Friday, October 31, 2014

How M&As exhibit wavelike behavior when faced with a location problem.

A prey acquired by a wolf. Credit: Mariomassone
Every industry produces according to a supply chain to increase its market share, or extend its market to overseas borders. When a firm decides to acquire another, either two of the above reasons holds, or a third - acquiring the subsidiary for purely risk reduction purposes. Mergers – horizontal, vertical or conglomerate – are the most dominant form of foreign direct investment (FDI), a sign that the international markets are confident about an economy’s ability to reward them in profits. For multinational enterprises (MNE), mergers are strategic. Understanding the behavior of mergers is really important for any economy.

It is unarguable that mergers constitute 80% of FDIs, especially for developed countries. Whether a multinational seeks to gain access to foreign markets through horizontal mergers, exploit differences in factor endowments and low wages through vertical mergers, or pursue motives related to ameliorating its financial and managerial imperfections, mergers and acquisitions affect both developed and emerging economies. Therefore, it is in their best interest to understand the wavelike behavior of mergers.

Consider an atypical MNE. Why would it decide to acquire a subsidiary in a foreign market that is in the same industry? To increase its market share, of course. What really matters to this MNE is the size of that country’s GDP. Corruption and high corporate taxes might be turnoffs, but the size of the GDP is a reflection of the size of the market. What if it decides to acquire a company that manufactures a product that is part of its production process and involves intensive labor? Then, rather than GDP, low wages and wage differences, as well as the available factor endowments in the host country, would be determining factors. Sometimes, though, M&As occur for reasons outside the normal line of activities of the MNE. It might want to please its shareholders, or buy up undervalued firms in weak markets where it sees an opportunity for financial arbitrage, or because the host country has poor shareholder protection.

According to Nils Herger and Steve McCorriston in a discussion paper titled: Horizontal, Vertical, and Conglomerate Cross Border Acquisitions, horizontal and vertical mergers are by far more stable and most prevalent, while conglomerate mergers are much more noticeable just after a financial crisis. The wavelike nature of M&As are largely in favor of firms in markets that are unrelated to the primary business of the MNE because it is pursuing a strategy of risk reduction in lieu of a financial crisis.

CBAs over time and their composition: 1990-2011. With the amiable permission of the authors.
Two cases in point were in 2000, after the dotcom bubble burst, and 2007, the beginning of a global financial crisis. Excepting a crisis, conglomerate mergers are not too common. This might be because acquisitions are a sort of a location choice solution in the market for corporate control. If the search for a location for expansion was the problem, then horizontal mergers and vertical mergers would be the variables under consideration.

A choice for horizontal expansion is then a corporate desire to increase market share, for access to new markets and cultures. This is more noticeable in manufacturing such as food production and electrical equipment, in the services sector as in engineering and accounting firms, and also in the oil and gas extraction industries.

A choice for vertical expansion becomes a desire of possessing suppliers at the intermediate stages of the production process, especially where labor constitutes a significant part of it. The highly labor intensive manufacturing sector is a first culprit.

The wise investor seeks to understand what motivates MNEs to merge and acquire other firms in other countries, and why the international market for corporate control seems volatile, at times, with no apparent rationale. The wise investor who understands the difference between portfolio investment and FDIs and what drives both would not be taken unawares.
This article was inspired by the discussion paper from the University of Exeter, UK, titled: Horizontal, Vertical, and Conglomerate Cross Border Acquisitions..

Links: An African Private Equity marketplace launched by Kusuntu Partners

Links of some interesting stuff online.
  • Launch of Kusuntu, a marketplace for African Private Equity Firms

  • There are currently close to 8 million Small and Growing Businesses in Africa looking for growth and expansion capital. This represents an untapped investment opportunity for those Private Equity Funds that are active on the continent. Therefore, Kusuntu Match Making service, an internet based market place that lists a selection of African Small and Growing Businesses in a view to be identified by Africa focused Private Equity Funds and International Investors looking for deals opportunities on the continent, was born. If you are a small business firm looking for Private Equity investments, you’d be wise to register on the platform.

  • Finnish mutual pension insurer, Ilmarinen, is ready to tap from Finnish pension reforms

  • Ilmarinen foresees a growth in its equity weighting due to new freedom granted it by the country’s recently agreed pension reforms. Although the conflict between Russia and Ukraine has not been good for business, the proposed 60% portfolio investment equity weight increment was meant to be slow and gradual.

  • Obama flexes unilateral muscles for American taxes

  • Corporate tax inversions, double Irish arrangement and tax definitions of corporate intangibles like goodwill, going concern value and “workforce in place” are some tax loopholes and opportunities for tax evasion that Obama wants to unilaterally settle without interference from Congress. Although evasion of foreign taxes in the double Irish arrangement does not concern US revenue authorities, the incentive to evade abroad makes it more likely that those dollars will not come into American soil. So, it makes sense to give aid to some taxmen on foreign soil.

