FIFA and the Failings in Ethics

Welcome back bloggers! Today i am going to be talking about an organisation which I have been very accustomed with from an early age, FIFA. Coming from a football crazy family in Newcastle, I have played the sport at a high level and continue to do so now. As you are probably aware, FIFA are currently under investigation and mass scrutiny over bribery charges. This is an issue very close to my heart as the beautiful game that I adore myself, is seemingly corrupt at the very top. 

Sepp Blatter, the man at the head of FIFA and his partner in crime Michel Platini have both been recently suspended upon comeuppance of the news that World Cups (the greatest competition on earth) vote for which nation is to host has been riddled with bribery and corruption which dates back to France '98. U.S authorities have recently announced criminal charges on 16 FIFA executives past and present for abusing their position in FIFA to gain finance. Furthermore, the negative press that FIFA has been deservedly put under has raised pressure from main sponsors which include coca-cola who threaten to withdraw their financial support they provide to the organisation. They do not want to be seen supporting an organisation that is allegedly corrupt. FIFA executives have been acting highly unethically in what is a privileged position.

FIFA are also scrutinised for running their operations from Switzerland. Switzerland is a country that has very low tax rates so having their headquarters here allows the organisation to reap these benefits. Furthermore, for a country to win a World Cup bid, they must agree to certain conditions, one being the event has to be tax free for FIFA. Surely it is unethical for an organisation as large and renowned as FIFA to avoid tax to the maximum by operating here don't you think? Also the irony of the condition just mentioned absolutely amazes me. How are they able to get away with? They may be acting within the law but surely the must take ownership as a global leading organisation and set an example to act ethically?

The big question for FIFA now is how to they regain the confidence of the masses and begin righting their previous wrong doings? It has been suggested that FIFA should adopt an EU style presidency rotation strategy to reduce the chance of any future corruption. As Sepp Blatter has been president of FIFA for 18 years, he has been able to run the organisation with his corrupted control. Changing to this style could freshen up the organisation and help rid them of corruption and restore confidence in FIFA. There has been examples of companies who have triumphed in the face of adversity when they have faced dilemmas like the one FIFA face currently . Mattel, a US toy manufacturer had sold some products that had dangerous levels of lead paint which when ingested, could be very harmful to children. Their policy of acting with complete transparency allowed them to recall 20 million toys to nullify the chance of any children being harmed. This transparency ensured they maintained customer confidence as they were praised for their approach to the situation eventually leading to sales rising by 6% Ethics clearly lay a huge role in todays world and the demand for honesty and integrity is at the forefront. 

Let me know what you think about Sepp Blatter and all things ethicsy below guys!

Much Love, Liam Mac x

The Goodwin, The Bad and The Ugly

Welcome back guys! Today we will be focusing on RBS who were branded as the bank who ran out of money. Impossible right? Apparently not as RBS so gratefully demonstrated (probably not what they want to be known for). In 2001, Fredrick Goodwin became CEO of a well respected small banking firm, the RBS. Under his tenure, RBS would transform from this little known bank, into a world leader before it all came crashing back down in 2008. I hope your ready for this hyper speed recipe for disaster...

Little known RBS soon became a big player in the banking market after an audacious takeover of struggling NatWest. The sized upon the opportunity as NatWest had a relatively low share price and were underperforming considerably. After a hostile bit of £21 billion, the RBS take over of NatWest became the biggest in UK history! Everything on the rise for this once small banking firm? Nope, you're wrong!

Employing Fred the Shred (a quirky nickname he acquired over the years for being an efficient gaffer) may have been the been the biggest mistake RBS made. By the end of 2005, RBS had acquired 25 businesses and spending close to $30 billion at which point shareholders demanded an end. They had seen enough. Fred was seen as a maniac. He seemed only to care for creating the biggest bank in the world rather than focusing on shareholder maximisation and focusing on controlling the business.

