Week ending 16th May 2014

INTERESTing Times

With the Bank of England delivering its latest quarterly Inflation Report last week it was no surprise that the business and political media was focused on what it would say about interest rates.  The level of unemployment had already dipped below the 7% point that BoE Governor Mark Carney had previously indicated could be a trigger for a rise in rates.

In the event Mr. Carney effectively quashed speculation that rates could rise before the end of this year.  He conceded that the day Bank Rate would start to rise is getting nearer but now was not the time to raise rates and when they did start to rise they would only do so gradually.  In the BoE’s judgement that there is still enough slack in the economy to enable it expand further without triggering inflation.  This is based on information from the network of BoE agents based all over the UK who talk to local business people about the prospects for their business and the sector they operate in.  The feedback is that generally most sectors are still highly competitive with capacity to fill and little prospect of being able to raise prices.

The exception seems to be the housing market.  Much has been written and said about this in recent weeks and what this could mean for interest rates and what the authorities should/can/can’t/want to do about it.  The British have national obsession with house ownership and consequently the prospect of even a small increase in interest rates is portrayed as apparent personal and national financial Armageddon.  In spite of all the speculation and bright ideas Mr. Carney repeated what should by now be the “bleeding obvious”.  Whatever the BoE can or can’t do about interest rates to influence the housing market, the core problem is that we are just not building enough houses to meet demand.

We have not been building enough for 30+ years and we know we haven’t.  This has not been for want of trying, or at least for want of target setting for house building by successive governments.  Whatever they said and whatever they intended, it just didn’t happen.  Yet still we have the Labour Party announcing it has the answer because if elected they will build 200,000 houses a year to 2020.  Well, what a brilliant idea, and thank God we have the Eds Milliband and Balls to think of these things for us!

The truth is that they have no more idea than their predecessors on how to actually achieve this.  There was a time when we could build houses at that sort of rate, so the conclusion is that we should be able to do it again.  However so much has changed since those times that the same approach will not deliver today.  And that is the real problem.  After so many years of repeated and almost continuous failure in this area there is only one possible conclusion.  As a nation we simply don’t know how to deliver enough houses to meet demand.  We did once but we clearly don’t now.  Now all is not lost because it is possible to find out.  However that is not going to happen until our political leadership actually recognises and crucially admits that it doesn’t know but that it has a plan to find out.

Sadly, with an election coming up next year finding a politician who will admit to not knowing how to do anything is about as likely as finding the Holy Grail.  In the meantime though for the rest of us, when we come up against a problem we just don’t seem able to solve, however hard and often we try, then maybe it’s time to ask ourselves if we actually know how to do what needs to be done.  If we can identify what we don’t know how to do then we can start the process of finding out.  Even the most complex problems and challenges can be tackled effectively if we start by admitting and identifying what we don’t know.  Try it sometime!

ONS on us

On the subject of house prices, last week the Office of National Statistics (ONS) informed us that twenty percent of adults who hold at least one university degree now have wealth totalling at least £1m.  Apparently the number of millionaires has risen by fifty percent in four years despite the recent financial crisis and almost a tenth of British adults own assets worth more than £1m.  The flipside of this is a stark gap in wealth between people with different levels of education, with only three percent of people with no formal education qualifications worth more than £1m.  This gap is widening.

David Willets the universities minister seized on this as justification for coalition policies to charge higher university fees and to push more school leavers to go to university.  They also seem to be pushing more people into apprenticeships which is a bit contradictory.  But as long as they are pushing the rest of us somewhere they seem to be happy.  The Labour party were a bit slow off the mark to pick up on the increasing gap between the wealthy and poor, but don’t worry they will!

Strangely the figures from the ONS take no account of liabilities, mortgages and other loans and debts.  This renders the figures meaningless.  A pensioner living in Middlesborough who has paid off their mortgage and with no other debt could actually have greater net wealth than someone living in London with their house mortgaged up to the hilt and in danger of paying a mansion tax.  They don’t FEEL like millionaires whatever the ONS says and that is what really matters for real people.

