Archive for the ‘Business News’ Category

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The deal between Vodafone and Verizon announced earlier this month is, in fact, the third largest corporate deal in history. In comparison the deal between Microsoft and Nokia is small beer, but it is still a massive arrangement by any normal yardstick. Interest rates are low, but they may not be low for much longer. Is now, and pretty much right now, the time for a new M&A boom?

Let’s look at some of the reasons why the two mega deals of this month have happened. Okay, there is good strategic fit. Verizon and Vodafone both see new opportunities, particularly thanks to 4G in their domestic markets. In the case of Microsoft and Nokia the rationale for the arrangement is pretty obvious and has been discussed to death elsewhere.

But consider two other factors less commonly discussed. In the case of Vodafone and Verizon the factor is low interest rates. Fears that rates may rise soon, was possibly the main rationale for the timing of their deal – indeed Verizon referred to this very point. In the case of Microsoft, the software giant is one of the companies with a massive cash pile. There are many of them. Corporate cash piles have been a particularly notable phenomenon of recent years. Market bulls have been predicting the release of this cash mountain for some time. In the case of Microsoft, its partial release has been triggered by desperation – fear of Google, Samsung, and Apple, even Amazon. Other companies may start spending because they see signs of an economic pick-up. The reason may not matter. It was surely inconceivable that companies were going to sit on all that cash for much longer, but a trigger was required to release it.

Look further down the corporate league and other evidence of new M&A activity emerges. David Lloyd Leisure has been bought by private equity firm TDR Capital – and its new owners have plans for expansion.

The ‘Telegraph’ recently quoted Greg Lemkau, who is the co-head of M&A at Goldman Sachs, as saying: “Within two or three years from now, people will be looking back on this time as a golden opportunity.”

But the overriding point is this. The economy both here and in the US seems to be improving, and pretty significantly too. M&A is always popular during an economic upturn. But because interest rates are set to rise, the ideal timing for such activity is now.

Not everyone in the corporate world has cottoned on to the recovery; they were likewise slow to spot the seriousness of the crisis five years ago, but as the recovery gatherers momentum, the penny will drop, and then we will see a rush for leveraged deals before rates rise much further.

What are the implications? AS M&A activities rise, so too will equities. The FTSE 100, the S&P 500 and the Dow will all pass new highs – probably.

Is it all a good thing in the long run? Well that will be the subject of another article.

© Investment & Business News 2013

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Over the weekend the press were full of talk of Steve Ballmer, the CEO of Microsoft, who has announced his plan to retire next year. This begs the question: what next for the company? Should it revisit the idea of a merger with Yahoo?

Some focused on the somewhat less than gushing terms of the Microsoft release announcing Ballmer’s retirement. Some reckoned they saw hints of a rift between Ballmer and Bill Gates. The two men have been colleagues for decades. By the way, Ballmer was Microsoft’s 30th employee, joining the company in 1980. He became CEO in 2000.

It is not hard to point to what is wrong with Microsoft these days, and as the boss Ballmer will clearly receive most of the blame.

It is not so obvious that things would have been much different if Bill Gates had stayed at the helm. Gates famously failed to predict the rise of the internet, so it is doubtful whether he would have come up with a plan to counter the threat posed by Google, Apple and Facebook.

In fact, you may recall that back in the 1990s Microsoft, led by Bill Gates, and Apple began a joint venture. Some Apple aficionados saw a tie-in with Microsoft as akin to a pact with the devil. Few foresaw a day when Microsoft would be struggling, and living in Apple’s shadow.

But will Microsoft come back?

It is suffering from classic innovators’ dilemma with a little bit of recession to the mean thrown in for good measure. See: The UK’s export-led recovery

The market it has dominated for so long is changing – arguably disappearing – and Microsoft seems to be left plugging technology people no longer want.

