New York, April 3 (Bloomberg) -- The dollar's 6 percent rally against the yen this year could be capped in coming weeks as international investment into assets in Japan outweighs the money flowing out as investors there seek higher yields abroad.
After months of shunning Japanese investments, global portfolio managers are easing back in as Japan's government works to pull the economy from its worst recession in 50 years. The shift contributed to a 17-percent gain in Japan's benchmark Nikkei 225 stock index in the past month.
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Evidence of merger bubble can be seen in the market's reaction to the Citicorp-Travelers merger. Before the merger announcement, the firms had a combined market capitalization of $120 billion. Afterwards, their combined market cap rose to $165 billion. Thats a $45 billion increase or 38% for signing a bunch of documents. After putting their two firms together, Citi's John Reed and Traveler's Sanford Weill paid themselves about $30 million each in 1998 despite Citigroup's massive layoffs and poor results. This is the stuff behind the 10,000 Dow.
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On the internet front, there is Amazon.com.
According to Rita Koselka of Forbes Magazine, Amazon has no profits - margins, in fact, are moving in the wrong direction - and definitely no monopoly. To Amazon's chief financial officer, 35-year-old Joy Covey, who joined Amazon in December 1996 at a lowly salary of $100K (Covey's package is worth $190 million once it vests), Amazon's customers include not just the book buyers but a cultlike collection of investors and option-rich employees. Her job is to bridge the gap between a soaring stock price and the need to plow billions into building the business. Amazon ran a net loss of $75 million last year, and another $200 million could go out the door this year. The obvious thing to do is convert shares into harder assets. Amazon could do this by floating new stock, depositing the proceeds in the bank; or by using stock to acquire a business with real earnings—say, a book wholesaler. Amazon has done neither.
If Amazon were to sell more shares—or even to use them as currency in buying a conventional business—it just might spook investors and crash the stock. In the special religion that deifies Internet stocks, it is considered acceptable to buy another Internet company but sacrilegious to merge with something mundane. Look at how Wall Street punished Lycos for agreeing to combine with USA Networks Inc.
But Covey's employer needs cash, gobs of it. Late last year she oversaw a $326 million junk bond issue—the first by an Internet company— on terms that let Amazon go five years without having to make any payments. Yield to maturity: 10%. In January she did a convertible-bond offering first pegged at $500 million; at her behest, it ballooned to $1.25 billion later the same day. "I was always pushing for bigger." Each $1,000 bond pays 4.34% in annual interest and can be converted into Amazon common stock at $156 a share; lately Amazon trades around $130.
Why would anyone in his right mind lend money to a company that is losing it? "We knew there were investors who had not gotten into Internet stocks before but didn't want to take all the risk of buying at today's high prices," Covey says. "This instrument gives them downside protection, and they still get the upside."
Instead of paying suppliers first and waiting to get paid by customers, Amazon gets paid by customers first and keeps book publishers waiting. That lets Amazon have free use of customers' money for 36 days—a $130 million float at the company's current billion-dollar-a-year sales rate. Covey invests it in short-term securities.
Wal-Mart is valued at $211 billion and has $140 billion in revenue. Amazon's value is at $21 billion with $1 billion a year in sales. Both retailers have gross margins of about 20%. Wal-Mart's operating margins have consistently been around 6%. Amazon fully believes it can have operating margins of 6% or better.
So if Amazon can sell $10 billion in goods, maintain a gross margin near 20% and hold costs to $1 billion a year, it would have $1 billion in operating income (net before depreciation, interest and taxes). And you can run an on-line store with precious little debt and equity capital.
The problem is, even a high return on invested capital may not represent such a high return on Amazon's present market value.
Is there any hope for today's investors? Some. It's conceivable that Amazon will become the Wal-Mart of cyberspace, hitting sales of $100 billion, in all manner of dry goods. (End of Forbes report.)
It's what Greenspan calls a lottery chance, the engine of growth for the US economy. Still, it has better odds than current US policy in the Balkans.
Henry C.K. Liu