Tags: Buffett | Successor | Western | Union | todd | combs | berkshire

Shidlo: Buffett’s Successor Banks on Western Union

By    |   Monday, 29 Nov 2010 10:39 AM

On Jan. 1, 2011, Todd Combs, a relatively unknown hedge-fund manager, will start working at Berkshire Hathaway, managing $2 billion to $3 billion in investments.

Combs, 39 years old, reportedly has been tapped to become Berkshire’s chief investment officer in the future.

While at chief executive officer and director of Castle Point Capital, Combs picked Western Union (NYSE:WU) as one of his top investments, purchasing more than one million shares. Why?

Western Union, the world’s largest global remittance player, has a large and growing cash flow, with a network of more than 400,000 agents in 240 countries and revenue of $5 billion.

It might be considered a type of investment that Buffet would like – a value play with a strong “economic moat.” (The term "economic moat," coined and popularized by Buffett, refers to a firm's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.).

But what about its competitors?

One of Western Union’s largest competitors is MoneyGram International (NYSE:MGI), which is based in Dallas, Texas.

Like Western Union, it is investing and partnering in new technology companies that allow money to be transferred via mobile devices (in 2009 MoneyGram signed an agreement with Affinity Global Services of Dallas). Western Union has recently signed an agreement with MTN, Africa’s largest cell phone company, to enable their clients to transfer money in the 21 countries that MTN operates.

Other global money transfer companies are Euronet Worldwide (Nasdaq: EEFT) and Global Payments. Euronet Worldwide offers automated teller machines (ATM), point of sale (POS) services, credit/debit card services, and other electronic financial services.

Global Payments (NYSE: GPN) process e-commerce transactions for more than one million merchants worldwide.

Another growing player in the money-transferring business is PayPal, a subsidiary of eBay (Nasdaq: EBAY). While initially it was intended to process payments for online auctions, PayPal has expanded and now operates in 190 markets and manages more than 200 million accounts with more than 73 million of them active. PayPal allows clients to transfer funds in 19 currencies globally and operates in 13 countries.

PayPal customers can use their accounts to send money online to their friends or family. One can now transfer money by using a PayPal application on iPhone, BlackBerry or Android. PayPal is probably the cheapest solution for sending small amounts overseas, especially if the recipient also has a PayPal account.

All of the players make profits not only from the transaction fee but also from the spread between the wholesale and retail exchange rates they charge. For example, if one were to send $500 from the U.S. to a relative in Brazil, PayPal would only charge $2.50 for the fee to another PayPal account or bank account but nearly $20 if sent to a credit card.

Western Union would charge $15. Both would profit from the spread in exchange rates as well as the recipient would receive it in local currency.

PayPal wouldn’t be available to someone who doesn’t have a PayPal online account, bank account or credit card. Western Union has offices in many countries, where you can go and get the cash. For relative smaller amounts, the profits margins are even higher — a $100 transfer from the U.S. to Mexico by Western Union is about $9.99 plus the spread in exchange rates, which makes it a very profitable business.

Who is losing from this as more and more people are using alternative payment methods to the traditional credit card or bank model? Indeed there are more people in the developing world with a cell phone than with a bank account or credit card.

Global money transfers via mobile devices (as well as PayPal) is becoming a very serious competitor for the traditional bank or credit-card model, the same way that landline operators have been challenged by a new a generation of users that opt to communicate only via the Internet using a cable connection.

Soon the younger generation might opt to close their bank accounts and opt for cheaper and faster solutions.

Although there are risks of regulation by the government on the fees Western Union charges, there is potential for growth in this industry — and also for consolidation.

Credit-card companies or banks that feel threatened by global money-transfer companies might be tempted to try and take them over.

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On Jan. 1, 2011, Todd Combs, a relatively unknown hedge-fund manager, will start working at Berkshire Hathaway, managing $2 billion to $3 billion in investments. Combs, 39 years old, reportedly has been tapped to become Berkshire s chief investment officer in the future....
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Monday, 29 Nov 2010 10:39 AM
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