Quick reads

Good articles by Pat Buchanan and Ann Coulter

Good counter point by Larry Kudlow

Good for them

Talk about rising from the dead. Nortel (NT) smoked estimates and reported its first full year profit since 1997 and the stock is on fire. I didn’t think they would make it, but lo and behold they did.

I do not hold any positions in NT stock.

Reminiscing ’bout the days of old

So one of my clients is a venture capital fund in Silly Valley (my name for Silicon Valley). And being that I use to be in the high tech investing game, it’s a nice trip down memory lane.

Remember back in the day when they said it was a good idea to buy a basket of stocks in a hot sector, and needing only one of them to become the next Microsoft for the whole investment to pay off? Well, boy did these guys ever – they’re the real deal. The fund began with $100 million, and one of their first investments was an early round investment in ABC Networks for $5 million. Five years later, at the height of the tech bull market, they distributed shares in ABC Networks to their partners (cashing out in VC speak) with a gain of over $625 million.

Think about it for a minute. It’s the same as buying shares at $1 and selling it at $126 for a gain of $125. That’s a 125x return on the original investment. In percentage terms that’s a 12,500% return over 5 years, or roughly a compounded return of 265% per year over 5 years for their investment in ABC Networks. Overall, the original $100 million fund made over $850 million in capital gains for its investors. Or to put it simply, they turned $100 million into almost $1 billion. Takes your breath away doesn’t it?

Capitalism at its finest.

Note: Names and figures have been changed due to the information being privy to the fund and its investors. The figures used are fictional. However, I’ve maintained the magnitude of the figures for illustration purposes.

As a side note, there’s plenty one could critique – i.e. the market was a euphoric bubble, the investors may not have sold once they received the shares and rode it down, we’ll never see a market like that again, etc, etc. I wanted to give an inside peak at a VC, what can go right, and a reason why people invest in venture capital funds. Hope you enjoy.

Update: I forgot to mention, the standard fees the GP would charge to manage a fund is in the ballpark of 2.5% of capital committed per year and 20% of profits.

Update2: Here’s a good article about Google and its relation to the IPO/VC world.

“Cheap Foreign Labor” and Prison Reform

Over at The Corner, Mark Krikorian suggested spending funds Bush earmarked for job training on “immigration enforcement” at work sites. The idea is to make cheap immigrant labor less available, and thereby to make domestic ex-convicts more attractive to employers.

But how about streamlining immigration procedures instead? If immigrants will work for lower wages than ex-convicts, artificially restricting the labor market to benefit ex-cons amounts to an indirect and inefficient subsidy. Krikorian ignores the costs to business, and hence consumers, of immigration restrictions that drive up labor costs.

He also ignores the possibility that employers prefer immigrants for many jobs at a given wage level. In that case the better course of action might be to eliminate, or at least lower, minimum wage rates that price less-productive and higher-risk workers out of jobs.

It’s obvious that most immigrants come to this country because they want to work, but we shouldn’t forget that American employers want to hire them. It should be easier for hard-working immigrants to come here without first spending years jumping through bureaucratic hoops.

Prison reform is a separate issue. Ex-convicts may be made employable via training programs (as Bush proposes), by lowering the minimum wage, or even by directly subsidizing employers who hire them. Attempting to increase demand for ex-con labor by driving illegal immigrants — many of whom are illegal mainly because it’s prohibitively difficult and time consuming to become legal — out of the labor market, is a poor alternative.

American Manufacturing

My last client was for a spin out of a small manufacturing business of an oil equipment giant. This subsidiary’s business isn’t really related to the parent’s, so they’re trying to create value through an IPO. I was there for the diligence part of “due diligence”, so really got to know the operations inside out. (The cynic in me says the partners are there for the “due” part, which is to collect the bills due, but that’s another story in itself.)

One thing that really stuck out in my mind through this assignment was that this was one of the last great American manufacturing jobs left. By which I mean a relatively uneducated employee could start on the company’s manufacturing line with a salary of around $22,000 a year, and work their way up. With hard work and patience, they could eventually work their way into a skilled job up the line with a respectable annual salary of $50,000 – $70,000 a year. Granted it would take many years, but it’s an accessible on-ramp into middle class for literally someone with a high school education. If the person were really dynamic and had the brains, they could even swing themselves into a management position at some point. The company had good benefits, including retirement and all the usual goodies. In a nutshell, a worker’s paradise for lack of a better term.

Looking over what they do and what they make, there isn’t really anything – save social responsibility on the company’s part – to stop them if they wanted to transplant their entire operations to China or India. They would save a bundle on labor costs, and given the highly automated nature of their machines, you really don’t need that much skill on the part of the workers. At the very least, none of the skills involved are above the aptitude of an eager Chinese or Indian. The double edge sword of modernization is also that since you want to make everything automated and dumb it down to the n-th degree to maintain high quality, you get to a point where you can literally take the brain out of the equation. So pay a Chinese or Indian $100 a month, and you decrease your biggest operating expense by more than 90%.