Cornell Business Review - Spring 2013 by Cornell Business Review

Cornell Business Review

Spring 2013 | Volume III | Issue 2

A Problem for Angels by Grace Gorenstein America’s Sinking Safety Net by Richard Horgan Economic Growth & Mobile Technology in Africa by Sagar Galani From Books to Scripts by HaeSoo Cheon

JOHNSON’S

SHARK TANK COMPETITION

by Aaron Weiner

Featured Interview

JON MOELLER CFO of Procter & Gamble

Contents finance 4

Grace Gorenstein

Jessica Krause

Aaron Weiner

A Problem for Angels

6 Are We the Entrepreneurial Generation? 8

Swimming with the Sharks

government 10 13 16

Securing the Scandalized

Austin Opatrny

America’s Sinking Safety Net

Richard Horgan

The “Dig” on the Debt Ceiling

Melissa Groark

featured 20

Interview with Jon Moeller CFO of Procter & Gamble

international 26 Spending Japan’s Way to Recovery Zhi-Yen Low 29 Economic Growth and Mobile Technology in Africa Sagar Galani

industry 32 34

Heinz Ketchup

Kelli Keith

From Books to Scripts

HaeSoo Cheon

Ji Yung Suh editor-in-chief Managing Editor Business Manager

Vinay Ramprasad

Associate Editors

Catherine Chen Austin Opatrny Annelise Schuepbach

CHIEF Designers

Amy Chen

HaeSoo Cheon Sagar Galani Grace Gorenstein Melissa Groark Richard Horgan Kelli Keith Jessica Krause Zhi Yen Low

Business Team

Ashini Ganesalingam Richard Horgan Susan Jiang Aaron Weiner Sheng-Nan Zhao

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One of CBR’s main missions as a student organization has been to encourage analytical and insightful discussion on business-related issues. Our editorial staff has taken the time to carefully select the article topics both relevant to our mission and recent current events, and we are excited to present to you the Spring ’13 academic semester’s issue of the Cornell Business Review. Ranging from articles on crucial headline topics such as the U.S. debt ceiling to Japanese Prime Minister Shinzo Abe’s economic policies, this semester’s publication also covers articles on diverse topics such as entrepreneurship and the film industry. Continuing the CBR tradition, the executive board is proud to provide a way for our editorial staff to come together and produce high-quality work that reflects the personal and unique business interests of our individual writers. Aside from our relevant and insightful articles, our student organization continuously strives to create more value for the Cornell business community. Unlike the usual articles focusing on current events taking place outside of Ithaca, this semester we included a featured piece on the recent Johnson Shark Tank Competition to bring more

Lillian Chen An-Chi Dai

Staff Writers

Vinay Ramprasad

Editor’s Letter

An-Chi Dai

attention to business-related events happening on campus. Along with other ambitions, we hope to initiate a public weekly electronic newsletter next year to provide a convenient means for the student body to learn about recent current events, as well as to expand our presence online. We are proud to finish this semester on a polished, accomplished note, and look forward to expanding our organization’s presence on campus for years to come. We would like to thank the colleges for their support, the students and professors for their readership, and Jon Moeller (CFO of Proctor & Gamble) for his candid interview. Lastly, we express our sincere gratitude to the business team, writing staff, and designers for making this semester’s publication a success. We hope you continue to find value in the Cornell Business Review, and in our future projects to come.

Ji Yung Suh Class of 2014 Editor-in-Chief

Lillian Chen

CORNELL BUSINESS REVIEW / 3

FINANCE

HOW VERIFICATION WOULD WORK

Grace Gorenstein

A Problem for Angels

Investing with Unverified Online Forums

ngel investors have a new way to find and fund entrepreneurial ventures. Defined as people or institutions looking to invest in small start-ups, angel investors hope to generate large returns from the risky entrepreneurial ventures. For entrepreneurs, angel investors bridge their capital gaps. The growth of websites such as AngelList.com, designed to connect investors with entrepreneurs online, has created an efficient way for these parties to connect with one another. For example, startup Submittable, Inc., located in Montana, has raised almost $1 million from online angel investors. With an online forum, entrepreneurs no longer need to compete in entrepreneurial hotspots like New York and San Francisco for capital. The ease with which online angel inves-

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tor sites allow investors and entrepreneurs to connect has made a difference. For Double Robotics, a start-up in California, about 50 angel investors clicked AngelList’s “invest” button, giving the new venture much-needed funds. However, the ease with which these transactions can occur is problematic; investing in start-ups is inherently risky, and online services create additional risk. AngelList, one of the most popular angel investing sites, notes in its terms of service that “we do not, and cannot, guarantee that any Investor is actually an ‘Accredited Investor,’ or that any Content is true, correct, complete, or viable.” This is a big red flag. While SEC assurance that an investor is accredited is somewhat of a standard, there is no check on start-ups. A fake entrepreneur could easily post information about a non-existent project, and would-be in-

Entrepreneurs pay the project fee to have their project considered

Assessor contacts project and coordinates a visit to see operations, funding, progress, etc.

Assessor visits project and determines whether the project is fraudulent or not

Non-fraudulent projects are publicized on the site

Angel Investors can more confidently invest online, knowing the projects are not fraudulent.

vestors could waste large amounts of money. The lack of a verification system may make the cost of entrepreneurial investments too high for some potential investors. To date, no website has set up a verification system that guarantees projects are legitimate. A verification system would benefit both entrepreneurs and investors. For entrepreneurs, it would give them an official mark distinguishing their venture from less-serious ones. For investors, they could be confident that the projects they are investing in are not scams. While there would be no guarantee whether a project will be successful, a verification that the project exists would be helpful in decreasing the risk of fraud. Just as banks have the FDIC “stamp” of verification, a site that offers a similar assurance would be less risky than others. AngelList, a free

site, does not regulate or verify the legitimacy of its members. Others, such as MicroVentures.com and Gust.com, charge a fee for their services, but do not verify the legitimacy the start-ups posted on their website. The Financial Industry Regulatory Authority (FINRA) offers tips to help investors avoid investment fraud, but no concrete verification system. Were sites like AngelList and Gust to incorporate a FINRA verification, projects would be far less likely to be fraudulent. To make this system work, investors and entrepreneurs pay for site use. The fees associated with membership would reduce risk in two ways. First, it would encourage only entrepreneurs with legitimate practices to sign up. Second, the revenue generated would fund an assessment system. Assessors would evaluate the validity of projects.

Their job would only be to ensure that the project is valid, not determine whether it is a good or bad investment. A verified project is more likely to get funds than an unverified one. Therefore, entrepreneurs would want their projects verified, and investors would prefer to invest in verified than unverified ones, all else equal. Though a verified project’s likelihood of success may be the same as that of an unverified one, the verification guarantees that the project is not fraudulent. It ensures that capital is not wasted on fake ventures. Given the nature of verification and trust, developing a system investors and entrepreneurs respect would take time–trust isn’t instantaneous. However, working with an established a u t h o r i - So far, no webty such as site has set up a the FINRA verification could help a system that website es- guarantees that tablish itself projects are as the only legitimate. one offering investors and entrepreneurs a verified, less risky platform. Start-ups are inherently risky, but verification could limit fraud. Angel investor websites are thriving; for the industry to grow in a safe manner, verification must become a component of the future of online investment forums. Grace Gorenstein (geg62@cornell.edu) is a sophomore at Cornell University majoring in History and Economics.

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FINANCE

FINANCE How Many Young Americans Want to Start A Business?

