M&A

Week in Review: Tensions flare

This week saw tensions rise up in all different areas of the world. Anger is being channelled by the French and Russians into their efforts to take down ISIS, with some blowback. Similarly, Pfizer provoked outrage by announcing their intentions to relocate from the US to Ireland through the acquisition of Allergan, mainly for tax reasons. On the other hand, George Osborne helped to settle tensions after he backed down from his plans to implement £4.4bn worth of public spending and tax credit cuts, which would have disproportionately hurt the poorest families.

The daddy of all megadeals

pfizer take over

 

What happened? So far this year, we’ve had the biggest tech deal in history, the biggest beer-brewing deal in history and the biggest hospitality deal in history. And now? The biggest pharma deal in history. That’s right; Pfizer, known for its production of Viagra, has agreed a deal to purchase Allergan, which makes Botox, for a record $160bn, to create the world’s largest pharmaceutical company.

What’s going on behind the scenes? Rumours had been circulating about whether this deal would actually go through for several month but after all of the anticipation, this deal has certainly made a splash. Not just for the size of the deal (it is set to be 2nd largest in history), but also for the motivations behind the deal; Brent Saunders, CEO of Allergan, has highlighted the “highly strategic” nature of the deal. This mainly stems from the tax inversion that Pfizer is desparately seeking; Pfizer is currently domicilied in the US where the corporate tax rate is 26% compared to the 17-18% that Allergan pays in Ireland, helping to save the company $2bn over the course of the first three years. Some analysts also believe this deal is simply a play to replenish Pfizer’s branded drugs portfolio before divesting its generics business, to leave the firm more streamlined.

Why is this important? Although this deal is very atypical in its size, the two key issues that plague almost every M&A transaction are especially pertinent to this deal; concerns over regulation and culture clashes. Politicians have been quick to denounce the deal with Hilary Clinton claiming that this leaves the US  taxpayer “holding the bag”, referring to how Pfizer has long benefited from US  taxpayer-funded research and American scientists and suggests that this deal could be blocked. Also worryingly, the chief executives of the firms have a very different take on the importance of R&D in ‘big pharma’; currently, Pfizer invests heavily in R&D whereas Allergan is known for buying or licensing drugs that have already been unearthed by smaller biotech firms.

Christmas come early?

Autumn Statement chart: Fiscal forecast

George Osborne faces the biggest test of his chancellorship.

 

What happened? This week saw George Osborne deliver his first budget for a wholly Conservative government and with it, the Chancellor of the Exchequer brought a nice treat in time for Christmas; he abandoned his plans to introduce £4.4bn worth of cuts to tax credits and public spending which were widely lambasted for their harm to the livelihoods of working-class families.

What’s going on behind the scenes? It is most likely that Osborne’s change of heart has come as a result of a more optimistic forecast by the Office of Budget Responsibility for the government’s coming five-year public finances, which was improved by a health £27bn, giving Osborne more leeway in his aim to achieve a £10bn surplus by 2020. On the other hand, it could also be that public opinion is turning against Osborne’s crusade of austerity, with a Populus poll by the FT showing that fewer people now support the notion that there is a need for ‘austerity and cuts in government spending over the next five years’, down to just 48%.

Why is this important? Given Osborne’s reputation as an opportunist, showcased by his outdoing of Labour through the repackaging of their minimum wage increase into a ‘living wage’, this U-turn by the chancellor seems to be just as well-calculated. In his budget, he outlined significant tax rises in the form of an apprenticeship levy on businesses and higher council taxes, as opposed to the spending cuts he has become known for in what appears to be a move to take the centre ground that has been left open by Corbyn’s Labour.

A “grand coalition” to fight a grand enemy



 

What happened?  This week, François Hollande made good on his promise to wage ‘war against ISIS’; not only did he triple the French air-strike capacity in Syria to bomb ISIS targets, but the French President himself has met up with numerous allies to form a ‘grand coalition’ of countries that will help him to take down ISIS.

What’s going on behind the scenes? Following the Paris terror attacks, for which ISIS claimed responsibility, the French feel very strongly about retaliating to “annihilate” the terrorist organisation and this sentiment is also shared by Russia who are equally furious at ISIS’ bombing of Metrojet Flight 9268, which killed over 200 Russians who were on board. With ISIS very clearly targeting Western Europe countries, this has made the possibility a collaboration amongst the Western allies and Russia very real.