The ONS has a record of publishing statistics that are either late or wrong or both.  It has now added meaningless to its track record, except of course for politicians.  As we are paying for the ONS to do its work, we should expect something useful to come of it.

Pfizer - all pfizzle?

By the time you read this Pfizer’s bid for AstraZeneca may well have petered out, at least for the time being.  Last week both companies’ top management appeared in front of the Business Select Committee.  Pfizer boss Ian Read was vague on detail about potential job cuts and reductions in R&D investment, though he admitted there would be some.  His main argument appeared to centre on the combined businesses being “bigger” and therefore by definition “better”. He justified the unquantified cuts to jobs and R&D as “part of being efficient”.  As with “bigger” he appears to view the word “efficient” as a "good thing" so no need to spell out what it might actually mean.  He also insisted that Pfizer was a “company of high integrity focused on patients and delivering drugs to patients”.  He seemed oblivious to a track record that gives the perception of exactly the opposite.  His 36 years at Pfizer were definitely showing.

If I was an AstraZeneca shareholder that performance would be enough for me to say “no way”.  Of course that is not the only consideration.  AstraZeneca’s insistence that they would be better off as an independent company is founded on their claims for their research pipeline of products in development.  If a reasonable proportion of these reach the market then the future would look good for AstraZeneca.  The problem is that it is very difficult with pharmaceutical companies to predict whether this will happen.


However there is one party involved that must believe that these developments will be successful and that party is Pfizer.  Why would they be bidding to buy AstraZeneca now if they did not?  If they can buy them now before the pipeline is proven then they would win handsomely and put off the evil day when their own under investment in new product development catches up with them.  It means if Pfizer can buy AstraZeneca at or around their current offer they will either win, or not lose because they could hack out enough savings to redress any shortfall from the product pipeline.  All the more reason for AstraZeneca shareholders to say no, or at least to hold out for a substantially improved offer.

Meanwhile

The French government has moved quickly to block the GE bid for Alstom by creating new powers to stop foreign takeovers of “strategic” industrial groups.  In fact they moved so fast I wonder if they are using some sort of “app”.  Something called “Legislation a Grande Vitesse” (LGV) perhaps.  You just put in what you don’t like the look of and then the app searches through the legal statutes to come up with the necessary legislation for you to put it right.  It also dates everything at around 1849 so it is very difficult for the EU commission to argue against.

Industry Minister Arnaud Montebourg stated “With this reform, France will have a clear and efficient legal framework comparable to other open economies within and outside Europe”.  Whilst our government talks about what they should/can/shouldn’t/can’t do the French just do it and then issue statements like this with a straight face!  As I said last week it helps if you know clearly what you want.

You heard it here first

In my previous article I said I did not like the look of the proposed Dixons Carphone Warehouse merger.  Well it seems I was not alone because when they officially announced the proposal for the merger last week, Dixon’s shares fell more than 10 percent and Carphone Warehouse 8 percent.  David Alexander, retail analyst at Conlumino acknowledged that “Although there are plenty of reasons to view the merger in a positive light, the history of M&A is littered with the corpses of failed unions”.  Says it all for me.

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

Week ending 9th May 2014

M&A Pfizzing!

For some time one of the frustrations for the UK government as they attempted to kick start the economic recovery was the huge cash balances being hoarded by many businesses which they seemed reluctant to spend.  Not only was this holding back growth, but also preventing the emergence of a more balanced economy.

Now with confidence returning companies in the UK and in other countries, notably the US are starting to invest again.  However they are not focusing so much on new plant, new premises, developing new markets etc. but rather on merger and acquisition.  M&A activity is now at its highest for over 6 years.  There were a number of big M&A’s making the business and political headlines last week with the real biggie on both counts being the Pfizer bid for AstraZeneca.

