A New Start

FT: The man who put paid to the paper cheque

The man who put paid to the paper cheque

By: By Andrew Ward, FT.com site
Published: Dec 13, 2005

It did not, at the time, look like the start of a successful business career. Pete Kight, a 23-year-old college drop-out, pulled his blue Ford Cougar into the driveway of his grandmother's house in Columbus, Ohio, and started unloading a rented trailer filled with his possessions.

The year was 1981 and Mr Kight had recently left his job as a fitness centre manager in Texas. "I remember exactly how much money I had to my name that day because it was such a memorable number: $777," he recalls.

With no job, no degree and few assets, Mr Kight's prospects looked dim. But what he did have was a promising business idea and a rent-free space in which to develop it.

"My grandmother offered me her basement as an office," he explains. "I used my [late] grandfather's wooden work bench as a desk surrounded by his old fishing tackle."

The low-tech surroundings contrasted with the futuristic concept he planned to commercialise: an electronic bill payment system to replace the paper cheque.

Twenty-four years later, Mr Kight's company, CheckFree, is the world's largest provider of electronic bill processing services, with annual revenues of $758m and a market value of $4.3bn.

Now headquartered on a leafy, sprawling campus near Atlanta, Georgia, CheckFree provides the technology used by growing numbers of US consumers to pay everything from utility bills to store cards over the internet. Of the 12bn electronic payments made in the US last year, CheckFree was involved in more than two-thirds of them.

"We are helping take paper out of financial services," says Mr Kight. "The industry is moving too fast for paper to keep up. It is no longer good enough to have to wait three days for a cheque to clear."

Mr Kight got the idea for CheckFree during his time managing fitness centres when he noticed how customers were deterred by the hefty one-off cost of annual membership.

To solve the problem, he introduced more manageable monthly fees processed by software he designed for the fitness centre computer. "It had such a transformational impact on cashflow and profitability that I saw it had wider applications," he says.

Spurred on by a long-held ambition to run his own business, Mr Kight set out to turn his innovative payment system into a commercial product that could be marketed to health clubs throughout the country.

Before he could do anything, however, he had to find himself a computer – no small challenge in 1981 for a man worth less than $1,000. To overcome the obstacle, Mr Kight struck a deal with a property management company in Columbus. In return for setting up a paperless payment system for tenants, the company allowed him to use the office computer at night. "I spent the day going from door to door signing up tenants and spent the night working on the computer with a software programmer I had hired," he recalls.

Gradually, as CheckFree began to attract customers, the business outgrew his grandmother's basement and the property company's sales office. Mr Kight approached venture capital firms for funding but, with the technology boom of the 1990s still more than a decade away, they showed little understanding of his product and still less interest in investing in it. A consortium of Columbus-based insurers showed more foresight, stumping up the $3m needed to turn CheckFree into a serious business.

The company's first big breakthrough came when Mr Kight spotted Jeff Wilkins, president of Columbus-based CompuServe, one of the earliest pioneers of online services, as they boarded an aircraft. "He was sat in first class and I was in coach," recalls Mr Kight. "I stopped in the aisle to introduced myself and tell him about CheckFree. People were trying to squeeze past with their bags. He could have told me to go away but fortunately he was interested."

Soon after the chance meeting, CheckFree began collecting monthly fees from CompuServe subscribers. Not everyone, however, was as enthusiastic about electronic billing. The banking industry, whose co-operation was crucial to a truly paperless billing system, initially showed little interest. 

"I called hundreds of banks and every one said: 'You can't do this. The consumer will not pay this way,' " recalls Mr Kight. "Yet consumers were calling us and saying: 'Hey, I want to pay my other bills like my CompuServe bill.' "

CheckFree set out to prove the sceptics wrong by establishing its own online payment website through which consumers could pay any household bill. In those cases where billers were not equipped to receive electronic payments, CheckFree would write paper cheques on behalf of its customers.

As the volume of payments being made through CheckFree increased, banks and billers were forced to reconsider their attitudes. "American Express had always said 'no, no, never, never'," recalls Mr Kight. "But after several months of turning up at their offices every day with three large trays of cheques they agreed to develop an electronic payment system with us."

By the mid-1990s, as internet usage took off, banks and billers were rushing to embrace electronic payments. This achievement of critical mass caused a change in CheckFree's business model. Instead of marketing directly to consumers, the company began striking partnerships with banks to provide bill payment services through their websites. Today, its customers include Bank of America, SunTrust and Wachovia.

By joining forces with banks, CheckFree gave itself much greater reach and cloaked its technology with the credibility of trusted financial institutions. Today, most electronic bills in the US are received and paid through bank websites.

"Lots of companies tried creating bill payment portals – Yahoo, Microsoft, the Post Office," says Randy McCoy, CheckFree's chief technology officer. "But consumers are leery about who they trust with their money online. Banks still have the highest level of trust."

Once e-billing achieved a reasonable scale, its advantages became clear. On average, the cost to a biller of submitting a paper bill, including printing, postage and labour, is $1.10 per bill, according to Gartner Group. Electronic billing reduces this cost by half.

Already 31 per cent of US households pay some bills online and the proportion is forecast to reach 52 per cent by 2010, according to Forrester Research.