51%

IN NEXT 5 YEARS

Jessica Krause

Are We the Entrepreneurial Generation? E

ver since kindergarten, we’ve been asked the million-dollar question: what do you want to be when you grow up? We were excited to be a musician or an astronaut or even President. With time, we realized some more practical careers like a doctor, lawyer, or teacher. By college, we know (or at least tell recruiters) in which type of research we want to specialize, or in which division of finance or consulting we want to work. But soon that may no longer be the case. Fifty-four percent of people ages 16 to 34 either want to start a business or already have started one. What inspires a person to take a step back and throw themselves into a startup? What inspires one to go against the grain? But even more, what inspires a generation to do just that?

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Maybe it’s the risk/reward game. After all, we’ve grown up with incredible success stories like Mark Zuckerberg or Sergey Brin and Larry Page. But inherently our society is changing. Professor Pedro Perez, Entrepreneurship Professor of the Dyson School, says the economy is no longer about sheer quantity of output; it’s about finding your place to add value in the overall economy, which is how we define etrepreneurship. The eLab business accelerator is adding value to undergraduate Cornell entrepreneurs. Founded by successful businessman Dan Cohen in 2007, the eLab it’s about has seen incredible growth, as applica- finding your tion numbers surge place to each year. These add value in students come from the overall

every college, though Cohen has ship as the Tech Campus becomes a recently seen an influx in MBAs es- major force in New York City? Most pecially. This presents an interesting students felt that it would pull redichotomy as Johnson graduates sources away from Ithaca. However, traditionally go to firms represented faculty members were optimistic. by recruiters (at over 100 Fortune Professor Brian Earle of Communications thinks that “Cornell will re500 firms). One reason for this new de- main the hub that we have built it to mand, according to Professor Co- be and resources will flow from the hen, is that, “The country is shift- city to Ithaca rather than vice versa. ing. Students want to create their This is in large part due to how hard own thing. They have the passion, the faculty have worked to get the and want the experience, the thrill, program where it is today.” Regardless, the success of and most impor“The country is shifting. the tech campus tantly, the ownerStudents want to create will be heavily imship. We’ve tranpacted by Ithaca’s sitioned so now their own thing. They execution of entregraduate students have the passion, and preneurship. like MBAs come in want athe experience, This exeto Cornell knowing the thrill, and most that they want to importantly, the owner- cution is vital because it will posipursue a startup.” ship.” In addition, start- - Dan Cohen tion Cornell and us, as students, in ups provide big opportunities for more employees this rising field. The Harvard Busithan just founders: entrepreneur- ness Review and TechCrunch both ship is an ecosystem. Becoming one agree that entrepreneurship is not of the first employees of a compa- a bubble. Technology has catalyzed ny, whether it succeeds or fails, is the industry but its true roots lie invaluable. Marissa Mayer joined much deeper than that. Junho Kim, Google as employee number 20; she the Chief Product Officer at Rosie now serves as President and CEO of Applications, Inc., also notes, “The crazy thing about the start-up game Yahoo. But will Cornell continue to today is how radically different the be this place of rising entrepreneur- playing field has become…the chal-

lenge now is how do we enhance people’s real world experiences.” The game company, Valve, has been a leader in this way of thinking. When a new employee is accepted to the company, that person has six months to figure out where they can add the most value. That’s it. No assigned tasks, no required deliverables. Just a new, engaging form of responsibility. So the question becomes: where will you, and our generation, add value? Jessica Krause (jlk275@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics and Management.

economy

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FINANCE

Aaron Weiner

Swimming with the Sharks Inaugural Shark Tank Recap

n February 5th, Cornell students had the opportunity to pitch their business ideas to Johnson alumni and successful venture capitalists. Spectators filled Duffield Hall to witness the Johnson Shark Tank Competition sponsored by various departments of the university. The phrase Shark Tank is derived from the current television show, where entrepreneurs pitch an idea to a panel of successful entrepreneurs in an attempt to become business partners with one of the “Sharks.” Twelve teams competed in the competition with four minutes allotted to their pitch and six minutes for the judges to ask questions. All of the twelve business ideas were idiosyncratic and interesting; however, five in particular stood out. The first pitch that quickly gained the crowd’s attention was Marshfillows, a patented chocolate-filled marshmallow. This

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could revolutionize how people eat s’mores today, a very popular food item, as it has proven successful with 84% preferring Marshfillows to regular s’mores. Another idea that was pitched is called Pick2Pay, which aims to capitalize on the complex rewards programs of each credit card the consumer owns. Pick2Pay accounts for the consumer’s rewards preference and matches the consumer with the best credit card to use for each item they intend to purchase. BrewJacket is a product that can cool kegs of beer without ice, as it uses electricity. The product is slim, very easy to use, and energy efficient. There is a large target market for this idea because not only can it be used on college campuses, but also in restaurants and bars. SUNN is a business that creates LED bulbs, which adjust to the sunlight level outside.

If it is very light out, the bulbs will decrease to accommodate for such light. Not only is this energy efficient because light is not being wasted, but also, as studies have shown, those lighting mechanisms improve sleeping habits and circadian rhythms. The audience at the Shark Tank Competition selected this idea as the popular choice, although that does not warrant any prize besides the audience’s approval. Lastly, Solar Flare, co-founded by a freshman engineer Mikayla Diesch, produces a nutrition bar for astronauts during space travel. Solar Flare demonstrated a “wow” factor during their pitch when they showed a picture of their product in space with the astronauts. This product was first presented at a competition for developing nutrition bars specifically for astronauts at NASA; however, the additional MBA students on the team have

recognized its scalability. Since then, Solar Flare is not only sending its product to space, but it also planning to manufacture the bars in 2013 for retail across the country, specifically targeting the college market. Deemed to be as healthy as vitamin supplements, now astronauts can consume a nutrition bar instead of vitamins to optimize their brain activity. The Johnson Shark Tank Competition was very successful in both promoting entrepreneurship as a whole on Cornell’s campus and in showcasing the business ideas of fellow students. The competition gave exposure to ideas that could have gone unheard of for a while. Who knew that a freshman engineer created a product that is currently being used by NASA in space? As Cornell’s New York City technology campus becomes more involved with entrepreneur-

ship, such events are expected to become more frequent. However, general comments suggested that future competitions should strive to broker equity investment deals for competitors instead of offering a flat prize. Similar to the actual Shark Tank show, investment deal negotiations would be helpful to both the audience and the entrepreneurs, offering demonstrated real-life applications of business valuation methods and a chance for competitors to gain new business partners. Aaron Weiner (ajw94@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics and Management.

