Category Archives: Business

Size doesn’t matter; age does

John Haltiwanger, Ron S. Jarmin, and Javier Miranda, “Who Creates Jobs? Small versus Large versus Young”, The Review of Economics and Statistics, May 2013, Vol. 95, No. 2, Pages 347-361.


The view that small businesses create the most jobs remains appealing to policymakers and small business advocates. Using data from the Census Bureau’s Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues at the core of this ongoing debate. We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age, there is no systematic relationship between firm size and growth. Our findings highlight the important role of business start-ups and young businesses in U.S. job creation.

The entire article is here.

Institutional Investor on high-frequency trading

From Institutional Investor:

Inside the Machine: A Journey into the World of High-Frequency Trading

10 Jun 2010
Michael Peltz

An editor’s journey into the world of high-speed trading and proprietary algorithms that make or break markets.

At 2:45p.m. on Thursday, May 6, George (Gus) Sauter received a frantic call from one of his traders to get in front of a Bloomberg terminal. The Dow Jones industrial average, already down 3.9 percent that day on fears about Greece, was in free fall. In just five minutes the index plunged 573 points. Less than two minutes later, the Dow had rocketed back up 543 points, going on to finish the day down 3.2 percent.

“It was just crazy,” Sauter, chief investment officer of mutual fund giant Vanguard Group, told me a few days later. “I had to go to our fixed-income building, about a five-minute walk from my office. By the time I got there, the market had rallied.”

Crazy, indeed. The aptly named “flash crash” temporarily wiped out more than a half trillion dollars in equity value, shaking what little faith nervous investors had in U.S. markets. Shares of Dow component Procter & Gamble Co., the ultimate defensive blue-chip stock, dropped more than one third in a matter of minutes before recovering almost as quickly, all for no apparent reason. A few other large U.S. companies, including accounting firm Accenture, saw their stocks trade as low as a penny a share, only to close not far from where they had begun the day (nearly $42 a share in the case of Accenture) — again, on no news. By the time the dust settled, a whopping 19.3 billion shares had changed hands, more than twice the average daily U.S. equity market volume this year and the second-biggest trading day ever.

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Smart Grid in China

From Institutional Investor:

Investors Want to Plug Into China’s Smart-Grid Market

01 Apr 2010
Xiang Ji

Beijing’s massive conversion to a smart power grid could just one-up the rest of the world. Savvy entrepreneurs and investors are looking to get a piece of the green action.

When Beijing announced a $585 billion stimulus package in November 2008, Jeffrey Kang spotted an opportunity. The package’s vast investment mandates included one aimed at upgrading the country’s electricity distribution system to a smart grid that would use high-tech meters to precisely match supply with demand in households and offices. The energy savings would be an obvious boon for the planet — but savvy entrepreneurs and investors like Kang also wanted a piece of the green action.

China Electricity Council, a national power industry association, estimates that total spending on the smart grid will hit $40 billion by 2011, although the entire project likely won’t be completed until 2020. An estimated 300 million old electricity meters are to be replaced by smart meters that encourage lower energy use by displaying usage prominently. The meters can also track household energy patterns and adjust distribution accordingly.

The whole smart-grid system — comprising ultrahigh-voltage transmission lines, sensors and smart meters, all connected through computer networks — enhances energy efficiency not only by matching supply and demand, but also by more efficiently managing intermittent renewable energy sources.

Entrepreneurs and investors see great prospects in the conversion to a smart grid. Kang, who is CEO of Nasdaq-listed, Shenzhen-based module supplier Cogo Group, signed a deal in April 2009 to acquire China’s Mega Smart Group, a supplier of parts for smart-meter makers. Kang estimates the deal will generate $20 million in sales in the first year, or about 7 percent of Cogo’s total revenue. And that’s only the start. “Smart meters will be a key driver in our growth going forward,” says Kang. Just last month Yale University said it had invested in Redwood City, California’s Silver Spring Networks, a smart-meter manufacturer planning an IPO in 2010.

