Category Archives: Economy

Can Mergers & Acquisitions be More Successful?

Board meeting room

Image via Wikipedia

Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

Related Articles

Advertisements

Can Twitter Really Drive Investment Decisions?

Image representing Twitter as depicted in Crun...

Image via CrunchBase

A group of hedge-fund managers are launching a multi-million dollar hedge fund next month, using Twitter as its market indicator to determine sentiment and to thereby make investment decisions.

This information came from a recent article on CNBC / Yahoo Finance which quoted Derwent Capital Markets – a London-based hedge fund – as saying it had successfully marketed the new venture, officially called the Derwent Absolute Return Fund, to high net-worth clients and had attracted over £25 million in investments.

The company is confident it can achieve returns of at least 15-20% per annum by analyzing information gathered from over 100 million tweets each day, which the firm brands as “The 4th Dimension.”

On the face of it, this may sound like a risky, or even crazy, venture – but is it?

Let’s face it, the concept of rational markets has been comprehensively debunked during the last few years of economic crisis, and the global growth in wealth came to a dramatic end largely through a change in general sentiment. We’ve also seen plenty of allegations – many apparently backed by evidence – of collusion between those in research and those in investment banking to pump stock prices of certain companies at various times. In fact, based on this and my own experience, it seems that relying on the “experts” to manage your investments is no greater guarantee of success than simply using a general market-tracking fund – and often provides worse returns.

Furthermore, most people agree that we won’t see real growth return this cycle until consumer confidence picks up. Isn’t that really just about general market sentiment?

So contrary to some of the views on this fund, I would argue that this is a smart bunch of people – what they’re doing is using current technology to gauge market sentiment and make investment decisions from there.  Instead of listening to a small group of people to try to understand what “the man in the street” is saying, they’re tapping into the collective feelings of millions.

I see this as the start of a whole new way of tapping into societal collective wisdom and sentiment. What do you think?

October 2010 – Another Black October?

a tale of two lottos
Image by jordi.martorell via Flickr

There’s an interesting phenomenon surrounding October as regards the stock market – it’s probably the single most feared month of the year, with the three biggest crashes all occurring (or starting) in October. Will October 2010 be another bad month?

The Great Depression was triggered by the sharp slides which happened in October 1929 (and kept going), although the biggest one day drop was that of 19th October, 1987, when the Dow lost nearly 23% in one day, and then kept dropping for some weeks until finding a new bottom, with losses of somewhere around $1 trillion. Most recently, October 2010 was seen as the worst month for the stock markets after the banking crisis came to light – and the economic repercussions are still being felt strongly in most parts of the world.

Although there was hope that economic recovery would continue throughout this year, there are growing concerns about whether this will happen, or if we will see a further drop – the infamous double-dip recession. Behind this are the questions of whether governments put too much money into trying to boost recovery too soon, or whether they haven’t put enough in for it to be effective; how and when countries are going to be able to afford to pay for the economic stimulation so far given, and how they can pay for any more if this is needed; and whether the idea of such government intervention has been effective at all, or whether the market needs to sort itself out.

I’m certainly not qualified to answer these questions. To be honest, I’m not sure that anyone really has the answers, especially given that we’ve seen fairly convincing proof that markets are far from rational as they had previously be held to be. Watching the daily rise and fall of the main indices like the Dow Jones it seems to me that the smallest piece of news is magnified in terms of its impact on the market overall, with billions of dollars being added to, or taken from, the value of companies on the strength of relatively insignificant items.

If this is the case and we go into the last quarter of the year without some strong positive news, will the markets over-react once more and lead us back into a “Black October.”  What do you think?

Enhanced by Zemanta

Whither the Welfare State?

Sea wall and railway
Image via Wikipedia

Or should that be “wither” as it’s clearly time to change the model dramatically – a model which was developed after the last war, in a very different world?

As Dr Adrian Rogers quite famously put it, “You cannot legislate the poor into freedom by legislating the industrious out of it. You don’t multiply wealth by dividing it. Government cannot give anything to anybody that it doesn’t first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving. The worst thing that can happen to a nation is for half of the people to get the idea they don’t have to work because somebody else will work for them, and the other half to get the idea that it does no good to work because they don’t get to enjoy the fruits of their labour.”

Having only moved to England a few weeks ago, I find it’s interesting to listen to what people here are saying about the “welfare state” issues, particularly at the moment when it’s clear that the new government has no chance but to make some dramatic changes to the way things have been done in the past 13 years of Labour Party rule.

But it seems that it’s not just the country that Labour has brought to the edge of bankruptcy: former Deputy Prime Minister under Tony Blair, John Prescott, has told us that the Labour Party itself is in danger of bankruptcy, with debts of some £20M ($30M) through a combination of over-spending and poor accounting: ironically making the announcement on the day that Tony Blair’s new investment bank was being registered… At least the party was consistent with its approach to finance, even if the former Prime Minister seems to have profited most handsomely from his time in office.