CheckFree faces two main threats to its dominance of the market. One is the handful of direct competitors, such as Metavante, that offer similar e-payment services at slightly lower prices. The second, and potentially most troubling, is the ability of banks to develop their own technology. Citigroup and Wells Fargo are among those that have chosen the in-house option.

However, the company's customer base has so far suffered little erosion and its growth is strong. Revenues have risen by more than 75 per cent since 2001 and net profits quadrupled to nearly $47m last year – though it will take a long time to recoup the $1.1bn of losses accumulated since 1981.

As the pace of growth in electronic payments gradually slows, CheckFree is seeking fresh sources of growth. The company is developing portfolio management software for investment companies and back office software for banks.

Overseas expansion has been limited by the scale of opportunity that remains in the US and the differences in other countries' bill payment systems. However, the company is starting to become more adventurous outside the US, with two recent acquisitions and a joint-venture in the UK.

Checkfree may have become almost part of the financial establishment but Mr Kight has not stopped pushing for innovation. One of the company's greatest opportunities, he says, is the potential to combine bill payment, banking and portfolio management software into an integrated financial management package for households.

"I have the technology to do that today," he says. "The question is whether the investment services industry and the banks are ready."

HOW CHECKFREE BROUGHT THE MONEY ONLINE

1981

■ Pete Kight was a college drop-out whose only assets were $777 of cash and a blue Ford Cougar motorcar.

■ Mr Kight ran the company single-handedly from the basement of his grandmother's home.

■ CheckFree shared a computer with a local property company – but only had access to it at night.

■ CheckFree served a handful of fitness clubs and an apartment rental company.

2005

■ CheckFree is valued at $4.3bn, with Mr Kight's 5 per cent stake worth $215,000. His salary last year was $1.9m.

■ CheckFree employs 3,000 people around the world. Its sprawling headquarters are near Atlanta, Georgia.

■ The company's data centre, one of the biggest of its kind, handles more than 1,000 transactions a minute.

■ With 1,500 or more customers it serves many of the world's largest financial institutions.   

 

Copyright © Financial Times group

COMMENT & ANALYSIS: Corrections

Financial Times
Published: Dec 19, 2005

* An article on December 16 said that Wm Morrison, the supermarket chain, had taken on more than 40 ex-prisoners. This should have read Morrison, the utilties contractor.

* An article on December 14 gave an incorrect figure for the value of Pete Kight's 5 per cent stake in Checkfree, the electronic bill payment provider. The correct figure is $215m.

© Copyright The Financial Times Ltd

FT WEEKEND - LAST WORD: Beyond toil, an ineffable humanity - Trato

FT WEEKEND - LAST WORD: Beyond toil, an ineffable humanity

By Harry Eyres

Published: July 12 2004 16:17 | Last updated: July 12 2004 16:17

I have a Spanish friend who came over to live in London about eight years ago. He doesn't mind the weather (actually very similar to that of his native Oviedo); he puts up with the food; and he greatly enjoys the freedom to move across groups and classes offered by the multi-cultural metropolis. But there is one aspect of London - or English - life which he finds difficult to accept: the lamentably poor quality of what he calls "trato".

Trato is a difficult word to translate. It covers many aspects of the intercourse and dealings people have with each other. In this case, I think Paco is talking about the way people treat each other, the way they greet, interact, pass the time of day with others, especially in commercial contexts. Trato includes, but is much broader than, the concept of service.

In his emphasis on good trato, Paco is revealing a deep part of his Spanish heritage: the ancient belief in the dignity of each and every person regardless of status, the late establishment of the cash nexus as the primary bond between people in Iberian lands.

Looking for trato in England might be like searching for Baroque altarpieces in Norway. Ours was the country that more or less invented capitalism and established the cash nexus before others: at least, Carlyle was the first to write about it in the 1840s. In the second half of the 20th century draconian management techniques set about squeezing the last drops out of trato and denaturing it. I recall a meal at a pseudo-tapas bar in south London in which one poor waitress seemed to be serving the entire dining room. It was just about physically possible, in that she could take down the orders and eventually deliver the food, but it was not humanly possible. She was too harassed to speak or attend to or convey any kind of welcome to guests - and eventually mixed up the orders.

What tends to be emphasised these days is not trato but product. Product is obviously easier to define and to reproduce than trato. Product can be packaged and more or less convincingly wrapped up in a mission statement, whereas with trato a mission statement would be useless: the proof would always lie in unquantifiable human intercourse rather than a set of things, boxes to tick, even promises.

The mission statement for the Pret À Manger chain of coffee and sandwich shops is rather impressive. It is certainly not meaningless that the chain makes all its sandwiches freshly in store each day, uses organic eggs, avoids "nasty" chemicals etc. The product, in my experience, is excellent, whereas the trato is quick and efficient. This is not to say you don't often get a smile from the charming young people who work in Pret À Manger, but that the whole set-up favours speed and convenience, not the extra lingering moment of pleasantry.

It is easy in London to succumb to the notion that humane trato of the kind missed by Paco and still encountered in many contexts in Spain is as extinct as the dodo, a victim of the onward march of industrialisation and modernisation. Engels in the 1840s was already horrified by the bustle of the London streets: "hundreds of thousands of people of all classes and ranks of society . . . rush past one another as if they had nothing in common or were in no way associated with one another. No one even bothers to spare a glance for the others."

