Mercantilism, North America, Pontiac’s Rebellion, American Revolution, Northwest Territory, George Rogers Clark, Louisiana Territory

Posted by PITHOCRATES - May 31st, 2012

Politics 101

The French claimed great Territories in the New World but they did not Settle them nor could they Defend Them

In the Age of Discovery the Old World discovered the New World.  The Portuguese bumped into Brazil while sailing around Africa.  And they stayed awhile.  Which explains how the language from tiny Portugal is one of the top ten spoken languages in the world today.  Because of Brazil.  Population 205,716,890 in 2012.  The Spanish pretty much discovered and settled the rest of South and Central America.  Working their way up the Pacific coast of North America.  And into Mexico, Texas and Florida.  Because of this Spanish is now the 4th most spoken language in the world.  The British discovered and settled North America east of the Appalachians between Maine and Georgia.  They also settled parts of Canada south of the Hudson Bay.  And some of the Maritime Provinces.  Today English is the 2nd most spoken language in the world.  The French also came to the New World.  But they weren’t as successful.  Today French is only the 10th most spoken language in the world.

The Age of Discovery was also the age of mercantilism.  Which is why the Old World was racing to settle the New World.  So they could establish colonies.  And ship back raw materials to the mother country.  And in Spain’s case, all the gold and silver they could find.  Which they found a lot of.  Mercantilism is a zero-sum game.  To maximize the export of manufactured goods.  And to maximize the import of raw materials and bullion.  To always maintain a positive balance of trade.  And whoever had the most overseas colonies sending raw material back to the mother country won.  And as they expanded throughout the New World they eventually began to bump into each other.  As well as the Native Americans.  Who weren’t mercantilists.  But hunters and gatherers.  Like all Europeans were some 5,000 years or so earlier.  Before they became farmers.  Moved into cities.  Where they took control of their environment.  And became more efficient.  Growing ever larger populations on smaller tracts of land.  Which proved to be a great threat to the Indians.  For when these Europeans took their land they also increased their numbers.  Greatly.  And this fast growing population had the latest in war-fighting technology.

Soon they were stepping on each others’ toes in the New World.  The British and the Spanish north of Florida.  The British and the French between the Mississippi River and the Appalachians.  In New Brunswick.  And large parts of Ontario and Quebec.  A lot more territory was in dispute between the British and the French.  And that’s because the French claimed so much territory in North America.  Their claims included the lands around the St. Lawrence Seaway.  All the land around the Great Lakes.  And pretty much the total watershed into the Mississippi River.  The French had profitable business in the fur trade.  They used the rivers in North America for that trade.  With a few forts scattered along the way.  Where they traded with the Indians.  But the big difference between the French and everyone else is that the French claimed the land.  But they didn’t settle it.  Which made the Native Americans tolerate them more than the other Europeans in the New World.  But in the days of the mercantilist empires that was a problem.  Because everyone wanted everyone else’s land.  And if it wasn’t settled with large and growing populations, someone else was just going to take it.

The Proclamation of 1763 and the Quebec Act of 1774 tried to make Peace with the Indians but Inflamed the Americans

And that’s what happened in the French and Indian War (1754–1763).  The European powers came into conflict with each other over their North American territories.  The British came out the big winners.  And the French were the big losers.  Losing pretty much everything east of the Mississippi to the British.  And everything west of the Mississippi to Spain.  The various Indian tribes fought alongside the various European powers.  But it is the fighting on the side of the French that we know them for in this war.  Where their fighting against the British Americans was some of the cruelest fighting in the war.  For the Indians liked the non-settling ways of the French.  While they didn’t care for the settling ways of the American colonists at all.  Who kept encroaching on their hunting grounds.  So at the conclusion of the French and Indian War the Native Americans were restless.  Something the British were keenly aware of.  And after the long and expensive war they just fought they didn’t want a return to hostilities.  So King George III issued the Royal Proclamation of 1763.  Setting the border between the British American colonists and the Indian lands along the watershed of Appalachia.  Lands where the rivers flowed to the Atlantic Ocean were the American colonists’ lands.  Lands where the rivers flowed into the Mississippi River and its tributaries (east of the Mississippi) were Indian lands. 

This did not go very well with the American colonists.  For they planned to expand west until they could expand west no further.  At the shore of the Pacific Ocean.  Especially Virginia.  Who wanted to expand into Kentucky.  And into the Ohio Country (across the Ohio River from Kentucky).  Before the Proclamation of 1763 could even go into affect the Indians rose up in the Great Lakes region, the Illinois Country and Ohio Country.  Where the British displaced the French.  Pontiac’s Rebellion (1763–66).  A rather nasty and brutal war where the Indians killed women and children as well as prisoners.  And the British used biological warfare against the Indians.  Giving the Indians smallpox-infested blankets.  In 1774 Parliament passed the Quebec Act.  Which did a lot to further annoy the American colonists.  Especially that part about extending the province of Quebec (the former French territory from Labrador all the way to the Great Lakes region) south into the Ohio and Illinois country.  Many lumped the Quebec act in with the Intolerable Acts of 1774 which were to punish the colonists for the Boston Tea Party.  All these acts of Parliament and proclamations of the Crown failed in one of their main objects.  Maintaining the peace on the frontier.  One year later there was another shooting war in North America.  And this one did not end well for the British.

