Perils of having a charismatic leader
(Jan 15, 2009)
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In this issue:
What happens when a charismatic CEO goes on a medical leave? The stock of his company tanks! Yes, we are talking about Apple here and the CEO in question is Steve Jobs. With his health deteriorating, the founder and CEO of Apple is on a medical leave till June. The announcement caused the stock of Apple to plunge 11%. This raises an important issue about the perils of having a leader on whose charisma the fortunes of a company are based. Sure, the going is great while such a leader is heading the company but in his absence a vacuum gets created in the echelon of the top management, consequently having a negative impact on the stock price of that company. Compare this with our very own Infosys. When Narayan Murthy stepped down, paving the way for Nandan Nilekani, the management change hardly caused a flutter in its stock price. This is due to Infosys' management depth so that the absence or the stepping down of a key person does not affect the overall running of the company. Meanwhile, in Steve Jobs' absence, the responsibility of overseeing the company will fall on the shoulders of Tim Cook who despite not having the magnetism of Steve Jobs has nevertheless quietly run the company for several years.
» World Bank, Satyam, Wipro in murky waters
» Bankrupt Nortel's impact on Indian IT
» US retail sales drop for the sixth straight month
» Bank of America to receive further aid
» ...and more!
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The theory of developing economies 'decoupling' from the recessionary trends seen in the developed world has gone to the grave in the past few months. Poor demand for exports and cut down on offshoring service orders have severely impacted the economic growth in the developing countries as well. More importantly, job losses that were perceived to be a trend restricted to the West have become a common phenomenon even in the relatively fast growing Asian economies like India and China. Economists are of the view that a prolonged recession in the developed economies, particularly the US, could do extensive harm to the prospects of developing economies as well. The following chart provides some compelling visual evidence...
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Source: The Big Picture
Ever since the biggest fraud in corporate India (Satyam) was unraveled, the saga has been occupying the front pages of leading business dailies. The company's chairman, MD, CFO, board of directors and the auditors (Price Waterhouse) have all come under fire. Given that the auditors have been severely criticised for their inability to detect this fraud of epic proportions it was not surprising then that a new team of auditors had to be appointed to inspect Satyam's books and restate its doctored accounts. As per a leading business daily, KPMG and Deloitte, both of whom are part of the Big Four in the accounting and audit world, have been appointed as joint auditors for the same.
After the Enron scandal in the US which saw the demise of the then reputed Arthur Andersen and the latest Satyam fiasco, the reputation of these big accounting firms have come under the scanner and therefore the question to be asked is whether it makes sense for the new set of auditors to be appointed from this circle. Infact, there is already a buzz doing the rounds in the accounting fraternity that there is an urgent need to appoint a high ranking Indian accounting firm as joint auditor for the beleaguered software company. Is this a case of jumping from the frying pan into the fire? One will have to wait and watch.
Although Indian IT companies like Satyam and Wipro have been successful in putting an end to the controversy surrounding the ban on them by the World Bank, Mint is trying its level best to go to the heart of the matter. And its investigation, if assumed to be true, has put forth some disturbing facts about both Satyam as well as Wipro. The investigations revealed that the World Bank suspected some of its software vendors of implanting spywares in the bank's networks. Furthermore, during the time these devises were implanted, the bank's technology was headed by the same man who is also accused to have been one of the beneficiaries of stock awards by both Wipro and Satyam. None of the allegations could however be ascertained as all the concerned parties have declined to comment further on the issue. If the allegations are indeed true then it could deal a bigger blow to the already tarnished image of Indian IT industry in general and these companies in particular.
The dark clouds on the beleaguered Indian IT sector don't seem to be going away anytime soon. Yes, there some more bad news for the sector. Nortel Networks, which is the biggest telephone equipment maker in North America, has filed for bankruptcy yesterday. So? Well, Nortel was one of the key clients for many Indian IT majors. Some of them include TCS, Infosys, Wipro and Sasken Communication. Nortel is among the top 15 clients of Infosys, Wipro and Sasken, while 1% of TCS' total revenues come from Nortel. Thus the revenues of these companies will be directly impacted. Also, Nortel's filing of Chapter 11 permits rehabilitation or reorganization under bankruptcy laws, and may stall the receivables of the Indian IT firms from Nortel. The Indian software industry is really going through some trying times.
