Happy New Year

After two weeks of non-work because of the unique holidays, we are back at work. Let’s look back at our mistakes so we do not commit them again. Let’s look forward to trying harder and surpassing our goals. Let’s not forget to share our good fortune with the less endowed (and share our patience with the mentally challenged).

AOL Time Warner in the news again

AOL bought Time Warner for more than $100 billion exactly 12 months ago. Steve Case of AOL made a brilliant move of buying Time Warner last year, morphing his clicks-only dot-com to a clicks-and-mortar company. If he had waited until midyear, his stock would not have been worth anything for such an acquisition.

Fast forward to today. AOL Time Warner is writing off its goodwill by more than $50 billion (Yup, not million but billion). As they say, finance is not an exact science but rather an art. Why did Richard Parsons, the new CEO, agree to such a big hit to his bottom line for 2001?

This is the typical first move for a new CEO who wants to accelerate all the possible expenses. Parsons argue that his predecessor (Gerald Levin) caused these losses. Going forward, his earnings per share is no longer burdened by regular reduction of "amortization of goodwill," overall a cleaner earnings per share figure.

In his second move, Parsons also managed expectations down. Using the Sept. 11 tragedy as a tangible excuse that corporate advertisers worldwide have reduced their ad spending significantly, Parsons announced that 2002 would not be a great year as far as advertising revenue goes. Actually ad spending was already down since the second quarter of last year.

As a company, AOL’s cash flow in terms of EBITDA (earnings before interest, depreciation and amortization) was about $10 billion for the past 12 months, which is about seven percent of its current market capitalization of $141 billion. Clearly, the stock is overpriced for the cash it delivers. US investors are better off investing in tax-free municipal bonds and come back to AOL next year.

My Two Cents: Cash is king! Any financial gymnastics cannot cover up the failure to deliver results. It is also better to just deliver results than manage expectations.

Toll roads

My family and I were domestic tourists this past holiday season. We went to Subic to visit the false killer whales one weekend. Last weekend, we went to Anilao, Batangas. In both cases, I was quite disappointed with the speed of the trip. Northbound, it took us about four hours to traverse 175 kms. or an average of 44 kms. per hour. Southbound, it was slightly better but it still took 2.5 hours to traverse about 125 kms. or about 50 kms. per hour. (I could have biked there faster if not for the pollution; then again, with my waistline, maybe not.)

I am sure the snail’s pace can be attributed to basically two things: lack of driver discipline and lack of good quality roads.

a. Lack of discipline from drivers of both buses and private vehicles. Buses continue to take more than two lanes of a three-lane highway to discharge and collect their passengers (Q.C. right before the North Road entrance). Drivers continue to drive very slowly in the passing lane, forcing other drivers to pass on the shoulders/emergency lanes. I think the Philippines is the only country where we pass on the right for left-hand drive vehicles.

b. Below par roads. I would define this problem in terms of both quantity and quality. Both the North and the South Luzon Expressways have two lanes each way. I believe the volume of cars and trucks already requires a third lane. In addition, there are consistently damaged or pot-holed portions of the road, such that you effectively have only one lane available for a volume that requires three lanes.

In this environment, the PNCC has raised toll fees for both toll roads. (Hmm…is this logical?) On the surface, the increases look horrendous, if not usurious. However, if you dig deeper, I am sure the PNCC and the Toll Regulatory Board will argue that the fees are to cover the increasing costs of maintaining these roads. In fact, if you compare these toll rates to world prices, they are quite a bargain compared to the highways of Europe.

I submit that we should increase the tolls even more, but subject to certain performance guidelines. For example, they can increase the tolls by two pesos or more per kilometer if they build the third lane. (Note: after they build it.) On the other hand, they should pay a penalty for every meter of pothole; say, P1,000 per day per meter. By my calculation, the toll operator owes motorists P10 million per day because there should be about 10 kilometers of potholes/bad roads between the two toll roads. (That’s for a combined carrot-and-stick approach.)

I have always subscribed to the theory that you get what you pay for. I will pay premium fees for premium service but will require penalties for below par service. Next time they want a rate increase, if I were part of the Toll Regulatory Board, I would require a penalty clause.

Driver’s education should be a requirement for all professional drivers. The LTO should impose stringent standards before issuing driver’s licenses.

How is this related to IT? Several toll takers, the ISPs and the telcos serve the information highway. There is still a distinct lack of sufficient competition such that our bandwidth costs are still high compared to the rest of the world. Despite the advertised service level of always up, there continues to be service interruptions and downtimes. Our service providers still do not feel the pain of losing a customer because their service is below par.

My Two Cents: If we build it right, costs should drop, then investment (both foreign and local) will come. With investment comes employment.

* * *

Dickson Co is CFO (C is for Cheap) for both Dfnn and HatchAsia.com. For comments and suggestions, e-mail [email protected].