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GOVERNMENT

Austin Opatrny

Securing the Scandalized

The Responses to Financial Services’ Improprieties

ver the past year, we have seen an explosion in high profile scandals surrounding the financial services industry. These scandals have touched all segments of financial services: SAC Capital insider trading, Libor fixing by many market participants, JPMorgan’s London Whale, HSBC drug money laundering, and Bank of America’s Robo Signing, to name a few. As a result of the Troubled Asset Relief Program of 2008 (commonly known as the Bank Bailout) and the general financial crisis, financial services already carry an albatross of poor public perception. With the explosion of scandals this year, we have seen a new range of regulations and increased prosecution of lawbreakers. From Switzerland’s newly voted cap on executive compensation to an increased focus on insider trading by the Securities and Exchange Committee, regulators are already reacting. What further

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global action might we see? UNITED STATES In the United States, two main fields have dominated news headlines: insider trading and foreclosure violations. There have recently been multiple prosecutions for insider trading. SAC Capital, faced with two separate allegations of insider trading, has paid over $600 million in fines, a record-breaking amount. Since October 2009, the US Attorney for New York City has charged 69 people with insider trading. Sixty-three have been convicted, five are pending, and one defendant is still at large. This represents a substantial increase in prosecutions, which mirrors national trends. In addition to insider trading, foreclosure practices have been under investigation. The five largest mortgage servicers have been accused of

engaging in Robo Signing (automatic generation of foreclosure documents) and other improper foreclosure practices, and have agreed to pay as much as $25 billion in direct payments to states, as well as to distressed borrowers in the states who signed on to the settlement. As a result of these investigations, the newly created Consumer Financial Protection Bureau has created new regulations that increase protection for borrowers, reduce surprises, and eliminate bureaucratic redundancies. Forty-four states have some form of new foreclosure legislation pending. As foreclosure was one of the main manifestations of the financial crisis, lenders will likely continue to face increased regulatory scrutiny. EUROPE In Europe, the Libor-fixing scandal has dominated the news. The LIBOR rate determines the rate of interest paid by borrowers in the United Kingdom, and was established by an average of reported interest rates by lenders. While concern over the subjective nature of the LIBOR rate had been voiced over several years, it was only in

June 2012 that criminal prosecution began. Banks colluded to move the LIBOR rate in advantageous directions to bolster their balance sheets. Barclays was fined more than $400 million and UBS later agreed to pay regulators more than $1.5 billion in fines. Multiple other industry players have also been fined for their involvement. In addition to these fines, the oversight and mechanism of the LIBOR will be completely revamped in a careful, transparent manner, as the LIBOR is the basis for over $300 Trillion in assets. Additionally, substantial losses by traders at JPMorgan, UBS, and RBS have captured headlines for the failure of internal safeguards to prevent huge monetary losses. The London operations of JP Morgan and UBS have lost $6 billion and $2 billion respectively, due to the actions of one or two individuals. RBS, which is majority-owned by the British government, had a net loss of $9 billion in 2012.These losses were derived partially from normal operations, and also from certain funds set aside to compensate clients for improperly sold insurance products (£2.2 billion) and small businesses improperly sold interest-rate hedg-

ing products (£700 million). All of these substantial losses have come after post-2008 financial regulation, including the Dodd-Frank Act in the USA. As a result, regulators will seek new ways to further reduce risk-taking in “too big to fail firms.” Already, the UK is creating changes, with the UK Financial Services Authority to be replaced with two new agencies: a consumer-focused watchdog and a financial regulator that will be integrated with the Bank of England. Executive Compensation Across the world, the high level of executive compensation has drawn increased scrutiny by the public, especially for firms that have performed poorly or have required government assistance. The Securities and Exchange Committee has thus taken steps to increase transparency in the compensation process. Similarly, compensation was limited in the UK for firms such as RBS, which saw its departing 50-year-old CEO Fred Goodwin given an annual pension of £693,000 when the firm lost £24 billion the same year. Voters in Switzerland

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GOVERNMENT have recently approved a law that will allow shareholders to make binding resolutions on overall pay packages for executives. The impact on business of such regulation remains to be seen, but if regulation on compensation proves successful, it could serve as a model for other countries. Derivatives Fixing The most recent investigation by the US Department of Justice and the European Commission focuses on the market for derivative contracts, a market controlled by a small group of major banks. The investigation is specifically on a type of derivative known as credit default swaps, which is when companies across multiple industries hedge against potential losses. The banks have allegedly colluded with the International Swaps and Derivatives Association, a trade organization for market participants, to delay the establishment of a transparent independent market mechanism for the derivatives. The results of the investigation are still pending, but the creation of new regulations focused on derivatives trading could follow, as well as huge monetary penalties for violators.

GOVERNMENT Drug Money and Terrorism: The Perils of International Expansion 2012 saw a flood of cases involving prominent banks violating international money laundering and anti-terrorism laws, mainly through recently acquired international subsidiaries. HSBC was fined $1.9 billion for lax internal controls that allowed its Mexican subsidiaries to launder hundreds of billions of narco-dollars from Colombian and Mexican drug distributors, as well as Saudi terrorists. Between 2007 and 2008 alone, HSBC Mexico shipped $7 billion in cash to its US unit, a volume that only makes sense if they included illegal drug proceeds. Many have criticized this settlement, as no criminal charges were made, while small time non-violent dealers in the United States are routinely given life sentences. ING and Standard Chartered paid $619 million and $327 million respectively to compensate for decades-long violations of US sanctions against countries like Iran, Cuba and Myanmar. Standard Chartered hid more than 60,000 transactions worth $250 billion over a decade. Again, these organizations received only monetary sanctions, rather than criminal prosecution of specific individuals. Lawmakers have expressed frustration over the lack of criminal prosecution and may make changes to the legal language used.

“Bankster” Image All of these scandals have reinforced the “bankster” image, which is critical of the cozy relationship between bankers and regulators. As the European Union continues to face their sovereign debt crisis and enact measures like Cyprus’s bank deposit levy, they will have to justify their actions to an increasingly skeptical and populist public. The success of Beppe Grillo, a comedian, in the Italian elections is just one indication of the increasingly disenchanted and frustrated outlook of the common people. This carries through in the United States, where bankers continue to face criticism for perceived benefits and perks. If the financial services industry wishes to avoid even more restrictive regulations, it needs to start cleaning up its act interAustin Opatrny (abo27@cornell.edu) is a junior at Cornell nally. University majoring in Economics and Asian Studies.

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America’s Sinking Safety Net Richard Horgan

assed in August of 1935, the Social Security Act was drafted by President Franklin D. Roosevelt as part of an initiative to limit what were seen as “dangers in the modern American life.” It would provide benefits to senior citizens, the impoverished, the unemployed, widows, and fatherless children. During the Great Depression, the stock market crash wiped out many Americans’ retirement savings and pushed unemployment for senior citizens over 50%. The act passed, and was financed through a payroll tax on current workers’ income. The contribution of the worker was matched by their employer. Benefits were based on each individual’s accumulated payroll tax contribution. The system was modified several times after its passage with

additions such as a cost of living adjustment and reduction in retirement age to 62. This system, though supportive and helpful to Americans, is incredibly expensive and fragile. Today, we face an era where our generation may not see the day where we receive retirement benefits or be able to rely on this safety net that generations before us counted on. For decades, the system paid out benefits that exceeded what each individual paid Today, we face an era in capital due to where our generation longer average may not see the day lifespans and the where we receive retirepopulation bulge ment benefits or be able known as “Baby to rely on this safety net that generations before us counted on.