The American Revolutionary War evolved into a World War.  Once the Americans defeated a British army at Saratoga the French joined the American cause and declared war on Great Britain.  Eager to get back their North American territories.  The Spanish would join the French in alliance and declared war on Great Britain.  Primarily to settle some old scores in the Old World as opposed to helping the American cause.  They had the lands west of the Mississippi and control of that same river.  They had no desire to see the Americans advance any further west.  In fact, they wanted to expand their territory at the expense of both the Americans and the British.  The Indians, meanwhile, saw the Americans as the greatest threat and allied with their two-time past enemy.  The British.

The Indians were Little More than Bystanders while the Europeans Traded their Land with each Other

The war in the frontier lands of the West was as nasty and brutal as ever.  The British coordinated their war effort against the Americans from their frontier outposts.  Where they traded with their Indian allies.  Some even paying the Indians for each scalp they brought back from their raids.  And so the Indians crossed the Ohio River into Kentucky.  Throughout the war.  And attacked these frontier settlements.  While the Americans fought a defensive war.  Until one man arose.  Who believed the strongest defense was a strong offense.  And he took the war to the Indians and the British in the West.  Saving Kentucky.  And conquered the Northwest Territory. 

George Rogers Clark’s plan for conquering the Northwest was bold.  First take Vincennes (in southern Indiana near the Illinois border).  Travel up the Wabash River.  Down the Maumee River.  And then on to Detroit.  After taking Detroit head north to Michilimackinac (on the northern tip of Michigan’s Lower Peninsula).  The Virginian authorities liked the plan.  And commissioned him colonel in the Virginian forces.  And authorized him to conquer the Northwest.  For Virginia.  So Clark led his men down the Ohio River.  And traveled all the way to Kaskaskia near the Mississippi River in southern Illinois.  Not far from St. Louis.  Took it.  And marched to Vincennes.  And took Fort Sackville at Vincennes.  Shortly thereafter Henry Hamilton (who had a reputation for buying scalps from the Indians), governor of Detroit, Left Detroit and headed to Vincennes.  Gathering Indians along the way.  Recaptured Vincennes.  Then Clark returned and in one of the most fabled actions of the entire Revolutionary War took back Vincennes.  Despite the British and Indians greatly outnumbering Clark’s force.  Detroit lay open.  But Clark did not have the men or provisions for that conquest.

Meanwhile the Spanish were looking to cash in on their alliance with France.  And moved against British outposts from New Orleans.  Taking Baton Rouge.  Natchez.  Mobile.  And Pensacola.  To turn back the Spanish Governor Sinclair of Michilimackinac gathered a force and headed to the Spanish outpost St. Louis.  With the ultimate goal of taking New Orleans.  It did not go well.  The following year the Spanish launched an offensive of their own to take Detroit.  They got as far as St. Joseph on the other side of Michigan’s Lower Peninsula.  Around the bottom of Lake Michigan from Chicago.  A lot of land changed hands in the Northwest.  But thanks to Clark much of it remained in American hands at the end of the war.  Who came out the big winners in this war.  The British ceded all their claims east of the Mississippi to the Americans.  Including all of the Illinois and Ohio country.  Including Michigan and the lands surrounding the Great Lakes south of Canada.  The French did not drive the peace as they had hoped.  And recovered none of their North American territories.  The Spanish emerged with pretty much what they had when they entered.  Only with the Americans across the Mississippi instead of the British.  Who were much more interested in westward expansion than the British.  But they didn’t have to worry about the Americans crossing the Mississippi.  For Napoleon strong-armed the Louisiana Territory from the French in exchange for some land in Tuscany.  Who would later sell it to the Americans.  While being rather vague on the exact boundaries.  Which the Spanish would have to worry about in the years to come as the Americans headed west.  Towards Spanish country on the west coast.

Of course the Indians were the greatest losers.  For they were little more than bystanders while the Europeans traded their land with each other.  Making the Native Americans ever more restless.  And unwilling to give up their hunting and gathering ways.  Which sealed their faith.  For while they retreated west the American population exploded.  Due to their efficient use of the land.  It was the New World against the Very Old World.  Modern farming civilizations displaced the hunters and gatherers everywhere in the world.  A trend that started some 5,000 years earlier.  And the history of North America would be no different.  The Indian ways since then have been fast disappearing.  The Indian languages were so rarely spoken in the 20th century that the code based on it was the one code the Japanese couldn’t crack during World War II.

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Silicon, Semiconductor, Electrons, Holes, PN Junction, Diode, LED, Photon, 7-Segment LED and Full-Color Flat Panel LED Displays

Posted by PITHOCRATES - May 30th, 2012

Technology 101

Applying a Voltage across a PN junction to Create a Forward Bias Pushes Electrons and Holes towards the Junction

There’s gold in them thar Hills.  And silicon in the valley.  California has been a fountain of wealth.  Much of which they built from two materials located on the periodic table.  Atomic number 79.  Gold.  Or ‘Au’ as it appears on the periodic table.  And atomic number 14.  Silicon.  Or ‘Si’ as it appears on the periodic table.  Both of these metals proved to be valuable.  One by its scarcity.  One by what we could do with it.  For it was anything but scarce.  Silicon is the second most common element behind only oxygen.  But this commonly found material proved to be a greater font of wealth for California.  For it fueled the semiconductor industry.  For when we doped it with impurities we produced negatively (N-type) and positively (P-type) charged material.  Bringing the N and the P together gave us the PN junction.  Giving us the diode, transistor and integrated circuit.

