October 2010

Don’t worry about the £117 million you can’t find. Instead, just go on a nice long holiday…

Published on: 29 Oct 2010

Paul Bowtell, the CFO of Europe’s largest travel company TUI Travel will soon be able to go on a very long holiday.

TUI recently announced that Mr Bowtell will leave the company at the end of the year.

Why is this I hear you ask?

Put bluntly, the reason is that he messed things up in a big way when he was in charge of the finances of the company.

TUI stated that they would be writing off £117 million of “irrecoverable balances” and restating their prior year financial results.

£117 million is a significant write off in anyone’s books. The share price of TUI fell by over 10% as a result.

It also highlights one of the challenges faced by organisations that merge.

The write down originates from “failures to reconcile balances adequately in legacy systems in the retail and tour operator businesses in TUI UK”. In other words, back in 2007 when TUI merged with First Choice Holidays they had to integrate different systems and simply didn’t manage it.

Questions have got to be asked as to why they couldn’t reconcile the systems. After all, given there’s been a recession on for a few years there must have been a few IT consultants available to work on the reconciliation of the systems and who would have charged a lot less than £117 million.

Mergers often have problems with integrating areas such as the culture of the companies but it’s clear now that the integration of these IT systems has also been far from easy. Being unable to reconcile £117 million makes for a spectacular suspense account.

Publicity around mergers tend to focus on their advantages, real or perceived, but the behind-the-scenes work that has to be done can be substantial.

It no doubt proved to be a real headache for Mr Bowtell. For his sake we hope that this will prove to be the biggest write off he has to oversee in his career.

Was it a good bet or not? 10 years and £1.4 billion later and the answer seems to be…

Published on: 27 Oct 2010

Although people have been gambling for a long time, the profile of the betting industry has changed dramatically over recent years.

The bookmakers that were seen on many a high street seem to be gradually disappearing.

People are still gambling though but the delivery method of the industry is switching to internet based gambling rather than placing bets at a physical bookmakers.

Ten years ago former professional gambler Andrew Black and former JP Morgan trader Edward Wray started up a betting business that addressed matters in a new novel way.

For years the typical approach to gambling had been where a bookmaker set the odds and it was up to the individual gambler whether or not he or she accepted these odds and placed the bet.

Betfair pioneered the concept of person to person betting whereby individuals bet against each other rather than the bookmaker. Betfair provide the platform for the betting and take a commission on each transaction.

A gambler will say that they want to bet on a certain event happening (or not happening) and if another gambler wants to accept the bet then the transaction goes ahead. Betfair provide the mechanism for this to happen.

This is known as a betting exchange and is a great example of where first mover advantage really counts.

In order for the business model to work there has to be a critical mass of gamblers that are willing to offer and accept bets. Without this critical mass the business simply would not work.

Another example of where first mover advantage has been critical to business success is in online auctions. After all, who are the main competitors to eBay?

Back to Betfair though and it certainly is a good business model. Risk for example, is nicely reduced as the company is not standing to lose on the bet but instead takes a nice commission on each transaction.

So how well has it done over the last 10 years?

The answer to this can be found last Friday when 15% of the company was floated on the London stock market and the company was valued at £1.4bn.

Betfair’s advisors were some of the biggest names in the business and included Goldman Sachs, Morgan Stanley and Barclays Capital to name a few.

Amongst other things their job was to identify the price range of the proposed offer. Initial indications were that it would be between £11 to £14. The final initial public offering (IPO) price was set at £13.

With some of the top investment bankers involved and Betfair being in the gambling industry (which is not necessarily renowned for being generous to gamblers) it was something of a surprise to some people to see the share price rise by nearly 20% in the first day of initial trading after the IPO. After all, this could imply that the IPO was undervalued if there was such an initial jump in price.

I wonder what odds you would have got from Betfair that the IPO share price would rise by 20% on the first day of trading?

Forget who’s in charge of the TV remote control, who’s in control of the TV channels?

Published on: 25 Oct 2010

BSkyB is the largest broadcaster in the UK, reporting a profit of £11.7 million on revenues of £5.9 billion in its most recent financial statements.

Its ownership structure is dominated by News Corporation, the transnational media conglomerate owned by Rupert Murdoch, whose other ventures include numerous newspapers and Fox studios in the USA.

It’s fair to say that Rupert Murdoch is a controversial figure.

A review of the most recent financial statements shows that News Corporation presently owns approximately 39.1% of the shares of BSkyB.  The next two largest shareholders own 5.02% and 3.01% of the votes in the company.