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GOVERNMENT

Boomers” (born between 1946 and ceive full benefits at a later age [note 1964). In 2005, the Trustees of the chart 1 for precise ages that full benSocial Security Fund estimated that efits are awarded]. A 20% deduction revenue would peak in 2008 and in benefits is imposed if a worker decline thereafter through 2018, at retires earlier than 62. Conversely, which point expenditures would delaying retirement will increase outpace income. At the current pace benefits awarded until the age of of spending, there will be a deficit of 70, when benefits are no longer in$300 billion by 2033. creased. The average benefit award Let’s start by examining how ed is 42% of a worker’s previous benefits are calculated in order to wages and consequently, isn’t meant identify problems with the current to be a sole source of retirement insystem. As mentioned, individual come. Social Security benefits are based Another aspect of Social on each benefactor’s lifetime in- Security is disability insurance come. The amount of time a person (“SSD”). Individual benefits do not works is tracked using credits. One depend on the beneficiary’s contricredit is awarded for bution. Instead, each quarter year In times of ecoSSD is funded worked. In order to nomic troubles, by the aggregate be eligible for Social low wage earners payroll tax. There Security retirement face the decision are three main rebenefits, a person to collect benefits quirements to get must have 40 credits due to a “disability” SSD: 1) the person or work for at least or work a minimum must have a con10 years and earn wage job, often dition that will last at least $890 each with SSD being more more than twelve quarter. Workers lucrative. months and may can begin to collect prevent gainful retirement benefits at 62 (the early activity, 2) they must be under age retirement age) and depending on 65, and 3) they must have worked at when a person was born, can re- least five years, though this is waived

for someone who was disabled before 22. The percentage of adults on SSD has risen dramatically from 2.2% of adults in 1985 to 4.1% by 2005. Breaking down the revenues, SSD received $104 billion through SSDI taxes and spent $127.7 billion in benefits. Yet it began running a deficit in 2005 and is estimated to run out in 2017-2018. Moreover, since the beginning of the Obama administration in 2009, 5.9 million individuals have been added to the program, increasing costs by about $6.67 billion dollars per year based on an average monthly payment of $1,130. Only 2.5 million jobs were added during the same period. Furthermore, the federal government includes an enormous range of disorders as eligible for SSD. Eligible conditions include having back pain, difficulties maintaining social relationships, or headaches with untraceable origins – making it incredibly easy to get benefits. In times of economic troubles, low wage earners face the decision to collect benefits due to a “disability” or work a minimum wage job, often with SSD being more lucrative. Consequently, many end up going on disability for

By 2020, Four Big Items Will Suck Up 92% Of Tax Dollars

28%

21%

15%

Social Security

Interest

Medicare

Medicaid

Others

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would keep the account full for another 75 years. Decreasing benefits Full Retirement Age by 13% would keep the ship afloat for the same period. There are also 65 more contentious solutions offered. 65 and 2 months One of those measures suggested 65 and 4 months by President Bush includes allowing people to put 4% of Social Se65 and 6 months curity payments into privately held 65 and 8 months accounts that would be invested in safe mutual funds or other retire65 and 10 months ment vehicles, whose gains will off66 set deficits in the system as well as 66 and 2 months give Americans more control over their earnings. This is known as pri66 and 4 months vatizing Social Security. 66 and 6 months That best solution isn’t clear. What 66 and 8 months is clear is that something needs to be done before the system begins 66 and 10 months to implode on itself. An interesting 67 point remains: how much would Social Security save if it were to worker/beneficiary ratio was 5.1. raise the retirement age by merely Currently, the worker/beneficiary two years? ratio is 3.3. By 20103, the ratio is Richard Horgan expected to have decreased to 2.1:1. With such a ratio, it is estimated (rwh272@cornell.edu) is a juthat Social Security will be able to nior at Cornell University pay benefits until 2042, when the majoring in Applied Economics and Management. account balance goes to 0. There are several solutions to this problem. According to the Trustees’ report, an increase of 1.89% in the Social Security tax

Age To Receive Full Social Security Benefits Year of Birth

1937 or earlier 1938 1939 1940 1941 1942 1943-1954 1955 1956 1957 1958 1959 1960 and later

one of the endless disabilities that the government considers debilitating. When the Senate conducted a study in 2011 on Combating Disability Waste, Fraud and Abuse, they found that 25% of claims were fraudulent and that billions are being awarded to individuals who are not in the least bit disabled but simply unwilling to work. Furthermore, individuals are supposed to notify the Social Security Administration when they’ve recovered, but many recipients fail to do so. The biggest Almost One-Quarter of Social Security Beneficiaries problem is through false claims, Receive Disability or Young Survivors Benefits 40% of which are awarded through Disabled Workers and the appeal process by sympathetic Retired Workers, DeDependents judges who were reluctant to refuse pendents, and Aged 19% any claim. Widows The outlook is bleak. “Work77% ers per beneficiary” is the number of workers putting money into the Young Survivors system versus the number of peo4% ple pulling money out. In 1961, the

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GOVERNMENT

Melissa Groark

The ‘Dig’ on the Debt Ceiling The debt-ceiling increase was eventually passed on August 2, 2011. This $2.4 trillion dollar followed Democratic concessions to cut future spending. During the debate market volatility was common. Because of increased risk, Standard & Poor stripped the United States of its AAA credit rating.

or the second time in six months, the United States economy will be held hostage by a political debt-ceiling debate. The executive branch of the government needs to know if it has Congress’s permission to borrow additional money for committed projects. The wedge between spending authorization and borrowing is a diplomatic problem. Currently, the government does not have enough money to pay for federally sponsored programs. The lack of funds increases the country’s debt, which cannot surpass a fixed limit. Raising the debt ceiling permits our nation to borrow more money to pay the bills for expenditure decisions already made.

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These include Social Security and Medicare obligations. Increasing the debt ceiling does not authorize any new spending. To clearly spell it out, the United States debt-ceiling crisis is not a monetary crisis, but rather a political one. The government spends more than it earns. This gap is covered with bonds issued by the U.S. Treasury. By law, however, the Treasury can’t issue new debt once the country is at its borrowing limit – and this limit, or ceiling, must be approved by Congress. In July 2011, this issue was temporarily resolved by a complex deal that both raised the debt ceiling and reduced proposed increases to future gov-

ernment spending over the following twelve months. The limit is currently at $16.394 trillion, but was temporarily suspended by a bill approved in January 2013. The debt ceiling will technically need to be raised again on May 18, 2013. The major issue is that there is an enormous amount of uncertainty regarding how much spending needs to be cut in the future and from what areas. America is climbing on an uphill budget trail. Current spending and debt are unsustainably high. The US Department of Economic Development reports that “U.S. federal spending in 2013, combined with depressed receipts from a weak economy, is on track to result in a deficit of $850 billion. Publicly held debt in the United States will exceed 76 percent of gross domestic product (GDP) in 2013, and chronic deficits are projected to push U.S. debt to 87 percent of the economy in 10 years.” Even more menacing is the fact that future spending and debt are on track to rise even higher, due to snowballing entitlement spending. Because of this, the United States government is at risk of imposing a significant

Raising the Federal debt ceiling All Americans Republicans

Independents Democrats

Vote in favor of raising debt ceiling

19%

15%

33%

Vote against raising debt ceiling

47%

70%

46%

26%

Don’t know enough to say

34%

21%

40%

last 20-year period and this increase in public debt threatens to augment interest rates, crowd out private investment, and raise price inflation. The repercussions would be austere and prominent for all Americans, especially for the impoverished, the elderly, and the middle class. Policymakers should take action immediately if they want to avoid economic stagnation brought about by public debt. Ignoring the debt ceiling is not a plausible solution, as that does not solve any problems. If the debt limit is exceeded, the United States Treasury cannot borrow money to pay back its prior spending commitments. The government would be forced to slash spending. This could result in

interest or principal payments on time. Typically, economists have seen the United States as having one of the safest bond markets of any country in the world. For any country with a developed market, a default is almost unconceivable. The result would be a large hit to economic growth and a substantial downturn in the financial markets. In turn, salaries and jobs would be cut. The prices of consumer goods would rise. Companies would not have as much money to spend or invest. Overall, quality of life would be downgraded. In the past, the procedure of supporting increases in the debt ceiling has mainly been a conventionalism that occurred frequently but was outside of the public eye. More recently, however, the progressively discordant political U.S. federal spending in 2013, comclimate has urged both parties to bined with depressed receipts from choose a side and support it vocally, a weak economy, is on track to rather than come to a compromise. The first obvious outbreak was in result in a deficit of $850 billion. late 2010 when the Tea Party Movement sent petitioners to Washingand prolonged reduction in eco- a partial government shutdown and ton with the goal of compelling the nomic growth. U.S. debt has grown a debt default, since the government government to cut spending and reat a rate of twenty percent over the would not have the funds to make duce the income tax rate. Again in