The miracle of semiconductors occurs at the atomic level.  Down to the electrons orbiting the atom’s nucleus.  The nucleus contains an equal number of positively charged protons and neutrally charged neutrons.  The number of protons gives us the atomic number.  Changing the number of neutrons gives us isotopes.  Radioactive material has more protons than neutrons.  Uranium-235 is an isotope.  The stuff that made the atomic bomb dropped on Hiroshima.  Electrons orbit the nucleus.  In discrete energy levels.  The orbits closest to the nucleus have the lowest energy levels.  The orbits father away from the nucleus have higher energy levels.  Most of these orbits are ‘full’ of electrons.  The outer electron shell when ‘full’ is inert.  An outer shell that isn’t ‘full’ or has extra electrons is active.  And can chemically react.  Forming molecules.  When chemicals come into contact with each other and form molecules it is these electrons in the outer orbits (or valence electrons) that move into and out of the orbits of the different chemicals.  That is, the different elements share these valence electrons.

This is what we do when we dope silicon with impurities.  We either remove electrons from the valence shell to create a net positive charge.  Or we add electrons to the valence shell to create a net negative charge.  Giving us P-type and N-type material.  At the PN junction the N-type material loses its excess electrons to the P-type material across the junction as the empty holes in the valence shell attract the excess electrons.  As electrons leave the valence shells in the N-type material they leave holes in the valence shell where they once were.  Or, in the world of electronics, as electrons flow one way holes flow the other.  When we apply a voltage across a PN junction to create a forward bias (negative voltage applied to N-type and positive voltage applied to P-type) we push electrons and holes towards the junction.  If the forward bias is great enough they will continue all the way through the junction and into the material on the far side.  Where electrons will combine with excess holes.  And holes will combine with excess electrons.  Creating an electric current.  If we apply a voltage to create a reverse bias we will pull electrons and holes away from the PN junction.  And there will be no electrical current. We call such a PN device a diode.  A very important and indispensible device in electronics.

Placing Seven LEDs into a Figure-Eight Pattern created the Seven-Segment LED

Now back to those discrete energy levels.  There is another useful property we get when electrons move between these energy levels.  Electrons absorb energy when they move to a higher energy level.  And emit energy when they move to a lower energy level.  We make use of this property in fluorescent lighting.  A charged plasma field in a fluorescent lamp excites a small amount of mercury in the lamp.  As electrons fall into lower orbits in the mercury atoms they release invisible short-wave ultraviolet radiation.  The phosphor coating on the inside of the lamp absorbs this radiation and fluoresces.  Creating visible light.  By using different materials, though, we could see the energy (a photon) emitted by an electron falling into a lower energy level.  We have been able to move the wavelength of this photon into the visible spectrum.  The first commercial application to convert these photons into visible light was a device that gave us a red light.  That device was that important and indispensible PN-junction.  The diode.  And the use of different materials other than silicon moved these photons into the visible spectrum.  Giving us the light-emitting diode.  Or LED.

The first LEDs were only red.  Then we developed other colors using different materials.  Shifting the wavelength of the photon through all colors of the visible spectrum.  Being low-power devices, though, the intensity of light emitted was limited.  So an LED required careful mechanical construction and optics.  To direct the light out of the material forming the PN junction.  With a reflector behind the junction.  And a lens above.  To aim and diffuse the light.  And to prevent it from reflecting back into the material where it may be dissipated as heat.  Early use of LEDs was for indicator lights.  The low power consumption meant little heat was generated as with an incandescent lamp.  Which worked well in the temperature sensitive computer world.  Placing 7 LEDs into a figure-eight pattern created the seven-segment LED display.  With a rectangular shaped piece of translucent plastic above each LED you could see a bar of light for each light emitting diode.  Creating a forward bias on certain bars in the seven-segment display created the numbers we saw on our first calculators and digital watches.

An LED could produce a similar radiation like in the fluorescent lamp.  Using that radiation to fluoresce a phosphor coating inside a lamp to produce white light.  Similar to the fluorescence lamp.  Only while using less power.  Mixing the emitted light from red, green and blue (RGB) LEDs also produced white light.  Further improvements allowed us to emit whiter and brighter lights.  Allowing brighter lamps that consumed less power than the compact fluorescent lamps which were energy saving alternatives to the incandescent lamps.  With the lower power consumption of LEDs creating less heat we expanded the lifespan of lighting sources made from LEDs.  Using them to increase the service life in lamps inconvenient to change.  Like in traffic signal lights over busy intersections.  To the taillights in tractor trailers.  Where anytime spent not hauling freight was lost revenue.

We made Full-Color Flat Panel Displays from LEDs by combining Red, Green and Blue LEDs into Full-Color Pixel Clusters

The market didn’t demand these developments in semiconductors or LEDs.  For the most part the market didn’t even know this technology existed.  But the entrepreneurs gathering in Silicon Valley did.  They had some great ideas of what they could do with this new technology.  All they needed was the capital to bring these ideas to market.  It was risky.  The technology was good.  But could they use it to make useful things at affordable prices?  And would the people be so enamored with the things they built that they would buy them?  There were just too many unknowns for conservative bankers to take a risk.  But thanks to venture capitalists those entrepreneurs got the capital they needed.  Brought their ideas to market.  Created Silicon Valley.  And the modern world we now take for granted.