You might think the process was intensifying, as supermarkets designed for impersonal efficiency take the place of markets and shops, and there is less and less time to spare a glance for the others around you as you bellow instructions into your mobile phone.

Strangely, though, I am beginning to notice a counter-movement to all this. In my local supermarket, on a jostling, working thoroughfare, I am amazed by the way the women at the check-outs manage to spare not just a glance but a kind word for customers, especially older ones for whom passing the time of day with someone is more important than rushing from A to B.

My local pub has put a conscious effort into improving the trato it offers - and I mean trato and not just service. The staff who work there seem genuinely interested in the customers; though they are busy, they are never too busy to exchange a pleasantry; in a delightful breach of conventional pub etiquette, they serve drinks at the tables and not just at the bar. They enjoy working there, they tell me, because they are encouraged to do so.

The secret is that trato is a two-way street. However unpromising the context, you yourself can instigate good trato with the smile or remark that may not be answered, but surprisingly often is. Gerard Manley Hopkins, in his sonnet "God's Grandeur", described a world "all seared with trade; bleared, smeared with toil". And yet, beyond that, he saw how "nature", including human nature, "is never spent: . . there lives the dearest freshness deep down things".harry.eyres@care4free.net

Copyright The Financial Times Limited 2006

FT: Ports enjoy sea change in fortunes

Extracts

The series of deals has been accompanied by news that owners of other port operations, such as Seattle-based SSA Marine and Oakland-based Marine Terminals Corporation, have hired investment bankers to consider sales to cash in on investors' new appetite for the assets.

There is, nevertheless, agreement on the main reason for the increased prices. The ports sector has become the latest infrastructure class - after toll roads and airports - to attract investors such as pension funds seeking a stable, long-term return on investors' cash.

Trade growth is seen as reasonably certain, in the same way toll road investors have been sure that people will keep driving cars.

==

Ports enjoy sea change in fortunes

By Robert Wright, Transport Correspondent

Published: November 29 2006 02:00 | Last updated: November 29 2006 02:00

When Dubai's DP World agreed to buy the global terminals business of CSX, the US railroad operator, for $1.15bn in late 2004, there was general astonishment in the world ports industry.

The valuation was seen as a giddy high because it valued the terminals - in places as varied as Hong Kong and the Dominican Republic - at 15 times annual earnings before interest, tax, depreciation and amortisation.

However, that multiple now looks modest. Most analysts valued DP World's £3.92bn ($7.63bn) takeover this year of P&O, the UK container ports and ferries operator, at 19 times ebitda.

Last Thursday, the Ontario Teachers' Pension Fund announced it would pay $2.35bn for the container terminals business of Orient Overseas International, the Hong Kong-based parent of OOCL, the container shipping line: a valuation of more than 20 times.

There have been fierce contests to buy other assets, including the UK's PD Ports and Associated British Ports, which was bought by a consortium led by Goldman Sachs, the US investment bank, in July for £2.8bn: about 15 times ebitda.

The Goldman consortium had to raise its bid twice, once after being rejected by the ABP board and once after a counterbid from Australia's Macquarie.

The series of deals has been accompanied by news that owners of other port operations, such as Seattle-based SSA Marine and Oakland-based Marine Terminals Corporation, have hired investment bankers to consider sales to cash in on investors' new appetite for the assets.

But at the same time other industry observers have expressed scepticism about whether port assets - long regarded by investors as overly risky because of their exposure to cyclical shipping markets - can suddenly be worth so much more than previously thought.

There is, nevertheless, agreement on the main reason for the increased prices. The ports sector has become the latest infrastructure class - after toll roads and airports - to attract investors such as pension funds seeking a stable, long-term return on investors' cash.

"There's a general realisation that these are scarce assets," says one person involved in the industry. "It's difficult to increase supply, particularly in developed countries where planning and environmental concerns come into play."

Trade growth is seen as reasonably certain, in the same way toll road investors have been sure that people will keep driving cars.

Tom Cooper, the UBS investment banker who handled the OOIL sale on the seller's behalf, agrees about infrastructure funds' significance. But he says there is a separate battle between Hong Kong's Hutchison, PSA and DP World to dominate the world container ports industry.

"You have two different things going on," Mr Cooper says. "You have infrastructure funds on the one hand, which are participating in a rather different market from the game of global consolidation of container ports that's going on between Hutchison, PSA and DP World."

The infrastructure funds' assessment of the risk of the assets has also decreased. He says: "In the old days, port assets were seen as partly cyclical. They're exposed to trade cycles and local competition. In some places they were unionised and high-cost. The perception of each one of those has changed."

Not everyone agrees prices can continue at their present level. In an interview this year, Kim Fejfer, chief executive of APM Terminals, the world number three container terminal operator by throughput, said he expected valuations to return to closer to historic levels.

Copyright The Financial Times Limited 2006

FT: Divestment seen as aid to growth

Divestment seen as aid to growth

By Ben White in New York

Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00

The theory that bigger is always better in the financial services industry is fading, according to a study by Citigroup, the bank that once hoped to provide consumers with everything from insurance policies to retail brokerage accounts.