When I first heard about this I was puzzled as to why a fizzy drinks company would want to buy a pharmaceutical business.  Then I realised of course that Pfizer is actually a global pharmaceutical business, famous for those little blue pills that help gentlemen stand to attention even when all they want to do is go to sleep!  Apparently a Charles Pfizer was one of the co-founders of the company, so hence the name.  Quite an appropriate name when you think about the little blue pills!

Although a dominant force in the global pharmaceutical industry for decades Pfizer faces challenges as its patents run out.  The patent on its biggest selling drug Lipitor ran out in 2010.  To counter this since 2000 Pfizer has pursued a strategy of growth by acquisition, the last being Wyeth for US$68bn in 2009 and now it is after AstraZeneca.  Most analysts and business commentators judge that this strategy has destroyed shareholder value rather than created any.  Much has been written in the media last week about how Pfizer cut jobs and research capacity and investment as it chased the “synergies” from each acquisition.  Furthermore in 2009 Pfizer broke all records when it was fined $US2.3bn for illegal marketing of its products.  This was the fourth time it had been found guilty of this and similar illegal practice.

This is the core of the concern over the bid for AstraZeneca. Do we really want to let a company with this kind of brutal post acquisition track record and contempt for legal, never mind ethical business practice into our backyard?  To be fair to Pfizer it has new leadership today, but in spite of this and all the assurances from Pfizer if the fox is still a fox will we end up with a lot less chickens?

Should government intervene?

It is not surprising that this has become a political hot potato.  Even though AstraZeneca is an Anglo-Swedish company, run by a Frenchman, chaired by a Swede with operations in 100 countries, the Pfizer bid is being portrayed as an assault on British jobs and the British science base.  Ed Milliband has accused the government of “cheer leading” the bid and has called for a “national interest test” to be applied on all foreign bids to takeover British companies.  As usual with his bright ideas Milliband does not spell out exactly what a national interest test would be and he really needs to be careful what he wishes for.  If a national interest test had been applied to him, then he might well not be leader of the opposition!

The government is trying to give the impression that it is taking a “hard-nosed” approach to seeking assurances from Pfizer on jobs and research investment.  The question is how much can they trust Pfizer to deliver on its assurances?  The answer to this question is not a lot if at all.  Apart from the track record we have the wonderful answer given by Pfizer CEO Ian Read to a question put to him last week.  When asked whether Pfizer would break up AstraZeneca he replied “we will conserve that optionality”.  Now that tells you all you need to know.  The cunning fox is still a fox and if you let it into your backyard it will do what foxes do to your chickens, if and when it thinks it can get away with it.  So the only safe assumption is that Pfizer will at some point behave exactly as it has in the past.  So the question is can government do anything about it?

If AstraZeneca shareholders want to sell then there is not much strictly legally they can do to stop this and in a free society nor should they.  However this is where “having an industrial policy” comes into play.  This government and its predecessors claim to have one but it is difficult to see what it is exactly.  However in this case the implications are simple.  If you do not have a policy you just let whatever is going to happen, happen and use the desirability of preserving a free market as your excuse.  If you do have one then you can sit down with the parties involved and spell out the rules of the game.

One of the attractions of this deal for Pfizer is that they can move their HQ to the UK and enjoy our now low business tax regime.  Our government should tell Pfizer that whilst we are happy to welcome overseas businesses to the UK to enjoy the lower tax regime it is not available to just anybody.  In exchange for lower taxes we expect them to create extra value for the UK in terms of jobs, investment, skills and knowledge.  Where having an industrial policy comes in is that you can spell out clearly what that means when applied to a particular situation.

Government does not have a lot of “hard power” for this, but it does have buckets of “soft power”, if it cares to use it.

