Blain's Morning Porridge - Beans and Plague of Corporate Stupidity to come?
Blain’s Morning Porridge – Feb 20th 2017
“Beans, Beans, good for the heart, the more you eat the more you.. “
I’m intrigued as to events between Friday and Sunday when Kraft pulled its bid to acquire Unilever? Let me be open and honest – I know diddley-squat about the global consumables sector, but I’m cynical enough to see some trends.
The consensus is the weekend’s deal/no-deal farce was a long overdue outbreak of common sense in Heinzville as the US food giant realised a hostile takeover would be “resource inefficient”. The hostile Unilever response killed the deal. Warren Buffet’s experience tells him anything but a friendly merger would have been value destructive. I suspect he’ll be less than happy at the way it’s all panned out.. Embarrassing to say the least..
The deal begs many questions… How could any global firm contemplate a deal that size without already having the in-depth intelligence to know how the target is likely to respond? Being surprised when the prospective bride says FROAD is pretty embarrassing. (That’s as bad as a Government that allows its electorate to have a referendum without being certain of the outcome – but that’s another story…)
Investors will want to understand why Kraft spooked the markets so early during a potential bid process… Some of the news flow suggests the deal was leaked early, thus making the US company look distinctly amateur. That’s Kraft’s problem – and will no doubt be reflected in expectations.
But step back and understand the drivers facing all global corporate behemoths like Kraft: corporate debt at its cheapest levels ever, stock markets on a stratospheric trajectory and able to supply unlimited capital, the feel good of likely US and global recovery, and a US government that is going to be extremely pro US firms in the global market place.
Moreover, the likely changes to the US tax code – especially in terms of the potential to repatriate and use foreign cash reserves - are further drivers of corporate action. And, if Trump succeeds in cutting US tax rates, then US corporates are going to find themselves cash rich…
These are not reasons to make acquisitions – but they sure make them easier.
These environmental factors lie outside any fundamental logic for a deal. The risk is analogous to my argument “the only thing more dangerous than a bank with too little capital is a bank with too much” – it encourages them to do silly things.. like buy overpriced Dutch banks and trigger the summer of 07… If you make corporate capital too cheap, then it loses its value and ability to discipline decision making.
There’s a danger the next phase of this peculiar 10-year global recession following the dead hand of monetary experimentation, and now the first snowdrops of renewed growth, could be a plague of corporate stupidity.
M&A provides great banking and advisory fees, makes executives feel very important, but seldom add as much to the sum of corporate value as their proposers expect.
For the last 8 years or so we’ve seen corporates adding value by using ultra-cheap rates to ramp up their debt to buy-back their own stock. While there are sometimes sound financial (and accounting) reasons for buying their own stock, generally the rash of corporate debt to fuel stock buybacks has added zip to the global stock of factories, jobs created or corporate value. It’s pushed up corporate valuations – financial asset inflation being very beneficial for CEOs and senior execs’ bonuses.
In order to justify their now stratospheric salaries, they now need to be seen to be doing the next clever thing to “add value”. Which will include looking to make mega-acquisitions.. So, in the wake of the “UniKraft” farrago its probably worth checking which US corporates are sitting on obscene cash piles, look a tad stagnant, and could do with the jivvy up a major acquisition might raise. Everyone is now talking about what Kraft might go for instead of Unilever… This is the time to be looking across the whole corporate market and flagging the likely targets.
Meanwhile, back on planet London, a thin day in prospect with US closed. We’ve got more worries on Greece, the French Elections looking “messy” and Renzi out the game in Italy. Same old, same old..
But, to make it more interesting, I’m looking at some very interesting long dated sterling bonds with attractive yields and a rinky-dink that makes them look a most attractive play for risk-adverse funds.. anyone want to know more?
Thanks to everyone who has donated to my Fastnet Charity Appeal: http://www.sail4cancer.org/fastnet-2017-bill-blain
Out of time..
Bill Blain