The study found that the number of divestitures by financial services groups increased by almost 35 per cent between 2002 and 2005.

In addition, six of the 10 largest financial services divestitures of all time have occurred in the past two years, including Credit Suisse's sale of its insurance business, Merrill Lynch's disposal of its asset management unit and American Express's spin-off of its financial advisory business.

Citigroup itself accounts for the two biggest divestitures, with the $12.2bn spin-off of its Traveler's Property Casualty business in 2001 and last year's $11.5bn sale of Travelers Life and Annuity to MetLife.

The report says the pace of financial divestitures may quicken in the coming months because groups that shed assets are seeing a healthy rise in their share price and there continues to be a flood of capital chasing a limited number of acquisition targets.

"In theory, value can be created in conglomerates from synergies, economies of scale and scope," the report concludes. "In practice, conglomerates sometimes encounter inefficiencies, absence of synergies and low valuations."

It adds: "At the root of the problem are misconceptions that divestitures are rarely a path to success and shrinking is not really an option. Current signs show that this is no longer the case."

According to the study, shares in North American groups that divested assets rose 3.6 per cent above a market benchmark in the 10 days before and 100 days after the divestiture was announced. Non-North American groups saw a 5.4 per cent boost following a divestiture.

Citigroup looked at 55 North American divestitures and 87 non-North American divestitures worth $500m or more from January 1997 to June 30 2006.

Charles Schwab's agreed sale of its US Trust private banking unit supports Citigroup's findings. Schwab shares surged 4 per cent the day the deal was announced.

Divestitures are not always about getting smaller. The report also notes they can give financial groups capital to pursue strategic acquisitions.

Some analysts have suggested that Schwab could use cash from the US Trust sale to pursue a discount broker such as Etrade.

The report also found that analysts reacted positively to divestitures 58 per cent of the time and negatively just 11 per cent of the time.

Copyright The Financial Times Limited 2006

"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2006.

FT: Infosys - Programmers’ passage to India

Running a training centre on this scale poses considerable management challenges. Infosys takes graduates from across the world – with varying strengths, abilities and cultural expectations – and must bring them to a similar level of understanding on complex subjects, while instilling them with a sense of the Infosys culture.

The US graduates divided into two streams on arrival at Mysore: the computer science majors who take a two-and-a-half month software engineering course before moving to on-the-job training, and those from other backgrounds, including the liberal arts, who study for three-and-a-half months.

Mr Pradhan says the company can turn most smart graduates into software engineers regardless of their academic background because it hires people with so-called “learnability” – Infosys jargon for strong logic skills.

He says the Americans exhibit different learning patterns from their Indian and other Asian counterparts. They prefer to keep lectures short and break them up with exercises. By contrast, Indian students can sit through three hours of lectures while some Chinese interns, he says, can last nine hours.

Mr Pradhan says the company is not concerned with how the trainees learn, so long as it works. “What we want is a 126-person strong set of software programmers, not students,” he says. So far, no US trainee has dropped out.

==

Programmers’ passage to India

By Joe Leahy

Published: November 27 2006 17:35 | Last updated: November 27 2006 17:35

On a gloriously sunny morning Anubhav Pradhan, an instructor at Infosys’s software engineering factory in Mysore, southern India, is telling his class about “entity beans” and “persistence mechanisms”.

To the outsider the software engineering jargon at the Global Education Centre, is exotic, even impenetrable. But even more unusual are his students. Instead of the normal class of diligent trainees from India or elsewhere in Asia, Mr Pradhan is teaching a group of American graduates.

The class is part of an ambitious experiment by Infosys, India’s second largest computer services company. In a reversal of the usual pattern of outsourcing, in which developed world jobs are replaced by cheaper Indian ones, Infosys will next year start a pilot programme in which it will recruit 25 graduates from 12 UK universities for training in Mysore before eventual redeployment in their home markets.

The programme will ex­pand on a scheme the company kicked off in July, when it started training 126 US graduates at Mysore. It plans to have trained a total of 300 US graduates when this fiscal year ends in 2007.

Known as the Global Talent Programme, the scheme is part of an increasing push by Indian outsourcing companies to make the relationship with their clients in their target markets more “seamless”. Technology may have “flattened the world” – a phrase made famous by Thomas Friedman’s book about outsourcing and which has become a mantra at Infosys. But there is still nothing like having a local face to talk to when you are overhauling something as critical as your IT systems and business processes.

For Infosys, the scheme is also part of a more ambitious move up the value chain into the territory of its more established, developed-world rivals. Rather than just helping clients re-engineer their IT systems or writing new software for them, the company wants to advise them on how to deal with large shifts in technology and other strategic issues.

Or, as chief executive Nandan Nilekani, puts it: how to “navigate the twists and turns” and “win in the turns”. In the quarter ended September 30, this type of business accounted for about 21 per cent of Infosys’s $746m in sales.

“In a sense, our whole endeavour is to go from just being perceived as an outsourcing company to somebody who can be a trusted transformation partner for our clients,” Mr Nilekani says. “There is no company that can do both very well.”