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2011, Republicans opposed approving the usual debt limit increase, unless the Democrats agreed to future spending cuts. The debt-ceiling increase was eventually passed on August 2, 2011. A $2.4 trillion dollar debt ceiling increase was accompanied by Democratic concessions to cut future spending. During the debate, equity market volatility was common. Because of increased risk, Standard & Poor stripped the United States of its AAA credit rating. While the 2011 compromise addressed the problem in the short term, two new issues arose from the agreement. First, the automatic spending cuts and tax increases that were were to go into effect on the same day, were dubbed the “fiscal cliff ” to refer to their enormous potential negative impact on the U.S. economy. The second concern is the growth rate of debt in the

GOVERNMENT United States. U.S. debt grows so quickly that even the $2.4 trillion increase to the debt ceiling agreed upon in 2011 lasted for a little less than 23 months. According to outgoing Treasury Secretary Timothy Geithner, the United States hits the debt ceiling six months after every meeting. One solution to solving issues created by the debt ceiling is to eliminate the debt ceiling altogether. The question multiple renown scholars are asking is: Is it necessary to have a debt ceiling at all if it merely results in crises and roils the market? Some economists claim that the debt limit has done little to curb spending or reduce debt. Treasury Secretary Timothy Geithner has said the United States should “absolutely” abandon the debt limit, and that “The sooner the better.” The United States. is the only democratic country, besides Denmark, in which Congress has to approve borrowing separately from

30 Years

of Bipartisan Debt Ceiling Raises

spending. In most other countries the authority to borrow money is inextricably tied to the authority to spend money. In Canada for example, the executive branch is permitted to appropriate as much money as approved in the yearly budget. And in New Zealand and the United Kingdom, the Treasury department has the authority to borrow as much as they need to pay for congressionally approved spending. According to a Congressional Research service report the debt ceiling was created during World War II as a way to give the Treasury “freer rein to manage the federal debt as it saw fit,” in a time where spending was chaotic. Now that a time of war is over and that the debt ceiling is causing the chaos it sought to prevent, it’s promising that this proposal will come up for debate in the months and years ahead. The debt ceiling has not been an effective tool in slowing the ac-

celeration of spending rates. Instead, it has taken away focus from the real problem, spending, by creating an artificial and arbitrary limit. However, for now financiers must stay focused on the ambiance in Washington and what it means for the May deadline. Melissa Groark (mlg237@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics and Management.

$18 $16 $14 $12 Trillions of Dollars

GOVERNMENT

$10 $8 $6 $4 $2 $0

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CORNELL BUSINESS REVIEW / 19

Jon Moeller

FEATURE

An exclusive interview with the

CFO OF PROCTER & GAMBLE

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CORNELL BUSINESS REVIEW / 21

FEATURE

You have been part of many different segments of P&G, such as Salted Snacks, Juice Products, and Global Beauty Care, before becoming CFO. Which of your past experiences do you consider to be the most valuable to your personal and professional growth? Jon Moeller: I believe that two experiences really helped me. One was living and working in China from 1995 through 1999. That was a tremendous experience because being in a place that was that different from where I grew up forced me to re-question everything. Even from a business standpoint, we were just beginning to build what is now our second largest business in terms of most sales and profit. It was very difficult since we had multiple levels of joint venture business partners. Working through all of that was very exciting. The second experience was when I was treasurer of the company through the recent financial crisis. That stretched every financial muscle I had and taught to me the importance of thinking around corners, anticipating change, and being prepared for significant adjustments. Both of these assignments stretched me, but were extraordinarily important in helping me to get to where I am today.

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FEATURE You have now been at P&G for 25 years. What has kept you at the company for so long? JM: P&G has shown me the world - as an active participant, not just as a traveler. I am involved with consumers, governments, customers, and suppliers from all around the world. I cannot imagine the amount I have learned from the company – and the Company enabled me to do this all in the context of a value system I can relate to. I have left P&G offices every day for the past 25 years knowing that I was paid each day to do what was right. I never was pressured to do wrong things. Additionally, my wife works at P&G. She is a Cornell graduate and is very important to me, so I tend to stay close. What do you consider to be the most challenging aspect of your role as CFO? JM: The most challenging aspect is communication. As CFO, I have to communicate simultaneously to an array of constituents including employees, the Board of Directors, investors, customers, retail partners, suppliers, etc. You always have to be thinking when you are saying something. It needs to be relevant and sensitive to all of the constituencies who have different needs. At such a large, global firm, what qualities do effective leaders have, and how can they rise up the corporate ladder? JM: I think the ability, willingness, and commitment to make a difference are the most important qualities. I tell people that at the beginning of every week they should ask themselves “How is the business going to be different as a result of my effort this week? How is the organization going to be better or stronger?” You need to be able to answer those

“I have left P&G offices every day for the past 25 years knowing that I was paid each day to do what was right. I never was pressured to do wrong things.” questions now and retrospectively as well. Respect for other people and realizing that anything significant can only be accomplished with the help, skills, and ability of other people is also important. The world around us is changing quickly, so we need to be in a continual learning mode.

tunities as a real learning opportunity. As you know, I was a biology major here, and Monsanto is a biotech company. This experience gives me a way to scratch that intellectual itch at the same time. Generally, what I learn at Monsanto, I can apply to P&G, and what I learn at P&G, I can apply to Monsanto.

Swinging back to your experiences abroad, what were the most valuable lessons that these travels taught you, and do you feel that students should pursue international opportunities? JM: I would encourage students to put themselves in uncomfortable positions since that is how you learn and grow. Experience in a different culture, at its early stages, is very uncomfortable and forces growth. Looking back at my life, these periods of change were some of the hardest but also the most developmental experiences. I do not know if people necessarily have to work abroad to get that kind of experience, but working in a different culture certainly does that.

You mentioned your Biology major. How did choosing this major lead you to P&G? JM: I was always interested in Biology and thought I wanted to go into veterinary medicine, specifically exotic animal medicine. I interned at SeaWorld working with whales and dolphins, and while I enjoyed it, I started getting interested in the business side of it. I took business classes as well as Biology classes. It frankly came down to where the bigger opportunities were and where I could make the biggest difference. The field of exotic animals is very small, so business just seemed like a bigger opportunity for me.

On top of being CFO of P&G, you are also a member of the Board of Directors at Monsanto Company. Can you explain your role there and how you balance your responsibilities between these two commitments? JM: Being on the Board of Monsanto is part of my job. It gives me exposure to the way other companies approach issues and oppor-

Is there anything at Cornell that specifically shaped your interest in this area? JM: Not particularly, but Cornell taught me very important things, like the need to work hard and that play is important to refresh and refocus. I met the kind of people at Cornell that were very passionate about something. I learned from them that I wanted to live a passionate life and be really engaged in something important.