Goodwin at this point eventually listened to what his shareholders were saying ... HA of course he didn't. The guy was fixated on growth and getting bigger and that was all that seemed to matter to him. In 2007, the maniac decided to announce the biggest takeover in banking history, that of Dutch bank ABN Amro. RBS planned the takeover in a consortium with Santander and Fortis bank and collectively acquired the company for €27 billion. Goodwin failed to consider 3 major problems with this takeover. Firstly the US housing bubble burst in 2006 and investment banks were now beginning to feel the full force of the problem. Secondly, RBS failed to carry out their due diligence in this acquisition and finally, the nail in the coffin for RBS was that it financed the takeover from its cash reserves. BONKERS!

Overall this lead to the company almost running completely out of money until they accepted a £20 billion bailout from the government which was funded by the tax payer. Crazy to think that one man at the head of one organisation was able to get away with this for so long! What a way to have to spend the tax payers money. After digesting all that, let me know your thoughts on our friend Fred. Do you think this is solely down to him or do you think other people within RBS should have known this was coming sooner?  Chat soon bloggers!

Much Love, Liam Mac x

To Merge or not to Merge?

Hey guys! how are we all doing this week? Today i will be focusing on all things merger and acquisition! Why would a company be looking to merge or acquire another? Should they be wary and tread carefully or should the be welcomed? How successful to M&A'S tend to be? We will explore this vast topic and begin to answer some of these questions.

The main reason as to why a company would look to acquire another is for value creation. Companies primarily see this opportunity through the concept of 'synergies'. Synergies happen when the combined total of a new merged company would be greater than the combined total of the 2 companies acting as individuals. Take this as a simple example... If we describe 2 companies as A & B. Company A has a value of £100 million. Company B also has a has a value of £100 million. Separately the total of the companies combined would be £200 million. You're following so far? Good. If the 2 firms were to merge and there value is now £250 million, the gain from the merger would be £50 million through synergies. I think I made that simple enough for you! Feel free to tell me I'm rubbish if you think otherwise!!

Taking over an intangible asset such as a brand identity can be a key motivated for a M&A. This was demonstrated by Disney in 2006 in their pursuit of the worlds most famous computer animation studio name, Pixar. The deal, which was worth a colossal $7.4 billion also brought the technology company Apple closer to disney, with the founding member the infamous Steve Jobs taking a seat on 'Disney Pixar's' board. Furthermore, taking away this label and adding it to their own reduced the competition in the market, increasing their own market share which was another motive for disney. This merger has in time proved to be one of the most successful of all time.

However, all M&A's don't quite experience the success that Disney Pixar has over the years. Lets look at the case of Kraft and Cadbury. First of all, it is worth mentioning that this takeover became hostile. What this means is that the initial approach for Kraft to take over Cadburys was rejected by their management team as they felt it fundamentally undervalued the company. As a result of the rejection, Kraft appealed directly to the Cadbury shareholders which eventually got the job done. This M&A failed post acquisition primarily down to the companies not integrating with one another. Cadbury employees felt that the family culture was undermined by Kraft and the heart of the company had been ripped out. The failure to integrate Cadburys into their business model lead to this M&A failing.

This has only scratched the surface of reasons as to why M&A might take place and why they may be successful or fail. Can you think of any other reasons as to why they a business would want to acquire another? As always keep reading and keep commenting!

Much Love, Liam Mac x

Was is really a Margin Call? An Insight to the toxic world Wall Street can create

Welcome back friends, I'm here to brighten up your day with some more knowledge gains and quality banter! Before writing this blog i watched a fascinating fictional movie called Margin Call. The film aims to give you an insight to an investment bank in the financial crisis and although it isn't real, it seems to give a tremendously good indication to what conditions would be like in the real world! Also id just like to mention how much of a Kevin Spacey fan i am, WHAT A GUY! As soon as i seen his face, i knew it was going to be a good watch!

