Perjury

Disclaimer: This is a rant post 

Here’s a notice to everyone out there. If you are ever summoned before a congressional judicial committee, or required to disclose information pursuant to judicial or regulatory action or law, please keep quiet and plead the fifth if you have anything you wish to conceal from public knowledge. I know I do not have a law degree (yet; maybe) but take my free unadulterated legal advice: Unless you have a President that is willing to commute your sentence, do not commit PERJURY. Do not even breathe the word ‘per’ and ‘jury’ in the same sentence while under such legal process. Do not try to twist the truth, or plead ignorance when such is not the case. Just plead the fifth. Federal prison is not as cool as it sound.

That is all. You’d be surprised how many people can actually benefit from this free legal advice.

APR v. APY

The Federal Reserve has been dropping the federal fund rate in order to stimulate the economy and avoid a recession. While this is a short-term solution that may or may not stave of a US recession, it does have some externalities that immediately, whether positively or negatively, affect the consumer population.

One of these externalities occurs when commercial banks follow the listed fed rate and adjust their savings and/or lending interest rate based on the news of the Federal Reserve’s actions. As the Feds have recently cuts the fed rate in the last few months, the commercial banks have followed suit. Many rate-chaser (people searching for the best rate for their money) start jumping from bank to bank, chasing the bank that will produce the greatest return for their money. If you are one of these rate-chasers, listen up: You need to know the difference between APR & APY, and what each number means for your money.

APR = Annual Percentage Rate is the quoted rate that a given principal will face over the course of the year. APR is used to calculate how much interest is generated on the original principal over the course of the year, but it does not factor in the effects if compounding (earlier interest accumulated will also generate additional interest). This is where APY comes in. If you find yourself comparing APR between two banks, you need to find out how often the interest is compounded in order to calculate the yield.

APY = Annual Percent Yield is the actual yield that a principal will grow if left untouched for the entire year. APY was created to factor in compounding so that the APY will be the yield (total interest) that a given principal will earn over the course of the year. If you find yourself comparing APY between two banks, you need to only consider the quoted yield. It doesn’t matter how many times the interest rate is calculated in a given year. The APY has already factored the intra-year compounding.

APR is calculated as Periodic Rate * Number of Periods in a Year,

APY is calculates as (1 + Periodic Rate) ^{# of Periods} – 1

The periodic rate is the actual rate charged on the loan or investment over a specified period of time. Since most rates are quoted annual, working backward the periodic rate is the quoted APR divided by the number of times compounded in a given year.

Example:

A bank that offer APR of 5% on its deposit, compounded monthly can quote any of the following numbers

Periodic Rate = APR/Periods = 0.05/12 = .0041666 = 0.417%

APR = 5%

APY = (1 + Periodic Rate) ^{# of Periods} – 1 = (1 + 0.417) ¹² – 1 = 0.051204 = 5.12%

(The more times a rate is compounded, the greater the spread between the APR and APY)

So there is the information you need in a nutshell. The information is pretty basic and if you find yourself comparing rates and/or yields, make sure you do it right.

Microsoft, Yahoo, Google, oh my…

On February 1, Microsoft (NASDAQ: MSFT) announced that it was offering a bid of $44.6 billion ($31/share) to acquire Yahoo (NASDAQ: YHOO). This bid price represents a 62% premium over Yahoo’s closing price the prior day. Even at this price, many analysts are calling the bid price a discount since Yahoo, as of November 2007, had been trading at the bid price. Microsoft is taking advantage of Yahoo’s depressed price caused in large part by the recent economic downturn and the latest poor earnings report released by Yahoo in order to officially announce its long anticipated bid for Yahoo. Microsoft has employed The Blackstone Group and Morgan Stanley to advice on this acquisition while Yahoo has likewise hired Goldman Sachs and Lehman Brothers. Although not yet confirmed, it seems Yahoo is treating this bid as a hostile takeover and the board is meeting with its advisors to plan their takeover defense. Given Microsoft and Yahoo’s past relationship, it isn’t farfetched to imagine that this is actually the reality.

Microsoft has been on the offensive lately against the upstart new-comer in the telecom business, Google (NASDAQ: GOOG). Google has gained substantial market share in a relatively short time and is now the dominant player in the online advertising business. Microsoft and Yahoo have also lost significant market share in their search engine enterprises and ultimately lost the advertising revenue associated with them. Microsoft rationale is that the combined forces of Microsoft and Yahoo would make a better competitor and reverse the loss of market share saying “resulting benefits of scale along with the associated capital costs for advertising platform providers make this a time of industry consolidation and convergence. Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo can offer a competitive choice while better fulfilling the needs of customers and partners”.  Microsoft is already claiming at least $1 billion in possible cost synergies that would improve its bottom line and effectively create a player in this $40 billion online advertising industry (italics added).

What is left to be said is that Microsoft is ignoring a crucial issue by commencing with this bid. No one denies that Microsoft needs to respond to Google’s continual market dominance in online advertising, especially given Google’s recent encroachment into Microsoft’s core product when it began offering complimentary office suite software that directly competed with Microsoft Office. Still, Microsoft tactics of acquiring, or purchasing stakes in, companies that also compete with Google is short sighted. While this tactic might work in the interim by providing short term stock gains (mostly due to speculation), Microsoft’s tactics does not provide the company with the ability to adequately compete with Google in the long run. None of the recent acquisition improves Microsoft’s intrinsic value – and by intrinsic value, I refer to the value of Microsoft assets based on its ability to return value on its shareholders equity (see definition here) – but only target its share price at the benefit of short term speculators. Microsoft should be more concerned with improving the technology behind its product offerings and offering products that can actually draw consumers away from Google’s products. Relying on acquiring companies that plan to develop this technology, or worse yet, acquiring companies that operating with similar archaic technology (when compared to Google’s) is not going to improve the situation that Microsoft finds itself.

I would rather not see this acquisition proceed, as it reeks of such M&A disasters like the AOL -Time Warner merger which, rather than creating the estimated $350 billion hydra, resulted in a $240 billion debacle after AOL’s revenue started tumbling soon after. Even Tyco (a company no other should be in a hurry to emulate), went on a buying binge in an attempt to hide its poor and dwindling earning before all the fraud, illegal tax shelters and accounting schemes were revealed (I should point out for my readers that the investment industry was close to awarding Tyco a blue-chip company before the company began its downfall). I would give anything at this moment to be on Goldman Sachs M&A advisory staff contemplating ways to prevent this acquisition from proceeding. It’ll give me the opportunity to practice all these anti-takeover techniques learnt in the classroom, such as the poison pill and golden parachute. As this potential acquisition will likely play out in the news and print papers over the next few months, I’m taking this moment as an opportunity to send a message to the industry; Wait for me. I’m almost there. Don’t use up all the fun before I arrive. Please.