In an industry as reliant on engineering talent as computer services, the training centre at Mysore is a vital part of this strategy. The facility currently has capacity for 4,500 trainees at a time but this will be increased to 13,500 in about 12 months. Investment in the 335-acre complex, which also includes offices and software development blocks, will total $300m.

A significant portion of the new students will, for the first time, be non-Asian. In the UK, the company plans to tap several universities such as Cambridge, University College London and University of Nottingham. In the US it drew candidates from 82 universities.

Running a training centre on this scale poses considerable management challenges. Infosys takes graduates from across the world – with varying strengths, abilities and cultural expectations – and must bring them to a similar level of understanding on complex subjects, while instilling them with a sense of the Infosys culture.

The US graduates divided into two streams on arrival at Mysore: the computer science majors who take a two-and-a-half month software engineering course before moving to on-the-job training, and those from other backgrounds, including the liberal arts, who study for three-and-a-half months.

Mr Pradhan says the company can turn most smart graduates into software engineers regardless of their academic background because it hires people with so-called “learnability” – Infosys jargon for strong logic skills.

He says the Americans exhibit different learning patterns from their Indian and other Asian counterparts. They prefer to keep lectures short and break them up with exercises. By contrast, Indian students can sit through three hours of lectures while some Chinese interns, he says, can last nine hours.

Mr Pradhan says the company is not concerned with how the trainees learn, so long as it works. “What we want is a 126-person strong set of software programmers, not students,” he says. So far, no US trainee has dropped out.

Out of class and late at night in one of the campus’s pristine canteens, a group of students from Hyderabad, another southern Indian city, talk as though they are in another country.

“The biryani here is not biryani,” they say, implying it is not as good as their own regional variation. They find the course very intensive and disappear after dinner to continue studying.

The Americans seem more relaxed even though they are further from home. Like most of the Americans, David Craig, who studied engineering management at the University of Arizona, says he first heard of Infosys through the careers service at his college.

He was persuaded to join by his father, a systems engineer, who had just bought the stock. “I had never been overseas before. I had just been down to Mexico and up to Canada and that was about it,” says Mr Craig.

All had to battle perceptions at home about what they would be doing in India. Nathan Linkon, a marketing executive, was part of an earlier pilot programme in 2004, when outsourcing was a political hot potato in the US. “People were saying to me, ‘I’ll call you when I have a problem with my Dell computer’.”

Perhaps the most important difference between the US trainees and their local counterparts is that ultimately the foreigners are being groomed for a return to their home markets.

The company is kind to them – allowing them, for instance, to take long weekends to see more of the country – with the aim of creating brand ambassadors who are familiar with both Indian culture and their own.

Some of Infosys’s competitors could argue that the company is in fact late to the party. Only 3 per cent of Infosys’s 66,150-strong workforce is not Indian. This compares with the industry leader, Tata Consultancy Services, 8 per cent of whose 78,000 staff are foreign. TCS also runs extensive internships lasting 12-18 months, after which the company decides whether it wants to hire the candidates.

There is also a risk that Infosys’s foreign graduate recruits will simply use their training to enhance their CVs before joining larger rivals. First-hand experience of outsourcing is becoming a valuable commodity in the IT industry.

“There is a lot of demand. India is suddenly very hot and our brand is strong, so we get the best people,” says Mohandas Pai, Infosys head of human resources.

‘Club Med’ for Mysore

Step on to an Infosys “campus” and it is hard to escape the feeling you have somehow entered the set of “Logan’s Run”, the science-fiction film starring Michael York in which no one seems to make it beyond 30 years of age.

The average age at the Bangalore headquarters of the Indian computer services company is 26; at its Mysore training campus it is even lower. Yet to attract and retain a young workforce of highly trained software engineers Infosys has worked hard to provide a workplace culture that appeals to them.

Its efforts cover language as well as the physical landscape. Trainees are “infoscions”; Narayana Murthy, one of the founders, is the “chief mentor”; and recruits are hired for their “learnability”.

There are no bars on the spotless Mysore campus. Instead, there is an Employee Care Centre, whose halls of table tennis and billiard tables, rooftop swimming pool, yoga room, music room, and bowling alley, would put an elite club to shame. At the rear is the field where the Indian women’s cricket team trains. Nearby is the spiky sphere of a multiplex cinema that looks like one of the attractions at the Florida Walt Disney World.

The company went to great lengths to accommodate the US graduates. The group’s head chef designed a menu for them while instructors attended cultural sensitivity sessions and neutralised their accents.

But the US trainees proved adaptable anyway. It is now mainly the Chinese trainees who eat the western food – their US peers often prefer Indian dishes. If anything, some of the US graduates would like more contact with the real India outside the compound’s walls.

“They do a good job of hiding that it is a developing country when you’re on campus. I feel like I’m at Club Med,” says Katrina Anderson, a mathematics major from the University of Notre Dame.

Copyright The Financial Times Limited 2006

FT: MBOs

MBOs

Published: November 27 2006 22:28 | Last updated: November 27 2006 22:28

Handle with care. As management buy-out fever sweeps the US, ever more executives are flirting with the idea of taking their company private.

