Lenovo's Acquisition Spree; Vodafone Sells Back

Lenovo recently acquired IBM’s low server business ($2.3 billion) and Motorola Mobility from Google ($2.9 billion), wrapping the two deals up within a week. Lenovo is known for surpassing HP as the largest maker of personal computers; however, the PC market is in steady decline. This acquisition falls into Lenovo’s PC plus strategy—expanding into the international smartphone market with Motorola’s global brand (90% of Lenovo sales are from China). However, Lenovo is going to have to integrate Motorola, which reported losses of 384 million in their last quarter, and the servers that they hope will drive innovation and value in system and software areas such as cloud and cognitive computing, instead of just hardware. This is important in a market where several tech giants are phasing out low end servers for high end servers that can handle more complex tasks.

Vodafone recently approved the sale of its 45% stake in Verizon Wireless, returning $84 billion to Vodafone shareholders; the largest single return of value to shareholders in history. Verizon Communications now has complete ownership of its wireless industry, at the cost of $130 billion, the third largest deal in corporate history. Verizon executives assert that the purchase will give them the financial flexibility to invest in new mobile technologies. Verizon shares were down one cent at $47.68 on the New York Stock Exchange after the news. Vodafone shares closed roughly flat at 223.44 pence in London. After AT&T announced that it was not in talks to buy Vodafone (valued at more than $100 billion) and trading on Vodafone stock dropped 4% in London. Analysts are divided over whether Vodafone can prosper on its own or whether it is better off as a takeover target, especially as the European telecommunications sector faces regulatory uncertainty.
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Brandon Nesfield

Obamacare and Jobs, What's Really Going On?

This past week, the nonpartisan Congressional Budget Office (CBO) released a report that included its projection of Obamacare’s impact on the economy, specifically in labor markets. In Appendix C of the report, the CBO concluded that Obamacare will cause “…a decline in the number of full-time-equivalent workers of about 2 million in 2017, rising to about 2.5 million in 2024.”

Then, the media went crazy.

Headlines such as “ObamaCare could lead to loss of nearly 2.3 million US jobs” (Fox News) and “The Jobless Care Act,” (Wall Street Journal) popped up everywhere. These headlines grossly misrepresented the report and the CBO’s intent behind that statement. The Wall St. Journal should know better.

The CBO did not say 2.5 million Americans would be fired because of the Affordable Care Act (ACA), nor did they claim that employers would seek 2.5 million less employees. This statement means that 2.5 million Americans will voluntarily leave their jobs or not seek employment over the next few 10 years. In CBO Director Douglas W. Elmendorf’s words, “[there] is there’s a critical difference between people who like to work and can’t find a job or have a job that was lost for reasons beyond their control and people who choose not to work.”

Fewer Americans will look for jobs due to Obamacare’s incentives, which are both beneficial and detrimental to society. Democrats point out how an individual willingly leaving their jobs to pursue other things is a positive and that one should not work just to get health insurance. For example, mothers of young children or the elderly may happily leave their job because affordable health care is available elsewhere. Republicans discuss how the subsidies the ACA provides to the poor disincentive work because as income goes up, the amount of subsidies one receives goes down. In that case, it may be better to rely on the government safety net instead of actively seek a job.

For once, both the Democrats and Republicans are probably right. I say probably because the policies within the ACA have never been implemented on such a large scale and unintended and unpredictable outcomes in the labor market are to be expected. The CBO admits, “The actual effects could differ notably.” In the 6 years of debate about the merits of the ACA, there have been too many lies, misrepresentations and dishonesty from both sides. This CBO report could have easily been twisted as “2.5 million new jobs over the next 10 years” and that would have been a distortion of the truth as well. So, whatever the ramifications of the ACA are over the next 1, 10, even 20 years, I recommend following the old saying “believe none of what you hear, and only half of what you see.”
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Luke Wolf 

Analyzing the Sports Cable Bubble and Its Impact on Customers and Teams Alike

In recent years, revenues of many professional sports teams, particularly in Major League Baseball, have increased significantly because of a boom in local television revenues. The values have continued to rise in recent years because of the inflation of America’s collective cable and satellite bill. However, few people fully understand why this is the case. Even if someone had no association to a team or channel, simply by paying for cable television they would be contributing to the cause. Each time a cable bill is paid, the channels collect a small fee. The most highly demanded channels are able to bargain for higher fees. As it turns out, most of these are sports channels. For example, according to Wunderlich Securities, ESPN brings in a staggering $10 billion annually. They gain $3.5 billion from what expected sources, such as television, digital, and magazine advertisements. They bring in the remaining $6.5 billion from cable and satellite affiliate fees. ESPN charges cable companies $5.06 per month per subscriber, which when multiplied by 100 million subscribers gets you to the $6.5 billion figure. Much of this comes from consumers who never so much as think of turning the channel to ESPN. This is the genius, or scam, of the sports cable bubble: tens of millions of customers paying at least $100 a year for sports they never watch but indirectly giving billions of dollars to these industries.

