Investment Banking Hours, Investment Banking Pay

I have a Human Resources midterm coming up on Friday and was reading up on recruitment and selection. One of the problems companies face is that they have certain budgets and costs that is a constraint against hiring the best talent. With this in mind, companies have to make do by hiring less qualified people in order to fill up job vacancies.

But lets stop right there and put up this hypothetical situation. Assuming hiring a genius would cost $100,000 a year, and hiring an average person would cost $50,000 a year, and there are two job vacancies, would it make sense to hire the two rather than the genius?

Now in the investment banking world, people work 100 – 120 hours a week. Thats easily more than double what a normal 9 – 5 job would entail. So why do people go through such an ordeal? Reasons range from an interest in finance, an Excel addiction, prestige, etc… But regardless, the investment banks make sure their employees are appropriately compensated with a lot a lot of money and thus manage to attract the best talent in the world.

So why don’t these investment banks simply hire two people to do the job? It could simply be the banking way of doing things but I’m convinced its because that way they can continue attracting talent into their organizations. Investment banks are a lot like technology companies, its success depends almost entirely on the ability of its people. As such, attracting the very best is absolutely necessary for the organization’s continued survival and growth. By giving undergraduates $100,000 a year for an entry-level position, geniuses enamoured by the pay will be willing to overlook even the most insane hours.

Perhaps this is the route companies will take in the future. The aging population will be causing a labour shortage and with limited qualified applicants, those applicants will be very highly paid. In exchange for doing the work of two.

Yahoo + Microsoft

With so many people asking questions about why Microsoft might want to acquire Yahoo!, I wrote a short article explaining the possible reasons for the acquisition…

Yahoo + Microsoft? At $44.6 billion, Microsoft has offered to buy Yahoo at a 62% premium over its closing stock price before the announcement. In itself, a 62% is already incredibly expensive so in current market conditions what could possibly justify such a massive premium?

Perhaps the current market conditions are the very reason why Microsoft has grabbed this opportunity to buy Yahoo. 62% may seem like a large number but just three months ago, Yahoo was trading at a price higher than this premium. If not for a severe sell-off in the technology sector, Microsoft’s bid might have been laughable.

According to Microsoft, synergies through the increased scale, expanded research and development capabilities, higher operational efficiencies and more resources to focus on emerging internet user experiences will generate at least $1 billion annually. This does make sense as Microsoft’s and Yahoo’s market share in web search, 9.8% and 22.9% respectively, has so far failed to threaten Google’s dominance. Together, they might just be able to form a resemblance of competition to Google’s 58.4% market share.

Microsoft’s acquisition makes even more sense when looking at the two firm’s web properties. At the very end is a table of where Google, Yahoo and MSN properties appear within the top five positions of various web applications and portals.

By competing on a totally different field, Microsoft and Yahoo will be able to control web applications which can then be leveraged to maintain or even increase revenue from Microsoft’s core competency of office and operating software. On a different note, Google and Yahoo are also strong in different geographic areas, Yahoo in Asia and Microsoft in Latin America and Europe, and a merger would greatly expand their reach.

There is always an integration risk from failing to absorb its acquisition, even more so with large technology acquisitions where there is a graveyard of previous failures. However Microsoft has undergone careful thought and valuation before going through with its bid and with the online advertising market projected to double in the next three years, the return might just justify the risk.

The Chinese Stock Bubble

A little article I wrote for the trading floor newsletter at the beginning of the year. With the Shanghai Composite Index already down 12%, it doesn’t seem such a bad analysis after all…

The Chinese Stock Bubble

Three decades of solid double-digit growth in GDP has made China the third largest economy in the world. Yet despite the shape of the economy, it wasn’t until 2006 till the Chinese stock markets became recognized on the world stage. The Shanghai Composite Index averaged a 113.6% annual return over the last two years to make it the fifth largest stock exchange in the world by market capitalization. Such returns seem neither sustainable or realistic indefinitely, and this explosion has the earmarks of a market bubble.

After five consecutive years of negative growth in the stock market, the Chinese government lifted a ban on IPOs in the middle of 2006, and relaxed restrictions to encourage many of the largest Chinese companies who previously were only listed on the Hong Kong or/and American Stock Exchanges to start raising funds in mainland China. These new entrants may have brought in repute into the markets of a country where corruption is rife. Perhaps this is what triggered what Alan Greenspan termed as “irrational exuberance”. No market bubble has occurred without investors speculating and driving up prices beyond rational expectations of its real worth. China’s new found wealth meant a burgeoning middle class who had no place to put their savings. Constricted to just investments in mainland China, the stock market now seemed the best and safest place to put your savings, and everybody was doing it. There was also a commonly-held belief that the government, who holds majority holdings in many benchmark companies, would not let the markets crash before the Beijing Olympics due to the devastating effect it might have on its economy and reputation.

Not many countries have had a major index quadrupled in two years. Yet with the Shanghai Composite and Shenzhen Composite having P/E ratios of 65 and 72 times trailing earnings respectively, the markets are undoubtedly due a market correction, a fact not missed by the government. Chinese government has a lot more control and has been trying its best to control the euphoria in the stock market, even going as far as to warn investors that a bubble might be forming and to be increasingly cautious. The markets themselves have a few measures in place that might help mitigate the effects of a correction. The two Chinese stock exchanges have implemented caps which prevent stocks from rising or falling more than 10% a day by halting any trading on that stock. Short-selling is also illegal in China due to a suspicion that it might exacerbate market crashes. And of course the classic move of increasing interest rates hasn’t been neglected with interest rates raised six times in 2007 to a nine-year high of 7.47 percent. Yet despite all their efforts, the markets have continued to grow unabated, market forces prevailing in spite of the government’s actions. It certainly seems inevitable that the Chinese markets will crash; the only question left unanswered is when it will occur, and how bad it will be.