Why is this important? Whilst Hollande’s efforts of a grand coalition were occurring, the week also brought further news that highlighted the point of a coalition; Turkey had shot down a Russian fighter jet for violating its air space, the first time a NATO member had entered hostilities with Russia since the end of the Cold War. With more co-operation, it is hoped that these countries can work together as opposed to working against each otehr, in order to achieve their common goal of eradicating ISIS from the world.

Other News:

This week marked the 100 years since Albert Einstein formulated his famous theory of general relativity. Even today, it is talked about with much admiration and is seen as one of the major milestones of scientific progress. At its heart, the theory explains gravity as a curvature of spacetime and has helped to explain an array of phenomena such as the nature of black holes and the state of the universe.

The US growth rate for Q3 was revised upward significantly from 1.5% at an annualised rate to 2.1%, with the bulk of the upward movement coming from inventories being overestimated. By putting a more optimistic spin on the data, this further raises the likelihood of a Fed rate hike next month.

Having announced five profit warnings in the last 2 years, the new chief executive of Rolls-Royce, Warren East, made her attempts to win back the trust of investors by laying out her plans to restructure the British engineering company. He intends to  cut jobs and slim down management whilst transitioning the company’s focus from jet engines, which are seeing declining demand to new generation turbines.

 

Week in Review: Animals galore!

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!

A Marriott flag hangs at the entrance of the New York Marriott Downtown hotel in Manhattan, New York November 16, 2015. Marriott International Inc will buy Starwood Hotels & Resorts Worldwide Inc for $12.2 billion to create the world's largest hotel chain with top brands including Sheraton, Ritz Carlton and the Autograph Collection. REUTERS/Andrew Kelly

  • 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?

Jack Dorsey

  • 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
ECB president Mario DraghiJanet Yellen testifies before the House Finance Committee in the Rayburn House Office Building November 4, 2015

  • 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.

Other News:

  • 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.

Week in review: A spring in my step

This week saw many important developments, with the release of new data to suggest that some economies like the US and UK were doing worse than anticipated whilst others like the Eurozone finally caught some wind in their sails. Nonetheless, despite facing setbacks in a number of forms, both Osborne and Yellen seem committed to carrying out their intentions, whether it be the introduction of harsh budget cuts or the first Fed rate rise in years. In a similar vein, it seems that nothing can dampen the resurgent M&A pipeline with speculation of yet another megadeal. 

Another M&A megadeal in the making

Pfizer lab handout

Branded boxes of Allergan Botox, produced by Allergan Inc., are arranged in this photograph taken at a skin and beauty clinic in London, U.K., on Monday, Nov. 17, 2014. Actavis Plc agreed to pay about $66 billion for Allergan Inc., a deal that creates a new top 10 drugmaker and ends Valeant Pharmaceuticals International Inc.'s attempt at a hostile takeover of the maker of Botox. Photographer: Jason Alden/Bloomberg

  • What happened? Pfizer, the world’s largest pharmaceutical company, this week approached Allergan, most famous for their Botox drug, to discuss the possibility of creating the world’s largest drugmaker worth over $300bn.
  • What’s behind this story? Although the talks are just at a very early stage, there are very good reasons for Pfizer to pursue a deal. The most significant is the tax benefit; being based in the US, Pfizer paid an effective tax rate of over 25% last year compared to just under 5% for the Ireland-domiciled Allergan so by acquiring Allergan, Pfizer would be able to complete a tax inversion where it domiciles in Ireland and drastically reduces the amount of corporation tax it pays. Aside from the usual synergies that result from acquisitions of this scale, especially applicable to biotech firms that are heavily dependent of their drug pipeline for revenue, now is a particularly attractive time to seek a deal as US pharma stocks have lost a significant amount of value following a promise by Hilary Clinton, the Democratic presidential frontrunner, to regulate drug prices more heavily.
  • Why is this important? This follows what has been a record year for M&A transactions as just last week, a megadeal in the brewing industry between AB inBev and SABMiller was just agreed upon. However, just like with the ‘Megabrewer’ deal, there are numerous complications that make the likelihood of a deal slimmer; politically, there needs to be a lot of manoeuvring as the US government has already instituted a set of anti-inversion measures and is in the process of implementing more whilst it should be noted that it was the outrage of British politicians that prevented Pfizer’s acquisition of AstraZeneca last year.