  • One Ford plan appears successful as Ford posts Q3 profits

  • Ford Motor Company (NYSE:F) records its 21st consecutive profitable quarter. A pre-tax profit of $1.2 billion, a 3% decline compared to a year ago, could have been better if not for high warranty costs, lower volumes and adverse balance sheet exchange items. Ford Credit, North American and Asia Pacific arms continue to be profitable although losses were lower in Middle East and Africa. One Ford plan, successful so far, and a cadence of new products, are behind the recorded Q3 profit.

  • Myanmar’s banking sector – a sorry story

  • It’s a story riddled with inefficiencies – high government interests in the banking sector, manual payment systems, loans must be collateralized with land, gold or export commodities and by the way, only a few persons use the banking system. No wonder bank lending as a share of GDP is very low, a twin to… South Sudan! After years of civil strife, it gained independence 3 years ago, in 2011.

Friday, October 3, 2014

What a balance sheet can teach you about a company's health

The links below are snippets of what I have been reading this week.

Online reputations matters in the job search process

Employers search online profiles of potential employees for employability. Online indiscretions can cost you a job, so you better be informed. Some indiscretions the blog pointed out are: posting during work hours, regular negative posts, poor spelling in posts and employees who do not seek to build relationships in their social media activities.

Source:How to get a job by spring cleaning your social media accounts

When transferring money abroad, keep a record

. A charity group for humanitarian aid in Syria, Australians for Syria, will be having several of its bank accounts in the Commonwealth Bank of Australia (CBA) closed down for connections for Biostel Rieh, a money transfer business with relationships to Khaled Sharrouf, a Sydney terrorist. Australians for Syria is not yet being accused of any money laundering activity, but what can be learned from the incident is that keeping records of money transfer operations is important for trust building, especially when sending money to pariah nations.

Source: CBA shuts down bank accounts connected to Syrian humanitarian charity

What a balance sheet could teach you about financial health

Buying stocks is heavily predicated by a company’s balance sheet. This blog on investing was a commentary on Transocean (NYSE: RIG), a rig company. You might wonder why the balance sheet of a company like Transocean might matter? Because the sector is a peculiar one that is heavily dependent on equipment and assets, and the balance sheet can help you determine the financial health of a company as well as understand how much that assets a company owns are worth. The piece focuses on three themes: financial health, efficiency and value. The conclusion reached was that Transocean might be an opportunity to buy at bargain basement prices.

Source: What Does a Balance Sheet Analysis of Transocean Tell Us?

Playing the bond market in India the non-traditional way: through the credit curve

In the traditional way of playing in the bond market, when yields are expected to decrease, due to increasing income and decreased inflation, existing bonds are cheaper and favorable to newer bonds and bonds of longer duration favored over shorter duration bonds. This strategy is based on the yield curve for bonds. Now, fund managers in India are playing it the non-traditional way – using the credit curve. They concentrate on the spread, or the difference between yields on government bonds and corporate bonds, in order to make decisions on buy or sell. Spreads for lower rated bonds are now higher than that for higher rated corporate bonds. So, what do fund managers do? Buy low rated bonds, or what you’d call junk bonds, or bonds close to those. There are fixed in this decision because credit risk and liquidity are improving in the market.

Source: Forget rate cut, here’s how you can play bonds.

While New York’s Junk bond market seems to be facing corporate shivers

Although spreads seem to be rising in the high yield junk bond markets, some big corporations have been pulling off sells this year. General Cable Corp, a maker of wire and cable products, is the tenth corporate body to have announced pulling off its sales of debts on the junk bond market. Citing weak and overall uncertain conditions in the market for its decision.

Source: Rough waters for junk bonds sink deal.

What are cryptocurrencies? Are they valueless or have enduring value?

Louis XV of France coin. Wikimedia Commons
Bitcoin as a brand should readily ring a bell, or even litecoin and zerocash, or maybe not. These are cryptocurrencies: the use of digital tokens as a means of exchange and not a unit of account. Cryptocurrencies solve the problem of double spending (ensuring that even without trust, a currency is transferred absolutely to the exchanging party without the transferer having a second copy and without a third party) and the Byzantine Generals problem. Yet, do they have enduring value? This article explains cryptocurrencies, the problems solved and future directions.

Source: Cryptocurrency

You can now link your Bitcoin account to your bank account – US only.

Anyone in the US can now use Circle to link their bank accounts to Bitcoin accounts and start using the crypto-currency. Amazingly, there is no fee to transfer funds between accounts. Additionally, like most money held by banks, Bitcoin funds held through Circle are insured.

Source: Circle opens up, inviting anyone to link their bank account to Bitcoin