However, I digress. The basic issue, as Dr Rogers so succinctly put it, is that Governments can’t just create money magically, but can only redistribute money from one part of society to another, and the more that people want to take, the more that others are forced to give.

Few people doubt that societies should help those within them that are unable to fend for themselves – this compassion, after all, is what is supposed to make us human – but the question today is how much help should be given and to whom. I find it astonishing, for example, that there are families in England who have not worked at all for three generations, and simply live off benefits. Others, who receive free housing, believe it should be their right to pass these houses onto other family members. Girls find that being a single parent is a profitable enterprise, and start to have babies at a very young age, then turn to the state for housing and benefits, and are able to live comfortably without working. The list of abuses to the system is endless…

Clearly this is wrong. We should protect those unable to work for reasons of frailty, but those who are healthy should have a defined maximum period – say 6 months – on “free” benefits and then should start “earning their keep.” If they can’t find a paying job within that period, the welfare authorities should have them working for the society that is housing and feeding them – there is so much that needs to be done, from infrastructure development and maintenance to helping the elderly and the sick (hospital porters, for example), and would provide benefits in return for such work. This would not only help motivate them to find more steady (and, perhaps, comfortable) work, but reduce the costs of running local authorities as much of the work could be done by those on benefits.

What do you think – should benefits be given without restriction, or should recipients who are able to do so be obliged to “earn” their benefits, and help the society that is providing them in return?

Enhanced by Zemanta

Not Really a Global Economy

My Pocket Contents
Image by William Hook via Flickr

The news continues to be full of stories around the Global Economy and how companies increasingly operate independent of national boundaries – so that one could be forgiven for believing that we really do live in a global economy.

However, as my current experience of relocating to a “First World” country – England – shows, where one would expect that things do operate in this way, the reality is very different and the Global Economy seems a long way off.

Certainly, some things work well – one can move money between bank accounts across multiple geographies easily (provided, of course, your accounts are all with one bank, otherwise it’s far more complicated). Mobile telephones also operate well across boundaries, although you pay handsomely for making and receiving calls when away from the country where your phone is registered – profiteering, perhaps?

However, the rather large holes in this Global Economy story (myth?)  have really been exposed when trying to establish myself with the basics here.

  • Renting a home – this is far from simple. You have to get credit reference agencies involved and they require enormous amounts of information. Simply giving them details of your bank/s and relationship managers isn’t enough: you have to do all the leg work yourself.
  • Insurance – amazingly, motor insurance companies apparently don’t give credit for a no-claims driving record in countries like Dubai (an extremely challenging environment as anyone who has driven there will attest), although they are happy to do so for comparatively tame driving countries like New Zealand, so no more no-claims bonus on motor insurance…
  • Telephones – it took me a week to establish that I COULD get Blackberry Services on a Pay As You Go basis (I was told by some mobile operators and some phone shops that this was impossible for the first week, but kept researching until I found it could be done).

In fact, for most general things (even using your new bank account’s debit card) the over-riding requirement is for a local Post Code (you’re asked for this the whole time), so if you’re still trying to set things up and don’t yet have a fixed abode, you end up having to borrow a post code and address from a willing friend or relative for even simple transactions.

Why is it, that with a 30+ year history of banking, credit, insurance, telephone, etc., etc., usage in countries like South Africa and Dubai (countries that have “First World” standards of traceability on such things) I have to start over? One would think this information would be available to the relevant companies and authorities in other countries, but it seems to be only the case for adverse information and anyone else is “guilty until they prove themselves innocent.”

So much for the Global Economy – or is it just a case of laziness and profiteering?

———-

P.S. This relocation process is, of course, the reason for my lack of blogs recently – I hope to be back to regular blogging in September.

Regular readers will notice the banner picture change to reflect my new home…

Enhanced by Zemanta

The End of Cash?

Image representing iPhone as depicted in Crunc...
Image via CrunchBase

It’s interesting to see the number of recently introduced products coming to market which are designed to, in effect, remove the need for cash.

One that has garnered particular attention recently is, of course, Square. This comprises a small application that resides on your iPhone (or iPad, iPod Touch) or Android phone, together with a little reader that plugs straight into the audio input jack of the phone and turns it into a personal credit card payment machine that will allow the user to accept credit card payments from anyone for a small fee (typically 2.75% + 15c). With no costs for set-up, application or card reader this is sure to change the game for those tens of millions of small businesses, traders and professionals that have, until now, fallen outside the electronic payment net because they are too small for the card companies to serve cost-effectively.

But Square is not alone – Obopay allows anyone with a  mobile phone to set up an Obopay account and, for just 25-50c (plus 1.5% if you’re using a credit card to fund your account) send money – in other words, make a payment – to anyone else with a mobile phone, whether or not that person already has an Obopay account. Again, there are no setup costs.