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FEATURE Looking back, what are some of the mistakes you have made and what did you learn from them? JM: Well, my mistakes came from a few things. First is not truly understanding something. You have to really understand the essence of the subject and make decisions with that understanding. You should be able to take a complex topic and boil it down to a sentence or two that you can explain to your grandmother. Others include competition responding much faster than I assumed, laws changing faster than I thought, making investments that did not end up returning as much as I had planned. I did not anticipate some things. I have learned to be wary of these situations and to never be complacent.

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What do you feel is the most valuable lesson you picked up while at Cornell? Can you impart any wisdom to students who are in college today? JM: Work hard, follow your passion, respect others, make a difference, and generally good things will happen. Passion is a very personal thing, and some people do not find what they are passionate about until later in life. Be open to new experiences and making a difference. Ask the same question I referred to earlier but relative to this context. How is Cornell going to be a better place because of what you do?

INTERNATIONAL

Japanese Prime Minister Shinzo Abe delivers a speech at his official residence in Tokyo

Spending Japan’s Way to Recovery

Zhi-Yen Low

Ab·e·nom·ics [noun]

1. Economic policies advocated by the current Japanese Prime Minister, Shinzo Abe, consisting of loose monetary policy and massive fiscal stimulus for the purpose of encouraging private investment and targeting inflation.

n a single, unifying sweep, Japanese voters handed the Liberal Democratic Party a landslide victory last December. Shinzo Abe, the newly-elected Prime Minister, has rolled out aggressive measures to revive the country’s economic malaise of stubbornly low inflation. Low inflation of roughly zero percent (well below the targeted rate of two percent) has plagued the Japanese economy for years by eroding profits and wages, as well as stifling consumer spending. In the two short months of his tenure so far, Abe has already nominated a replacement for the head of central Bank of Japan - Haruhiko Kuroda, who shares Abe’s sentiments for aggressive monetary

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easing. Mr. Abe has previously voiced his intentions to target the yen for competitive purposes and flirted with the possibility of buying more foreign currency government bonds, which sparked worries of a currency war. A currency war occurs when one or multiple countries begin to target their exchange rates to devalue their currencies in order to boost their trade competitiveness. Abe’s statement was suggestive of currency targeting, whereby a currency is devalued in order to gain more revenue from trade. Finance minister Taro Aso quickly stepped in to clarify the central bank’s stance by ruling out this

inflationary measure. The recent fallen sharply by 20 percent against leadership transitions and conflict- the US dollar due to bold inflationing messages on economic policies ary measures. The yen has been show signs of dissension within the hovering between 92.3 and 94.3 new Japanese cabinet, adding more over the past few weeks, its lowest uncertainty to Japan’s already shaky point in more than a year. economy. As it turns out, this weakCentral bankers at the recent G-20 er yen is exactly the strategy Jameeting in Moscow pan needs in order to Currency manipupledged “not to target breathe life into its exour exchange rates for lation is a zero-sum port-oriented econogame that causes my, which increases the competitive purposes”. By G-20 standards, the countries to act in a risk of a currency war. use of monetary policy tit-for-tat manner. Abe’s reasoning behind to stimulate domestic stimulating the export demand is accepted through the market is that increased growth in implementation of interest rates, domestic demand, coupled with quantitative easing, and forward negative interest rates, will result in guidance. However, it is generally greater spending, and consequently frowned upon to use narrowly-fo- higher inflation. As inflation takes cused exchange rate policies to pur- hold, Japanese bond yields will rise, posefully devalue a currency for the attracting more foreign investment purpose of increasing trade. Since capital to stimulate domestic borAbe began his tenure, the yen has rowing and spending.

However, given the sluggish growth and demand of the global economy, any recovery of the Japanese export market will be at the loss of other countries’ market share. According to Chartier, a lecturer at Babson College, “currency manipulation is a zero-sum game that causes countries to act in a titfor-tat manner”. If the currency war of the 1930’s and its resulting global trade meltdown are any good indicators, countries’ threats to depreciate their currency and their resulting trade protectionism could prove disastrous for the global economy. Dramatic fluctuations in the value of currencies could also discourage investor spending, because it is difficult to forecast and plan for international trade in the face of such uncertainty. Developing countries also have a stake in this dilemma; declining exchange rates in devel-

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INTERNATIONAL oped countries will also result in unstable capital flows to the emerging markets. Some countries have already begun to retaliate. European Central Bank President Mario Draghi recently emphasized the need to assess the economic implications of the euro’s strength. French Newly inaugurated South Korean President Park Geun-hye has pledged to take pre-emptive measures to ensure stability of the Korean won, as a weakened yen creates challenges for South Korean firms. The yen has dropped over 20 percent against the won over the past six months, signalling a direct loss to Korean exporters, most of whom are direct competitors of their neighboring Japanese exporters. China has been surprisingly silent on the currency war front. China’s central bank Deputy Governor Yi Gang stated that this is because of a growing consensus that the yuan’s exchange rate is close to equilibrium. Huang Yiping, Chief Economist of Barclays China, speculates that Chinese policymakers are concerned about financial stability and are therefore not considering a devaluation of the yuan, which may trigger dramatic capital outflows. As Japan’s new leadership pledges to do “everything within its control” to fight crippling deflation until its economy stops weakening, the rest of the world’s leaders look on watchfully over their exchange rates, the doors of government safes at their fingertips. The United States, for one, has already managed to avoid a much worse economic fate as a result of its loose money strategies and quantitative easing programs. At a time when global economies are on the brink of spiralling demand and newly elected governments are facing impatient, expectant voters, international cooperation may be the first to go. Zhi-Yen Low (zl258@cornell.edu) is a junior at Cornell University majoring in Applied Economics and Management.

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INTERNATIONAL

Sagar Galani

Economic Growth & Mobile Technology in Africa

erception of technology in the poorest continent of the world has drastically changed in the past decade. The growth in internet services, computer literacy, and infrastructure in the continent has been immense. In 1999, less than 10% of the African population had cellphone coverage. By 2008, 60% of the population had access to a cellphone signal (equivalent to the combined coverage of USA and Argentina), and currently more than half the population has a cellphone subscription. Today, cell phones have been integrated into the lives of local Africans: farmers use it to check market prices, rural inhabitants use cell phones to search for healthcare providers, and mobile banking commonplace in the area. Africa has now become the second fastest growing economy in the world. This, in addition to increased political stability and a growing young middle

class, has caused a surge of foreign investment in the continent: Google, IBM, Intel and other major companies have set up offices in the area and are strategizing to penetrate this untapped market. MOBILE TECHNOLOGY IN AFRICA Mobile phones have integrated themselves into every aspect of Africans’ lives. In the past five years alone, there has been a 550% growth in the number of mobile phones sold. High returns on investments have been seen in this sector: Indian firm Bharti Airtel has gained profits of $13 billion after a mere two years of its investment. The implications of high investments can directly be seen on the GDP. A study by Deloitte conducted in early 2013 showed that a 10% increase in mobile phone penetration correlates to a 1.2% increase in GDP in MDC/LDCs. This phenomenon occurs because cell phone access increases an