They continue to advance this technology.  Creating full-color flat panel displays.  By combining red, green and blue LEDs into full-color pixel clusters.  Which, unlike an LCD flat panel display, does not need a backlight as they produce their own light.  So these panels are thinner and use less power than LCD displays.  Making them ideal for the displays in our cellular devices for they allow more battery life between charges.  They also have wide viewing angles.  People looking at these displays from near perpendicular viewing angles see nearly the same quality of picture as those viewing directly in front.  Making them ideal for use in stadiums.  The video replays you see on that mammoth flat panel display in the new Dallas Cowboy stadium is an LED flat panel display.

All of this from joining two differently-charged semiconductor materials together.  Creating that all important and indispensible PN junction.  The foundation for every electronic device.  And of Silicon Valley itself.

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Balance Sheet, Financial Ratios, Private Equity, Toys “R” Us, Bain Capital, Leveraged Buyout and Initial Public Offering

Posted by PITHOCRATES - May 29th, 2012

History 101

Private Equity guides a Business foundering in Rough Seas into a Safe Harbor to Refit it for Profitability

The balance sheet is the one of the two most important financial statements of a business.  It’s a snapshot in time of the financial position of a company.  In the classical format all assets are on the left side.  And all liabilities and equity are on the right.  And the total value of all assets equals the total value of all liabilities and equity.  In other words the business bought all of their assets with money raised by borrowing (liabilities), with money raised by selling stock (equity) or with money generated by the business (retained earnings/profits). 

Everything you ever wanted to know about a business you can find on the balance sheet.  Through numerous financial ratios you can determine if the business is using their assets efficiently.  Or have too many assets that cost more to maintain for the revenue they produce.  You can tell if a business has too much debt.  Or has so little debt that new debt can finance growth and expansion.  Which could attract new equity investors for further growth.  You can see if they’re matching the terms of their debt with the life of their assets.  Or if they’re taking on long-term debt obligations to provide short-term working capital.  A review of a firm’s balance sheet can also tell how well the management team is doing.  Or how poorly.

The financial picture the balance sheet provides of a business is an objective picture.  It gives an outsider a different view of the company than an insider.  Who may have a more subjective view.  They may not want to shutter a poorly utilized factory because of pride, sympathy for the employees or unfounded hope that business will improve soon.  So they will risk losing everything by not accepting that they must let some things go.  Like a cargo ship foundering in rough seas.  To save the ship and most of its cargo a captain may have to jettison some cargo.  If he or she doesn’t the captain can lose the ship.  The cargo.  And the lives of everyone on board.  Perhaps having a life or death decision in the balance makes it easier to make those hard decisions.  Perhaps that’s why some CEOs can’t let some things go.  Because they never accept the seriousness of their situation.  Perhaps this is why an outsider can read a balance sheet and see what the CEO can’t.  And act.  Like the captain of a ship foundering in rough seas.  And this is what private equity does.  Guides a foundering business into a safe harbor.  Refits it.  And then re-launches it on a course of profitability.

Toys “R” Us

Toys “R” Us was hitting its stride in the Eighties.  They were dominating the retail toy business.  Even expanding internationally.  And into other lines.  Children’s clothing.  Kids “R” Us.  And baby products.  Babies “R” Us.  There was no stopping them.  The secret to their success?  Sell every hot new toy kids wanted.  And sell it cheap.  At or below cost.  Using these loss leaders to get people into their stores.  Where they could sell them more expensive goods in addition to the most popular ‘must have’ toys. 

Then came the Nineties.  And serious competition.  From the big department stores, discount chains and warehouse clubs.  Target.  Wal-Mart.  Costco.  And then the Internet.  Who could use the Toys “R” Us strategy just as well.  And do them one better.  Toys “R” Us focused on selling the ‘must have’ toys at the lowest price.  Where customers came in knowing what they were looking for.  Finding it.  And heading to the checkout.  With a plan like that you don’t need customer service.  So when the competition matched them on selection and price they also threw in better customer service.  Wal-Mart surpassed Toys “R” Us.  Which was by then losing both profitability and market share. 

In 2004 a consortium of private equity (KKR and Bain Capital) and Vornado Realty Trust bought Toys “R” Us for $6.6 billion in a leveraged buyout.  And they turned the corporation around.  With a new management team.  Made the corporation more efficient.  In the brick and mortar stores as well as online.  The company is better and stronger today.  But it has delayed its Initial Public Offering (IPO) for about 2 years now due to a couple of lackluster Christmas seasons during the Great Recession.  They will use the capital raised from the IPO to pay down the debt from the leveraged buyout now sitting on Toys “R” Us’ balance sheet.  Making the turnaround complete.  Allowing the private equity firms to exit while leaving behind a healthier and more profitable company.

The Goal of the Leveraged Buyout was to make Toys “R” Us a Stronger Company

Private equity was successful at Toys “R” Us because Toys “R” Us was a good company.  From 1948 it consistently did the smart thing and grew into the giant it is.  But then it matured.  And the market changed.  Like a ship foundering in rough seas they just needed a little help to captain them through those rough seas.  And that’s what private equity did. 

Many will criticize the sizable debt they’ve left on their balance sheet.  But the plan was always to take the company public again.  Using the proceeds from the IPO to clean up the balance sheet.  Yes, the equity partners will also make a fortune.  But Toys “R” will emerge from this process a stronger company.  Which was the goal of the leveraged buyout.  They did not chop up the company and liquidate the pieces.  They purchased it in 2005.  And the company is still around today in 2012.  What have they been doing all this time?  Trying to make the company the best it can be.  So they can profit greatly from the IPO. 