All eyes on me

Janet Yellen

  • What happened? This week, there were a number of developments that have significantly changed the outlook for a December increase in the Fed’s Funds Rate. In particular, these developments included the latest Fed meeting, the release of the US growth data for Q3 and the completion of the negotiations over the raising of the /US government’s debt ceiling.
  • What’s behind the story? Let’s start with the October Fed meeting; although the Fed as expected did not change the interest rate itself, the sentiment of its monthly statement has changed to a more hawkish tone because it explicitly outlined the conditions required for a December rate rise which will be the US economy’s ‘progress … toward its objectives of maximum employment and 2% inflation’ and removed mention of global risks such as China’s slowdown adversely affecting the US economy. On the other hand, data this week revealed that the US had grown by just 1.5% at an annualised rate for the third quarter of 2015, a drop of over 60% compared to the previous quarter’s growth rate of almost 4.0%. Although this was due to largely temporary factors such as the slowdown in inventory accumulation, it still gives reason for the Fed to delay the Fed rate rise. On a similar note, the US Congress agreed to raise the government’s debt ceiling to avoid a debt ceiling and in doing so, allowed government spending to rise by $80 billion over the next two years so by paving the way for fiscal stimulus, it also may reduce the incentive for monetary stimulus in the form a rate hike.
  • Why is this important? Speculation over the timing over the impending rate hike has been the driving factor behind many of the big stories in the past few months as firms are seeking to capitalise on the low borrowing costs through M&A deals, stock markets have adopted a bullish markets in the drive for higher returns and emerging market currencies are being battered as investors are taking their cash back to the US in preparation for the rate hike.

Austerity gone too far?

The UK's chancellor of the exchequer, George Osborne

  • What happened? In a dramatic turn of events, UK Chancellor of the Exchequer George Osborne was defeated in his plans to introduce £4.4bn worth of tax credit cuts but not by the democratically elected House of Commons, rather by the unelected House of Lords.
  • What’s behind the story? This latest chapter in Osborne’s march to austerity has been highly controversial because this measure would hit the poorest hardest with the Resolution Foundation, a think-tank, estimating that 3.3m families would lose on average £1,100 a year and it would greatly damage incentives to work, imposing an effective marginal tax rate of up to 80% on some of the poorest in societies.It is in this light it only makes sense that the Lords scuppered Osborne’s planned cuts but in doing so, the Lords has allegedly overstepped their constitutional boundaries by voting down a financial package backed by MPs in the Commons.
  • Why is this important? The incumbent governing party, the Conservatives, were elected on a mandate to cut the deficit in the form of a £10bn budget surplus by 2020 and their austerity measures have resulted in considerable progress towards that goal with public sector net borrowing for the first half of the financial year already down almost 15% compared to the year before. However, having pledged £12bn worth of welfare cuts in their manifesto, Osborne must decide where to make those cuts without upsetting the very electorate that voted the Conservatives back into power with a majority and without causing too much harm to the economy which has already a slowing rate of growth of 0.5% in Q3 compared to 0.7% in the previous quarter due to poor export performance.

Other news:

  • China released the first details of its upcoming five-year plan, by announcing the end of its infamous one-child policy by replacing it with a two-child policy and the moderation of its economic growth target rate to just 6.5%. So far, these measures reflect China’s attempt to modernise both economically and socially but the devil is truly in the details as more specific and drastic reforms will be needed to arrest China’s economic slowdown.
  • The Eurozone showed promising signs of progress as it escaped deflation in September by recording a 0.1% inflation rate whilst unemployment in the region for September was recorded at 10.8%, the lowest rate since January 2012. On the whole, whilst these statistics are indicative of an improving economic outlook, they are still far below target and make the case for monetary stimulus by the ECB strong nonetheless.
  • The World Health Organisation this week declared that processed meats were responsible for causing cancer by labelling ham, sausages and bacon as “Group 1” carcinogens, a category which includes tobacco and asbestos. It is however important to note that their report clarified that they are not as “equally dangerous” as the other carcinogens because whilst “eating processed meat causes colorectal cancer”, the risk “remains small.”