In other words, resisting the might of News Corporation to impose its will on BSkyB would require something more akin to a peasants’ revolt than a more standard company vote in the AGM.

IFRS 3 defines a subsidiary as an entity that is controlled by another entity.

Looking at the evidence, it would appear that the 39.1% ownership would be enough to give control of BSkyB to News Corporation, on grounds that it would be almost impossible to resist decisions favoured by such a dominant investor.

One such decision was appointing James Murdoch, son of Rupert Murdoch as chairman of BSkyB.  Lots of investors didn’t like this, but Murdoch took the helm of the company.

News Corporation produces its financial statements under US GAAP and has always consolidated BSkyB using the equity method, as an associate.

Under IFRS, it would have been arguable that full consolidation as a subsidiary would have presented a more true and fair view, as IFRS uses more principles based recognition of control than US GAAP.

However, a shock recently came to News Corporation, when it tried to increase its holding from 39.1% to a clearly controlling 61%.

The board of BSkyB refused to agree with the chairman that an offer of 700p per share should be accepted.  The board defied its biggest investor and said that they would recommend refusal of any offer less than 800p.  This appears to have come rather as a surprise to the dominant Murdoch family, who show signs of thinking of BSkyB as their fiefdom.

It’s just a nice example of when apparent control is not control and thus how to be cautious in deciding when to consolidate a company as a subsidiary, even if it generally does everything you tell it to.  If there appears to be a chance of the other investors saying “enough” and refusing to give into your will, it’s not a subsidiary.

According to Apple there’s an App for…something that I shouldn’t say…

Published on: 22 Oct 2010

Apple is an extremely successful company. Earlier this week they released their latest set of results.

For the first time their quarterly sales exceeded $20 billion. In my opinion though the really impressive thing about the published figures was their cash balance.

They have total cash and marketable securities (stocks and shares, etc that can be readily converted to cash) amounting to a staggering $51 billion.

To put this amount of money in perspective, if they took their cash and put it in an empty company and then listed this “cash only company” on the London Stock Exchange, it would not only make it into the FTSE 100 but the “Apple cash company” would in fact be the 18th largest company quoted on the London Stock Exchange!

The blog entry here provides some thoughts on what else Apple could do with their cash if they decided to go on a shopping trip.

One of the growth areas of Apple can be found within their Apps business. Apps are “applications” (in effect software to use on their devices). 3 billion apps were downloaded in the first 18 months after their launch.

Apple has a very slick and professional marketing strategy.

Apple’s iPhone adverts such as the one below famously state “There’s an app for that” and finish with “There’s an app for just about anything”.

As well as having a very creative approach to their advertising Apple has also taken a very commercial and sensible approach to matters.

Last week the phrase “There’s an app for that” was officially classified as a trademark of Apple.

This means they will be able to prevent competitors benefiting from the phrase.

It will probably result in adverts such as the one below by US network carrier Verizon being prohibited. Verizon parodied it’s competitor  A&T (a carrier for the iPhone in the US) with this “There’s a map for that” advert.

The waiting is over. Say goodbye to David Tweedie and hello to Hans Hoogervorst.

Published on: 18 Oct 2010

Photo by Seb ter Burg

After a long wait and a fair bit of speculation, rumour and expectation, we accountants now know who the next chairman of the International Accounting Standards Board is going to be.

Now, this might not sound quite as exciting as we’d like to make it sound, but this really is very significant.  When a new pope is elected, crowds throng the Vatican, there is black smoke, followed by white smoke and a general excitement and drama.  Our own global leader was announced by a modest press release from Cannon Street in London (home to the IASB) with a type of modesty that may be typical of our profession.

The successor to Sir David Tweedie will be Hans Hoogervorst, with effect from 1 July 2011.

Mr Hoogervost is a Dutch national, with an interesting background in both academia, politics and business.

Between 1998 and 2007, he held a number of positions in the Dutch Government, including minister of finance, minister of health, welfare and sport, and secretary for social affairs. Prior to this, he served both as a member and senior policy advisor to the Dutch parliament and the ministry of finance. He also spent three years as a banking officer for the National Bank of Washington in Washington, DC.

Mr Hoogervorst holds a Masters degree in modern history (University of Amsterdam, 1981) and a Master of Arts degree in international relations (Johns Hopkins University school of advanced international relations, majoring in international economics and Latin American studies).

This is a varied profile of experience and one that is probably very suited to the man that will take IFRS to the next level of development with the (hopeful) convergence of IFRS and US GAAP.  We think that considerable assertiveness and diplomacy will be required in that task!

