Welcome to week 362! The articles below caught my attention this week. What are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********). Article titles preceded by [SR] require a subscription.
(21 February 2019): “Rethinking Comparable Companies” Morningstar
********Real estate agents and their customers know the importance of “comparables” in pricing houses. Likewise, the notion of peer groups is important in firm comparisons for investment and financial management. (When I taught managerial finance, peer groups were identified by referring to two conventional factors—product and size—and two additional factors—place and strategy.) So this article by investment research company Morningstar caught my attention. (I learned off it from Bloomberg’s Barry Ritholtz.) In brief, the article presents “A new approach to identifying comparable companies.” The approach employs artificial intelligence to automatically generate “a full list of comparable companies, even if a firm’s competitors aren’t all in the same sector or industry.” In effect, Morningstar’s method generates a set of peers that is not tightly wedded to product. This is especially useful when a firm produces a wide variety of products (as most do). The method results in a colorful plot that suggests its potential usefulness.
********The article uses Tesla as an example of how the approach works. Although it is commonly thought of as a car company, it is more than that—it also sells batteries and is involved in solar energy. To me the usefulness of the Morningstar approach is not so much to determine a set of actual competitors, but rather a set of potential competitors. Potential competitors are those companies, more generally organizations, that one might be in competition with. This could work in two ways: (1) to identify potential threats from other competitors— and (2) to identify potential opportunities by competing with companies in other lines of business.
(20 March 2019): “How to value a life, statistically speaking” Marketplace
——–“When we talk about the value of a human life, we normally say it’s priceless. Because it is. But at the same time, economists do put a dollar sign on life in a way. And so does the government. In fact, that’s how many regulations are evaluated—weighing the cost to businesses with the benefit in lives. That is how the U.S. government came to do so.”
********This is a five-minute podcast that takes a historical look at “how we came to put a price on human life.” Rand Corporation is part of the story, as is the background of the serious consideration of how to deliver an atomic bomb to the Soviets. An approach was developed that would result in the death of many pilots, which the “Air Force hated.” As a result, monetary valuation of human lives began. It now plays a central role in regulatory assessment. Vanderbilt economist Kip Viscusi played a central role in the formulation and current use of “value of statistical life,” which is used by regulators, who know it more simply as VSL He is interviewed in the podcast.
(21 March 2019): “Why Should Americans Be Grateful for $137 Insulin? Germans Get It for $55” The New York Times
********This article takes a look at Eli Lilly’s Insulin drug, Humalog, and its marketing of an authorized generic, which it sells for about half the price. Evidently an authorized generic is one produced by the drug maker (Humalog) itself. This is in contrast to the traditional understanding that “Generics . . . are copies of brand name drugs made by competing manufacturers once the original patent protection has expired.” My understanding is that Humalog and its authorized generic are chemically identical—only the trademark is different. Eli Lilly is not alone in this practice, which is worthy of reflection.
********The subject of pricing also appears in “Low-cost veterinarian clinic in West Asheville raises questions on price transparency” The Asheville Citizen Times (25 March 2019). The clinic, Open Door, “opened to great fanfare in early 2019. As promised, its lower prices have made veterinary care accessible to pets that would otherwise have to do without. But Open Door’s pricing has also disrupted the vet industry in Asheville—and left pet parents wondering why their vet is so much more expensive.” The article goes on to point out the price transparency among veterinarians is hard to find.
(21 March 2019): “Why Companies Swallow Poison Pills” JSTOR Daily
——–The term ‘poison pill’ “generically refers to various defensive measures adopted by boards of directors in response to takeover attempts that can cause sever economic repercussions in an acquirer or potential controlling person.” Such pills “became popular after 1985, when the Delaware Supreme Court ruled in their favor in Moran vs Household International Inc. After that ruling, companies quickly began adopting them at an extremely high rate.”
********Generally speaking, poison pills aim to make a takeover less attractive. The post is based upon the article “Poison Pill Defensive Measures,” which was published in The Business Lawyer in 1987. The article is available at a link at the end of the post. If you are interested in a concise and readable exposition of poison pills, this is the place to go.
(21 March 2019): “A Beginner’s Guide to MMT” Bloomberg Businessweek
********Here is another look at Modern Monetary Theory. It is a nice companion to other posts in previous weeks and introduces a few new elements. The most noteworthy, perhaps, is the information that a textbook has been published—February 2019—on the theory: Macroeconomics, by William Mitchell, Randall Wray, and Martin Watts. Perhaps a systematic exposition of about 600 pages is enough to shed more consistent light on the theory for those who are not well informed.
(26 March 2019): “Is Gig Work a Job? Uber and Others Are Maneuvering to Shape the Answer” The New York Times
——–In December a Texas regulator held that “Companies that use a ‘digital network’ to dispatch workers the way Uber does could label them contractors rather than employees. The proposal . . . was a turning point in a campaign that has played out in legislatures and courts in numerous states, and even in Washington, as Uber and other gig-economy companies have risen to prominence in recent years. Lobbyists involved in this state-by-state effort have worked behind the scenes to provide rule makers with a template. Hanging in the balance could be billions of dollars in costs, and even fundamental business models, as more gig companies move toward public stock offerings.”
********As the article notes, “Industry officials estimate that a work force of employees costs companies 20 to 30 percent more than a work force of contractors—a sum worth many hundreds of millions of dollars per year to Uber.” Clearly, the classification of workers could easily make the difference between operating profitably or at a loss, and greatly affect company valuation. What I found especially interesting about this article was its discussion of the strategy being followed by companies that stand to benefit from having workers classified as contractors rather than employees. Essentially, companies have found the legislative route to be too difficult to navigate, so they are taking a regulatory route. Working with regulators rather than legislators may well be easier and quicker. Bradley Tusk, CEO of Tusk Holdings, has been especially effective in pursuing “the strategy of working through regulators.” Evidently, The Fixer: My Adventures Savings Startups from Death by Politics, foreshadows Tusk’s approach.
May you have a good week!