Week in review: With great power comes great responsiblity

In this section, we provide a comprehensive look at the week’s top stories, examining all the important parts of the story from the immediate details to the critical factors lying below the surface. This week was marked by events which bestowed great power into the hands of a few. With recognition for his work in econometrics, Angus Deaton should be able to influence policymakers for the better. Even though the megadeals were just agreed upon this week, it is in the hands of the executives to convince the regulators that the combined entitty would not damage consumer interests. Finally, with US banks at a turning point, it is up to their executives to decide how they should respond to such poor performance recently.

Hurray for Economics and Econometrics!

  • What happened? This week, Angus Deaton, a Cambridge economist, was awarded the Sveriges Riksbank Prize in Economic Sciences “for his analysis of consumption, poverty, and welfare”.
  • What’s behind this story? Mr Deaton has made a plethora of significant contributions to angus deaton angus deaton is the dwight d eisenhower professor of ...the field of economics. His work has helped to expand our knowledge of consumptions patterns; by creating a model called the “Almost Ideal Demand System”, he has helped to better estimate for goods using the prices of all goods and individual incomes. He has even had a concept named after him; the “Deaton paradox” argues the case for consumption smoothing in which people do not change consumption significantly even when income changes. This last point is
    particularly pertinent when we consider the austerity regimes across Europe today because even if people see their incomes falling, they are likely to take up debt to maintain their consumption patterns and this can create a debt problem that can spiral out of control.
  • Why is this important? Praised for his particular focus on econometrics, Deaton’s work underlines the importance of ‘evidence-based economics’: the idea that we should be meticulous in our theories and strive to find the empirical evidence in support of our theories.

A deal of great proportions or great necessity?

A combo of file pictures shows the Logo of EMC Corp. (T) in London, Britain, 02 March 1999 and the logo of Dell in Montpellier, France, 12 September 2013. According to news reports on 09 October 2015, US privately owned computer company Dell together with private equity firm Silver Lake Partners are in advanced talks to buy or merge with US multinational EMC Corporation. EPA/STR/GUILLAUME HORCAJUELO

  • What happened? The major PC maker Dell has come to a deal to acquire the data storage giant EMC for roughly $63 billion in a part-share part-cash deal which if successful, would be the third largest tech deal of all time.
  • What’s behind this story? The main driver behind this deal is strategic; Dell currently relies on its original core business of selling PCs but this is on the decline (i.e. global PC shipments fell by nearly 8% in the third quarter, compared with the same period a year ago)  due to the rise of smartphones whilst EMC’s main sales come from the sale of digital storage devices that is under threat from cloud computing as storage sales rose by an annual rate of just 2% last year compared to double digit increases several years ago. The hope is that by joining together, they will be able to take advantage of synergies such as “converged hardware”; by offering servers, storage devices and networking equipment in one package, they will hope to try and increase their sales. Another driving factors has been the cheap sources of financing as Dell with raise $4bn of new common equity as well as $40bn in new debt.
  • Why is this important? This deal is of particular interest because it emphasises the importance of technological innovation and creative disruption; as two stalwarts of the tech industry, both are coming under pressure from the emergence of cloud computing and trying to combine to remain afloat in a fiercely competitive and fast-changing industry.


The hard work finally pays off… or has it?

  • What happened? This week also saw another major deal being agreed upon; after weeks of negotiations and rejected offers, AB InBev was finally able to secure a deal to acquire SABMiller for a cool £67 billion in what will be the third largest M&A transaction in history by value.
  • What’s behind this story? There is no doubt that there are significant benefits to this deal; the combined entity would have roughly 1/3 of their entire global market share for beer production and would have a truly global presence, allowing them to reap almost half of the global beer market profits. Desperate to get this deal to go through, AB InBev is most definitely paying through as its accepted offer price of £44 in cash per share is a 50% premium on SABMiller’s undisturbed stock price.
  • Why is this important? A common element that underpins almost all of the megadeals that have been agreed to this year is the potential for the deal to collapse or for the widely anticipated benefits to fall flat. With the creation of a mega beermaker that has been fittingly dubbed ‘Megabrew in anticipation’, there are cultural and regulatory issues abound. For example, in two of the most lucrative markets for beer, China and the USA where they have over 40% and over 70% of the market share respectively, the combined company would have to sell off their stakes in local joint ventures.


