Taxes give government more command over an economy

May 12, 2015 By in Government Tags: 1 Comment

Direct corporate and personal income tax in the GCC is extremely low or even non-existent. Even when indirect taxes, usually in the form of fees and dues, are added in, the total tax burden in the GCC remains light relative to the rest of the world.

It is not hard to see how this is possible, and the usual debate surrounding this topic centres on the sustainability of such policies. The general position is that the absence of corporate and personal income tax is a unilaterally beneficial state of affairs and that any introduction of a tax would have no benefits to the residents of the GCC.

Perhaps such a view is too one-sided. Could there be benefits to an income tax?

One idea used by taxing governments is that the structure of taxes can be used to influence behaviour. At the top of this list is the saving and investment behaviour of corporations and consumers.

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Avoiding the Hannibal Lecters of the Investment World

May 5, 2015 By in Due Diligence Tags: , ,

Portfolio managers and investment analysts like to say that due diligence, a deep review or audit of a potential investment, is an integral part of their business. They are most probably lying, or if we want to be charitable, they are deluded.

Due diligence is not considered sexy. It involves legal, financial and operational reviews. Where are the six screens with hundreds of flashing numbers? Where are the bank of telephones with people shouting orders into them? Where are the oak-panelled boardrooms? The late nights at Cipriani’s and Harry’s? Where, when all is said and done, are the … well, let us not get too carried away.

Portfolio managers and investment analysts rarely perform due diligence personally. They rarely even lead the process. Just look at all the professionals taken in by the Madoff scandal. This is a shame, as due diligence is the only way to consistently make money.

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Investment Valuation Lessons III: Discounted Cash Flows versus Peer Group Comparison

April 29, 2015 By in Investments Tags: , , ,

The debate of whether discounted cash flows or peer group comparisons are the better business model has raged ever since M&A became vogue. Let me put an end to the suspense right now: both are useless as effective valuation tools. Let’s find out why and what might work.

Discounted Cash Flow

The problem with discounted cash flows (DCF) is the sensitivity to a large number of parameters especially since DCF is usually used to predict high-growth. It is hard enough to predict the future performance of stable businesses. Trying to predict the performance of companies in a growth phase is indistinguishable from guessing.

So how should you go about valuing the company that is about to go into a high-growth phase? The short answer is you use a value based on the scenario that the company continues as is. In other words the high-growth is as much a result of your cash as it is of the company’s business. Therefore the growth phase piece should be treated as if it is a complete start-up where everything is valued at book value and therefore there is no premium on the current business.
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Letting Go for Sustainable Growth

April 28, 2015 By in Management Tags: ,

Why do successful companies fail? One reason is an inability to let go of a successful product. Read that again – the issue is not about an inability to innovate but an inability to let go of successful products so as to allow newly developed superior ones to take their place.

An example of how to do it right is Apple and the iPhone. Apple’s turnaround at the turn of the century began with computers. The iPod was a hit and provided much-needed diversification for Apple. In late 2007, when the iPhone was launched, Apple faced a pivotal moment.

The iPod sold 50 million units worldwide in 2007. To use the language of the industry, it was a killer product. The problem was that the iPhone would cannibalise part of the iPod market. Indeed, the iPhone was basically an iPod with a GSM chip implanted.

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Investment Valuation Lessons II: Value Attribution

April 27, 2015 By in Investments Tags: , , ,

An interesting phenomenon is when investors agree on valuation but incorrectly attribute the source of the valuation. The result is that incoming investors or buyers of the firm end up paying the sellers for value that the buyers create.

A common occurrence is when a start-up sells out to a major player, especially in the services industry. Imagine that there is a local start-up, which we will call Triangle, sells a particular service offering into the market.

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Investment Valuation Lessons I: Equity Dilution

April 26, 2015 By in Investments Tags: , , ,

Valuation techniques and methodologies are usually taught within the context of developing a financial model or using comparative ratios. In real life the actual decision makers might use the output of these models but will not be the ones who develop the models. Decision makers will also be influenced by other factors, not all of which are rational.

I have seen many examples of this and there are certain repeating patterns that are worth examining. In this post I will concentrate on how equity dilution leads to misperceptions and mistakes.

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Leadership versus Management: Myth and Reality

April 21, 2015 By in Leadership, Management, Leadership Cornerstone Tags: ,

The “Leadership versus Management” debate has mushroomed, infesting every corner of the business media space. Sadly, the debate has devolved into a polarised view of leaders as empowering saints and managers as narcissistic hell-spawn. This is not only wrong, it is harmful.

Leadership and management are simply roles. Anyone in business who fills just one role and not the other will fail spectacularly. Not knowing when each role is appropriate will also stifle an executive’s career.

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Adapt and progress: Learning from Germany’s Fifa World Cup 2014 success

April 14, 2015 By in Strategy Tags: ,

There is a saying: insight comes after action far more often than action comes after insight.

Decision-making under uncertainty is a normal part of business. One could argue that it is at the core of managing a business. It is simply impossible to assemble all the data relevant to a decision. Other barriers include some of the data being in the future as well as being generated continuously, which could lead the decision-maker to wait indefinitely.

This leads us to another saying: paralysis by analysis.

The uncertainty surrounding decision-making provides an excuse for the timid to avoid making any real decisions whatsoever. Only by raising the spectre of risk can decisions be made. For executives, since full information can never be acquired no decisions are made. Sound familiar?

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The Importance of a Culture of Trust

April 7, 2015 By in Leadership, Management, Leadership Cornerstone Tags: , , 1 Comment

This blog recently talked about the importance of trust-based systems, as opposed to personal trust. This article continues investigating the role of trust in business with a focus on the importance of building a culture of trust.

The prime mistake made with respect to building a culture of trust in a business is believing that the aim is to have senior employees trust more junior employees. This is the complete opposite of what is needed, and the core reason that so many corporate cultures lack an element of trust.

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Fox News: Manipulative not News

March 31, 2015 By in Management Tags: 1 Comment

Fox News is arguably the dominant news network in the United States. It is also quite possibly the most hated channel on Earth. Understanding that dichotomy also leads to some interesting business insights.

Although Fox is often accused of reporting biased to the conservative side, it is clearly its political commentary that the anti-Fox crowd finds most objectionable. Studies have shown that Fox News is not as effective at keeping its viewers informed.

Yet despite the channel’s objective failure as an information provider, its viewership stays loyal to the brand and its ideology. A short digression on commentary, or rhetoric, can explain the Fox phenomenon.

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