Milosevic burial: ultimate irony of history

According to news reports, Serbian authorities are not willing to grant Slobodan Milosevic a state funeral in Belgrade. His family therefore is taking his body to Moscow, where they reside and he is likely to be buried in a Moscow cemetery. In the on-going controversy about the circumstances of Milosevic’s death, Russian authorities stand firmly behind his family, after having granted his wife and son political asylum.
I wonder how many people appreciate the irony of this situation. Milosevic was a legitimate successor, if not necessarily a heir, of Joseph Tito, the founder of post-war Yougoslavia. While Tito was a bona fide Communist, he was his own man, who did not depend on Soviet Army to gain power. Because of his independence, he fell out with Stalin in 1947 and 1948 and then became the principal enemy of Soviet Union. There was no worse crime in the eyes of Polit Buro than the titoism. And condemnation was not just verbal. Principal leaders of Communist parties in Czechoslovakia and Hungary were arrested and put to death in the early 1950s after the show trials, which accused them of titoist deviationism. Stalin has tried repeatedly to get rid of Tito via covert means of assassination or poisoning attempts. He did not succeed because of Tito’s vigilance and willingness to be as ruthless as Stalin. Certainly, there was no love lost between the two countries.  Pan-Slavic solidarity that apparently motivates the sympathy shown by the present Russian government to Milosevic family is quite a recent phenomenon.  

Financial exchanges' market: another milestone

Financial exchanges’ market: another milestone

Today represents somewhat of a milestone in the history of public listing of stock exchanges: New York Stock Exchange is going public. It may be the last but it is certainly not the least. The expectations is that the combination NYSE – Archipelago Holdings will be valued at about 10 $billion, which will the biggest equity marketplace in the world below both Chicago Mercantile Exchange and Deutsche Borse (DBAG) but high above Euronext, Nasdaq and LSE. The table below shows the market capitalisation of quoted major exchanges and their relative valuation (as expressed by P/E ratio)

Quoted Financial Exchanges: market data

(as of March 6, 2006 COB in euros)

aaaaaaaaaaa CME AX NDAQ Euronext DBAG LSE OMX

Market Cap 12285 2641 2998 6112 10904 3218 1694

P/E Ratio 48.6 74.58 70.11 42.42 25.74 37.38 29.16

The most highly valued exchange in absolute terms is the CME. One assumes therefore that the market puts a premium on derivatives rather than on straight equity markets. This is apparently confirmed by the high valuation of DBAG. However, this is only a partial corroboration as DBAG’s derivatives segment, Eurex, is actually bigger than that of CME. Come to think of it, Euronext also has a sizable and flourishing derivatives business, LIFFE. The current market ranking suggests that those businesses are undervalued, relative to CME. This may reflect a degree of scepticism about the willingness of the management of Euronext and DBAG to maximise shareholder value. It also creates what fund managers see as an arbitrage opportunity. On Monday March 6, Financial Times published an article on the “Hedge fund’s love affair with exchanges.” Among reasons for their interest, the article lists the uncertainty about proper valuation, which creates a potential upside.” As we know, some fund managers were not content to wait patiently for such upside but took active steps to make it happen. They were instrumental in torpedoing a potential merger between DBAG and London Stock Exchange and bringing about top management changes in DBAG. At present, they appear to favour a combination between DBAG and Euronext. This is not an easy proposition. Current market valuation suggests a takeover rather than a merger of equals. Politically, this may not be acceptable to the Euronext shareholders and, even more, to its overseers. Furthermore, it would require major business restructuring, concerning both the clearing and derivatives businesses. I am sure that some managers and their advisers are exploring the idea of splitting those businesses and floating them separately.
The arrival of NYSE is going to make the life of exchanges even more interesting. Many observers believe that the NYSE cannot remain as it is and its flotation, by creates an acquisition currency, is a necessary stage in the process of its continuing transformation. Logically, the process should next unfold in the US market but one cannot rule a transatlantic move.

ATT buys BellSouth: Backing into the future

On Monday morning, March 6, 2006, AT&T announced that it will merge with BellSouth, a Baby Bell in a 67 $billion transaction. This was big, potentially market-moving, news, which triggered a flood of comments and analysis. The gist of it was that the old AT&T was back with vengeance and that the further consolidation was preordained.  
While these statements are undoubtedly true they are not necessarily the most pertinent ones.  The emerging AT&T is very different from the old one. For one thing, it is actually a Baby Bell, SBC, which is running the business. And at the time of the break-up, SBC was generally deemed as the one most likely to be consolidated rather than consolidator. What made the difference was a strategic intent and managerial skill of few people (Ed Whitacre in particular: he may look like a quintessential company man but he is a remarkable business builder). But beyond the corporate identities and human interest stories, the logic of the deal is clearly defensive. And this logic covers not only the declining fixed line business but also the flourishing mobile business. It is the latter that is the key driver behind the deal. As a matter of fact, SBC bought AT&T to get into Cingular and once they have a half-share of it, the merger with the other half-owner (BellSouth) looked unavoidable. This should reduce cost and streamline management. More importantly, it should (in theory at least) help the company focus on the strategic challenges to the mobile business. These challenges include:

• Technological integration among different mobile standards (GSM, TDMA, CDMA) and the speed of convergence to CDMA (and related technologies)


• Pricing structures rationalisation in order to increase usage and to prevent


• Declining ARPU (average revenue per user)

Underlying these challenges lurks a spectre of the wireless high-speed Internet. This is the promise and the menace t of CDMA and other 3G technologies. Much is made of the threat that VOIP (voice over the IP) poses to fixed line telcos business. But the threat is actually as real and economically much more serious to the mobile voice business. And the mobile voice is at present both the cash-cow and the growth driver of the traditional telcos not only in the US but also in Europe. It does not require much of crystal-balling skills to foresee that the VOIP over wireless high-speed internet will cause drastic adjustments in pricing of voice services, similar to the one that broadband Internet imposed on ISPs, forcing them to shift from time-based to fixed-use pricing. To the extent that mobile revenues are much higher and more important than Internet data ever were, the adjustment will be more dramatic and painful.  
Telcos have between eighteen months and three years to put in place alternative pricing structures, based on service and third-party pricing and to further restructure their business. Failing this, we shall witness a destructuring scenario, similar to the one that shook up the computer industry between 1985 and 1995. By the end of this period, none of the major players have survived in its previous incarnation and the sectoral hierarchy was changed beyond recognition with new players (Microsoft, Intel and Dell) becoming market leaders. We can anticipate similar or even bigger upheavals in the telecom domain.