SBI Energy, a Rockville, Maryland–based market research firm, forecasts that the smart-grid market will grow from $90 billion in 2009 to $171 billion in 2014. SBI says government and corporate mandates to convert to climate-friendly energy systems will drive the boom.

Vinod Khosla, founder of Khosla Ventures, a Menlo Park, California–based venture capital firm, predicts that the world’s electricity grid will eventually be set up “so that smart transformers are feeding information to smart way stations and talking to smart meters.” VC firms’ interest in smart grids emerged only recently, with investments as of last year totaling $414 million. By contrast, solar power has attracted $1.2 billion of VC funds, according to consulting firm Cleantech Group.

London-based VC firm WHEB Ventures not long ago made a capital injection of an undisclosed sum in PassivSystems, a Berkshire, U.K., company that makes energy management systems that fit into smart grids. “Though it’s still in early stages, smart grid represents a potentially vast global market,” says Megan Bingham-Walker, an associate at WHEB Ventures, which manages £114 million ($170.2 million). President Barack Obama last October granted $3.4 billion in stimulus money to develop smart-grid technology and install upgraded meters in the U.S.; utilities are to match these funds. Europe, meanwhile, has mandated that 20 percent of its energy must come from renewable sources by 2020.

Still, investors looking to plug directly into the smart-grid market may find it difficult to do so. For instance, Robert Metcalfe, a partner at Polaris Venture Partners, a $3 billion, Waltham, Massachusetts–based private equity firm, has been screening energy-management software developers but has yet to write a check. “One of the challenges is that there is no standard to root for, making it hard to recognize the winner,” he laments.

Corporate bonds boom in China

From Business Week:

In China, a Burst of Corporate Bonds

Thanks to streamlined regulations, more companies are issuing debt cheaply and fast
By Frederik Balfour

Hong Kong – Here’s a little-known fact: Chinese companies now issue more corporate debt than their counterparts in Japan, making the yuan-denominated bond market the world’s No. 3, after those for dollars and euros. In the first five months of 2009, mainland companies sold $82 billion worth of debt, vs. $51 billion for the Japanese. “The growth in issuance has been phenomenal,” says Liao Qiang, credit analyst at Standard & Poor’s (MHP) in Beijing.

Bond sales in China started to come to life when the mainland’s equity markets headed south in late 2007. As sellers parked their stock proceeds in deposit accounts, banks found themselves flush with money they couldn’t lend because of government limits on loans. To give banks somewhere to put their excess liquidity, regulators in April 2008 streamlined rules on bonds.

Before the changes, corporate bonds had to be listed on the stock exchange. That required approval by exchange regulators, which was costly, time-consuming, and subject to political whims. So most issues were enterprise bonds—money raised by state-owned companies to finance big infrastructure projects such as the Three Gorges Dam or new railways. These all had state guarantees and offered identical yields.

The new rules make things simpler. While all issues require a credit rating, they no longer need to be traded on the exchange. The market got an added jolt last September when Beijing halted new domestic stock offerings as Shanghai shares tumbled. That forced companies to look elsewhere for capital. And with interest rates down worldwide, bonds have become yet more appealing. In the first five months of 2009, corporate bonds accounted for 22% of all debt issued in China, including government debt, vs. 3% in 2007.

Corporate bonds will be crucial to Beijing’s efforts to make the yuan a global currency. For that to happen, the mainland’s capital markets need to be far more sophisticated and better integrated into the international financial system than they are today. “The government is pushing to make financial markets more broad-based and mature, and without debt you cannot say that is complete,” says Frank Gong, chief China economist at JPMorgan Chase (JPM).

More than 100 companies have issued bonds. The largest offering to date came in May when Agricultural Bank of China raised $7.3 billion, priced to yield 3.3% for five years, vs. 2.4% on government bonds. Billions more are in the pipeline, including issues by International Commerce Bank of China, Bank of Communications, and Bank of China.