No doubt the balance sheet of Toys “R” Us has never looked better.  Other than the debt added for the leveraged buyout.  Which they have been able to service since 2005.  So clearly the company is doing something right.  And just imagine how well they will do after they clean that debt off of their balance sheet.  After the IPO.  Suffice it to say that our grandchildren will be shopping there for their own children one day.

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Venture Capital and Private Equity

Posted by PITHOCRATES - May 28th, 2012

Economics 101

An Idea is only an Idea unless there’s Capital to Develop it and a Business Plan

People put money in the bank to save it.  And to earn interest.  To make their savings grow.  So they can afford a down payment on a house one day.  Or start up a business.  To start a college fund.  Or a variety of other things.  They put their money into a bank because they have confidence that the bank will repay that money whenever they want to withdraw it.   And confident that the bank will earn a profit.  By prudently loaning out their deposits in business loans, mortgages, equity loans, etc.  So the bank can pay interest on their savings.  And make it grow.  While not risking the solvency of the bank by making risky loans that people won’t be able to repay.  With responsible saving and responsible lending both parties achieve what they want.  And the economy grows.

A high savings rate means banks can make more loans.  And businesses can borrow more to expand their businesses.  This is a very critical element in capitalism.  Getting capital to the people who need it.  Who can do incredible things with it.  Create new jobs.  Develop a new technology.  Find a better way to use our limited resources.  Bringing consumer prices down and increasing our standard of living.  Because when prices go down we can buy more things.  So we don’t have to sacrifice and go without.  We have a higher standards of living thanks to capitalism.  And the efficient use of capital.

As technology advanced individuals had more and more brilliant ideas.  But an idea is only an idea unless there’s capital to develop it.  And a business plan.  Something a lot of brilliant entrepreneurs are not good at.  They may think of a great new use of technology that will change the world.  Their mind can be that creative.  But they don’t know how to put a business plan together.  Or convince a banker that this idea is gold.  That this innovation is so new that no one had ever thought of it before.  That it’s cutting edge.  Paradigm shifting.  And it may be that and more.  But a banker won’t care.  Because bankers are conservative with other people’s money.  They don’t want to loan their deposits on something risky and risk losing it.  They want to bet on sure things.  Loan money to people that are 99% certain to repay it.  Not take chances with new technology that they haven’t a clue about.

Venture Capitalists make sure their Seed Capital is Used Wisely so it can Bloom into its Full Potential

Enter the venture capitalists.  Who are the polar opposite of bankers.  They are willing to take big risks.  Especially in technology.  Because new technologies have changed the world.  And made a lot of people very wealthy.  Especially those willing to gamble and invest in an unknown.  Those who provide the seed money for these ventures in the beginning.  That’s their incentive.  And why they are willing to risk such large sums of money on an unknown.  Something a banker never would do.  Who say ‘no’ to these struggling entrepreneurs.  And tell them to come back when they are more established and less risky. 

This is responsible banking.  And this is why people put their money into the bank.  Because bankers are conservative.  But there is a price for this.  Lost innovation.  If no one was willing to risk large sums of money on unknowns with brilliant ideas the world wouldn’t be the same place it is today.  This is what the venture capitalists give us.  Innovation.  And a world full of new technology.  And creature comforts we couldn’t have imagined a decade earlier.  Because they will risk a lot of money on an unknown with a good idea.

Most venture capitalists have been there before.  They were once that entrepreneur with an idea that turned it into great success.  That’s part of the reason they do this.  To recapture the thrill.  While mentoring an entrepreneur into the ways of business.  Like someone once did for them.  But it’s also the money.  They expect to make a serious return on their risky investment.  So much so that they often take over some control of the business.  They do what has to be done.  Make some hard decisions.  And make sure they use their investment capital wisely.  Sometimes pushing aside the entrepreneur if necessary.  To make sure that seed capital can bloom into its full potential.  Perhaps all the way to an initial public offering of stock.  And when it does everyone gets rich.  The entrepreneur with the good idea.  And the venture capitalist.  Who now has more seed capital available for other start-ups with promise.

The Goal of the Private Equity Firm is to Get In, Fix the Problems and Get Out

Venture capital belongs to the larger world of private equity.  Where private equity investment firms operate sort of like a bank.  But with a few minor differences.  Instead of depositors they have investors.  Instead of safe investments they have risky investments.  Instead of low returns on investment they have high returns on investment.  And instead of a passive review of a firm’s financial statements by a bank’s loan officer they actively intervene with business management.  Because private equity does more than just loan money.  They fix problems.  Especially in underperforming businesses.

A mature business that has seen better days is the ideal candidate for private equity.  The business is struggling.  They’re losing money.  And they’ve run out of ideas.  Management is either blind to their problems or unable (or unwilling) to take the necessary corrective action.  They can’t sell because business is too bad.  They don’t want to go out of business because they’ve invested their life savings to try and keep the business afloat.  Only to see continued losses.  Their only hope to recover their losses is to fix the business.  To make it profitable again.  And selling their business to a private equity firm solves a couple of their problems fast.  First of all, they get their prior investments back.  But more importantly they get hope. 