Based on a true story about Lehman Brothers and set on wall street the night before the financial meltdown, Margin Call tells the story of John Tuld, the head of a respected finance company and their meltdown at this time. The firm realises its assets are worthless and the film takes a strong focus on psychological decisions that would have been made by company heads at this time. Realising their assets were worthless meant ruthless decisions would have to be made showing the selfishness and ruthlessness of Wall Street workers at this period. 

All of the risk the company undertook was mortgage backed securities which were liquid assets. The junior analyst in the film realised that securities were worthless thus decreasing the companies value by 25% which was more that the entire market value of the company itself! Once they realised they were worthless, the company tried to wipe their balance sheet by dumping all the worthless toxic securities on loyal customers. Absolutely brutal don't you think? This demonstrated the cut throat world of finance and highlighted the greed and selfishness the film were aiming to capture. Referring back to Markowitz (1959) and his portfolio analysis, a theory we have previously discussed which suggested a portfolio should be diversified, it is arguable that the company should not have laid all their risk in one security. if they were to become worthless as demonstrated in this case, they would have other assets to balance risk. 

A CEO who earned $86 million a year, yes, 86, million, 1, year failed to realise that the companies portfolio was unbalanced and the securities were basically void. Absolutely bonkers to think a man earning that amount of money could get it so wrong! A great short film, well worth a watch. What do you think about the CEO's actions? What do you think about the necessity to balance an investment portfolio? As ever let me know guys, SPEAK SOON

Much Love, Liam Mac x

Want Your $7billion back? You Must Be Mad

Hello again everyone! how are we all doing today?! This week we will take a close look at one of the greatest conmen of all time Mr. Bernie Madoff. Its all in the name! this guy was absolutely bonking mad! He stole BILLIONS of dollars from investors with the promise of return which never came.

The former chairman of NASDAQ had a good reputation in the financial market and used his exclusivity to make investors part with their money. He did this through a 'Ponzi Scheme'. Take this for an example in simple terms. I would come to you and say give me £100 and ill turn it into £500 for you. I would then go to someone else and say 'hey, i can turn your £500 into £2000'. The £500 i have taken from the second person i would then give to you. This was a never ending snowball effect which left many investors without the profits they were promised and Madoffs pockets healthily lined. Madoff downfall eventually started when clients demanded back a staggering combined total of $7 billion in returns at which point the mastermind only had $200 million to give. MAD

Madoff made his investments very appealing to his targets and was able to convince them on the most part to put all of their investment faith with him. Markowitz in 1959 theorised that a good, balanced investment portfolio is one that provides investors with opportunities and protection over a wide range of contingencies. Madoff promised the world to his investors but he was full of lies! You think that a clever, profitable investor would have other strategies, contingencies in lace to reduce there risk instead of blowing all the have on a crook like Madoff.

IMO I think its possible that the investors may have been a little bit naive and should maybe have delved a little deeper into what Madoff had to offer rather than backing him. On the other hand, the fact that he was able to swindle sooooo much money leads me to believe that he was one of the most convincing men ever to walk this earth! Maybe this crook was better equipped with skills to be a lawyer. If that was the case, he may not be in the situation he is in now, BEHIND BARS!!!

What do you think of this crook and how much do you think the investors are to blame for their daftness as well? Let me know people!

Much Love, Liam Mac x

Balancing Debt and Equity can be a WACCY game!

Good Morning/Evening/Night or whatever time you're reading this everybody, you'll be overjoyed to know I am back for another chat with you all! This week we are going to focus on the Capital Structure, what it all means and what Capital Structure is deemed optimal for a company to operate under. We will also be looking at all things WACC, what it means and how business use it.

Capital Structure is the way a company finances its assets, usually through a combination debt (loans) and equity (shares). They both carry risk; Debt is seen as lower risk therefore the cost of borrowing is lower (interest rates). Equity on the other hand is higher risk leading shareholders wanting bigger returns making equity a more expensive financing option.