It was not always this way. Back in the 1980s, Microsoft learnt how to experiment. To tell the story, we must rewind the clock to 1987. The company had a massive dilemma. It had enjoyed a good run, thanks to DOS, but the world was ready for change. The industry was alive with competitors – many much larger than Microsoft – wanting a slice of the action. Eric Beinhocker tells the story well in his book: ‘The Origin of Wealth’. These days we just assume Microsoft chose to ditch DOS and develop Windows. But it wasn’t as simple as that. It appears that Windows evolved, and a by-product of its development was the failure of most aspects of the Microsoft plan.

In fact, before Windows won through, Microsoft put more resources into beefing up DOS. It entered into a relationship with IBM for the development of OS/2; it held discussions with third parties for products aimed at the Unix market; it bought a big stake in a seller of Unix systems; created software for the Apple market; and, of course, invested in Windows.

By Ballmer’s own admission, Surface was a bet-the-company product, but there was never a need to take such a gamble.

What of the future?

Not so long ago Microsoft tried to buy Yahoo, but the price seemed to be the sticking point. Under  the dotcom seems to be staging something of a renaissance.  Maybe some kind of merger should come back on the agenda, but it’s difficult to see Mayer heading up Microsoft. If, however, she was to head up some kind of joint venture between Microsoft and Yahoo, now that might be more interesting.

© Investment & Business News 2013

When it comes to dividends, Vodafone has ruled supreme. It has been the FTSE 100s top dividend payer for years. But, talk was afoot that the times they were a changing. Investors who had got used to their shares in Vodafone paying out more income every year, feared the party was over. But this morning things began to look different.

The ‘Sunday Times’ spooked investors. This week it ran a story with the headline: “Vodafone’s golden decade of dividends comes to end.” The CEO of Verizon Communications, which owns a 55 per cent stake in Verizon Wireless, with Vodafone owning the balance didn’t help. In a recent meeting with analysts from JP Morgan was reported to have said this will be a lean year for owners in Verizon Wireless.

For Vodafone that was a problem, because over the past couple of years its stake in the US company earned it no less than $18.5 billion in dividends. So if that was set to come to an end, it wouldn’t be good news for the company.

It turns out that 2013 looks like being a lean year with a feast in it, or to put it another way, the fattest lean year on record. It was announced this morning that Verizon Wireless is to pay its owners a $3 billion dividend, with $3 billion of that going to Vodafone.

Okay, problems are not over for Vodafone. Its core European market is stuck in recession, and moves are afoot to buy it out of Verizon, although if it can get a good price, this may not be such a bad thing.

Still, if this is a lean year, imagine what a fat year will be like.

© Investment & Business News 2013

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Zombies are everywhere. They dominate the TV and offerings at the cinema. They are rife across the economy too. Some say interest rates need to go up; that there are too many companies that are being artificially propped up by low interest rates. They say that if the cost of borrowing goes up the zombies will be slain, and the economy can get on with the serious business of growing again.

One of the problems with taking a look at this issue is that there is very little, if any, hard data. How many zombie companies are out there? Does anyone know? If the media repeats the same thing often enough, it may feel as though it is true – because we keep reading about zombie companies they must be out there.

Last week Capital Economics attempted to take an objective look at what it called the zombification of the UK economy. There is an oddity concerning the logic of saying the economy is being overrun by zombie companies. The evidence for this claim is partly that insolvency levels are low. Does that not strike you as a circular argument? There must be lots of zombie companies out there because the level of bankruptcies is low.

Capital Economics said the low levels of liquidation could “be explained in part by the fact that corporate profitability has held up surprisingly well and by the consequences of the 2002 Enterprise Act in encouraging business rescue over liquidation.”

It also suggested, not unreasonably, that even if there are companies out there that have a kind of zombie feel about them, this may simply be a symptom of the fact that the UK is in the midst of its worse economic downturn ever recorded.

If these zombie companies were allowed to fail, is there not a danger that unemployment would surge? Maybe it would be better to purge the zombies when the economy is recovering.

But let’s say that there is something in this idea of zombie companies. This is a view typically held by those on the right-er wing of the political spectrum who see the solution as creative destruction. (You don’t have to be right wing to hold those views, but that is how it normally is.) Advocates of upping interest rates typically sign up to what’s called the Austrian school of thought. Let the markets decide, and let central banks step back and stop interfering.

