Thursday, December 07, 2006
The EDS- Mphasis Story
The recent acquisition of Mphasis by EDS is very exciting for Mphasis. An article in the Wall street journal tells us how EDS has been turning around. For Mphasis this is very good news; markets sense that. The stock has moved from a low of 130 to a high of 290 and is currently at 250. With a Marketcap of around 4500 CR and FY06 revenues of 380 CR mphasis seems very expensive. However if one factors in the fact that EDS has $ 25 Billion in sales and it might move a lot of its business to Mphasis to cut costs further, Mphasis doesn’t look that expensive
The article that appeared in the WSJ
EDS Writes a Recovery Tale (Wall Street Journal)
Three Years From Sea of Red Ink, Street Hails Leadership Moves
By JIM CARLTONDecember 6, 2006; Page C3
Three Years From Sea of Red Ink, Street Hails Leadership Moves
By JIM CARLTONDecember 6, 2006; Page C3
Just three years ago, Wall Street investors were racing to distance themselves from Electronic Data Systems. As the information-technology titan bled red ink amid a string of problem contracts, analysts urged investors to dump the stock. Wall Street now is writing a new contract with EDS.
The Plano, Texas, company is completing the first stage of a turnaround under Chief Executive Michael Jordan, who took over the ailing company in 2003. EDS officials say sales are on track to total $21.1 billion to $21.3 billion this year -- up roughly 7% from 2005 -- while adjusted profits are likely to double. Debt that stood at $5 billion in 2003 has been cut to $3.1 billion.
To help revive the firm, Mr. Jordan, 70 years old, restructured contracts EDS was having trouble handling such as by seeking more-favorable terms. He also cut costs by centralizing some business functions, diversified into additional support services and targeted new accounts.
To help revive the firm, Mr. Jordan, 70 years old, restructured contracts EDS was having trouble handling such as by seeking more-favorable terms. He also cut costs by centralizing some business functions, diversified into additional support services and targeted new accounts.
Six Wall Street analysts recently upgraded recommendations to the equivalent of "buy" from "hold." Another began coverage of EDS with a "buy" rating. The shares have more than doubled from a five-year low of $12 in 2002, to $27.06, down a penny yesterday in 4 p.m. New York Stock Exchange composite trading.
In a recent conference call to discuss third-quarter results, EDS officials explained how they had reduced staff, consolidated facilities and streamlined telecom and computer networks. The quarter "presented convincing proof that senior management is indeed able to pare back costs," Alan Hellawell, an analyst at Lehman Brothers, wrote in a Nov. 28 research note, raising his rating to "buy" from "hold." He doesn't own the stock, though Lehman does hold shares and has done business with the company.
Mr. Hellawell is among analysts who say there is room for the stock to rise further. He thinks it could trade at 20 times analysts' expected per-share earnings of $1.61 next year, which means a stock price of $32.
Some large institutional investors have built up their stakes in the company in the past few quarters. According to Securities and Exchange Commission filings, AllianceBernstein held more than 58 million EDS shares as of the end of September, up from nearly 35 million at the beginning of the year.
EDS helped invent information-technology outsourcing -- under which companies basically hand over management of their complex computer networks -- in 1962 under founder H. Ross Perot. By 2000, large corporations were flocking to a Big Three of IT providers: EDS, International Business Machines and Computer Sciences Associates. But in recent years, with competition from offshore rivals and companies parceling out their business to several vendors instead of just one, the Big Three's share of the IT business has shrunk to about a third from two-thirds, according to Sanford C. Bernstein & Co. That has squeezed profit margins across the industry.
In a recent conference call to discuss third-quarter results, EDS officials explained how they had reduced staff, consolidated facilities and streamlined telecom and computer networks. The quarter "presented convincing proof that senior management is indeed able to pare back costs," Alan Hellawell, an analyst at Lehman Brothers, wrote in a Nov. 28 research note, raising his rating to "buy" from "hold." He doesn't own the stock, though Lehman does hold shares and has done business with the company.
Mr. Hellawell is among analysts who say there is room for the stock to rise further. He thinks it could trade at 20 times analysts' expected per-share earnings of $1.61 next year, which means a stock price of $32.
Some large institutional investors have built up their stakes in the company in the past few quarters. According to Securities and Exchange Commission filings, AllianceBernstein held more than 58 million EDS shares as of the end of September, up from nearly 35 million at the beginning of the year.
EDS helped invent information-technology outsourcing -- under which companies basically hand over management of their complex computer networks -- in 1962 under founder H. Ross Perot. By 2000, large corporations were flocking to a Big Three of IT providers: EDS, International Business Machines and Computer Sciences Associates. But in recent years, with competition from offshore rivals and companies parceling out their business to several vendors instead of just one, the Big Three's share of the IT business has shrunk to about a third from two-thirds, according to Sanford C. Bernstein & Co. That has squeezed profit margins across the industry.
