The sky is falling

Back in September last year, the Wall Street Journal wrote an article about how low oil prices could lead to a global recession. An article by the Guardian last Friday repeated the sentiment with a suggestion that low oil prices could hurt the stock market.

Look out, Chicken Little, the sky is falling!

The doom and gloom argument appears to be based on two factors:

  1. Falling oil prices will hurt oil producers like Exxon and Chevron. Since these firms are large, falling profits will lead to lower share prices which in turn will pull down the market index and lead to a drop in the overall market. This would bad for shareholders;
  2. Secondly, the falling oil price will make it more difficult for oil companies to repay outstanding debts. When oil prices were high many Wall Street banks lent money to finance new drilling expeditions, and Dealogic estimates that the oil and gas industry has roughly $500 billion in outstanding debt. Increased levels of distressed debts could lead to stress in the banking sector.

Oil producers and the banks who backed their optimistic projects during the boom years will stand to lose in the new reality of low oil prices.

Luckily though the economy is composed of more than just banks and oil producers.

Richard Branson, the billionaire entrepreneur and philanthropist, provided some sound wisdom at Davos recently when he said that “oil prices are good for the consumer, they are good for most businesses. They are very good for the airline businesses. And obviously if you are an oil company they are not so good for you. But I think what the market has missed is that with oil below $30 a barrel and likely to stay there for a long time, that there is no need to try to make up a recession. This is going to be the greatest boost to the economy that you can imagine.”

In support of Branson’s view, The Economist reported on Saturday January 22nd that “the economies that have enjoyed the strongest GDP growth in the past year have .. been oil importers: India, Pakistan and countries in east Africa.” Similarly, in the IMF’s latest forecast, published on Tuesday January 19th, the economies that were spared a GDP growth downgrade — China, India, Germany, Britain, Spain and Italy — were all net oil importers.

While it is true that a slump in oil prices will produce winners and losers, and there are likely to be stormy waters ahead for countries like Brazil, Saudi Arabia, Russia and Nigeria, the good news is that the sky is not falling.

Ownership vs Control

The recent news of succession planning at 21st Century Fox brings an interesting issue to light.

On Thursday, the Guardian reported that James Murdoch will succeed Rupert Murdoch as CEO at 21st Century Fox.  At the same time, Rupert and Lachlan will become executive co-chairmen.

The interesting thing about the Murdoch family’s control of Fox is that it relies on a dual-voting structure in which the family has nearly 40% of the voting power but only owns about 12% of the shares.

This may infuriate some people, but the interesting lesson here for all of us is that “control is more important than ownership”.

This is an incredibly powerful insight that can be used by business owners who are looking to grow their business.

Giving up equity in a company or a subsidiary in order to gain key talent or much needed financial backing is worthwhile so long as it doesn’t result in loss of control.

This concept is used by Richard Branson to expand into new markets.

Virgin will, as I understand it, typically provide its brand name and a small fraction of the financial capital required for an investment, but at the same time gain most of the shares in the new venture, thereby retaining control.

Ownership versus control; it’s a valuable distinction for all of us to be aware of.

What’s Going On At FIFA?

What's Going On At Fifa 2

(Source: Flickr)

Seven senior FIFA officials were arrested on Wednesday at a high end Swiss Hotel as part of a larger two decades long investigation by the FBI into corruption at FIFA. The alleged wrongdoings include racketeering, wire fraud and bribery to the tune of more than $150 million.

The arrests occurred just prior to FIFA’s presidential election, in which current president Sepp Blatter was expected to be re-elected. Blatter should have known about the problems at FIFA, and only through his complacency could any wrongdoing continue to run rampant.

The Economist, Richard Branson and other high profile figures have been quick to call for a cleansing and reinvention of football’s world governing body. If Blatter was a corporate CEO then he would surely be fired for his negligence or complicity in the corruption; why should the consequences be any different just because he is the head of the world’s governing body for football?

The reason that FIFA may fail to reform (and Blatter may fail to resign) is that FIFA is a very powerful organisation.

Football is an international game and universally loved by millions of people from a diverse range of cultures and backgrounds. For many people football is more akin to a religion than a sport, and the institution at the center of the football cult is FIFA. It controls television and marketing rights to the World Cup which are worth billions of dollars, and the concentration of so much power in one organisation has led to what the concentration of too much power typically leads to, endemic bribery and corruption.

It is also unclear whether sponsors will withdraw their backing.

Sponsors pay for marketing, and the World Cup has millions of fans worldwide. The problem of course is that sponsorship dollars, coming from the likes of Adidas, Coca-Cola, Visa and Hyundai, help to support and enrich a corrupt organisation.

Being associated with scandal puts the reputation of sponsors at risk, and so the more people who talk about what’s happening the more likely they will be to reassess their involvement with FIFA.