The French do this differently

Running almost unnoticed under the Pfizer/AstraZeneca story is a $US17bn bid from GE for French company Alstom’s turbine business, which includes its nuclear facilities and power grid businesses.  In spite of the Alstom board agreeing to the deal, assurances from GE on French jobs that go way beyond anything Pfizer has so far promised with AstraZeneca, the French government has said “Non”.  Any government that can declare a yogurt maker a “strategic industry” as the French did when blocking a bid for Danone a few years ago, is always going to say “Non” to any deal on Alstom.

They have gone further by demanding an “equal partnership” deal with GE (whatever that means!) and bringing in the combination of the two companies rail businesses.  As a final piece of confusion they have brought in Siemens as a counter bidder.  This seems to have come as bit of a surprise to Siemens who have enough problems of their own right now, without adding Alstom’s to them.

The French have an industrial policy which is very simple.  It’s going to be all or at least mostly French.  They are subject to the same rules and regulations as the British Government in all this, but the difference is that the French don’t think they apply to them.  In fact they KNOW they don’t.  This is the only explanation for why Peugeot Citroen are still in business.  Whilst I would not advocate going to the extremes that the French government employs it does demonstrate how the skilful use of “soft power” can get you what you want, if you know what that is.

L’Entente Impossible

10 months ago two of the world’s biggest advertising agencies, New York based Omnicom and Paris based Publicis announced they were to merge.  What’s more it was be a “merger of equals”.  Now this is a French company and an American company proposing to merge as “equals”.  What are the chances of that coming off?  Well last week it was confirmed that there was no chance when the whole thing was called off.  They couldn’t even agree on who should be the Chief Financial Officer of the merged group.  Perhaps Omnicom did not understand that Publicis meant CFO would stand for Chief French Officer!

If it had come off it would have created the world’s biggest advertising agency.  Well it has achieved that, only it is Sir Martin Sorrel’s WPP that has retained this title.  While negotiations dragged on, costing millions, WPP picked up clients like Vodaphone, M&S, Compare the Market and others from Publicis and Omnicom.  Samsung, the biggest advertising brand spender in the world has placed its account with Publicis under review.  Publicis and Omnicom have managed to destroy value without even merging!

Another outcome is that the financial advisors involved were likely to be on a “no deal no fees” deal.  As both parties have called this off it is estimated that around $US70m won’t be paid to advisors.  Perhaps there is a God after all!

CarphoneDixons

Well this is one “merger of equals” that looks like it could actually come off.  Whether this is a good or a bad thing for shareholders and customers, only time will tell.  However there is one reason why I am not optimistic.  In the past I have consistently criticised Dixons for their abysmal customer service.  Equally consistently they announced time after time that they were tackling this, but customers did not see a difference.  In the last 12 months or so I have discerned an improvement.  Staff in their stores actually seemed to know something about the product and even where the product you were looking for might be.  It wasn’t brilliant, but it was better and clearly something has changed.

Now they are merging with Carphone Warehouse to become CarphoneDixons.  Carphone’s own reputation for customer service was probably even worse than Dixons, which means they must have been trying hard to be that bad.  Given that post-merger performance standards tend to fall to the lowest common denominator rather than rise to the best, will Dixons nascent customer service improvement be strangled before it becomes fully established?

Why?

After reading the above you may be thinking “why do they bother”?  Well that is a good question.  The one aspect of M&A that is never mentioned is the fact, and it is a fact, that it usually doesn't work.  Research over many years has consistently shown that whether in good times or bad at least 50% of M&A deals result in destroying value and this can be as high as 80%.  So all the above with all the millions involved has at best a 50% chance of success.

For any of you who are currently in or are contemplating an M&A project here are some tips.

• If anyone mentions the word “synergies” take tight hold of your wallet
• If they go on to produce spreadsheets to demonstrate these synergies, suddenly remember you have to be somewhere else.
• If the value to the customer is not clearly set out and explained early in the proposal, forget the whole thing.  This will save you a lot of time and money.

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