Mr. Perot sold the company to General Motors in 1984, and it was spun off by GM in 1996. In 1999, after IBM and other competitors began outmaneuvering EDS for contracts, the company brought in a new CEO, Richard Brown. Mr. Brown restored EDS's momentum as it went on to win a number of high-profile contracts, the most notable a $6.7 billion deal with the Navy in 2000 to manage its intranet. But EDS posted losses of $1 billion in both 2002 and 2003, amid problems with the Navy contract and others.EDS's board replaced Mr. Brown with Mr. Jordan, who had led a revival at Westinghouse Electric, which became CBS. Mr. Jordan devised a three-year strategy to stanch the red ink, putting in procedures so EDS wouldn't get caught in problem contracts and could invest in areas that would let it go after new business. "What had to be undone here was 20 years of management lethargy," Mr. Jordan says.
Mr. Jordan terminated some accounts, restructured others and assigned some of EDS's best engineers to bring the Navy contract into line. In 2005, the Navy contract turned cash-positive for the first time. Mr. Jordan also centralized sales functions so new contracts could be better screened to avoid potential problems.
Last year, he brought in Ron Rittenmeyer as operating chief, who is reorganizing data centers to make them more efficient and reducing head count in high-cost areas like the U.S. while ramping up in cheaper locales like India. Mr. Rittenmeyer yesterday was promoted to the additional position of president. Earlier this year, EDS acquired a majority stake in an Indian outsourcing company called Mphasis BFL, which has about 11,000 employees.
This year, EDS expects to sign $23 billion to $25 billion in contracts, up from $14 billion two years ago, says Chief Financial Officer Ronald Vargo. In April, EDS landed a $1.7 billion deal over seven years to handle IT services for consumer-goods provider Kraft Foods.
Some on Wall Street remain wary. One concern: EDS might repeat the mistake of landing more contracts than it can handle, as happened with the Navy imbroglio. "This is not a business where you want to grow fast," says Rod Bourgeois, senior research analyst at Sanford C. Bernstein. He said that he doesn't own EDS stock and that his firm doesn't do business with EDS.
Mr. Jordan professes confidence in EDS's future. "It may slow down, pick up, slow down," he says, "but I think it's basically a growth business."
Tuesday, December 05, 2006
Game thoery
What makes a good trader? Is it luck, innate talent, or is plain hard work? The question is an illusive one and perhaps one of the most difficult to answer. There are those who believe that traders are not born and can be made (the turtles for example) and those who believe that a good trader can only be shaped. There is one quality however that all great traders’ posses and that is the ability to clearly articulate their thought process. Almost all traders have a great intuitive sense but only a few can actually translate those thoughts into words. Over the last few years we have learnt and grown as traders. However the time has come now to communicate our thoughts. I will “try” to document experiences and learning’s that I have been through. I hope this process of communicating our thoughts makes us all better traders.
I read somewhere - In the markets there are no mistakes only lessons learnt.
When he conceptualized Nash’s equilibrium, John Forbes Nash didn’t know his principals would be applied across all walks of life. Somewhat similar to decision theory, game theory (based on Nash’s equilibrium) studies decisions that are made in an environment where various players interact. As a trader I have always been fascinated with game theory and have tried very often to apply it to the markets. To explain game theory a little more I will talk about one of the most commonly used examples, prisoner’s dilemma. Prisoners dilemma is a non zero sum game wherein the only concern of each prisoner is to maximize his own payoff.
Let’s take an example. Two prisoners A and B are arrested; the police however do not have sufficient to convict them. The prisoners each are placed in different rooms. The police tell convict A that if he confesses prisoner B will get a 5 year sentence and he (prisoner A) will be let free. Prisoner B is conveyed the same only in his case prisoner A will be convicted. If neither of the two convicts confesses then they both walk away free however if both of them confess then both get 2 years. The only way a prisoner can maximize his payoff is to betray his fellow prisoner, in an ideal world each prisoner would betray his fellow prisoner. However unknowingly each prisoner would get 2 years jail time. If however prisoner A keeps quite he is not sure his fellow prisoner will do the same. Herein lays the prisoners dilemma.
So why and how does “the game theory” apply to the markets?
I read somewhere - In the markets there are no mistakes only lessons learnt.
When he conceptualized Nash’s equilibrium, John Forbes Nash didn’t know his principals would be applied across all walks of life. Somewhat similar to decision theory, game theory (based on Nash’s equilibrium) studies decisions that are made in an environment where various players interact. As a trader I have always been fascinated with game theory and have tried very often to apply it to the markets. To explain game theory a little more I will talk about one of the most commonly used examples, prisoner’s dilemma. Prisoners dilemma is a non zero sum game wherein the only concern of each prisoner is to maximize his own payoff.
Let’s take an example. Two prisoners A and B are arrested; the police however do not have sufficient to convict them. The prisoners each are placed in different rooms. The police tell convict A that if he confesses prisoner B will get a 5 year sentence and he (prisoner A) will be let free. Prisoner B is conveyed the same only in his case prisoner A will be convicted. If neither of the two convicts confesses then they both walk away free however if both of them confess then both get 2 years. The only way a prisoner can maximize his payoff is to betray his fellow prisoner, in an ideal world each prisoner would betray his fellow prisoner. However unknowingly each prisoner would get 2 years jail time. If however prisoner A keeps quite he is not sure his fellow prisoner will do the same. Herein lays the prisoners dilemma.
So why and how does “the game theory” apply to the markets?