But for cash-starved private companies the market is still hard to penetrate. The minimum flotation is $141 million, and issuers must have a AAA or AA+ rating from one of the five domestic or joint-venture ratings agencies that have been licensed. That precludes all but a handful of private companies from participating, so more than 80% of bond issuers are state-linked companies. And because most purchasers of corporate debt hold it until maturity, bond trading after issuance is “still quite thin,” says Frances Cheung, fixed income strategist with Standard Chartered Bank in Hong Kong.

The bond market could get a further boost once Beijing opens up the market in “panda bonds”—yuan-denominated issues by foreigners. So far, the International Finance Corp. and Asian Development Bank are the only organizations that have issued panda bonds, although HSBC (HBC) and Bank of East Asia have been approved to sell them in Hong Kong. And later this year locally incorporated subsidiaries of foreign companies may be allowed to issue panda bonds on the mainland. Among the first will likely be London-based Standard Chartered, which aims to raise some $500 million to shore up its mainland balance sheet. Although stocks are climbing and IPOs are set to resume, “we’ll still see strong demand” for bonds, says Chris Zhou, director of debt capital markets at UBS Securities in Beijing. “The bond market is a relatively easy and cost effective way to get money.”

B of A recaps at market

From Institutional Investor:

At the Market Deal for Bank of America

03 Jun 2009
Steve Rosenbush

BofA issues stock to withstand market volatility.

Raising $33.9 billion in capital is no mean feat for a bank, especially given the violent mood swings that have gripped the financial markets of late. Nonetheless, such were the marching orders that the Federal Reserve Board handed Bank of America on May 7, when the Fed announced the results of its stress test of 19 U.S. lenders. The financial giant sprang into action the very next day, announcing that it would reduce a big part of the capital deficiencies identified in the stress test by issuing $13.46 billion in equity.

The issue took an unconventional form. Instead of executing the deal in one fell swoop, as companies commonly do, BofA parceled out the shares over the next eight trading sessions. This piecemeal approach, pioneered more than 15 years ago by utilities and real estate investment trusts, which recapitalize frequently, is known as an at-the-market offering, or “dribble out.” The bank’s ATM was the largest in history.

BofA had determined that the structure made sense, given the volatile nature of the market. Its own shares — whipsawed, like those of many big banks, by investor fears over the health of the industry — had plunged 93.6 percent, from a 52-week high of $39.50 on September 19 to a low of $2.53 on February 20, before recovering somewhat. “In a volatile market, the ATM structure is beneficial because it allows you to sell shares when you like the price and leave the market when you don’t,” explains Lisa Carnoy, global co-head of equity capital markets at BofA, which was book runner on its own deal. “It was a perfect approach for us. We were able to minimize dilution and maximize flexibility.”

Demand for the shares was strong, according to Carnoy. In an ATM, the sale of a fixed amount of equity can be stretched out over a month or more, but the company decided to complete the sale on the eighth day, in a so-called cleanup trade. The shares, which had rallied in anticipation of the offering, closed at $14.17 on May 8, dipped to an issue low of $10.67 on May 15 and finished the offering on May 19 at $11.25. The bank sold 1.25 billion shares at an average price of $10.77.

“In this environment, the ATM is a flexible way to raise money. However, with the capital markets open, it made sense to get the equity offerings behind them,” says Jason Polun, a large-cap-bank analyst at T. Rowe Price, a major holder of BofA shares. Polun has a favorable view of the company. And many apparently agree. Hundreds of institutional investors, including pension funds and mutual funds, lined up to participate in the offering. “We could have kept selling, but we just decided to get it done,” Carnoy says.

An ATM structure helps maximize price, minimize dilution and maintain flexibility with respect to size and timing of a deal. In BofA’s case, timing mattered because it had to coordinate the issue with other components of its capital raising plan, including asset sales and conversion of preferred shares. By June 25 the effort was all but complete.

