20 May 2012

That was week ending 18th may 2012

Eurozone crunch

Greece and the Eurozone occupied so much of the business, economic and political headlines last week. As no one can possibly know what is going to happen this has allowed many learned and not so learned people to speculate on what might happen, so we feel entitled to join in.
Greece may or may not default and leave the euro. Either way this is not going to be Greece’s decision, much as some of their politicians might like to think so. Even pretending they haven’t got a government so there is no one to talk to for another month will now make little difference to the outcome. The election of Fran├žois Hollande may or may not result in renegotiation of the fiscal pact. As it is entirely unclear who, apart from Germany has actually agreed with the existing pact this may or may not make much difference.
So basically no one will know what is going to happen till it happens. We advise businesses to prepare for a sharp post Lehman style tightening of credit. So if you are negotiating a facility with your bank right now it would be good idea to conclude those discussions now.  However there are two factors that don’t seem to feature yet in all this.
The first is that the banking system has a whole still has huge hidden liabilities, that they and the politicians have not owned up to yet. It may even be difficult to indentify exactly what some of these are. Either way this situation is a major drag on growth as it perpetuates the tightness of credit markets. One perverse benefit of a final crunch in the Eurozone is that it could finally force governments and central banks to turn on the money hoses and get to grips with fixing this problem. At least they would know where the fires actually were.
The second factor which is hardly mentioned in the austerity vs. growth debate is competitiveness. Unless the developed economies can regain their competitiveness to world class standards not only will fixing the debt problem be more difficult and prolonged but the decline will continue.
Which brings us to a bit of good news for the UK.

Three cheers for Ellesmere Port.

GM has confirmed new investment for Vauxhall's Ellesmere Port plant, including the creation of up to 700 new jobs. This also confirms that Ellesmere will be part of GM Europe’s future. The plant closures that GM needs to balance supply with demand will take place elsewhere.
Divisions of major international businesses have to compete just as hard internally for investment as they do externally to win sales and customers. Several commentators have pointed out that the Ellesmere project is a text book example of an “industrial growth strategy” in action and we agree. Make it clear that the sector is a key part of the UK’ economic future, back the key players in that sector, including the supply chain and the development of the skills required and you give confidence to the investors that you are serious.
This set the framework for unions and employers at Ellesmere Port to deliver what GM needed, including flexible working and a two year pay freeze and hey presto, you get the investment and the job security that goes with it.
UK Governments have been reluctant to be seen to be “picking winners”. This is mainly due to the disastrous track record of attempting this in the 1950s 60s and 70s. Ellesemere Port is one of the most productive automotive plants in the world. So this is about “backing winners” especially those who are already winners. Perhaps the government should try the same approach to other sectors, such as aviation where right now you would hardly have the confidence to land a plane in the UK much less run an airline service from here.

Facebook IPO – no surprises

Facebook’s IPO went much as predicted on Friday, resulting in a business that started just 10 years ago and making $1bn profit being valued at $100bn. What did not go as predicted was the expectation that the shares would pretty quickly trade at a premium.  Apart from a brief flurry by the end of trading they were back to the IPO price. This had the effect of lowering stock prices of other internet companies such as Groupon because the markets had expected a Facebook premium would benefit their share price.
It’s still pretty impressive but we have to say we are not impressed. Facebooks’s founder, CEO and still the majority shareholder says that making money doesn’t really interest him. Now he has a lot of other people’s money in the business is this really the right attitude to have?
One comment we noted was that “Facebook is a pretty new business and it is too much to expect brands and Facebook to have totally resolved what the new business model is”. Well at a valuation of 100 times annual pre tax profit we would have expected them to be pretty clear on this by now. GM seems to have made its mind up as they pulled their advertising off Facebook on the Tuesday before the IPO.
We are not saying that Facebook is not a good business now, or that it may not have potential to be a great business. However it is not there yet nor has it demonstrated its capability to be a great business so it is not worth $100bn. We see our old friends fear and greed at work here. The fear of missing out on the “next big thing” seems to be greater amongst the investment community than the fear of losing the money it has to bet on this company outperforming almost anything that has come before it.
But we shall see.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

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