The consequences of these seemingly endless streams of revenue is an example like Time Warner Cable being able to offer the Los Angeles Dodgers $7 billion for the rights to broadcast their games. As a result, the Dodgers payroll, in a league with no salary cap, is essentially infinite. The Dodgers were able to increase their 2013 payroll to a whopping $241.7 million, an unheard of 112% increase from the 2012 figure of $114.1 million. The franchise rises in value, the players make more money, the team wins more games, and, ironically, non-sports fans are paying for most of it. Because of the Dodgers deal, Time Warner is expected to launch a SportsNet LA channel that charges subscribers $5 monthly.

According to Bloomberg BusinessWeek, fees for televised sports are rising almost twice as fast as cable subscriber rates, which putting providers in a bind. They are forced to choose between hiking prices to compensate at the risk of customers leaving, or they must stay faithful to their customers and deal with smaller profits. Consumers and providers alike are beginning to complain publicly about the inequitable qualities. However, little appears to be changing in the near future.
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Frank Luby

A Directionless Sprint

Speculation stirring about whether telecom holding company Sprint Corporation will acquire competitor T-Mobile will soon be put to rest. It was reported yesterday, on February 14, that Sprint executives Masayoshi Son (Chairman) and Dan Hesse (CEO) regrouped their team to discuss the plausibility, or lack thereof, of the potential acquisition. This is after multiple meetings with anti-trust officials from the Justice Department and Federal Communications Commission in Washington, who displayed strong disapproval for the deal. Whereas Sprint believes a merger with T-Mobile will solidify a strong 3rd player to compete with conglomerates Verizon and AT&T in the telecommunications industry, regulators believe that healthy competition requires 4 players who should focus on organic growth. They view T-Mobile as a wild-card competitor that, though much smaller in operations, can put consistent pressure on the others with its speedy LTE network, cheap subscription plans, and ambitious offers to buy out contracts of customers from other. The regulators’ goal is to simply keep a balanced wireless marketplace that will benefit consumers in the long run with innovation and quality service.

Sprint, however, is slowly getting cornered and T-Mobile is ostensibly the most practical way out. The company lost 243,000 subscribers in Q4 2012, and analysts believed the company would lose over 350,000 in Q4 2013. This was primarily due to the fact that Sprint is taking its time with 4G LTE and is currently in the middle of a bumpy network upgrade aimed to handle more capacity at higher speeds for customers. The transition, though necessary, has led to poor voice quality and frequently dropped calls. Fortunately however, Sprint most recent quarterly showed that the company beat analyst estimates by actually adding 58,000 new subscribers and narrowing losses 44 cents per share in the year-ago quarter to 26 cents today. The news was characterized as “better than feared” by Wells Fargo analyst Jennifer Fritzsche, and the market responded as Sprint shares rose 7.4% to $8.26.

The future does not look too bright for the telecom giant. And because this deal is very unlikely to fall through – especially with T-Mobile’s aggressive tactics and recently reported gains – Sprint should target different, cheaper initiatives. The company’s recent Family Plan, a new $25 smartphone offer for large groups of family and friends, is a good start. But in order to truly keep up as a major player, Sprint needs to truly speed up its network restructuring and be creative. For a $30 Billion company, that is much easier said than done.
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Inder Takhar

SEC Lays Down the Law on Former SAC Capital Trade

SEC prosecutors have found former SAC Capital employee Mathew Martoma guilty of insider trading on Thursday February 6th. The prosecution was able to gather testimony from two doctors who have admitted to giving information about the drug to the former SAC employee. Martoma is the latest of eight SAC employee to be found guilty of charges brought about by the SEC. Martoma had allegedly received a tip about a new Alzheimer’s drug that had responded poorly in medical trials.

Prosecutors proved to the jury that Martoma acted illegally on this tip and encouraged SAC Capital to lower its stake in Elan Corp. and Wyeth, the makers of the drug. The results of this medical trial were not published until a month after Martoma received this tip, allowing SAC Capital to avoid nearly $275 million in potential losses on its holdings. The SEC stated that this was the largest insider trading case that they have ever found someone guilty of in a criminal trial. This case is no doubt a large step for the SEC in their campaign to put together a criminal trial against multibillionaire and SAC co-founder Steven A. Cohen.