The private equity firm uses some of their investment capital to secure a large loan.  The infamous leveraged buyout which has a lot of negative connotations.  But to a business owner about to go under and lose everything the leveraged buyout is a blessing.  And it’s so simple.  A private equity firm buys a business by taking on massive amounts of debt.  They put that debt on the business’ books.  Debt that future profits of the business will service.  Once the equity firm does its magic to restore the business to profitability.  Starting with a new management team.  Which is necessary.  As the current one was leading the firm to bankruptcy.  They may interview people.  Identify problems.  Find untapped potential to promote.  They may close factories and lay off people.  They may expand production to increase revenue.  Whatever restructuring is necessary to return the firm to profitability they will do.  Their goal is to get in, fix the problems and get out.  Selling the now profitable business for a greater sum than the sum of debt and equity they used to buy it.

But with great risk comes the chance for great failure.  When it works it works well.  Producing a huge return on investment.  But sometimes they can’t save the business.  And the firm can’t avoid bankruptcy.  The business then will be liquidated to repay the banks who loaned the money.  While the equity the firm invested is lost.  Which is why they need to make big profits.  Because they suffer some big losses.  But they typically save more businesses than they fail to save.  And the businesses they do save would have gone out of business otherwise.  So in the grand scheme of things the world is a better place with private equity.

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The Australian Government avoids using ‘Carbon Tax’ in Television Ads

Posted by PITHOCRATES - May 27th, 2012

Week in Review

You know a tax is unpopular when you buy advertising to sell the subsidies you can get to avoid paying that tax.  Without mentioning that tax by name (see Tax focus groups don’t test the c-word by AAP posted 5/28/2012 on The Australian).

THE Gillard government did not test the term carbon tax in focus groups for a television advertisement promoting its household assistance package.

The government is spending $36 million over two years on print, radio and television ads to sell the package, which aims to cushion the financial impacts of the carbon tax.

Assistance payments already have begun to land in bank accounts even though the tax does not begin to operate until July 1…

The department’s deputy secretary, Felicity Hand, said the government decided the campaign should primarily focus on the payments.

“There had been a lot of public relations activity previously that had linked household assistance package to clean energy future and carbon pricing,” she said.

Contextual information about the carbon tax was available at a website and if people phoned the hotline number.

Focus group testing.  Imagine that.  The carbon tax is so toxic and unpopular that the government is desperately trying to cushion the financial impact of it.  With some pretty commercials.  I guess to make you feel like you’re making a difference while you’re sitting at home with less of your earnings to spend because of that new carbon tax.  But they dare not mention the c-word.  Because, apparently, the people don’t want anything to do with that environmental BS.  The Australians are a hearty breed.  And more than a few got their ass kicked by the outback.  And yet that environment is so fragile that watching television at night might kill it.  Unless they pay a carbon tax on their electric bill. 

Amazing how all of government’s solutions come down to this.  Taking away our earnings for our own good.  And, of course, lying to us.  For the focus group testing tells them that telling us the truth will make us reject them and their silly policies.

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The Majority of Scots wish to remain part of the United Kingdom

Posted by PITHOCRATES - May 27th, 2012

Week in Review

According to the polls the Scottish people want to remain part of Britain (see Just one in three Scots wants independence from Britain, poll shows by Simon Johnson posted 5/25/2012 on The Telegraph).

An opinion poll published by Alistair Darling, the former Chancellor, showed only 33 per cent of voters in Scotland want independence and 57 per cent are opposed…

Mr Salmond will be joined in Edinburgh this morning by celebrities and the leaders of minor left-wing parties to formally start his bid to end the 305-year-old Union between England and Scotland…

Mr Darling’s publication of the The YouGov poll, which also showed more people think a separate Scotland would be worse off financially, was timed to undermine their message…

Nearly half of respondents (47 per cent) said they thought Scotland would be financially worse off after separation compared to only 27 per cent who said it would be wealthier. Thirteen per cent said independence would make no difference.

The finances of an independent Scotland would depend on a couple of things.  First of all there’s Britain’s debt.  Trying to apportion Scotland’s share of that would be more an act of politics than accounting.  And what about the military?  Would the Scottish units in the British armed forces return to Scotland?  If so would Scotland pay to outfit replacement units in the British armed forces?  Or would Scotland just enter into an armed forces agreement with Britain to carry on as if they didn’t become an independent nation?  And what about the currency?  Would they still be part of the Bank of England?  Or would they join the Eurozone?  And be a part of it when it finally implodes?  Trade agreements?  How would this affect treaties negotiated by Britain for Scottish interests?  What about environmental regulations?  Would they exit the emissions trading scheme?  Would they exploit their coal and oil resources?  Or build more windmills?

Interesting questions but moot.  For based on a recent opinion poll it appears the Scottish are not in favor of altering 305 years of history.

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The Chinese Government invests in LED Chips poorly causing Over Expansion, Price Deflation and Factory Closures

Posted by PITHOCRATES - May 27th, 2012

Week in Review

China’s formula for success is to partner government with business.  Like they did in Japan during the Eighties.  Before Japan’s Lost Decade.  And their deflationary spiral.  China is using the same formula.  Having government invest in corporations to expand production to dominate the market.  And, of course, create some bubbles along the way (see Analysis: Falling prices to kill off half of Chinese LED chipmakers by Leonora Walet and Twinnie Siu posted 5/27/2012 on Reuters).

In China, surplus capacity and sliding prices are sounding the death knell for half of the companies making light emitting diode (LED) chips used in Samsung television panels and Sharp computer monitors, with only the large, state-backed players likely to pull through.

Sluggish global sales of TVs and computers may further cut LED chip prices by 20 percent this year, and consolidation or closure are the only options for China’s smaller LED players, analysts say.