Such deals are riddled with possible conflicts of interest. Most obviously, executives involved in a bid have an interest in minimising the price they pay rather than maximising the value ordinary shareholders receive. As managers, they have better information than the independent directors and external shareholders. Also, if management links up with financial sponsors, it is tough for rival bidders to compete. Instead of shouting about new profit opportunities – to drive bids higher – executives can keep ideas to themselves. To add insult to injury, management can collect change of control payouts, before loading up on incentives in the buy-out vehicle.

Boards should be on red alert. MBOs make it tough to create a real auction. In extreme cases, executives who are also dominant shareholders can even rule out competing offers. Some bids are opportunistic moves to capitalise on an oversold share price – private equity can take a longer view than public equity markets. Sometimes approaches should be rejected because it is simply the wrong time to sell. At the very least shareholders should think hard when well-informed buyers see extra value.

But MBOs should not be dismissed. At today’s levels, equities are not obviously undervalued. If private equity buyers add a decent premium, offers can be attractive. In some cases, over-exuberant debt markets – acting like default risk is a thing of the past – might be providing the fuel for prices equity investors might otherwise not see for a while. After all, rising leverage multiples and low interest rates are letting deal-hungry sponsors buy ever bigger companies with limited equity.

MBOs should be distrusted. Boards should turn deals down if the timing is wrong. If it is not, they should do everything possible to create an auction. But not all buy-outs will deliver huge returns. With debt markets funding increasingly aggressive deals, canny sellers could, in some cases, have the last laugh.

Copyright The Financial Times Limited 2006

FT: A giant's strength is valuable - if not used like a giant

"O, it is excellent to have a giant's strength, but it is tyrannous to use it like a giant." - Shakespeare, Measure for Measure II.ii

Incumbents survived as natural monopolies because they did not exercise their market power. But when they used or abused it, they began to lose it. The New York Stock Exchange took advantage of the maxim that the best of all monopoly profits is a quiet life, resisting new technology and preserving outmoded trading arrangements. Then a wave of demutualisation set shareholders seeking higher profits and executives in pursuit of self-aggrandisement. New competition was the inevitable consequence. The paradox of contestability is that you can have a natural monopoly only so long as you behave as if you do not.

==

A giant's strength is valuable - if not used like a giant

Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00

Natural monopolies - industries in which it is difficult for more than one company to survive - seem the easiest, most rewarding of business opportunities. It is not as easy as you think.

Natural monopoly has two main sources. Economies of scale may be large relative to the size of the market. However, lower production costs are often outweighed by the inflexibility of corporate bureaucracy. History is littered with fallen titans, from United Steel to IBM, whose leadership once seemed impregnable.

The manufacture of large commercial aircraft has greater scale economies than any other industrial process. However, with two companies competing for the natural monopoly, life is always tough for either Boeing or Airbus. Natural monopoly may be the result of the modest size of a market niche. But that is a problem as well as an opportunity.

Natural monopolies are also found when all customers benefit from using the same supplier. Like everyone who taught introductory economics, I used to point to local telephone services - people wanted to be connected to the network that had most subscribers - and competition in telephone services became possible only when regulators insisted that new competitors were given access to the incumbent's customers. If I were teaching that course today, I would talk to my students about Ebay. Markets for homogeneous commodities are natural monopolies, because people flock to where the active trading is.

For decades, securities exchanges operated as natural monopolies. However, that stable industry structure has been disturbed both by consolidation and fragmentation. First, Nasdaq won new listings from the New York Stock Exchange with lower costs and better technology. Then dominant exchanges were slow to see the potential of derivatives and Chicago and Liffe grabbed market share. Competition developed between established exchanges in the same securities. New technology allowed entirely new trading platforms. Next year, the Markets in Financial Instruments Directive reduces the regulatory advantages of incumbent European exchanges and a group of leading investment banks has just announced a new pan-European exchange.

The basic economics of natural monopoly emphasise two main phrases: "sunk costs" and "contestability". Sunk costs are the costs of entering a market that you cannot recover if you leave it: the costs you must incur to be able to deliver the good or service even if nobody buys it. Existing suppliers have already invested in sunk costs but new suppliers will have to invest in them to get into the game. So these costs are the measure of existing suppliers' advantage. The higher the sunk costs, the lower is contestability. A perfectly contestable natural monopoly is still a natural monopoly, but such a business might be forced to behave like a competitive industry because behaviour is constrained by the prospect of "hit and run competition".

This is the history of securities exchanges. Incumbents survived as natural monopolies because they did not exercise their market power. But when they used or abused it, they began to lose it. The New York Stock Exchange took advantage of the maxim that the best of all monopoly profits is a quiet life, resisting new technology and preserving outmoded trading arrangements. Then a wave of demutualisation set shareholders seeking higher profits and executives in pursuit of self-aggrandisement. New competition was the inevitable consequence. The paradox of contestability is that you can have a natural monopoly only so long as you behave as if you do not.

So will the new European platform, succeed? Only because it will help demonstrate that no exchange can, in the long run, be a very profitable business. The success of the project will be judged, not by its own profitability, but by its effect on the sponsor's costs. Exchanges are destined to be low margin monopolies and such a market structure will inevitably emerge - in one set of hands or another. "O, it is excellent to have a giant's strength: but it is tyrannous to use it as a giant." And, Shakespeare might have added, often inimical to shareholder value.