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INTERNATIONAL individual’s ability to be involved in economic activity. However, what’s most exciting about the growth in telecommunications is its impact on other sectors: Commerce Though 80% of Africans still don’t have bank accounts, 16% of African citizens have used cellphones for financial transactions in the last 12 months. The implications of this growth will be seen on both a micro and a macro level:

mobile healthcare in Africa could Obstacles save about a million lives in the First, computer literacy rate next five years. There are numerous in the area has been low due to high cell phone applications connecting rural populations and a lack of inrural citizens to healthcare profes- stitutions that teach such material sionals. Three innovative healthcare in the area. However, most people apps that have potential to improve have access to mobile phones and healthcare in the area include: developers are working on using • HP, collaborating with a health- mobile applications to improve the care provider educational sector. and a mobile A 10% increase The stabilinetwork pro- in mobile phone ty of African infravider, is in the structure has been penetration process of develquestioned. Howevoping a mobile correlates to a er, recent developapplication that 1.2% increase in ments show foreign reduces governinvestments and GDP ment response government spendtimes to malaria outbreak (91% ing will change that. For example, of malaria-related deaths occur South Africa has spent over $100 in Africa) from a month to three billion to develop the nation’s inframinutes. structure. • “TxtAlert”: This application sup- Large amounts of the popports HIV patients and monitors ulation cannot afford internet appointment compliance. The rate services because of its high costs. of missed appointments has fallen However, broadband services have from 27% to 4% in South Africa. increased coverage within the area through external transfers. For ex-

Agriculture Cell phones have played a huge role in farmers’ ability to determine crop prices and farming conditions. Because 75% of the local workforce is in the agricultural sector, gains to the continent’s productivity levels are immense. The most-used application, M-Farm, allows farmers to access retail prices of their products, directly purchase farm inputs from various manufacturers (implying they get access to various sets of Economic growth in Africa compared to other countries prices), and find WORLD’S 10 FASTEST-GROWING ECONOMIES buyers for their fiAnnual average GDP growth, % GOP GROWTH nal products. This Unweighted Annual Average, % 2001-2010 2011-2015 makes the market Angola 11.1 China 9.5 more price-competitive and conChina 10.5 India 8.2 Asian Countries denses the trading Myanmar 10.3 Ethiopia 8.1 aspect of the agriNigeria 8.9 Mozambique 7.7 cultural business. Ethiopia 8.4 Tanzania 7.2 Healthcare According to PricewaterhouseCoopers,

Kazakhstan

8.2

Vietnam

7.2

Chad 7.9 Congo 7.0 Mozambique 7.9

Ghana

Cambodia 7.7 Zambia

7.0 6.9

Rwanda 7.6 Nigeria 6.8

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African Countries

“

INTERNATIONAL

The World Economic Forum (WEF), in January 2013, reported that Africa is now the second fastest growing economy in the world, and will continue to grow in 2013.

ample, Portuguese “MAINONE” submarine cables have been routed to South Africa. Such programs increase the availability of internet which in turn decreases the price. Frequent power cuts within the continent are another obstacle. To counter this, governments have implemented green technology & various energy projects around the continent. There has been a surge in cross border power trade; ESKOM’S $38 billion project in South Africa is a clear example.

tional strategy will be the easiest, cheapest way to gain more market share. This could imply a surge in companies trying to access citizens’ cell phones, which may lead to a leakage of personal data. Additionally, as technological literacy increases in the continent, companies may even seek ways of “mobile scamming.”

Potential Surplus In highly developed countries such as Kenya and South Africa, where the market has already been penetrated with large operators and developers, there is a surplus in the Implications of Growth in number of operators. This is causing Technology low prices that benefit customers, Technological growth in the but contribute to losses in compacontinent will affect people’s lives in nies. Certain African markets need various ways: to work on creating higher barriers to entry to promote long term sus“Mobile Spamming/Scamming” tainability in technological and eco As more people get cell nomic growth. phones, companies will start to use promotional texts more frequent- Resource Efficiency ly. Cell phone growth in the con- Cell phone internet growth tinent is so large that this promo- enables companies to find more

consumers to sell their products to: this implies less waste of supply. Additionally, because suppliers will be aware of more consumers, they will face a higher demand of their products, and in turn reduce their prices. CURRENT OUTLOOK To any investor, Africa is almost too good to be true: a large workforce population, political stability, technological development, and economic growth. Only 20% of this $500 billion IT sector has been realized, implying that potential for growth in moderately developed countries is high. Africa was once labeled “The Hopeless Continent” by the Economist, but has proven its potential to compete in the global market with its rapid adoption of mobile technology. Sagar Galani (sg674@cornell.edu) is a freshman at Cornell University majoring in Hotel Administration.

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INDUSTRY

Kelli Keith

Heinz Ketchup Warren Buffet shocked the financial industry, when he announced the $23 billion dollar deal to purchase the iconic American company H.J. Heinz. This investment in a well-established steady growth company, signals that the big food industry might be a good future investment. This deal is the largest this industry has seen; yet it might be one of many future deals. Leading Name in Ketchup “Heinz is synonymous with ketchup.” H.J. Heinz’s global brand recognition makes it one of the most well-known companies in the world. Heinz has products in over two hundred countries on six different continents. The company is a prime example of a business in the big food industry, the market segment dealing with all aspects of production and delivery of food to the customer. Heinz controls 29% of the foreign market and 59% of the domestic market for ketchup, but its product lines go beyond this. Other distinguished Heinz products include Bagel Bites, T.G.I. Friday’s frozen snacks, Classico, a pasta sauce, and Plasmon, Heinz’s baby food line. The scale and diversity of their product offering contributes to Heinz’s position as a valuable acquisition. Furthermore, Heinz’s financials make it a profitable investment. The company has generated sales growth the past thirty quarters, and closed out the year with $11.6 billion dollars in revenue and $1 billion dollar in profit. With a current growth rate of approximately 5.71% per share and low risk status, Heinz is a solid investment.

nity H.J. Heinz represents. The first major investor in this deal is Berkshire Hathaway under the influence of their CEO and primary shareholder, Warren Buffet. Berkshire Hathaway is a multinational holding company, or a company that makes its profits from “holding” the stocks of other companies. It is the eighth largest company in the world, reporting profits of 11.8 billion dollars last year. The company owns GEICO, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, and Net Jets, and has minority holdings in American Express, Wells Fargo, Procter & Gamble, and IBM. During what some investors refer to as the “lost decade” of 2000-2010, Berkshire Hathaway stock returned 76%, compared to the market index of 11.3% (S&P 500). They will be receiving 50% of H.J. Heinz in this deal. The second investor is 3G Capital under the leadership of Jorge Paulo Lemann. 3G Capital is a Brazilian firm best known for their acquisition of Burger King two years ago. Recently, 3G Capital has developed a reputation for rehabilitating firms by cutting costs and making companies more profitable. Both Berkshire Hathaway and 3G Capital see Heinz as a valuable addition to their portfolios.