But here is an alternative idea for dealing with zombie companies. Keep interest rates low, but increase the minimum wage.

Such a policy shift would have several beneficial effects. So called zombie companies with poor levels of productivity, may find they cannot survive if they have to pay their staff more money. So, such a change would destroy the zombie companies.

According to the Austrian economic theory, the companies that can afford to pay their lowest paid staff a higher wage could then move into the vacuum created by the destruction of zombie companies.

But what about the downside of an increase in the minimum wage? See Is it time to increase the minimum wage?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

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In some parts of the world the media love Apple. Their affection is born of years of attachment. After all in the days when Apple was struggling for its very existence, its PCs were the computers of choice for those we call media people. In China it is not like that. The media on the other side of the Great Wall have been taking it in turns to take pot shots at the company and its so called arrogance. The question is: are the accusations they throw at the giant US company justified, or is there something else going on?

In the West there is something almost irrational about the way some people hold Apple so close to their hearts. Now that the company is the world’s largest– or close, depending on which day you look at its market cap – that affection may not be quite so strong. But during Apple’s golden growth years nothing seemed more likely to wind up its public than a media publication being in some way negative about the company. Maybe such affection was in part down to Apple’s roots as a desk top publishing company, and the machine of choice for the media world. After all, the media world is the place of opinion formation. If you want to get any one sector of society on your side, it is best if this sector is one of opinion formers.

In China, however, the opinion formers seem to be distinctly un-Apple friendly. The Chinese paper the ‘People’s Daily’ accused the US company of two forms of arrogance: both “unparalleled arrogance” and “swaggering arrogance.” It said the company displayed the “traditional superiority enjoyed by westerners”. It said: “If you insist on challenging Chinese customers’ love and patience, and continue to be heedless, then your business will eventually decline no matter how glamorous or successful your brand is.”

Not all feel like that way, however. The ‘FT’ quoted one Chinese blogger as saying: “Everybody is eating cooking oil recycled from gutters, no problem! Everybody is drinking poisonous milk powder, no problem! We drink water filled with dead floating pigs, no problem! But when you change the back cover of iPhones for foreigners but not for us then that is not OK, that is far more serious than any of these problems.”

So are the accusations justified, or is there some kind anti-Apple conspiracy going on, or is there another explanation? I don’t know about you, but speaking as a westerner, a big question mark seems to apply to this notion that westerners think they are superior. A great many westerners may – if anything – suffer from an inferiority complex when it comes to China, especially when applied to the Chinese apparent penchant for mathematics.

Some have suggested there is a Chinese government backed anti-Apple campaign; that the government is – in effect – practising protectionism, a tariff made of press negativity. The ‘Economist’ speculated that a rival may be behind the campaign.

All these accusations may have merit, but here is a third explanation.

But before the third explanation is described, consider another Western company that has been a victim of Chinese media: Volkswagen. A recent report on Chinese television accused large Western auto companies of shipping cars into China containing materials that can cause cancer. China’s Central Television ran a programme focusing on the difficulties owners of Volkswagens in China have had with their car. These problems may be legitimate, but frankly common sense suggests there is a lack of press impartiality at work here.

Then again, look at Toyota in the US. Look at BP. Both companies made errors and the press reaction was extreme, both companies were found guilty by the court of US media. No attempt was made to compare design faults in Toyotas with the incidence of designs faults in cars made by famous US car brands. As for BP, the company had to change its boss to one with an American accent. US companies that were at least partially responsible for the oil rig disaster were not subjected to the same degree of scrutiny by the US media, and that very much includes one particular company that used to be headed by a former US Vice President.

If China is practising a form of protectionism, then the US has been doing likewise.

Or maybe – and this is the alternative theory – the explanation lies in self cultural identity. Some nationalities, and it is not hard to think of examples, just think they are the best. The media will slate foreign brands because there is an implicit belief that foreign brands are not as good as domestic ones.