The case for the ATM was bolstered by the disappointing performance of more-traditional offerings, says Carnoy, citing secondary placements this year that have priced as much as 15 percent below where they launched. Morgan Stanley issued $4.5 billion worth of stock in a follow-on offering on May 8 at $24 a share, an 11.57 percent discount, according to research firm Dealogic. And on May 12, bank BB&T offered $1.75 billion worth of shares priced at $20, which Dealogic pegs at an 11.11 percent discount. By May 28, BB&T shares had gained 5.95 percent and Morgan Stanley was up 19.21 percent, according to Dealogic. “If the market happens to be down on the day that you initiate a secondary offering, you are simply out of luck,” Carnoy says. BB&T says it was pleased with the demand for the issue.

BofA’s success with its ATM has already inspired one bank to follow its lead. Fifth Third Bancorp announced on May 20 that it would issue as much as $750 million worth of stock and sell the shares “from time to time” using the structure. It has hired BofA and Morgan Stanley as co–book runners on the deal.

Solar panels get cheaper

From Business Week:

Solar Panels Get Cheaper

Here Comes the SunWith Congress considering both a cap on carbon dioxide emissions and renewable energy requirements for power companies, utilities are trying to figure out how they’ll produce clean energy. One increasingly viable option: solar panels. Solar is still several times more expensive than wind or natural gas and many times pricier than coal, says John Rowe, CEO of Chicago-based utility giant Exelon (EXC). “But solar is where costs are improving the fastest.” One reason: Supplies of crystalline silicon, the base material used in most panels, are plentiful, thanks to climbing production capacity. On June 8, analysts at Barclays Capital (BCS) said they expect output in 2010 to top 138,500 metric tons, 13% more than originally predicted. At the same time, solar panel factories are now more cost efficient. In a recent issue of Science, the president of panel maker SunPower (SPWRA), Richard Swanson, says it will be possible to make crystalline solar panels for $1 per watt in five years, down from about $1.90 today. Competing thin-film (non-crystalline) panel makers say their somewhat less efficient product will get down to 70 cents per watt.

Either way, the solar power industry is closing in on the long-sought goal of “grid parity”—making electricity for a price that’s competitive, at least in high-priced U.S. markets such as California, where energy is typically produced with natural gas at about 12 cents per kilowatt hour. Clean technology research firm Clean Edge predicts partial parity by 2015.

“We think this opens up a huge market,” says Christopher O’Brien, head of market development at Oerlikon Solar, a Swiss maker of equipment to produce thin-film panels. A short-term problem for the recession-battered solar industry: Many deals are on hold as customers wait to see if they can get stimulus money.

Bonds for Microsoft

From Business Week:

Bonds for Microsoft

Cash is king these days—so much so that even debt haters are willing to take out loans to get more of it. On May 12, Microsoft sold bonds for the first time in its cash-rich history, adding $3.75 billion to its already impressive stash of $25 billion. Rumors of potential acquisition targets soon followed—not just Yahoo! (YHOO) but also business software rival SAP (SAP). So far, CEO Steve Ballmer is denying he’s got any mega-deals in the works.

Funny as it is, I’ve been assigning my students a problem involving bond issuance by Microsoft since 2002 or so…

An ethanol glut?

From Business Week:

BW ethanol

Lobbying for a Better Blend

The ethanol industry is about to hit a wall—the “blend wall.” U.S. biofuel factories now have the capacity to make about 12 billion gallons of ethanol a year, and the U.S. market can’t use much more than that. That’s because annual U.S. gasoline consumption is about 137 billion gallons, and gas isn’t allowed to contain more than 10% ethanol, a blend called E10. If every drop of gas actually met that limit, the ethanol market would be 13.7 billion gallons. But for logistical reasons, a portion of the gas sold will never contain any ethanol.

The looming blend wall is making it harder to get new ethanol plants financed, so corn growers and ethanol producers are lobbying to increase the blend to allow up to 15% ethanol (E15). Opposing them: a coalition of oil producers, food companies, and green groups, which complained to the Environmental Protection Agency that raising the quotient may lead to higher food prices and other woes. In April, the EPA agreed to review the issue.