And then there’s Intuit with its GoPayment service that also enables credit card payments from a mobile phone – this time with a Bluetooth reader – at a cost of 1.7% + 30c per transaction, although this service does have a monthly service cost of $12.95 attached to it (I wonder for how long, though, given the competition above).

Doubtless there are many others, too, either in stealth mode at present or on the drawing board.

What’s more, these systems allow you to build purchase histories by customers, offer loyalty programs and great levels of service more simply than the straightforward cash systems did – so even the smallest businesses can step up their marketing at little or no cost.

At present, all these products only work for you if you’re a US-resident/business, but it’s only a (hopefully short) matter of time before they go global and the way of transferring value changes forever from cash to electrons. No more looking for change, worrying about how the currency in a new country you’re visiting works, being concerned whether anybody’s watching as you withdraw a large amount of cash from an auto-teller…. And, of course, if you’re a small business, no more concerns about having the right change for those large notes that auto-tellers like to give, about the value sitting in your till, or being worried when taking your cash to deposit it.

It’s going to be interesting to see how society changes over the next generation as we move from cash altogether. Will the nationalistic bonds to a currency (and the resulting issues of payments from/to different countries and with travel) be removed, and could we find a common global currency?

And, of course, we’re seeing the continued drive for the mobile phone to be less a telephone and more a personal digital assistant in every way – clock, alarm, calendar, address book, diary, music player, radio, newspaper, camera, voice recorder and now, wallet. As an aside, it’s interesting to see how many of the Generation Ys don’t wear watches – their phones tell them the time. Has the watch industry got an answer to this, its potentially biggest threat?

We’re at a very interesting point in the 5000 year evolution of money as we know it. Will it disappear completely as a physical object in the next 20 years?

Reblog this post [with Zemanta]

Can Europe Survive? Life after Katla…

Katla
Image via Wikipedia

The recent chaos surrounding the eruption of the Eyjafjallajökull volcano in Iceland – with effects being felt globally in terms of significant financial losses, disruption to travellers, disruption to food supplies, and so on – needs to provoke some serious discussion as to what actions are needed to prevent even greater, and much longer-term, chaos in the event of a more significant eruption.

After all,  history has clearly shown that when Eyjafjallajökull erupts, it’s very much larger neighbour Katla is generally not far behind, and Katla is overdue for an eruption anyway.

While the size of eruptions can never be accurately forecast, the historical evidence shows that Katla’s eruption is likely to be at least ten times the size of the Eyjafjallajökull eruption – and quite possibly more. This could mean not only significant floods of fresh glacial-melt water into the sea (a volume equal to the combined flow of the Amazon, Mississippi, Nile and Yangtze rivers is estimated to have occurred following its 1755 eruption), but a column of ash rising 20km, or more, into the jet stream and being spread over a much greater part of the Northern Hemisphere.

History has already shown some of the worst effects from major volcanic eruptions in Iceland – that of Laki in 1783 resulted in famine across Western Europe, and as far south as Egypt, one of the longest and coldest winters on record in North America, and the death of tens of thousands of people from gas poisoning and famine. It was even linked to the start of the French Revolution, where the lack of food played a significant role.

Admittedly, these are somewhat extreme examples, but they show what is possible should Katla’s eruption be a big one – and almost all experts agree that with Katla, it’s not a question of “if” but of “when” it will erupt.

So, what are some of the possible effects of a big Katla eruption?

  • Air travel – the recent 6-day chaos would potentially be dwarfed by one that could last months. This would not only impact passengers, but freight, too. Tourism would certainly be impacted negatively, but so would food imports and general freight movement.
  • Agriculture – the impact of a prolonged cold spell would drastically affect crop production in Europe and, potentially, elsewhere in the Northern Hemisphere. For Europe, this would just add to the difficulties faced by the lack of air transport to bring in fresh produce from elsewhere.
  • Power – of course, a lengthy period of exceptionally cold weather would push up power consumption dramatically. Could Europe cope with a prolonged extra demand for power for heating?
  • Wealth – potentially a significant shift in the wealth of Europe as the combination of food shortages, collapsing tourism, freight reduction and prolonged cold takes its toll. Where would this wealth go, and who would benefit?

Disturbingly, though, little attention seems to being paid to this, in spite of the lessons we’ve learnt from Eyjafjallajökull. And if it’s not Katla, how long before another significant eruption – perhaps in Iceland, or perhaps elsewhere (Yellowstone?)…

European, and other, governments need to get together as a matter of urgency on this: the planning for overcoming the potential problems is not something that can be done overnight in a reactive manner. Rather, they need to start work today on ways to reduce the reliance on current modes of air transport (could the airship make a comeback?), to find additional reliable power sources, determine ways to source sufficient food, and so on.

Reblog this post [with Zemanta]