It’s not all sunshine and rainbows for the US banks

A U.S. flag hangs above the door of the New York Stock Exchange August 26, 2015. Wall Street racked up its biggest one-day gain in four years on Wednesday as fears about China's economy gave way to bargain hunters emboldened by expectations the U.S. Federal Reserve might not raise interest rates next month. REUTERS/Lucas Jackson

  • What happened? With the release of the third quarter earnings reports this week, it was revealed that the top US banks had performed particularly poorly with Bank of America Merrill Lynch seeing a 2% fall in Q3 revenues compared to the year before and JPMorgan seeing an even more severe 7% fall in Q3 revenues. Worst of all, Goldman Sachs reported that their third-quarter profits was down by almost 40 per cent, causing them to miss their profit estiamtes for the first time in four years.
  • What’s behind the story? One reason for such poor results has been the low interest rate environment. With such low rates, according to Allen Tischler, an analyst at Moody’s, assets are being “put on balance sheets at lower yields than things rolling off”. On top of this, regulation is another big factor as the authorities are requiring banks to be less leveraged and the regulation is particularly affecting the fixed income, commodities and currencies (FICC) business by restricting the sale of derivatives. Finally, cyclical factors are at hand as in the FICC trading division, demand has shifted away from exotic and profitable fixed-income products and towards regular government and corporate bonds. This was especialy true in the case of Goldman who reported a shocking one-third drop in FICC revenues in the third quarter.
  • Why is this important? The best response of any firm to bad news is to adapt; the question is whether Goldman Sachs and the other big US banks will do this. Whereas the European Banks as well as Morgan Stanley have significantly trimmed their FICC trading businesses by allocating them less capital, the remaining big US banks have defiantly not done so and have been punished in recent times with the drop in earnings. At present however, Goldman Sachs seems to stand undeterred with Harvey Schwartz, Goldman’s finance chief, claiming that they “don’t view [FICC] as a capital drag”.


Week in review: Hints of hope and dashs of despair

In this section, we provide a comprehensive look at the week’s top stories, examining all the important parts of the story from the immediate details to the critical factors lying below the surface. This week saw some good news in the form of a promising major trade deal as well as progress on a major megadeal but bad news as the European banks appear to be struggling and global growth looks similarly distressing.

European banks hit hard times 

  • What happened? This week, two of the biggest European investment banks showed signs of distress. Deutsche Bank suffered a €6.2bn loss in the third quarter this year due to exceptional costs of €7.6bn in support of its restructuring plans, most likely leading to its dividends being withheld this year. Similarly, Credit Suisse is trying to raise more capital to support its own restructuring efforts.
  • What’s going on behind the scenes? Both banks have seen the arrival of new chief executives in the past few months and are subsequently trying to restructure their business in order to make them more capable of handling the current economic conditions. Tidjane Thiam, Credit Suisse CEO, is attempting to shift the focus from volatile investment banking operations and towards private banking and Asian markets which are both becoming highly lucrative. Meanwhile, John Cryan, Deutsche Bank CEO, has yet to outline his full strategy for the bank but is set to do so this month under his strategic review, Strategy 2020.
  • Why is this important? What unites both firms is their desire become better capitalised in case of downturn or mishap. At present, both banks have a common equity tier one capital ratio of close to 10% which is above the required minimum (at least currently) but still notably below their peers.


Beer megadeal on the horizon

  • What happened? A proposal for a megadeal between two of the world’s largest brewers fell through this week as SABMiller rebuffed AB inBev’s £65bn public offer, having already made two private offers already.
  • What’s going on behind the scenes? AB inBev is eager to acquire SABMiller as a way to enter the African markets, where SABMiller has a dominant presence. In this light, it makes sense that AB inBev has been so insistent on trying to secure a deal; it is valuing SABMiller at nearly 28 times its forecast 2016 earnings which makes it a difficult task for AB inBev to get value out of the deal if it goes ahead. At the same time, SABMiller’s shareholders are playing hard to get and wisely so. At the latest offer for £42.15 per share, it is a 44% premium on the price at which SABMiller shares were trading at before AB inBev made its intentions public but there is still more room to negotiate; the 15 EV/ebitda multiple that the latest offer represents is far below that of recent deals in the sector and no other firm in the sector provides to AB inBev what SABMiller offers.
  • Why is this important? If this deal eventually goes through, it would be the third largest M&A transaction in history according to Dealogic and would round off a year that is on track to be busiest year for M&A activity on record. Indeed, something also to consider is that a successful acquisition by AB inBev would mark the creation of a brewing giant, responsible for the production of one-third of all beers in the world.