Prosecutors allege that SAC Capital has, for a long time, encouraged an investing strategy of “gaining an edge” and gathering inside information on its holdings. Cohen was said to have had a twenty-minute conversation with Martoma after he had learned of the drug’s failure. SAC had also paid Mr. Martoma’s legal fees for the trial. SAC Capital is currently barred from managing clients’ money and only manages the money of co-founder Steven A. Cohen. Mr. Cohen is currently facing no criminal charges but is being charged in a separate civil trial for his inability to properly supervise two of his senior employees that have been convicted of insider trading.
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Jack McIlvaine

Business Solution Firm 'Box' Moves Towards IPO

In a month that has seen the tech world react to Microsoft's announcement of a new CEO and earnings reports from both Apple and Google, Box, a business oriented cloud storage firm, has made covert moves towards an IPO. Box filed under a provision of the JOBS Act that allows companies with fewer than one billion dollars in annual revenue to file secretly. Last December, Box completed an initial funding round of $100 million resulting in a $2 billion valuation. Dropbox, Box’s biggest competitor, recently received between $250-$450 million of funding with a $10 billion evaluation. Although it may appear that Box is being dwarfed by its competitor’s sheer size, it’s important to make a distinction between these two company's goals. Box has been very forward in describing itself as a firm geared towards businesses.

The firm has leveraged itself as the premier cloud sharing service for business and enterprise by offering integration with Google Apps and database systems such as Salesforce.com. Although it is much larger, Dropbox lacks Box’s direction and focus. Dropbox prides itself on its large user base but has not yet created a reliable revenue stream. This has not been a problem for Box because it has a stable base of paying users. Dropbox’s user base is comprised of everyday consumers who can manage all their cloud computing needs with the company’s free storage option of up 2 gigabytes. Box’s public offering is slated to take place sometime in April with the goal of raising $500 million. The company's expected expansion of both its cloud capabilities and business integration will make Box a promising investment option once it becomes publicly traded.
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Nick Philip

Can the U.S. Afford the Affordable Care Act?

Democrats and Republicans have again entered into heated debate over the possible side effects of the newly adopted Affordable Care Act. Nonpartisan budget analysts have reported that, starting in 2017, the act will start to push the economy in a negative direction by dampening the supply of labor. Projections show a drop of 2.5 million laborers by the year 2024. This is mainly due to the Affordable Care Act affecting the previous relationship between employment and healthcare. The fact that healthcare is now independent of employment serves as a disincentive for the work force, where individuals are receiving this benefit regardless of their employment status. Furthermore, the lower labor participation rates are affecting the amount of taxable income in the economy. Republicans believe that the decrease in hours worked will have a substantial effect on the amount of tax moneys the government will inherit from income taxes over the next several years. This is certainly a dangerous position, especially with a government that is already looking into the eyes of a $17.2 trillion deficit.

Congressman Hakeem Jeffries

Democrats claim that the subsidies provided by the Affordable Care Act are freeing a large portion of the country from what the call a “job lock”, where individuals are unable to choose their work hours due to their dependence on their employer for healthcare benefits. Also, those who support the law are standing by the statistic that it will be responsible for the coverage of almost 13 million Americans this year alone. Hakeem Jeffries (D., NY) defended the Act; comparing it to the strict regulations put on child labor in the late 1930s. This shrunk labor participation rates, but was a necessary step to relieve the United States of its child labor problem. While many would see this as an extreme exaggeration, it poses the legitimate question of whether or not the law itself is worth the potential harm that it could bring to a slowly recovering US economy.
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Jack McIlvaine 

Silicon Valleys, Mountainous Valuations

Google recently acquired Nest, a smart thermostat maker with $300 million in revenue and no reported profit for 3.2 billion Though Google can afford a high price and high valuations aren’t uncommon in Silicon Valley, purchases like these illustrate how cozy the Valley is and how that coziness contributes to such high prices. Nest was founded in 2010; according to the S&P Capital IQ the company launched three initial investment rounds during which it hoped to raise $150 million in funds. Nest, despite decent sales (reported to be just over one million since 2010) may face difficulties in market penetration—the majority of thermostats are sold through home furnace and air condition repair services, which have longstanding relationships with well-established companies such as Honeywell (a company currently pursuing litigation against Nest for intellectual property violation). Consumers are unaccustomed to self-installation of devices such as thermostats; though Nest boasts its easy-to-install/easy-to-use nature, it is difficult to imagine swaths of average American consumers trading in the ease of repair service installation for a sleeker, shinier thermostat. This large price tag will probably drive up valuations of other similar start-ups and tech giants scramble to find the next big thing within the realm of smart home devices/appliances.

