The theme of this week’s post is animals! We have animal spirits are driving even more M&A activity, this time in the hotel industry. We see a fundamental divide between the hawks and doves in monetary policy, between those who want to see less monetary stimulus and those who want more. Finally, there is a tale about the mythical unicorns, the start-ups that are valued at over $1bn before even being public listed!
Hotels are getting in on the action!
- What happened? After the last few weeks were dominated by headline-making ‘megadeals’ in the beer, tech and pharmaceutical industry, it was the hotel industry’s turn; Marriott International approached Starwood Hotels & Resorts with an offer of $12.2bn to acquire them. However, the deal is not yet done as the door is still open for other hotel chains to propose an even better offer.
- What’s going on behind the scenes? The hotel industry is known to be widely dispersed; the combined firm would be the largest hotel company in the world but would still only have a global market share of 7%. Nonetheless, growing in scale is highly significant as Marriott hopes to gain greater bargaining power against the internet booking companies of Expedia and Priceline who together control 61% of the market, and a greater ability to compete with the likes of Airbnb who have intensified the competition that the hotel companies face. Finally, this deal is perfectly in line with Marriott’s strategy of international diversification because they are already steadily opening one new hotel in China every fortnight but through the acquisition of Starwood who sell over 20% of their rooms in Asia, they can dive straight into the Asia-Pacific markets where incomes are rising fastest.
- Why is this important? The hotel sector had been particularly quiet in the first half of this year, even when most of the sectors were seeing large amounts of M&A activity going on but within a fortnight, that changed dramatically. Firms such as Accor, the French hotel group and Travelodge, the budget UK hotel chain, were quickly immersed in deals before this bumper transaction was announced. Ultimately, it highlights that in the face of disruptive innovation and pressures from their distributors, firms must adapt and M&A is one way to do that. Only time can tell if that is a sufficient answer.
Are unicorns even real?
- What happened? Of course unicorns exist! No, we don’t mean the mythical horned creature, we mean the tech firms that have managed to amass a valuation in excess of $1 billion. However, one purported unicorn, the payment processing company of Square Inc, didn’t nearly as well as it hoped when it had its initial public offering last week. Its shares priced at $9, well below its indicated price range of $11-$13.
- What’s going on behind the scenes? In its previous private fundraising round, Square had been valued at $6bn and if the IPO had gone according to plan, it would have been worth as much as $4.2bn but alas, its public valuation at debut was just a meagre $3.2bn. When we consider why the firm was valued at such a discount relative to its private valuation, there are many reasons. The most important factor to consider is almost always the fundamentals; behind all the optimism about its status as a unicorn, Square is still a loss-making financial services company and although its year-on-year adjusted revenue growth rate is high at over 70%, it is on a downward trend. In fact, in an competitive industry where there are at least 5 other unicorns, it is clear that the market has deemed Square as being simply not unique enough to command such a high price.
- Why is this important? On the whole, tech IPOs have done rather poorly this year; there have been less than 30 tech IPOs in the US this year, the least since 2009 and there is good reason for this. Investors are suspicious of the high valuation that privately listed companies have received, as it is not clear how strong the fundamentals of the firm are and what terms private investors have been given by private tech firms. With unicorns being as illustrious as they are, just as with the mythical creatures, it seems that August’s market correction has made investors sceptical of the unicorns.
Hawks and doves
- What happened? More and more evidence is accruing to suggest that the ECB and the Fed are going to change their monetary policy stance in December. The big sticking point is that the changes are almost certain to be in the opposite direction to one another.
- What’s going on behind the scenes? The US is coming off the back of a strong jobs report in October where there was a record low level of unemployment and according to the minutes of the Fed’s October meeting, many members on the board support the view that the conditions for a Fed rate hike “could well be met”. In direct contrast, ECB President Mario Draghi echoed his famous call to “do whatever it takes” to save the Euro in 2012, by announcing that he “will do what we must to raise inflation as quickly as possible” after months of near-zero inflation rates and a paltry growth rate in Q3 for the Eruozone. As such, December looks set to be the month when the Fed finally abandons its rockbottom Fed funds rate with a hawkish rise but also when the ECB makes dovish moves to bolster its €1.1tn quantitative easing programme.
- Why is this important? A change in the monetary policy for the two biggest economies in the world would individually be enough to attract the interest of most economists but the fact that they are set to occur in the same month and with a difference in direction has added a whole new element into the mix. This is most plain to see in currencies and bonds where the dollar is surging to a seven-month high against the Euro whilst the sovereign debt spreads on two year Treasury notes against their G7 equivalents has reached almost 80 basis points, the greatest since 2007.
- There were significant developments in the fight against ISIS, in the aftermath of the Paris terror attacks that killed at least 129 people and injured more than 300 others. French President Hollande declared war on ISIS and launched an air offensive in Syria against known ISIS strongholds in retaliation. Meanwhile, the US continued to launch air strikes against and claimed to have killed the leader of IS in Libya. Finally, calls have been made to restrict the flow of Syrian migrants into Europe and the US, in fear of letting in would-be ISIS terrorists.
- Walmart reported positive results last week as its stocks rallied and its sales in its domestic stores were slightly higher in the third quarter but despite this, profit was down by 11%, owing to the poor performance of the international stores. In particular, sales at Asda were down 4.5% due to fierce competition from the discount retailers who have seen their market share double in the past 3 years.
- The Japanese economy fell into recession in the third quarter as it saw a slight contraction of 0.8% at an annualised rate that added to Q2’s contraction of 0.7%. This is a severe disappointment for Japanese Prime Minister Shinzo Abe whose efforts to eliminate deflation and revitalise economic growth through fiscal and monetary stimulus have clearly been in vain. Fortunately, the underlying reason for the contraction was simply a sharp decline in inventories, as private consumption had actually grown by 2.1% at an annualised rate, suggesting this ‘technical recession’ isn’t nearly as bad it seems.