Microsoft’s Yahoo Bid Rejected: Watch This Space!

Economics, The Interwebs 1 Comment »

Last week news broke that Microsoft had made a bid to buy rival search marketing company Yahoo for a figure of $44.6bn in a deal that would be made up of both cash and shares. When made, the offer was 62% above Yahoo’s closing market share price on Thursday.

The offer was made to Yahoo in the form of a letter to the board days after revenue forecasts had been cut and the company had committed $300m to try and revive its core business in 2008.

The offer to buy Yahoo came at a time when there is increasing belief that Microsoft’s existing business model is becoming more unfeasible in the internet age. The take over offer could therefore indicate a radical shift in how Microsoft perceives the internet and its own future within it.

With Google releasing a range of free online software alternatives for much of Microsoft’s offerings over the last year, the search market leader is certainly challenging the enterprise business model that software giant Microsoft in built upon.

Currently Microsoft makes the majority of its money by selling license fees to its impressive software packages installed on PCs and servers. With Google’s services available freely over the internet this immediately threatens the foundations the business is built upon.

Although there was much talk of counter bids and legal challenges from Google should the deal be accepted, many will rest easier in the Google camp with news that Yahoo has rejected at least the initial offer for its holdings.

With this take over bid Microsoft is undoubtedly after what it sees as the gems in Yahoo’s online advertising empire, a sector that Microsoft has thus far struggled to move into with any great success. Yahoo also has a range of online applications that could bolster Microsoft’s existing Windows Live online services for both businesses and consumers. It seems now Microsoft will have to come up with a better offer to in order to acquire those assets, meaning a steady re-evaluation of how valuable those assets are, and how important they actually are in Microsoft’s changing business model.

Yahoo said of the original offer that it “substantially undervalues” the company and was not in shareholders’ interests.

Originally worth $31 a share, the Wall Street Journal was quoted as saying that Yahoo’s board would be unwilling to accept any offer shy of $40 a share. That price is a 109% premium on the share price on the day of the original offer, and a price Yahoo has not traded at for over two years.

Although the original has now been rejected – worth $41.8b at time of rejection– the table was left open for further negotiations so watch this space as Microsoft could well sweeten its offer.

America: Protecting Her Economy

Economics No Comments »

Following on from yesterdays post discussing the threat the Euro poses to the petro-dollar cycle, The Shelf questions what lengths the US would go or has gone, to keep this cycle in place that her economy is so dependant upon. In the last of a series of three posts we revisit the Iraq II conflict as well addressing growing tensions with Iran, and whether these events could be part of a far greater plan to protect the American economy.

For some more background on the relationship between the dollar and oil we should recap two significant time periods over the last century.

The first is the Second World War, after which the US escaped much of the economic destruction suffered across Europe and Japan and amassed 80% of the worlds Gold. Based on this fact when the World Bank was founded in 1945 a fixed exchange currency was established based on gold, the gold standard dollar. As a result of this move the dollar currency was now pegged to the price of Gold.

The second is the Vietnam War (1967-72) proved which proved a turning point for the Gold standard dollar. The War Cost the US over $500 million, during which the US established hundreds of military bases across the world costing hundreds of millions of dollars a year to run, paid for by US dollars at the time backed by Gold reserves. The price of these bases ran the US treasury low as more and more dollars were printed to cover their running costs. In 1971 Nixon suspended dollar conversion into gold and the US dollar was floated on the international market.

At this same period of time US energy reserves began to deplete and American was becoming reliant on oil as an import. Its own production had peaked and demand was growing, and by encouraging Saudi Arabia to price oil in dollars it protected its currencies strength. Nearly four decades later the dollar has become an oil backed currency as opposed to gold backed, and therefore the power of the dollar in the world market is depended on oil.

After the first gulf war, brought on by the invasion in Kuwait, economic sanctions were placed on Iraq for twelve years by members of the UN security council ending around 2002. Towards the end of these sanctions Iraq could have been seen to want to hit back at the UK and US for their single handed threat to veto any lifting of the sanctions whilst Hussein remained in power.

In 2000 Iraq then decided to sell its oil exports in Euros, and went on to sell drilling contracts to European firms deeming the dollar the currency of an “enemy state”.

The US invaded Iraq in 2003. Amongst the initial stages vast oil fields were secured as part of the initial invasion strategy. Post war, as America rebuilt Iraq the oil they exported was reverted back into dollars, despite the Euro being 17% stronger at the time meaning the new Iraqi was actually getting less revenue for its oil that it was pre-invasion. Not only that but drilling contracts were then re-sold to American firms. This left the two largest oil exporters proven reserves in Saudi Arabia and Iraq firmly tied to the dollar.

Some sceptics say the Iraq war was also intended to deter Middle Eastern states from altering the currency export of oil. BUT, Iran has now stated it is to start exporting oil in Euros, and has already converted much of its treasury into Euros after growing tensions with the US. These tensions have come at the same time as a growing debate over Iran nuclear weapons program. :|

Saudi Arabia has also recently said OPEC may switch the currency it exorts oil in some time in the future, a move which would seal the end of the dollar dominance and turn economic power.