WACC stands for the Weight of Average Cost of Capital and using this calculation, a firm can determine the minimum rate of return that an investment project needs in order to satisfy creditors, owners and shareholders. It can also be used by investors to value a companies shares thus helping them to decide whether to invest or not, WACCy right? 

In 1958, Modigliani (thats an absolute mouthful by the way) and Miller created a theory known as the 'capital structure irrelevance principle' proposed that a company capital structure had 0 impact on WACC. Suggesting this would lead you to, from their thesis, think that loading up on debt was the best option as it was cheaper. Alright on the face of things you're thinking? However their paper in 1958 failed to consider the implications of taxations and financial distress. Their assumptions therefore were ridiculed for not considering these factors and it soon dawned on the theorists themselves that the better have another look at it. In 1963, they added taxation to their theory which was accepted widely...

Using this theory, companies could maximise their amount of gearing to keep WACC lower. However, companies who use high gearing are obviously subject to risk which was typified very recently by Chemring.

Chemring operated with a large amount of debt in their capital structure with net debt being around £160 million YIKES! Operating in such a manor caused financial stress both directly and indirectly which were effects felt by Chemring. If you were a shareholder in a company would you be happy with your company operating on so much debt? Disgruntled shareholders soon realised the extent of their problem as the company issues a profit warning which lead there share price to fall over 40%!

A well balanced capital structure will definitely be able to create wealth but as demonstrated by Chemring, operating on such large amounts of debt can be a risky way to go about things. 

What do you think about loading up on debt? Let me know below as usual guys!

Much Love, Liam Mac x

VW and EMH, Where do they fit the theory?

Hello everybody! I would like to welcome you all to a series of blogs I am creating which will explore the wicked world of finance. We will be talking things past present and future, tackling topics that will no doubt leave questions in your mind about this cut throat world!

Today we will be chatting about recent discovery of a scandal that has been ongoing since 2009 involving the worlds top selling automaker, Volkswagen. The sneaky little (I say little...) devils were caught by U.S officials cheating on emission tests by fitting a device that would show the cars emitting a low level of nitrogen oxide when they were in fact producing 40x more pollutants that were deemed legal. This left the car manufacturing giants reputation in tatters as they searched for a fresh leader to restore former faith in the company.

As you can see from the image on the right, VW's share prices plummeted on the 18th September when the news of the scandal hit the public. In financial economics, a theory developed in 1970 by Farma called Efficient Market Hypothesis (EMH for short) stated that asset prices fully reflect all information available to the public at all times. We will now look at what EMH is and how we can apply it to this case...


There are 3 forms of efficiency associated with EMH, the first being WEAK FORM. This is where future  prices can not be predicted by analysing past information. It is impossible for investors to make massive returns in the long run using investment strategies based on old data and share prices. Share prices over time are said to take a 'random walk' as future price changes result on information not contained in the price series.

Secondly, Farma identifies the SEMI-STRONG FORM of EMH. This is where a company share price reflects all past information as well as all information available to the public. Share prices will therefore react quickly and accurately upon the new release of information about the company. Investors are able to make healthy returns if the act quickly upon hearing news to take advantage of share price change at its earliest possible point.

Finally we come to STRONG FORM efficiency. This form which is described in todays market as impossible explained that share prices reflect all information available both publicly and privately. This means that investors wouldn't be able to use illegal information to beat the market when we all know that they have been doing it for years to make big big returns! (Naughty Naughty)

Looking back to our out of favour friends from earlier on VW and their share price changes in reflection to the news coming out about their sneaky dealings, it is fair to assume the market shows a SEMI STRONG FORM. Their share price had reacted quickly to the news coming available publically and has decreased which reflects on how they've acted. Who would have thought such a household name like VW could pull the wool over the worlds eyes. Some rotten corporate culture on show in this company don't you think? Let me know your thoughts below guys! Thanks again for reading!

Much Love, Liam Mac x