“It’s Our Kind of Company” - Buffet The Transaction There are two investors who plan to take Berkshire Hathaway and 3G Capital’s deadvantage of the valuable investment opportu- cision to purchase H.J. Heinz is the largest trans-

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action in industry history. After Investment for the Future factoring in the debt assumption, The two investors’ committhe deal is estimated to cost $28 bil- ment to a long-term investment in lion dollars. The upfront $23.2 bil- Heinz is logical. The investment in lion is from the purchase of shares Heinz is congruent with Warren at $72.50 or 19% of the all-time Buffet and Berkshire Hathaway’s highest price. This investment strategy will be financed by – to find companies “Heinz is a $4 billion dollar that have a low volasynonymous contribution from tility, or small changwith both 3G Capital and es in market price, Berkshire Hathaand then leverage ketchup” way. Additionally, that stock by buying Berkshire Hathaway it with a loan. This inwill contribute $8 billion to pur- vestment strategy has proven profitchase preferred stock that will have able as it allows an investor to make a dividend of 9%. The remaining a profit with low risk. The logic is as capital will be raised through debt. follows: with a low volatility stock Heinz announced plans to sell $2.1 such as Heinz, swings in the marbillion in bonds and $12 billion in ket will have very little impact on loans. Additionally, they have se- the price, which reduces risk for the cured a $8.5 billion dollar bank loan investor. Additionally, Heinz has to service their debt. a steady growth rate, reflected in a Due to the amount of debt, steady increase in stock price. If the this deal closely resembles a investor purchased stock in Heinz leveraged buyout, or the use on margin, or through a loan, they of borrowed money to ac- will make more of a profit than they quire a company. It allows would have if they had invested investors to acquire a com- with their own money. Thus, they pany without having to are making money without supplymake a substantial capi- ing their own, therefore magnifying tal investment. While the their returns. For this type of inincrease in debt is risky vestment model, the investment in for the company, it also Heinz appears to be a solid choice. magnifies the returns to the investors. How- An Industry to Watch ever, Berkshire Hatha- Many investors see Berkway and 3G have both shire Hathaway and 3G Capital’s denied that the deal investment in the big food industry is for this purpose. 3G as paving the way for future investCapital, who will be in ment in the area. This is due to the charge of the oper- financial structure of food compaations of Heinz, has nies. Food companies’ share prices stated that they are in directly reflect their potential fuit for the long haul. ture profits. These companies also

have the advantage of being one of the few sectors where their profit margins remain relatively constant, with strong brands that are already established and little worry about innovation. Additionally, emerging markets present an opportunity for future expansion. These factors combine to make the food industry a compelling investment. Looking Forward The purchase of Heinz is important since it capitalizes on the trend of safe but profitable investments that the food industry has to offer. After the financial crisis of 2008 and the disappointing IPO of Facebook and other technology companies, investors are looking to take advantage of safe but profitable investments. The food industry fits the definition as a good investment because this industry has steady growth with low variability. Although some investors are calling this $28 billion dollar deal overpriced, it is a solid investment for 3G and Berkshire Hathaway. Not only will it provide steady returns, it will also offer the two investors a platform for the acquisition of other international food companies that will increase the Heinz portfolio. Warren Buffet said he wanted to make $32 billion dollars this year, and he appears to be well on his way. Kelli Keith (kak293@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics and Management.

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INDUSTRY

From Books to Scripts

When we sit down to watch a movie, AFTER HAVING READ THE NOVEL, we have more personal knowledge about the character that compensates for what cannot be visually expressed.

The Relationship Between Novel and Film HaeSoo Cheon

2012 FILM STUDIO MARKET SHARES

Warner Bros 15.4% Dark Knight Rises, The Hobbit

23.6% Other

Paramount 8.4% Madagascar 3

12.2% Universal 20th Century Fox 9.5%

Ted, The Lorax

Ice Age, Prometheus

14.3% Buena Vista Sony/Columbia 16.6%

The Avengers, Brave, Wreck-It Ralph

Skyfall, The Amazing Spiderman

hen we envision the film industry, we imagine red carpets and Hollywood; however, the American motion picture and television industry is more than just glamour and fame. It supports approximately 2.5 million jobs, including over 115 various businesses, making it one of the most influential business industries in the world. Interestingly, there appears to be a recent influx of multi-billion dollar fantasy fiction series that have roots in literature. The Harry Potter series, the Twilight trilogy, and The Hunger Games are additions that have been transformed from fantasy worlds to visual realities. Our first inclination

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may be to think that the novels increased the box office revenue of these films, but equally important is the films’ impact on the success of these published works. The Journey of Books-to-Film The origins of film began in the late 1880s with the invention of the camera. Originally composed of silent films that lacked a narrative story, the industry has arguably grown into the most influential portion of the entertainment sector, bringing in over $10 billion in 2011. The rapid growth of the industry has resulted in the flourishing of producer

giants such as Warner Brothers and Paramount. While Warner Bros. produced the most movies during that year, Paramount led the industry by holding the largest market share and generating the largest total and per-film revenue. So what is it about turning books into film that we, and the industry, find so intriguing? One reason may be that society has generally become more fast-paced, restless, and impatient. Respectively, technological advances have allowed film directors to manipulate the types of edits used to keep viewers on the edge of their seats. Ninety percent of all edits in film are cuts, forcing us to redirect our attention regularly, keeping our visual systems busy and contributing to the efficiency of the movie-viewing experience. Our society has come to appreciate the ability to step into and

out of a theater for a visit to another world in a rather short period of time. Another reason that may contribute to the book-to-film success lies in the fact that we have prior knowledge about characters through their thoughts on a more intimate level if we read a novel before watching the respective film. This compensates for what cannot be visually expressed onscreen while the visuals that we do see directly stimulate our perceptions. Written works allow for a wide range of interpretation for the same schema but watching a film provides us with something tangible, an image or object that represents an abstract idea. The book-to-film trend appears incredibly successful recently due to the big three fantasy fiction series that have gained incredible attention: Harry Potter, Twilight, and The Hunger Games. These three franchises seem to encompass a vast portion of current film production. The eight Harry Potter movies collected over $2.3 billion in U.S. box office revenue and $7.7 billion worldwide. The Twilight franchise grossed over $1.3 billion at the box office and had a production budget that increased from $37 million to $136.2 million for Part 2 of Breaking Dawn (2012). For four of the

five films in the series, the domestic opening weekend revenue surpassed the costs. The Hunger Games franchise has gathered a respectable amount of attention as well, helping its distributer Lionsgate accumulate 11.5 percent of the market share in 2012. Film-to-Novels What we see is not only that novels contribute to the film industry’s revenue, but also that the reverse is true. Over 10 percent of readers decide to read a book after viewing its film. This may seem like a small number, but the release of Twilight (2008) is said to have contributed substantially to the near 20 percent growth in sales of science fiction and fantasy books from 2005 to 2010. Similarly, 36.5 million copies of The Hunger Games were in print within the span of a few months, a 55 percent increase from the 23.5 million copies in print in the beginning of 2012. Not only have films increased book sales, but some have inspired their own written works. The Star Wars and Star Trek series are of the most famous film-to-novel adaptations, but other films such as the Pirates of the Caribbean series and X-Men have

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INDUSTRY inspired texts as well. Therefore, the influence of film in the publication industry is also noteworthy and strengthens the relationship between these two industries as a whole. The Future Business of Film â&#x20AC;&#x2039;Film accessibility has grown extensively throughout history and has contributed to multiple industries around the world. Seeing a film on a screen and developing a new re-

lationship with familiar characters through novels is an irreplaceable experience. However, as films become more expensive, ticket prices steadily rise, and Warner looks for the next Harry-Potter-box-office-success, will a visit to Harkins or AMC become a luxury? The value of American film as a foreign commodity and export shows widespread interest as do newer developments like 3-D films, so the pressure to maintain reasonable costs is

a challenge the industry must manage. Nonetheless, with the history and current significance of film in our economy and culture, it is more than likely that the industry will continue to expand, renovate, and foster new trends in the future. HaeSoo Cheon (hc599@cornell.edu) is a sophomore at Cornell Universty majoring in Psychology and Asian Studies.

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