundamental principle that should be protected by all democratic countries. Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory levels of privacy. Swiss law distinguishes between tax evasion (tax -reporting of income) and tax fraud (active deception). International legal assistance is only granted with respect to tax fraud.

New Direct Tax Code for India

The Indian Government this week, unveiled the draft of a brand new direct tax law, which will replace the four-decade Income-Tax Act. If the bill gets passed in the Lower and Upper Houses of the Parliament, the government is hoping to implement the new code for 2011, after getting the bill passed in this year's winter session. According to Finance Minister, Pranab Mukherjee, the new tax will, "Improve efficiency
and equity of the Indian tax system by eliminating distortions in tax structure." Let's see what the tax code proposes for an Individual, Corporate, Stock Market etc.

Individual Taxation

• Lower the income tax but reintroduce wealth and capital gains tax at lower levels.
  

  (Wealth tax – Currently, Wealth tax is imposed on income of more than Rs. 30, 00,000 at the rate of _____.According to the new tax law, net wealth, which would include all wealth of an individual in excess of Rs 50 crore, will be chargeable to wealth tax at the rate of 0.25%.)
  

  Income Tax slabs
  

Income Tax Rate		Current Tax slab	Proposed Tax slab
Exempt	Upto Rs. 1,60,000 a year	Upto Rs. 1,60,000 a year
10%	Upto Rs. 3,00,000 a year	Upto Rs. 10,00,000 a year
20%	Upto Rs. 5,00,000 a year	Upto Rs. 25,00,000 a year
30%	Beyond Rs. 5,00,000 a year	Beyond Rs. 25,00,000 a year

• Now, an individual's gross salary would also include perquisites such as value of rent-free accommodation, medical reimbursements and leave travel encashment, which are currently taxable.
  
• Taxpayers will also not be able to claim tax benefit on interest repayment on housing loans. However, the benefit would be available if the house is rented. 
  
• Bring a uniform pattern of taxation on all long-term savings in the form of EET—exempt at the stage of contribution, exempt during accumulation and taxed during withdrawal. 
  

  ( This means that all the long term savings, will not be taxed when you are investing in them, will not be taxed when you are earning interest on it but not withdrawing it, and will only be taxed once when you are withdrawing it.)
  

 

Corporate

• Cutting down the corporate tax rate to 25% from current rate of 30% plus 10% surcharge if turnover is more than Rs. 1crore plus education cess (For Indian companies).
  
• Current profit-linked tax incentives for businesses will be replaced with investment-linked incentives. 
  

  (This means that current tax incentives given to corporate according to the profits they make should be given according to the investments they make.)
  

• It also proposes rationalization of tax provisions for amalgamations and demerger so that tax remains neutral when businesses reorganize. 
  
• Dividend distributed by companies would be taxed at the rate of 15%. From current rate of 12.5%.
  
• Currently, if there is a conflict between the tax treaty that India has with another country and the Indian tax law, the non resident Indian entity has the choice to opt for the treaty benefits and domestic law. According to the new code, this choice will be withdrawn and in case of conflict which ever has been framed later will be followed. So if a double taxation treaty has been signed later, the Indian tax law will be superseded by the Treaty provisions.
  

 

Stock Market

• Proposes abolition of Security Transaction Tax. Capital gains on shares and securities have been proposed to be taxed as income.
  

  (Security Transaction Tax that was introduced in Budget 2004-05, and is levied every time you buy or sell a security like shares. The rate differs according to the nature of the security and whether it is a purchase or sell. )