The UK self-cultural identity is quite different. Brits are easily swayed into believing that goods made abroad must be superior; that there is nothing the UK is good at. This, in turn, makes the UK more open to foreign goods. It’s a form of anti-tariff.

PS. It is not clear what the Chinese cultural self-identity is on this one. According to Boston Consulting, more than 60 per cent of Chinese consumers say that they are willing to pay more for products labelled ‘Made in USA’ than for those labelled ‘Made in China. See: US and Chinese Consumers Willing to Pay More for Made in USA Products

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

When Vladimir Putin isn’t shooting tigers, saving Siberian cranes, catching whales or just looking all round tough, he is being nice about BP.

Let’s face it, during the last few years things have been a tad troubled for BP. Cast your mind back to 2003. In that year the company agreed a joint venture called TNK-BP with a group of Russian billionaires. The British company invested $8 billion in the venture, and it all seemed rather promising. The joint venture appointed a BP man, a certain Bob Dudley, as CEO.

But while BP was busy laying the foundations for an environmental disaster in the Gulf of Mexico on a scale to make even its loyal shareholders shudder in disbelief, its relationships in Russia deteriorated. Eventually, things had got so bad that Mr Dudley was forced to leave Russia in something of a hurry, with questions about his visa. And ever since, BP and its partners in TNK-BP could barely look each other in the eyes without making evils at each other.

The bucks still came flooding in, however, and BP has enjoyed no less than $19 billion in dividends from its shareholding in TNK-BP.

So while Barack Obama was being all horrible to the company, and its CEO Tony Hayward, who (in typical British understatement) said: “I want to get my life back”, BP found itself promoted to the role of public enemy number one in the US. In the meantime, Vlad took time off from teaching Nicholas Sarkozy some Judo holds, to say how much he liked BP, and how very upset he was about the way in which Tsar Barack the First of the USA was treating  the company.

By then BP had a new boss, none other than Bob Dudley. His American accent helped to alleviate some of the bad PR Stateside, but how would Bob be able to manage the lucrative relationship with TNK-BP when he had personally suffered such a falling out?

Mr Putin said he wanted BP to work with Russia in developing oil resources in the Arctic. “Err, no to that,” said TNK-BP, “We have the exclusive on all dealings between BP and Russia.”

So that left BP in a difficult spot; its reputation in America was in tatters (and that might be kind to tatters), but its dealings in Russia seemed to remind one ever so slightly of wading in treacle.

Now things have changed. The huge Russia state owned energy company Rosneft– the one that picked up a lot of business from Yukos, the energy giant that went down after its boss Mikhail Khodorkovsky found himself in trouble over taxes/after moving into politics – has bought BP’s stake in TNK-BP. At least it has, subject to the normal legality issues.

BP is getting $12.3 billion plus shares in Rosneft worth 12.84 per cent of the company. Actually BP is getting more cash than that, but it is using some of the money to buy the Rosneft shares, so the $12.3 billion is a net figure. BP will also have two seats on the Rosneft board. Meanwhile, according to this morning’s ‘FT’, Rosneft is also going to buy the rest of TNK-BP.

All of a sudden BP finds it is in a pretty powerful position in Russia. Rosneft’s CEO, Igor Sechin, is a former deputy Prime Minister of Russia, and said to be one of Putin’s favourites.

For BP this is a pretty unique opportunity. Tsar Vladimir likes the company and the potential riches in the Arctic are great indeed.

BP’s rivals may well find they are squeezed out of Russia.

Not sure how the US will react. Many have said the last thing BP wants is too much cash from the deal, because Uncle Sam may then decide that actually BP needs to fork out more money in damages for the 2010 Deepwater Horizon disaster.

There is one thing BP has going for it, and that is superb skills in exploiting oil in those hard to reach places of the Earth.

The Russian deal may prove to be most lucrative for BP – that is for as long as the company has the confidence of Mr Putin.

Here is some advice for Mr Dudley: don’t suddenly decide you like that Russian punk group called Pussy Riot.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here