Global economy heading for the doldrums

  • What happened? The IMF this week announced that it expected the global economy to grow at its slowest pace since the financial crisis this year at just 3.1%, a significant step-down from the 3.5% growth rate that was forecast back in April.
  • What’s been going on behind the scenes? It is the poor performance of the emerging markets that is the root cause behind this ominous prediction. Whereas the fund predicted advanced economies to grow at their strongest rate since 2010 at around 2%, it also forecasted that developing economies would on average grow more slowly for a fifth consecutive year in a row at roughly 4%.
  • Why is it important? In some ways, it is but in some ways, it isn’t. The IMF’s managing director Christine Lagarde tried to downplay the bad news by stating that it was still a ‘continued recovery’ but that it is just ‘decelerating a bit’. Nonetheless, the downward revision to the growth rates reflects the short-term effects of a slowing China on exporters of oil and metal as well as long-term forces such as slowing productivity growth, ageing populations and a debt hangover in many countries.


A new age for trade?

  • What happened? On Monday, America along with 11 other Pacific Rim countries agreed to the first major multilateral deal in over 20 years, the much-discussed Trans-Pacific Partnership.
  • What’s been going on behind the scenes? Given the ambitious nature of the pact, it is no surprise that the negotiations for the deal have been ongoing for several years. All that wait should be worth it though as the trade deal breaks unprecedented ground; it introduces new labour provisions to ensure that all members abide by the standards of the International Labour Organisation, it curtails certain forms of protectionism such as the preferential treatment of state-owned enterprises and it is set to lower tariffs in oft-protected sectors like agriculture. Nonetheless, the pact is still politically controversial and still needs to be ratified in each country.
  • Why is this important? Affecting 40% of the global economy, this is a major deal that should help to stimulate more world trade, which is especially important given that cross-border trade has been declining in recent times, with a 13% fall in dollar terms in the first half of 2015 compared to the same period in 2014. In fact, the Peterson Institute for International Economics estimates that the deal should boost the world economy’s GDP by $223b by 2025, with most of the benefit accruing to developing countries such as Vietnam that should see an additional 10% growth in GDP over the period.

Trans Pacific Trade Agreement

Week in review: Policymakers steady their hand whilst market sentiment goes wild

In this section, we cover the 10 most important events of the week, focusing on the big stories in the markets, in business and in the world of politics. This week, there was a flurry of economic data released and monetary policy decisions made that were underpinned a cautiously optimistic tone whilst the M&A boom took to the wind and carried on inflating.

1. Let’s begin with the bad news: Citing a slowing China and impending monetary tightening from the US amongst others, the OECD cut its growth forecasts for the global economy slightly; from 3.1% to 3% for 2015 and from 3.8% to 3.6% for 2016. Nonetheless, the Paris-based thinktank emphasised that the ‘outlook [was] clouded by important uncertainties’ such as as Japan’s ‘erratic data’ and the Eurozone which was ‘improving, but not as fast as might be expected’.

2. It’s still not looking good for China: The tide of disappointing news continues to come for the world’s second largest economy as industrial output rose by 6.1% in August from a year earlier but disappointing fell short of expectations of a 6.6% rise. However, in an optimistic sign, the Chinese government has announced measures that seek to put the Chinese economy back on track – the reform of its inefficient state-owned enterprises, including the partial privatisation of of their operations.

3. But it’s looking better and better for the UK: This week provided many promising signs for British consumers. On Wednesday, the ONS reported that average weekly earnings (excluding bonuses) increased by 2.9% in the three months to July compared to a year ago, the strongest rate of growth in average pay since 2009. Together with the unemployment report that revealed that the UK unemployment rate had been unchanged at 5.5%, it suggests that employers are willing to pay more to keep existing workers or hire more workers in what seems to be a tightening labour market. Add to that Tuesday’s news that the annual UK inflation rate for August had dropped to 0.0%, this large boost in real earnings offers an encouraging sign for consumer spending in the coming months.