By contrast, Sanan Optoelectronics Co Ltd, China’s top LED chipmaker with a market value of $2.8 billion, and Elec-Tech International Co Ltd will be among a handful of large companies that will survive as they continue to receive subsidies and incentives from the government, according to analysts…

For the majority of LED firms, the government is slowly rolling back incentives, including tax breaks, free land and more than $1.6 billion in cash to buy LED chip-making equipment, that had helped sustain the industry for more than three years.

Proview International, whose Shenzhen-based unit is battling Apple Inc over the iPad trademark in China, is grappling with slumping LED prices and fierce competition that have dragged down earnings for other LED companies including Hangzhou Silan Microelectronics Co and Foshan Nationstar Optoelectronics…

Many LED companies are operating their factories at 50 percent capacity in China, with up to half of the 700 or so chip-making machines purchased with government money during the boom years in 2009 and 2010 left idle, industry watchers say.

In the past year, overcapacity has shut hundreds of small Chinese makers of LED lighting, according to analysts.

“China’s financial policy is not giving enough support to mid-tier and smaller enterprises,” said Bao En Zhong, executive vice chairman of the semiconductor lighting association in Shenzhen, one of China’s largest production bases for LED lighting. “We may see more factory closures…”

So the secret to success in China is government incentives, tax breaks, free land and lots and lots of cash.  If you can get this from the government you, too, can flood the market with product.  Sending your prices into a tailspin.  Then all you have to do is be one of the lucky few the government bails out so you can flood the market with more of your product.  Sending your prices into a tailspin.  Again.

People say this type of dumping of low-priced products onto the market hurts consumers.  I never understood that.  Here the Chinese helped to bring the cost of televisions down by making the chips that make them work so dirt cheap that they shuttered hundreds of Chinese manufacturers.  And chip prices may fall by another 20%.  I just don’t see how the consumer loses here.  It looks like the losers are the hundreds of shuttered businesses.  And the Chinese government who invested so much into those businesses.

This is state-capitalism.  Where businesses make bad decisions because of the free government handouts.  If it weren’t for those free government handouts these businesses wouldn’t have produced so many chips that they put themselves out of business.  You add up all of this bad government investment throughout China and it says only one thing.  A day of reckoning is coming.  If the Chinese don’t believe it they can ask the Japanese.

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Japanese Chipmaker Slashing Payroll due to High Supply and Low Demand in Lingering Recession

Posted by PITHOCRATES - May 27th, 2012

Week in Review

You know the recession is bad when electronic chipmakers are slashing their payrolls.  When that happens it means we’re not buying televisions, phones, computers, etc.  Because we don’t have the disposable income.  And don’t expect to have it anytime soon (see Japan’s Renesas eyes 14,000 job cuts, chip plant sale: Nikkei by Maki Shiraki and Taiga Uranaka posted 5/26/2012 on Reuters).

Japanese chipmaker Renesas Electronics Corp plans to sell off loss-making operations and cut its payroll by at least 12,000, a source close to the matter told Reuters on Saturday, as the company battles high costs and nimbler foreign rivals…

Renesas has posted cumulative net losses of nearly $6 billion over the past seven years as it struggles to keep up with South Korea’s Samsung Electronics and others in an expensive race to build ever smaller and faster chips.

Hobbled by a strong yen and forced to close eight of its factories after natural disasters in Japan and Thailand last year, Renesas has said it would hammer out a restructuring scheme by July…

The plan would trim its payroll by more than a quarter.

The Tsuruoka plant, which makes system chips that combine processing and other functions on a single sliver of silicon and are used in a range of digital electronics, has been a major burden for Renesas as Japanese consumer electronics makers cut production of TVs and other products.

Japan Inc. dominated during the Eighties.  They were manufacturing everything.  America lost its TV business as it couldn’t compete with the powerhouse that was government partnering with business.  Those on the Left in America said that was the way capitalism should work.  Put the government in charge.  Let the brilliant bureaucrats guide the hapless corporation.  For capitalism was chaos.  While government brought order to that chaos.  Which is why Japan Inc. dominated in the Eighties.  And frightened Americans as they used their massive profits to buy up American landmarks.  People worried that America would end up as a wholly owned subsidiary of Japan Inc. 

Of course, that was then.  Before their Lost Decade.  And the deflationary spiral that continues to this day.  For the bureaucrats may be smart.  But they’re not smart like the corporation people.  Who understand that while you can control your domestic markets with state capitalism you can’t control international competition.  And if you build up too much capacity you may just end up expanding supply greater than demand.  Sending prices so low your companies can’t operate at a profit.  And send your nation into a deflationary spiral.

This is typically what happens when the government interferes with the free market.  They create bubbles that eventually pop.  Sending prices into a tailspin.  A recent example in the United States is the subprime mortgage crisis.  Government kept interest rates artificially low creating a housing bubble.  And when that bubble popped it sent housing prices in a tailspin. 

It happens all the time when government interferes.  Yet it never stops government from interfering.  Amazing how we just can’t seem to learn this lesson.