Copyright The Financial Times Limited 2006

FT: S Korean farmers look further afield for brides

S Korean farmers look further afield for brides

By Anna Fifield in Yangbuk, South Korea

Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00

Down on his luck and approaching 40, Jang Sae-jong three years ago followed in the footsteps of an increasing number of South Korean men - he boarded a flight to Ho Chi Minh and within a week had a Vietnamese bride.

In a country fast leaving behind its agricultural roots, rural Korean men like Mr Jang are finding it increasingly difficult to persuade upwardly mobile Korean women to choose rural life.

ADVERTISEMENT

"I was living in a remote village with my mother then I decided to come to open a restaurant here in Yangbuk, but it failed and I lost a lot of money," Mr Jang says, sitting on the floor of his modest two-room house in the south-east of the country. "At the same time, I was getting old and there weren't many women around, so I joined a guy from this village who was going to Vietnam."

With a dozen other men, he went to a hotel in Ho Chi Minh where he was presented with a line-up of 60 potential brides, which he whittled down to three. He asked them about their backgrounds and families, then chose Tran Thi Diem, now 27.

"I didn't want anyone who was better educated than me because I thought that if she was too smart, she might figure out how to run away," he says. "And I liked her - she seemed nice."

The following day he met her family and the day after, they were married in a Vietnamese-style ceremony with the other bride-hunters. The trip to Vietnam, fees to the marriage agency and the wedding cost Mr Jang about $15,000, a third of which he had to borrow. Ms Tran, who had travelled seven hours to Ho Chi Minh, remembers the event in similarly un-nostalgic detail.

"My husband liked the look of me and I liked the look of him, but actually the brides don't get much choice," she says.

"I wasn't thinking about love. My family is very poor and my parents are sick and I heard that Korea was a very wealthy country so I wanted to help them and earn money for them," she says, their two-year-old twin daughters jumping on her.

In a conservative country fiercely proud of its ethnic homogeneity, marriages like that between Mr Jang and Ms Tran represent a seismic social shift. Indeed, the Korean countryside is fast becoming more globalised than the cities.

Last year 14 per cent of all Korean marriages were to foreigners, up 20 per cent on the previous year, but in rural areas, four in every 10 men married non-Korean Asian women last year.

Many are Chinese or Philippine but men are increasingly opting for Vietnamese women because of their ethnic similarity. Posters on the lampposts in Yangbuk declare: "Get a new life - marry a Vietnamese lady! You can pay later!"

With the birth rate plummeting and farming life on the brink of extinction, local governments are supporting efforts to help men find wives and have children to pass the farm to.

Kyongju City Government, which encompasses Yangbuk, will soon start giving grants of Won5m ($5,000) to help local men find wives. "There are no young people left in the countryside so we have to help the men revitalise rural areas," says Kim Sang-guk of the Kyongju welfare centre.

The local authority is also trying to help the 450 foreign women, including 282 from Vietnam, in the area, offering Korean language and cooking classes.

But almost all of the women struggle with their new lives. "This is not the Korea I imagined. I had heard that Korea was a wealthy nation and I wasn't expecting to be out here in the countryside," says Ms Tran. "But even though I didn't love my husband when we got married, since I had my babies I've grown to love him."

But the biggest problem has been the language barrier - she says she still often has to rely on sign language to communicate.

While Ms Tran seems to accept her new life, Mr Jang, who flits between temporary agricultural or building jobs, is not so happy. "It's quite a burden to send money to Vietnam because I don't earn much," he says.

But it is the relationship between his wife and his mother that causes him the most headaches. "My mother speaks very fast and gets angry when my wife can't understand her. My mother once yelled at my wife to go home to Vietnam and my wife cried a lot."

"Now I'm opposed to international marriage," he says in front of his wife, who is distracting herself with an imaginary spot on the floor. "If I get married again I won't go to Vietnam, I'll look for a bride in Korea."

Copyright The Financial Times Limited 2006

The scoop on ice cream

                                                                                            

>> ASIAONE / JUST WOMAN / ABOUT ME / COLUMNS / ARTICLE /

                                                                                                                                                                                                        