Whoever takes over from David Tweedie has a considerable job on his hands.  Under Tweedie’s leadership, IFRS has moved from peripheral relevance to near global domination.  Standards, on the whole, have become much better.  David Tweedie is a tough act to follow.

We wish Mr Hoogervorst every success.  We are pleased that we have the best part of a year to learn how to pronounce his name properly.

We all make mistakes at work and I know you shouldn’t laugh but…

Published on: 15 Oct 2010

On Tuesday, Microsoft were due to launch their much anticipated Windows 7 phone system. The launch event was scheduled to take place in New York with a start time of 3.30pm.

“Joe O” works for the electronics firm LG who were one of a number of phone companies that were expected to launch Windows 7 phones to coincide with the Microsoft event.

The phone companies however were under strict instructions not to announce anything until after Microsoft’s big launch.

Alas, poor Joe who is based in the UK made a slight mistake when he thought the launch time was 3.30pm UK time rather than 3.30pm New York time. The end result was that LG’s official UK blog revealed details of the phone and what it was capable of doing under the new Microsoft system some 5 hours before Microsoft started the official event.

The error was spotted by LG pretty quickly and the post was withdrawn but it was too late as it had already been picked up by a number of other websites.

Now, picture the scene. You’re part of a project team that has been working on a major project for some time. The “partner” to your company on this project is none other than the mighty Microsoft. The world’s press are anxiously awaiting the launch event and then you press a button which releases the news to the world some 5 hours early.

What would you do?

No, honestly, what would you do?

Deny it? Blame it on somebody else? Say it was a technical error?

Joe did the honourable thing and posted the following on the LG blog:

Yes, that early slip may have been my fault, I may have failed to notice the time zone was EDT, not BST, but let’s not kick a man when he’s down. And I was down, literally hiding under my desk ignoring my constantly ringing phone.

Please consider this my public confession… And remember “to err is human; to forgive divine”.

Showing that Joe has a good sense of humour he also posted the following animated GIF on the blog.

In today’s ever increasing global business environment this is a useful reminder that it’s important to remember the more simple areas of international business.

We all make mistakes though and well done to Joe for his excellent recovery!

Should you do a u-turn if you see a GAP in the market and it’s out of the blue?

Published on: 13 Oct 2010

According to dictionary.com the definition of a U-turn is

1. a U -shaped turn made by a vehicle so as to head in the opposite direction from its original course.

2. a reversal of policy, tactics, or the like, resembling such a maneuver.

For anyone that’s looking for a current example of a branding u-turn then I’d recommend looking at what has happened since the US clothing and accessories retailer GAP introduced their new logo last week.

GAP Inc, which was founded in 1969 in San Francisco, is home to a number of brands including Old Navy and Banana Republic. Their most famous brand though is that of GAP itself.

GAP has approximately 3,100 stores around the world and last year had revenue of nearly $15 billion.

They are a great brand and their “blue box logo” (shown above on the GAP shopping bag) is one of the best known logos in the fashion world.

They decided however to change the logo and introduced the new logo shown below. Now, what do you think of the new logo? Which one do you prefer – the original one or the new one?

Personally I think that the new one looks as though it would be more suited to a high tech or consultancy company. The original one seems to better match their concept of clothing being laid back and traditional.

Following the launch of the new logo last week there was uproar on social media sites such as Twitter and Facebook with people demanding that the old logo be brought back.

The upshot is that on Monday GAP released a press release where they announced that the new logo would be withdrawn and the previous one reinstated.

In the words of the President of GAP Brand North America there was “an outpouring of comments from customers and the online community in support of the iconic blue box logo.”

A decision was therefore made not to use the new logo but to revert back to the previous one.

Was this a company listening to its customers and giving them what they wanted or was it a company that didn’t speak to their customers enough before making the change? There will be arguments both ways.

We shouldn’t forget the cost of this u-turn.

There would have course have been the fee GAP paid to their branding agency (probably ex-branding agency now). A quick straw poll in the office felt that the fee paid for this particular design should have been in the region of £10.

There would also have been the costs of redesigned packaging and signage with the new (now old) logo on it plus of course all the management time.

They say that “there’s no such thing as bad publicity”. I’m not sure GAP’s Branding agency would agree with this.

Get out your sketch pad if you want to overcome a barrier…

Published on: 11 Oct 2010

If an organisation can create a successful barrier to entry then it will have a great competitive advantage.