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Even Cutting 28,000 Jobs will not help the USPS Compete against the Internet

Posted by PITHOCRATES - May 27th, 2012

Week in Review

The United States Postal Service (USPS) hates the Internet.  Before the Internet they had a monopoly in the letter industry.  If you wanted to send Granny a letter you had to go through them.  There’s only one problem with a monopoly.  Because they have a captive audience they don’t have to innovate.  They don’t have to improve anything.  Just make a lot of money.  And give your employees generous wage and benefit packages.  Just like the railroads did.  Before trucks came around, that is.  The trucking industry nearly destroyed the railroad industry.  But the railroads learned how to compete.  They helped redefine the transportation industry that now includes trains, ships and trucks.  The railroads are back.  Stronger than ever.  And making money.  But is it too late for the USPS?

The Internet is the USPS’ trucking industry.  It has all but destroyed the snail mail industry.  To survive the USPS has to do what the railroads did.  Reinvent itself.  Reinvent the industry they participate in.  If they can.  And they better hurry.  Because their monopoly is gone.  Not from other people entering the snail mail business.  But by new technology that created a better alternative to the snail mail business.  The Internet.  And it’s tap-dancing all over the USPS (see U.S. Postal Service offers buyouts to 45,000 workers by Emily Stephenson posted 5/25/2012 on Reuters).

The mail agency, which lost $3.2 billion in the first three months of 2012, plans to begin this summer moving mail-processing activities away from smaller sites to reduce annual costs.

As part of that plan, the Postal Service will offer $15,000 in two installments to full-time mail handlers who take early retirement or leave the agency, USPS spokesman Mark Saunders said on Friday…

The Postal Service has been hit hard by tumbling mail volumes as more Americans communicate online and by massive payments for future retiree health benefits…

The agency needs to reduce its workforce by 150,000 people by 2015, Saunders said. Consolidating and closing processing facilities, which will continue through 2014, could eliminate up to 28,000 jobs and save $2.1 billion a year, the Postal Service has said.

Saunders said he could not speculate how many mail handlers would take buyouts this year, but added that the change “will not affect mail service.”

It’s not enough.  If you annualize that $3.2 billion quarterly loss that comes to a $12.8 billion loss for the year (4 X $3.2 billion).  Cutting only $2.1 billion per year will not solve their problems.  They’ll still have an operating deficit of approximately $9.6 billion.  And if the Internet doesn’t go out of business in the foreseeable future these numbers are only going to get worse.

It’s pretty interesting that a company can cut 28,000 jobs without affecting its business operations.  Why, it’s almost as if they never shrunk their labor force all these years that their business has shrunk.  It’s as if 28,000 people have just been sitting around waiting for the work to pick up again.  While collecting a paycheck.  And while the USPS pours billions into a pension plan for their future retirement.  Hmm.  I wonder if this could have anything to do with that $3.2 billion quarterly loss. 

The clock is ticking.  While the USPS is still struggling to compete with email texting is giving email a run for its money.  And it just may be that the USPS is not as nimble as the railroad industry in pulling up its tracks and laying them on the road to profitability.

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The Elderly suffer Insanitary Conditions and Inadequate Nutrition in Britain’s NHS

Posted by PITHOCRATES - May 27th, 2012

Week in Review

National health care is having problems in the UK.  Their biggest customers are suffering from poor treatment.  The elderly.  In part because the NHS does such a good job at keeping the elderly alive (see ‘Friends and family’ test for hospitals by James Kirkup posted 5/25/2012 on The Telegraph).

Ministers are trying to improve standards after warnings from watchdogs that too many patients, especially the elderly, experience poor standards of basic care, including insanitary conditions and inadequate nutrition.

NHS staff are already asked to take the “friends and family” test, but the Prime Minister will say that extending it to patients will bring benefits to the service…

The Care Quality Commission last year found that one in five hospitals failed to meet basic standards of care for elderly patients.

This is a problem.  For many patients in a hospital are elderly.  Almost half of the patients in the NHS are age 60 or over.  So they’re dropping the ball on about half of the 16 million or so patients in the hospitals of the NHS.  If this were baseball batting almost 500 would be pretty good.  But this isn’t baseball.  And it’s just a bit unsettling that of all the moms and dads getting admitted to an NHS hospital about half of them will suffer poor treatment.  Including insanitary conditions.  And inadequate nutrition.

Will this happen in the US under Obamacare?  Well, the US has about five times the population as the UK.  And the UK has been practicing national health care for a long time.  So we probably won’t be as good as the British are at national health care.  So less skilled with about five times the patients?  I think it’s fair to say that the elderly will suffer even more poor treatment in the Obamacare system than they do in the NHS.  Especially with our aging population.

And it’s this aging population that’s the big problem.  People are living longer.  And because they’re living longer they’re having more hospital stays.  Requiring greater health care expenditures.  But because the population is aging the young have to carry ever larger shares of these health care expenditures.  As in higher taxes.  For the group consuming these health care services is growing faster than the group paying for them.  So they raise tax rates where they can.  And ration services.  To make their limited resources cover more and more patients.  Including having nurses treat more patients.  Sort of in a production line mode.  Spend as little time with each patient as possible.  To increase the number of patients processed.  It’s at this point when patients begin to fall between the cracks.  And suffer poor treatment.

This is the direction Obamacare will take us.  For when it comes to national health care the NHS is one of the best.  But it still ranks below most private health care.  Even Medicare.  For Medicare still operates in the realm of the private sector.  The government reimburses health care providers after the fact.  After the patient received treatment in the private health care system.  But once Obamacare morphs into the full-blown national health care system those on the Left want Medicare will struggle to meet the quality level of the NHS.  It will struggle to only mistreat about half of their elderly patients.  Because Obamacare will have five times the elderly patients than the NHS has.  It’s just simple math.

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