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Friday, February 15, 2008

What's a recession? How will US slowdown hit India

The fear of a recession looms over the United States. And as the cliche goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.

Weakening of the American economy is bad news, not just for India, but for the rest of the world too.

So what is a recession?

A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

What causes it?

An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years.

A recession normally takes place when consumers lose confidence in the growth of the economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans (See: Subprime pain: Who lost how much)

The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy.

How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts.

The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis.

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

Impact of a US recession on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.


Saturday, February 2, 2008

Microsoft offers $44.6bn to buy Yahoo


Washington: Microsoft, with the reputation of being among the world’s most hardball companies, has made a massive $44.6 billion bid to acquire internet veteran Yahoo in an effort to challenge their mutual competitor, the omnipresent Google.
Microsoft’s bid comes at a time when Google has raced ahead of the competition in the ad revenue rich search space, and Yahoo, a one-time leader and rival, is in the doldrums. Microsoft’s unsolicited offer of $31 per Yahoo share represents a 62% premium over its closing stock price on Thursday.
Yahoo has said it will consider the offer, but most experts think the buyout will be a shooin, given Yahoo’s weak position arising from poor results and a four-year low stock price. The company also announced a 1,000-person lay-off this week.
If Microsoft’s bid succeeds, it will be the company’s biggest acquisition and the biggest merger in the technology space after Time-Warner bought AOL for $180 billion in the heyday of the technology boom. Analysts say the merger will result in a potent competitor for Google in the lucrative web search and advertising market.
Although Yahoo, founded by two Stanford graduates, was one of the first companies to popularize web searches going back to the mid-1990s, upstart Google has stormed ahead in the last few years. Microsoft, which is the world’s dominant
software maker, has not been able to gee up its search capability either.
Microsoft evidently expects to challenge Google with Yahoo’s legacy and its managerial skills. Google’s share of the US web search market is currently estimated at 56% by Nielsen Online as compared to 17% for Yahoo and 13% for Microsoft.
Microsoft acquires anywhere from half-a-dozen to a score of companies each year. Its last acquisition in 2008 was Calista Technologies, a desktop visualization solution company co-founded by Indian techie Anil Kumar. But the Redmond giant has never attempted something on this scale.
Microsoft’s attempt to buy out Yahoo is not new either. The two sides are said to have pursued merger discussions for at least three years, but the offer always came up short. Now, mugged relentlessly by Google’s continuing strides and dominance in the market, the two are expected to team up for a fight.
Assuming that the merger comes through, no one expects any spectacular fireworks,much less immediate results given Microsoft’s past record. The Redmond veteran’s reputation as a destroyer of companies has given rise to the motto ‘Embrace, Extend, and Extinguish’ to describe its tactics. It famously bought out Sabeer Bhatia’s Hotmail in the late 1990s, but failed to make it the market leader in the e-mail space.

High-Profile Internet Deals 2000: AOL buys Time Warner for $164 billion creating AOL Time Warner
2007: Kohlberg Kravis Roberts (KKR) snaps up First Data Corp for $27.5 billion 2006: Google acquires YouTube for $1.65 billion 2002: eBay buys Paypal for $1.5 billion
2005: News Corporation acquires MySpaceparent Intermix for $580 million 1998: Microsoft buys Hotmail for $400 million
SEARCH CHARGE MS-Yahoo to rev up Indian mkt With Merger, Microsoft Plans To Create More Revenue Streams In Country
Bangalore: Microsoft’s proposed buyout of Yahoo will redefine the dynamics of global internet space. Being one of the largest web-savvy consumer markets, India too will witness significant market changes, observe industry experts. Analysts also see it as the beginning of a consolidation phase in internet space, although the business is pretty new in India when compared to other markets. Interestingly, six months ago Goldman Sachs had done a Yahoo-buyout feasibility study for Microsoft through JP Morgan Securities. The deal was then valued at $50 billion.
For Microsoft and Yahoo, India probably could be the most vibrant and dominating geography among the rest of the Bric region. “Microsoft is clearly trying to create additional revenue streams and additional people-front through this acquisition. With this, the country will have more number of researchers and developers working on newer internet technologies. The deal will simply bring more action in the internet product space in the country,’’ said Pavan Goswami, an industry expert.
Anand Lavi, partner, Tholongs, an offshore advisory firm said, “From an Indian perspective, Microsoft is a very popular brand. The deal will
enhance the country’s internet user base and internet experience of its netizens. It will also significantly expand the internet landscape of the country.’’ Kanwaljit Singh, MD, Helion Ventures, said, large number of social networking sites are becoming popular. Initiatives like Second Life (web2.0) are also expanding the internet market. “This trend is going to be huge thing in India wherein the Microsoft-Yahoo combine would be playing a dominant role along with the number one player Google.’’ The deal makes interesting synergy for Microsoft and Yahoo as both have significant presence in the country, adds Sridhar Mitta, MD, e4e.
(with inputs from Anshul Dhamija)

WHY YAHOO LOGIN?
Microsoft and Yahoo struggle to compete with Google for the lucrative online advertising market, currently worth $40 billion and expected to grow to $80 billion by 2010. Google has cornered around 40% of US online ad share
Yahoo shares have lost around 30% of their value in the past year, while Google shares have gained, despite reporting a slowdown in fourth-quarter revenue growth.
The $31-a-share offer represents a 62% premium for shareholders above the closing price of Yahoo stock on Thursday
WHO GAINS THE MOST?
The deal is a win-win situation for both Microsoft and Yahoo, and it will change the internet landscape, giving Google a serious competitor at a time when it seemed that its lead in all things internet was unassailable
SPAM JAM
One potential hurdle to a Yahoo and Microsoft merger, after the nod from Yahoo itself, would be antitrust concerns, especially from the European Union

MY SPACE NOT YOURS YET
“We are yet to hear anything from our Sunnyvale office. MS’ bidding is not a new thing for us, but we are not sure if it’s actually done this time. Well, none of us is overly excited as we are not going to be bought by an internet firm, but a software one,’’ said one of the Yahoo employees in Bangalore. Yahoo India was in trouble some time ago facing accusations of plagiarism and thereafter facing an exodus of top employees including its CEO, George Zacharias. Currently, Keith Nilsson, (head) emerging markets, based in Singapore, is in charge of India. TNN
DESI SHARE Google 49.6% Yahoo 24% MS 9% AOL 6% Others the rest