The scoop on ice cream By Stephanie Yap - Nov 16, 2006 The Sunday Times

MELISSA Phey’s love affair with ice cream began when she went to Melbourne to study at Monash University in 1996. During a trip to Sydney, she was amazed by the range of ice cream available. "The ice cream shops there were what captivated me," says the 30-year-old, who runs her own ice cream parlour, The Daily Scoop, at Clementi Arcade in Sunset Way. "They had really interesting flavours that were not available in Singapore then; flavours that catered to the Asian palate, like lychee, sticky rice and sesame." Though she contemplated starting her own ice cream business then, she decided to take the practical route and entered the corporate world when she graduated in 2001 with a double degree in business and communications. She joined a small advertising agency as an executive for nine months, then moved on to a large marketing firm. It was her year there that made her realise that the corporate world was not to her taste. "I found my hands tied in situations where I felt I could do more to obtain customer satisfaction, but because we were a big organisation, there was a lot of bureaucracy." She describes herself as a "late bloomer". Although she went to top schools like Raffles Girls’ School and Raffles Junior College, she says her favourite subject then was "the subject of fun". Failing to land a university place here, she went to Australia. But that was the turning point in her life - and not just because she was introduced to a whole new world of ice cream. "It was only in university that I learnt to apply myself. Maybe it was the different style of learning, which was more hands-on than rote," she says. After leaving her marketing job in 2003, she went back to Australia to do an intensive one-week course in ice cream making at the University of Melbourne. But first, she spent half a year working part time at an ice cream cafe in Singapore. "I was learning kitchen work and serving ice cream, and that’s when I had direct contact with customers," she says. "What sealed it for me was seeing the joy in customers’ faces when they had their ice cream. It was about selling joy in a tangible form." She started the course in late 2003, and used her savings to pay the fees, which amounted to a few thousand dollars. In a class of about 50 people, she was taught by different professionals who were experts in various fields of ice cream production, and learnt to concoct her own ice cream in the laboratories. Back in Singapore, she spent a year experimenting with ice cream flavours in the kitchen of the Katong apartment she shares with her mother. She is an only child, and her father, an IT executive, died 10 years ago. "I told myself, if it doesn’t work out, I can at least make ice cream for my cousins’ kids at Christmas." Local suppliers SHE found local equipment suppliers by looking in the Yellow Pages and on the Internet. When she heard in August 2004 that a store space was available at Clementi Arcade in Sunset Way for $3,000 a month in rent, she jumped at the chance. "From my childhood, I’ve heard people say that there is good food along Sunset Way, so I had that association in my mind." The cafe opened just a month later. It cost $100,000, and she borrowed the money from her mother and other family members. She has since paid them back. Two friends from her church - an interior designer and a graphic designer - helped her with the shop’s layout and decor. Her mother, who ran a furnishing business, provided advice on materials. She says that although she had a minimal budget for publicity, the location helped, as residents of the affluent neighbourhood and students from nearby schools were drawn to the new cafe. "A lot of my regular customers have become friends," she says. "They like to introduce new stuff to their friends and family, and that networking helps a lot." However, she has had her share of slow days. "There were quiet days, like rainy days, during the exam period, when we would make $100 or less," she recalls. Now she doles out 100 scoops on a weekday, and double that on weekends. A scoop costs $2.90, a double, $4.90. Her customers love the lychee martini, durian, coconut and the liqueur-based flavours, as well as the classic chocolate. She now has 32 flavours, although only about 16 are available at any one time. She also tries to come up with a new flavour every one to two months. The cafe is open every day, and she works 12-hour days, from 11am to 11pm. She has not gone on a holiday since she opened the shop, only taking breaks on some public holidays when the cafe is closed. Although the business is in the black, she says making loads of money is not her goal. "This isn’t a million-dollar money-making venture, but it is comfortable. The satisfaction outweighs the monetary incentives." That is why she has declined several offers from people interested in franchising the cafe, or developers who have offered locations for a second outlet. "My passion is to have a suburban neighbourhood cafe where I can have friendly chats with regulars and have people-to-people relations. If I were to operate a chain or franchise, I would find myself knee-deep in paperwork again, and that is not something I want to go back to." This story was first published in The Sunday Times on 5 Nov 2006

FT: Low-cost 'clone' for funds launched

Low-cost 'clone' for funds launched

By James Mackintosh

Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00

A hedge fund emulator has been launched by a London academic in an attempt to replace expensive fund managers with a far cheaper automated system.

Harry Kat, professor of risk management at Cass Business School at London's City University, is charging fees of just 0.36 per cent a year for investments made using futures trades provided to customers each day.

ADVERTISEMENT

The move is thought to be the first in what is expected to be a series of low-cost hedge fund "clones", which aim to provide the market-based element of hedge fund performance without the fees. Most hedge funds charge 2 per cent a year plus 20 per cent of profits. Funds of hedge funds typically add a fee of 1 per cent of assets and 10 per cent of profits.

If cloned funds are a success, it could put pressure on hedge fund fees, which have mostly been ignored by investors who generally choose to withdraw money in response to poor performance rather than demand lower fees.

Prof Kat said that in large-scale tests his system beat 82 per cent of funds of hedge funds. He said the idea was to "get rid of the managers without getting rid of the returns".

"Hedge fund fees are high and don't seem to be coming down while the returns get worse every year," he said.

Several other academics have been working on similar approaches, with one in the US and another in London in talks with investment houses to launch hedge fund clones. Dow Jones Indexes is also discussing the idea of adopting a model that mimics hedge funds by investing in the same assets.

Prof Kat and colleague Helder Palaro have been trialling their "FundCreator" system with 21 possible users, who log in to a secure website each day to be told by the computer model which futures trades to make. A couple are discussing licensing the system to produce funds into which outsiders could invest, potentially creating a low-cost alternative to hedge funds.

Prof Kat hopes to use profits to fund extra research assistants. Although legal structures have yet to be put in place, the website, linked in to futures prices, is already offering access.

Partners Group, the Swiss alternative fund manager, offers its own system, Alternative Beta Strategies, but has higher fees that are closer to those of active managers.

Narayan Naik, professor of finance at London Business School, said funds of hedge funds did better than passive replicator models - but only before fees. "There are a few good guys [among the fund managers], no question," he said. "But after paying fees and transaction costs, is there anything left over for the investors?"

Copyright The Financial Times Limited 2006