Having seen momentum grow in recent months for at least a duel currency split, selling oil in Euros and Dollars, the US sees OPEC a too large a cartel to excert influence on is Saudi Arabia changes its stance. To this end the US is paying increasing attention to Nigeria, an exsisting OPEC member, in the hope that with generous aid packages she will withdraw from the cartel and commit to serving US supply in dollars. It is not coincidence that there is also increasing attention being paid to the rest of the African continent and countries with vast untapped oil reserves.

The Threat Of The Euro

Economics No Comments »

After yesterdays post exploring the petro-dollar cycle it is worth looking at the consequences that could arise in the event of its collapse. This doesn’t seem as far fetched as it perhaps was two years ago with the rise of another dominant world currency in the Euro, and its continued strength against the dollar only stands to undermine confidence in its American counterpart. The threat of the Euro is a big one, and any OPEC suggestion on altering the currency its oil is sold in must send shivers down the spine of America.

As a ball park America currently has about 5% of the world’s population and consumes around 25% of its oil, meaning that the US is reliant on oil as an import. As mentioned yesterday, for the petro-dollar cycle to work America is also reliant on oil being sold in US dollars ultimately making the dollar a global trading currency.

Now, enter the Euro and its growing strength against the dollar, and the possibility of a new currency replacing the dollar as the global trading currency. If oil was to be sold in Euros, America would have to sell goods to Europe in Euros to get the desired currency in order to purchase oil. As mentioned yesterday they can’t make their own as Brussels is the only place Euros can be printed. America could exchange them but this would then mean she is dependent on fluctuating currency exchange rates, which as demonstrated by the current price of the dollar would be costly. As the US imports more oil than it exports goods to Europe the effect would be devastating to the American economy. If this did happen and the Euro became the worlds trading currency the US economy could be crushed, having drastic social effects along with it.

America has sustained a huge national debt for too long and economists have been warned about the bubble bursting, and repercussions it would have on global markets. We are currently seeing the effects of the currency weakening against the Euro on consumers in the US, and this is whilst the US dollar remains the worlds trading currency. Now it seems OPEC members are looking at the possibility of converting their cash reserves into other currencies, a move which would end the petro-dollar cycle for good. If this happened estimates put the dollars value at crashing anything between 20-40% creating a true economic crisis for the Americans.

With the consequences of the petro-dollar cycle breaking severe, it is easy to understand why America would go to great lengths to keep it in place, protecting her economy and stopping an economic meltdown taking place.

With this thought is it unthinkable that such steps have been taken in the past. Tomorrow we will look into this further.

The Petro-Dollar Cycle

Economics 1 Comment »

I read an article on the BBC today on the recent OPEC meeting and the closing statement of the Iranian president attacking the cartels ongoing policy to sell oil exports in US dollars, a currency that has steadily weakened over the last twelve months. This reminded me of some reading I started on the petro-dollar cycle, an economic cycle that is in place as a result of OPEC selling oil in dollars, and forms the basis of the US economy. I thought the consequences of such a statement could be profound, and so took to writing an article spread across two posts on The Shelf explaining the back ground of the petro-dollar cycle in order to better understand the effects its collapse would have.

In the 1940’s the US were somewhere near the largest exporter of world oil, which as such was exported in US dollars. As things changed with the development of extraction techniques the Middle Eastern became a key player in oil exports. Now Saudi Arabia is currently the largest producer and exporter of oil, and along with other countries who uncovered huge oil deposits at this time founded OPEC. The original intention was to limit production for consistent market so that overproduction didn’t devalue oil as an export product.

Upon the creation of OPEC the cartel first suggested selling OPEC oil globally in one of their domestic currencies, not the dollar. Around this time America’s support for Saudi Arabia in the Middle East began to grow. Saudi Arabia then agreed to sell OPEC oil in US dollars at the same time the Americans started to supply the countries arms. :| The economists will realise the significance of this move, as with Saudi support OPEC now decided to sell oil in US dollars. This decision was the foundation stone of America latter emerging as the world’s first superpower.

This is the case four decades latter today, and as the globes leading super power, America has been founded on two things; the dollar and its military.

It is important to point out that these two factors are inexplicably linked. Without the dominance of the dollar over other world currencies, Americans would have completely different spending trends, (unable to sustain huge credit deficits for one) and therefore the amount of money the US government had to invest in the military would have no doubt been reduced.

As a result of OPEC oil being sold in US dollars, Saudi Arabia stores all its export revenue from its oil in dollars in the federal reserve bank of New York. Around 70% of Saudi Arabia’s fortune is in that one American bank. As each country is responsible for printing its own currency the US Federal Reserve is the only place that the dollar can be printed. Any country therefore wishing to purchase oil as an import needs to store US dollars. As a result the likes of Japan will obtain US dollars buy selling Hondas to America, as one crude example. Those US dollars will then come back to America in the form of Saudi oil accounts. This fortune being held in US dollars therefore means America now in essence has an unlimited credit card at its disposal.

In terms of imports and other buying, it means the US can spend as much as it wants on the back of the Saudi Fortune, including military expenditure, and sustain a substantial national debt. This cycle has led to the US developing a distinct consumer culture. The birth of the ‘buy now pay later’ trend was all founded on this principle, know as the ‘petro-dollar cycle’.

The effects of this petro-dollar cycling collapsing will be contined in tomorrows post.

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