In simple terms, a barrier to entry can prevent competitors entering the market.

We’ve blogged before about a good example of a barrier in the Indian telecommunication market but a recent attempt to create a barrier by Southampton Football Club in the UK was met by a truly artistic response.

Southampton FC decided that they would try to boost their income by preventing any non Southampton FC photographers from taking photos of their match with Plymouth Argyle.

This barrier meant that the only photographers present were official Southampton FC photographers and hence any photos of the match would have to be purchased from the official agency. A nice revenue source for the club.

Ignoring the rights and wrongs of this in terms of impact on other clubs and setting a precedent, this is indeed a pretty tough barrier to overcome.

Understandably upset at having to pay for photos of their local team, the Plymouth Herald newspaper approached well known local artist Chris Robinson.

Chris watched the match on television and then drew “comic strip style” pictures of the football action which were then published in the paper instead of photos.

As you can see, the results were pretty impressive.

It also resulted in a pretty unusual answer to the question of “How do you overcome a barrier to entry”.

The answer now includes, “Draw some cartoons”.

Marks & Spencer – the figures weren’t padded out but what about…

Published on: 08 Oct 2010

Marks & Spencer (M&S) are one of the best known retailers in the UK. First established back in 1884 they have been a mainstay of British fashion for as long as anyone can remember.

They have however had a turbulent journey over the last few years but yesterday they announced their results for the quarter ended 2 October and a number of things were quite impressive.

First of all, the ability to release their figures within 3 working days of the end of the quarter was in itself no mean feat.

The figures themselves were also very good with group sales up by 6.5% and all the major divisions showing impressive growth. So, how have they managed this? After all, although we’re coming to the end of the recession people are still being careful about money.

According to Marc Bolland, the Chief Executive of M&S, “Customers are returning to quality. In Food they are responding well to our better value and innovation, and in Clothing are increasingly choosing M&S’s great fashions and quality that lasts.”

They were also successful in introducing “innovative new products” (classic Ansoff’s Product Development). For example, they have just announced that they will be the first to launch men’s “enhancing underpants” on the UK high street.

On the ladies side of things the success of the “Wonderbra phenomenon” has been well documented since they were introduced in the 1990s but in the words of M&S the Bodymax enhancement pants for men have a number of advantages.

The “frontal enhancement pants” are “specifically designed to visibly enhance your shape” and the “bum lift pants” are said to “lift and shape your buttocks for a visibly sculpted look”.

Mr Bolland also said that there had been “a positive response to increased investment in marketing”. It will be interesting to see how they market the enhancement pants.

Now, you’re possibly thinking what sort of person would buy these enhancement pants? You may also be wondering how comfortable they are to wear.

In answer to this final point I’ll let you know as soon as my pair are delivered.

That’s some obligation – it will take 180,000 years to repay it…

Published on: 06 Oct 2010

Yesterday, the so called “Rogue Trader”, Jerome Kerviel, whose unauthorised trades cost his former employer Societe Generale vast losses was sentenced.

Whilst this has got a serious element to it (he was jailed for 5 years) it also has a certain element of farce. As well as the jail sentence he was ordered to pay compensation to his former employer.

Now, this wasn’t any “normal” compensation we’re talking about here. It was the princely sum of €4.9 billion. Yes, Mr Kerviel was told that he has to pay nearly €5,000,000,000 to his former employer.

Based on his annual earnings before going to jail it would take him nearly 180,000 years to pay that amount! Societe Generale have sensibly announced that they will not be pursuing the money.

Control environments don’t generally strike students as the most scintillating area of their studies.  A number of ACCA and CIMA Papers however place considerable emphasis on controls, using Sarbanes-Oxley and the COSO frameworks.

Respecting controls might slow down an employee’s daily work routine and may feel sometimes like a constraint on innovation and enterprise.  Sometimes, it may be tempting to circumvent controls, especially if it generally appears to result in making quicker profits.

Anybody tempted to do this might be interested to note the Paris court’s decision to sentence Mr Kervie.  Although the hapless gentleman alleged that the bank had been complicit in allowing him to trade beyond his authority limits, this seemed to be little defence in either showing innocence or getting a more lenient sentence.

The lesson seems to be fairly clear.  Even if the tone appears to be one of disregarding controls because management don’t take them seriously, if anything then goes wrong, management will most probably not agree that controls were considered to be unimportant!

The safest thing to do is to assume that any controls are meant to be respected, even if it doesn’t feel that way.

It could literally be your “get out of jail” card.

The ExP Group