Recession in the US further made its mark as US retail sales fell by 2.7% marking the sixth straight month of decline. According to Bloomberg, this was the longest string since comparable records began in 1992. Job losses and lack of credit means that Americans are becoming increasingly vary of spending and are actually cutting back on the same. As a result, purchases in retail stores are obviously being curtailed and this has hit retailers badly. Other statistics reported on Bloomberg also do not paint a rosy picture. While inventories at all businesses in November dropped 0.7%, a 1.7% decline in stockpiles at retailers accelerated the overall fall. Purchases excluding automobiles slumped 3.1%, the most since records began. Categories that were badly impacted were gasoline service stations, grocery stores and restaurants. While a 16% drop was witnessed at gasoline service stations, the drop at grocery stores was the biggest since April 2002 and the decrease at restaurants was the largest since the terrorist attacks in September 2001. Things not looking too good in the US, indeed!
And speaking of the US, job losses there have taken a quantum leap amidst the global financial crisis. But the thing to note is that no one, not even CEOs have been spared. Infact, the current financial crisis has turned out to be a nightmare for the CEO community, many of them having seen their jobs getting axed due to poor financial results, plunging stock prices and increasing criticism from shareholders. This is not really surprising as the actions of CEOs are minutely scrutinized especially during bad times such as these when the pressure on them to tide over the crisis is high.
But firing CEOs at the drop of a hat may actually turn out to be counterproductive. This is because the new person who assumes office is expected to reverse the fortunes of the company in a short span of time, which may not be sufficient enough to grasp the dynamics of the business. That has, however, not stopped the corporates in the US from showing the door to CEOs across industries. In the last eight days, six CEOs have already departed. As per reports in a leading business daily, 61 companies in the S&P-500 changed CEOs as compared to 56 a year earlier. Leo Tolstoy, the famous Russian novelist had quoted in one of his works, "All happy families resemble one another, each unhappy family is unhappy in its own way". In the corporate world atleast, it looks like the unhappy families resemble one another.
Bank of America, which not long ago was considered a pillar of strength in the American banking industry, is beginning to run into problems. The bank came into the limelight for acquiring Merrill Lynch at the same time that Lehman Brothers filed for bankruptcy. But, while Merrill Lynch was purchased at bargain prices, relentless losses in the erstwhile investment bank are taking its toll on Bank of America. As a result, the US Treasury is moving to provide bailout money to the bank making it the second bank after Citigroup to receive an additional lifeline from the government. Bank of America had already received US$ 25 bn from TARP. Besides the Merrill acquisition, it also acquired troubled mortgage lender Countrywide last year. Thus, integration of these two acquisitions in such troubled times will be the biggest challenge for this US bank.
India's oil imports more than doubled in December. We are not talking of crude here but edible oil. India is the world's biggest buyer of vegetable oils after China and the decline in palm oil prices coupled with the rise in demand led to an increase in imports in December. As per Bloomberg, edible oil imports in the first two months of the season that began in November almost doubled to 1.24 m tonnes. Vegetable oil prices had slid 53% in the second half of 2008, after reaching a record in March, as production exceeded demand. Besides the low prices, anticipation of an import duty by the Indian government on palm oil imports (20% duty has already been imposed on crude soybean oil imports) could also have contributed to the surge in the same.
India relies on imports to meet almost half its edible oil demand with palm oil accounting for almost 90% of India's edible oil imports. This only highlights India's growing dependence on oil imports be it crude or edible oil. As regards the former, India currently imports around 70% of the crude oil that it consumes.
The Indian markets closed lower by 3% today mirroring the selloff in the global markets. BSE Bankex (down 6%) and BSE Metal (down 5%) contributed to the decline. While the Asian markets closed deep into the red, the European indices are trading mixed currently. As reported on Bloomberg, crude oil fell by 3% to US$ 36.1 a barrel after a government report showed that slowing demand sent US stockpiles soaring to a 16-month high.
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid" - Warren Buffett
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