4. Japan forgoes monetary easing…: In the face of an ailing Japanese economy which contracted in Q2 2015 and saw an inflation rate of 0% last month, the Governor of the Bank of Japan Haruhiko Kuroda argued that he foresaw a gradual recovery continuing in the economy and thus shied away from any more quantitative easing but pledged to be proactive if he saw continued further weakening in the economy.

5. … whilst Fed forgoes monetary tightening. After widespread speculation from some economists that the Federal Reserve would at last raise interest rates in this week’s monthly meeting, the Chairwoman Janet Yellen announced that the federal funds rate would in fact be maintained at 0-0.25%. Citing a below-target inflation rate of 1.2% and “recent global economic and financial developments” in the emerging markets like China as the primary reasons for the lack of a rate rise, 13 of 17 members of the Federal Open Markets Committee still predict a rate rise by at least 0.25% this year.

6. M&A megadeals at their all time high: With the total value of so-called attempted M&A megadeals (i.e. transactions worth over $10bn) reaching $1.19tn this week, no other year has recorded such enthusiasm for these megadeals. As one FT article notes,  ‘the M&A boom comes at a time when debt financing is particularly cheap and many US and European groups are suffering from a lack of revenue growth. A large number of companies are also under pressure from investors to do something with their large cash piles after years of share buybacks.’

7. Telecoms deal marks the zenith of the megadeals: French telecoms group Altice’s deal to buy Cablevision, a US cable company, for $17.7bn was what pushed the total value of giant deals in 2015 into record-breaking territory but bears the signs of excessive froth in the markets. By paying almost $35 a share in cash, Altice has valued Cablevision at $9.6bn, a 66% premium on its price from mid-May which has been boosted in recent weeks as speculation of a takeover emerged and by issuing a significant amount of debt of $8.6bn to finance the acquisition on top of cash from an equity issuance, many analysts fear that that Altice is becoming overleveraged by its growing debt pile, having made two large US acquisition in four months.

8. And there’s more on the way: Anheuser-Busch InBev, the world’s largest beer company, announced that it is considering taking over its biggest rival SABMiller, which would form a global beer monopoly which serves 1 in 3 beers worldwide. As this Economist article notes, there are three big reasons why AB InBev is interested in this takeover; its experience in reaping synergies from big acquisitions, its opportunity to expand its global reach and the appealingly low price of SABMiller at this current point in time.

9. Progress in migrant crisis stalls: This week, the European migrant crisis took a turn for the worst as countries struggled under pressure of the influx of refugees. After promising to be a sanctuary for desperate Syrian asylum seekers, Germany on Monday imposed controls on its border with Austria and prompted a classic beggar-thy-neighbour response; Austria, Slovakia, the Netherlands, Hungary and Croatia have become the latest to also impose border controls in an attempt to stem the enormous inflow of migrants into their country, effectively suspending the Schengen Agreement which had created a free-travel zone within participating countries.

10. Tensions over Syria come to a storm: With Russia being confirmed to have sent at least 4 fighter jets this past week in support of President Bashar al Assad’s government forces, the growing military aid it has sent in recent weeks in the form of tanks and military personnel has caused alarm amongst western nations.  US Secretary of State John Kerry is now calling for talks with Russian officials, because although Russia has stated that the presence of Russian troops in Syria is intended to help fight IS there, an equally likely motivation is that Putin wishes to prop up President Assad’s regime, who has long been his ally.

Week in review: A new future beckons

In this section, we cover the 10 most important events of the week, focusing primarily on the big stories in the markets and business as well as economic news. With promises of economic stimulus, significant progress being made on important geopolitical issues and the rise of a new political leader, this week was filled with stories that we may look back at one day and think ‘That was the turning point.’

1. Optimism for the Eurozone: At last, the Eurozone sees a glimmer of light. After its growth forecasts were revised downwards last week, this week brought the opposite movement; it’s growth during Q2 was revised up from 0.3% to 0.4%. Promisingly, the main components of growth appeared to be household spending which rose 0.4% and exports which climbed 1.5%. 

2. Optimism for the European migrants: In his state of the union address on Wednesday, the European Commission President Jean-Claude Juncker proposed what he has called a “swift, determined and comprehensive” solution to Europe’s migrant crisis. Under his plans for Europe to house 160,000 asylum seekers over the next 2 years, most of the EU member states have controversially been assigned quotas, forcing them to take in their share of the refugees or face a fine.