Nest's "Smart" Thermostat

In Silicon Valley, it would appear that nobody wants to be the company that can’t keep up. Google is making a bet on Nest—a very large one at that—and this is nothing new in Silicon Valley, where we’ve seen Facebook shell out $1 billion for Instagram to keep Facebookers where they belong, Google purchase Waze for $1 billion to keep the navigation app away from Facebook, and Yahoo acquire Tumblr for $1.1 billion just to keep up with the social media-sharing Joneses. NYT Dealbook analyst/contributor Steven Davidoff recently elaborated on this trend, noting, "The purchases are driven by a venture community that must feed the beast. Their friends at the few dominant players in technology — Google, Microsoft and Facebook — are all trying to find the next big thing and have core products that are money machines. The money is redirected into these acquisitions that are add-on products with great hype, but are undeveloped. It all builds the Silicon Valley prestige, driving valuations higher." Everyone wins...until the concepts don’t, and the bubble pumped up by the soaring prices bursts. I encourage you to think back to when Yahoo bought broadcast.com for $5.7 billion in 1997, before the dot.com bubble burst, which led to a frenzy of overvalued acquisitions culminating in AOL’s infamous $165 billion dollar, deal with Time Warner. This deal is commonly known as the biggest mistake in corporate history.
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Brandon Nesfield

New Era of Regulation or Business As Usual?

After decades of expansion and high returns, the past handful of years following the global financial crisis have been uncertain at best. Whether its been JP Morgan, Goldman Sachs, or any major firm in between, every week it seems like there’s another settlement in the papers breaking into 10 figures. Today’s victims/villains: Morgan Stanley settled its bond suit with the top U.S. Housing Regulator to the tune of $1.25 billion. In 2011, the Federal Housing Finance Agency filed suit against 18 major financial firms concerning the firms’ roles in the selling of over $200 billion in subprime securities, in addition to misreporting the quality of the loans backing those securities. The sum represented the largest financial crisis related legal settlement for the Morgan Stanley. Of the 18 firms, Morgan Stanley is now the eighth to settle these particular claims. The sum ranks third in worth, behind only the $1.9 billion and $4 billion Deutsche Bank and J.P. Morgan Chase paid in the fall, respectively.

J.P. Morgan CEO Jamie Dimon (R) and family pictured in their Christmas card, which has been called "tone-deaf" for its opulence; a sign of generous compensation amidst regulatory struggles and accountability concerns

Despite the evident tightening of regulation and supervision in the industry, the legal expenses surrounding the major firms come in sharp contrast to the executive paychecks and bonuses. In 2013, Morgan Stanley CEO James Gorman received a stock bonus of $5 million, double that of the previous year. Perhaps most shocking was the executive compensation given to J.P. Morgan’s Chairman and CEO, Jamie Dimon. Last week Dimon took home his base level salary of $1.5 million, coupled with board-voted addition of $18.5 million in restricted stock. This was a raise of nearly 75%. Critics have been quick to condemn the decision, alleging that the raise reflects the continued lack of accountability on Wall Street. The board has various reasons behind the decision. Namely, Dimon’s leadership in guiding the firm through the legal mess, as well as J.P. Morgan’s stock beating the S&P 500, which climbed 30% on the year. Perhaps more polarizing is notion, popular among J.P. Morgan executives, that the firm is receiving unfair treatment for the wrongdoing of other firms, specifically Bear Stearns. Nevertheless, the executive compensations reflect the general idea that, despite record legal settlements, business is indeed running as usual.
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Arthur Gosnell

Campus Enterprises: A Multifaceted Approach to Student Services

Campus Enterprises' Logo

Campus Enterprises is Duke University’s largest, most successful and widely known student-owned and operated business. Originally named Devil’s Delivery Service, Campus Enterprises was founded in 1994 by two Duke Students, Robert Benson and Scott Castle, making it the oldest student run business at Duke.

Although Campus Enterprises was first conceived as a food delivery service for Duke’s student community, the company made a critical transition in the Fall of 2010. Due to the rapid rate of its revenue growth, the company underwent a major corporate restructuring to fully accommodate its future potential. It was then that Devil’s Delivery Service, a Sub-Chapter S Corporation, officially evolved into Campus Enterprises, a Limited Liability Company. Since this transition period, the company has expanded to also provide laundry, screen-printing, marketing, catering, technology, cleaning, note-taking and online ordering services. Some of Campus Enterprises’ most notable business partners are Laundrymen, a laundry and dry cleaning delivery service, Radoozle, an online dining delivery service on food points, and BluePrint, a custom apparel screen-printing service. Newer ventures include BlueNotes, a class note-taking and distributing service, and Maid My Day, a professional cleaning service.