A solution to the migrant crisis?

3. Chinese fears compounded: After an awful few weeks with Chinese manufacturing activity reportedly contracting in August, this week offered no respite from the bad news. This time, the focus of the concern lies not in the output data but in inflation (or rather, the lack of it). Thursday saw the release of data suggesting that the producer price index (PPI) in China had fallen 5.9% in August from the same month last year, which was the largest fall in 6 years. Analysts have cited falling commodity prices as the main driver and express concerns about the effects of falling prices on corporate profitability as profit margins are eroded away.

4. Asian fiscal stimulus on the way: After an awful few weeks, Chinese policymakers announced new measures to stimulate an economy that is growing at its slowest pace in decades by promising “proactive fiscal policy and related measures, do timely fine tuning, and speed up reform measures”. Similarly, in Japan, Shinzo Abe responded to deflationary fears by introducing dramatic cuts to corporate tax rates from its current rate of 35% by 3.3% and outlined plans to reduce it further within the next few years. This launched quite the reaction in the Japanese stock market with the Nikkei experiencing its largest one-day gain since the financial crisis of 7.7%.

5. Bank of England holds rates unchanged: Although the decision to leave interest rates at 0.5% was widely expected, the main thing to note is that the policymakers commented that whilst the recent turmoil in Chinese markets would “add to the global headwinds” that the UK faces, they would be stick to their schedule for raising the interest rates within the “the turn of the year”. With no change in the monetary policy from the BoE, all eyes will now be on the Fed which will also be making the decision on whether to raise their interest rates next Thursday.

Bank of England Governor Mark Carney emphasises that the Bank is sticking to its schedule

6. A future with even cheaper oil?: Despite once predicting oil prices to reach a new high of $200 a barrel in 2010, 5 years Goldman Sachs has completely reversed their tone with new estimates suggesting that oil prices could fall to their lowest ever level at $20 a barrel. “The oil market is even more oversupplied than we had expected,” claimed the bank, citing ‘further OPEC production growth, resilient non-OPEC supply and slowing demand growth’.

Glencore attempts to improve its poor finances

7. Glencore takes precautionary measures: On the back of predictions of continued low oil prices, the mining and commodities trading giant announced that it would initiate a $10 billion debt-reduction plan by launching a $2.5 million share issue and a suspension of dividends. Many investors have already fled Glencore this year, driving its share price down nearly 60% and this move is clearly aimed at winning over the trust of investors, intending to protecting the firm’s credit rating should commodity prices fall further. In related news, Glencore also  suspended operations at two of its large African copper mines for 18 months to reduce oversupply in the market and raise the market

8. M&A boom sees no end in sight: Despite especially volatile markets in recent weeks, the appetite for M&A deals seems to have been undampened. On Tuesday, $40bn of new transactions worldwide were announced in what is on track to be a record year for mergers and acquisitions. For comparison, the level of M&A activity has already hit $1.46tn so far this year, surpassing the levels seen in 2014 and is on track to exceed $4tn in 2015, the highest level since the financial crisis. 

9.  Historic Iran deal gets the go ahead: After opponents of the deal to lift sanctions from Iran failed to secure the 60 supporters needed in a procedural vote to break a Democratic filibuster, Barack Obama has been given the liberty to implement the deal. The dynamics of the US Senate system meant that in order for a vote on the legislation to proceed, debate first had to be brought to a close with a so-called “cloture” motion, requiring three-fifths of the Senate to approve and without reaching that requirement, an infinite period of debate on the bill could have technically take place (i.e. a filibuster), thus preventing the Senate from actually being able to vote on the legislation.

10. Labour lurches to the left in landslide victory: Sweeping the Labour leadership election with almost 60% of the vote in the first round, Jeremy Corbyn, the hard-left candidate, was elected to the leadership of the party with an seemingly unshakable mandate. Having earnt his victory through the support of the Labour grassroots movement, his main priority is to now re-establish the Labour party after this year’s disastrous result in the General Election; his key proposals during the campaign included the renationalisation of the railways, apologising for Labour’s role in the Iraq war, ‘People’s quantitative easing’ to fund infrastructure, opposing austerity, controlling rents and creating a national education service.

Corbyn stands victorious