Currently, Campus Enterprises is comprised of 42 shareholders whose responsibility it is to generate about $500,000 of revenue this year for various business partners are restaurant clients. Each shareholder makes an initial one-time investment of $9,000 to buy into the company. The shareholder money is then used to provide the Campus Enterprises services. Once current shareholders graduate, they sell their share back to new members for the same price at which they bought it. This system functions as an insurance arrangement for members’ original share investments.

Campus Enterprises’ current Spring 2014 Officers are as follows: the company’s Chief Executive Officer is Griffin Cooper (Jr), Mia Hopper (Jr) is serving as Chief Financial Officer, and the two Chief Operating Officers are Jack Heller (So) and Rahim Gokal (So).
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Sarvi Shahbazi

Getting Rid of the Debt Ceiling

Three decades of bipartisan debt ceiling raises

The US government has been in debt every year since 1865. Every single President has added to the national debt. No other developed country but Denmark has a debt ceiling. The US debt ceiling has been raised 70 times since 1960, without ever defaulting. So when the limit needs to be raised again on February 7th, it should be the last time. We should do away with the relic that is the debt ceiling.

For those who are unaware, the US debt ceiling is an amount set by Congress that the US Treasury is allowed to issue. However, the debt ceiling is set separately from the expenditures authorized by Congress. Therefore, when the amount Congress authorizes to spend exceeds the borrowing limit, the limit needs to be raised or the US defaults on its debt. Defaulting has catastrophic effects on both the domestic and international economy.

The debt ceiling was initially meant to make it easier for the US government to borrow money in times of unexpected war or expense. Today, it is a political bargaining chip that has the power to blow up the economy. In the past three years, Congressional stalemate over raising the debt ceiling has led directly to a downgrade of the US credit, a government shutdown, and a stock market crash. Now imagine if we crossed it.

The effects of defaulting on our debt are terrifying. Both short-term and long-term interest rates will spike, stock markets will lose confidence and drop, it will become more expensive for the US to borrow money, and countries may begin to question a dollar-based global economy. Now, why would risk these incredible consequences so some partisans can make a political statement? We shouldn’t.

The US government’s budget is extremely flexible. Entitlements have unpredictable growth depending on how much people go to the doctor, Presidents can ask for emergency funds and predicting the amount the US collects in taxes is an inexact science. It is ludicrous to set a hard limit on the amount we can borrow when, regardless of whether Congress authorizes a higher debt ceiling, we still owe someone money. We owe social security checks to the elderly, Medicare reimbursement to doctors, interest payments on foreign loans and countless more necessary payments.

I agree that the amount the US borrows does need to be reined in, but this is not the way to do it. Leaving the debt ceiling in place puts the minority party, currently the Republicans, but previously the Democrats, in a position to hold the economy hostage by not paying bills we have already committed to pay. Not paying our commitments is decidedly un-American. How can we hold other countries to a high standard of economic responsibility and critique fiscal policy abroad if we do not pay our own debts to the citizen next door? So when you here Speaker Boehner and Republicans discuss this week how they will demand concessions in return for allowing the US to pay their global commitments, remember that this should all go away.
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Luke Wolf

Janet Yellen & The Federal Reserve

Janet Yellen is sworn in on Capitol Hill

Janet Yellen has officially been sworn in as the new chair of the Federal Reserve, replacing Ben Bernanke. Yellen is the first woman to hold the position, and faces several obstacles in her initial year as chair. Yellen’s primary objective will be to wind down the Federal Reserve’s bond-buying stimulus program without harming the nation. Although the American economy has been improving recently, it is still very fragile. Yellen is therefore in an incredibly challenging place to enact economic policy that is stable yet effective. The phased reduction of the Federal Reserve’s $85 billion a month Quantitative Easing program has already created issues in emerging financial markets. Quantitative Easing has kept US interest rates low and has therefore resulted in large outflows of cash from the United States into other currencies, as people search for more substantial returns abroad. It will be highly interesting to follow how Yellen’s appointment will shift US economic policy, and how this resulting policy will affect not only our domestic economy, but the global economy. Every action has a reaction, and Yellen’s position is undoubtedly a powerful one.

Yellen is an established economist, and is professor emeritus at the University of California at Berkeley specializing in business and economics. Her credentials suggest that she may be able to respond to the challenges at hand, regardless of the incredible complexity of the situation. However, Bernanke’s Quantitative Easing program marked a period of unprecedented government stimulus, and may provide Yellen substantial, unforeseen obstacles that could threaten the success of her office.
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Chris Geary