When chief executives ring the closing bell at the Nasdaq stock exchange in New York, it is usually because their firm has just gone public. When Adam Selipsky did so on June 27th, he was celebrating a tie-up with the bourse. He is the boss of Amazon Web Services (aws), the tech giant’s cloud-computing arm, and the deal is part of the exchange’s shift of its stockmarkets to aws’s More
When chief executives ring the closing bell at the Nasdaq stock exchange in New York, it is usually because their firm has just gone public. When Adam Selipsky did so on June 27th, he was celebrating a tie-up with the bourse. He is the boss of Amazon Web Services (aws), the tech giant’s cloud-computing arm, and the deal is part of the exchange’s shift of its stockmarkets to aws’s More
Americans are “always in a hurry”, wrote Alexis de Tocqueville in “Democracy in America”, his opus published in 1835. Until the covid-19 pandemic, nowhere was this more evident in recent decades than in packed trains at peak times as people commuted to work. Listen to this story. Enjoy more audio and podcasts on More
When warren buffett was asked to explain in April why Berkshire Hathaway, his investment firm, had built a 14% stake in Occidental Petroleum, or Oxy, over a frenetic fortnight of buying starting two months earlier, his answer was long. It included a digression into John Maynard Keynes’s “General Theory” of 1936, and a rollicking description of why Wall Street still resembles a gambling parlour, as it did back then. He barely mentioned the Houston-based oil company, now worth $69bn, besides saying that he had read Oxy’s annual report for 2021 and that Vicki Hollub, its boss, “made nothing but sense”. The pithiest explanation came from Charlie Munger, Mr Buffett’s long-standing sidekick: “We found some things we preferred owning to treasury bills.”Listen to this story. Enjoy more audio and podcasts on More
Investors couldn’t get enough of South-East Asia’s consumer-technology giants a year ago. This year, they have been unable to log off quickly enough. Tech firms across the region are suffering. They have been buffeted by the same forces that have sent tech stocks globally tumbling by more than 20% this year. On top of this, surging inflation and the expectation of higher interest rates have diminished the appeal of companies which aim for rapid growth in the present with reliable profits only arriving sometime in the future.South-East Asia’s giants not only have to cope with the ills besetting tech firms worldwide, but also face a “last-in-first-out” problem. The region is not a large part of the allocation of many global portfolios, and investors who piled in at the later stages of the boom may have lost their appetite. This has pushed down valuations further than the global slump. Sea, the region’s largest listed tech firm, is a case in point.Sea’s market capitalisation is now $36bn, down from over $200bn late last year. The firm’s share price recorded another steep decline after it released quarterly results on August 16th. Revenues, mostly generated by Shopee, its e-commerce subsidiary, and Garena, its video-gaming arm, rose more slowly than expected, up by 29% year-on-year to $2.9bn. Tech companies globally are being punished for an inability to produce reliable income by investors now monomaniacally focused on cash generation. Sea’s free cashflow in the second quarter ran to minus $607m, the largest negative figure on record. Sea is not alone in its struggles. Grab, a Singaporean superapp offering deliveries, ride hailing, financial services and more, listed publicly in December. Its shares have since tumbled. Bukalapak, an Indonesian e-commerce firm which also listed last year, has seen its valuation drop by two-thirds over the past 12 months. GoTo, the Indonesian holding company that owns Gojek and Tokopedia after their merger in 2021, avoided the rout but its shares have languished in recent months.Grab’s second-quarter results, due after The Economist is published, and GoTo’s, unveiled on August 30th could bring better news, but Sea’s recent experience shows that the three firms’ ambitious plans for payments and financial technology, which require big investments and many years to grow, do not suit impatient investors.Amid the gloom there are some reasons for cheer. Emerging-market equity-fund allocations to the region have risen slightly this year, notes Steven Holden of Copley Fund Research, as fund managers have looked for alternatives to Russian equities. China’s crackdown on its tech companies also leaves investors looking for other places to park their money. Beyond listed firms, venture-capital activity has slowed but not collapsed. Capital raised for funds focused on the region this year stood at $8.3bn on August 22nd, compared to $13.2bn for all of last year, according to Preqin, a data provider. The sum invested in vc deals this year runs to $10.7bn, already more than the total for all but two previous years—2018 and 2021. Sustained interest in smaller, private companies is good news for South-East Asia but does little for the pain of the larger listed ones. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More
Getting a package delivered is easy. Sending it back is not. Repacking, printing labels and shipping it back up to the seller is an increasingly familiar experience for online shoppers. In America 21% of online orders, worth some $218bn, were returned in 2021, according to the National Retail Federation, up from 18% in 2020. For clothing and shoes it can reach around 40%. It is a headache for retailers. Listen to this story. Enjoy more audio and podcasts on More
A city rivalry is heating up between Shanghai and Chengdu. The highest temperatures and lowest rainfall since records began 60 years ago have led to severe power shortages across the south-western province of Sichuan, where Chengdu is located, and in its neighbouring municipality, Chongqing. As a result Sichuan has been forced to curb energy use at thousands of industrial firms. That in turn has threatened the supply of parts to carmakers, such as Tesla in Shanghai. Listen to this story. Enjoy more audio and podcasts on More
The death knell for corporate America’s greatest individual experiment in mergers and acquisitions sounded in November 2021 when General Electric announced its intention to split in three. A thousand deals were struck by Jack Welch, its notoriously gung-ho boss who ran the American industrial and financial giant between 1981 and 2001, a pace that did not slacken under his successor, Jeffrey Immelt. The result has been a monumental destruction of shareholder wealth. The firm’s market value peaked at $594bn in 2000. Today it is a relatively measly $83bn.This lesson notwithstanding, bosses just cannot shake the need to shake hands. In 2021 dealmaking reached fever-pitch: a record $5.9trn-worth were announced globally, $3.8trn by operating companies and the balance by private-equity funds and special-purpose acquisition companies. Competition for assets was fierce and due diligence frenetic. The cost of capital was historically low and buyers paid top-notch prices, at a record median valuation of 15.4 times earnings before interest, tax, depreciation and amortisation (ebitda), according to Bain, a consultancy. The number of deals for highly-valued technology firms soared, accounting for a quarter of the total volume.If history is any judge, many of these deals will destroy value. It is easy to identify disastrous deals: large goodwill write-downs or even bankruptcy are useful signposts. But measuring the performance of the average deal is tough; relative share price performance is a quick but noisy measure and asking a counterfactual “what if” question is crystal-ball stuff. A recent review of academic literature by Geoff and J. Gay Meeks at Cambridge University, estimates that only a fifth of studies conclude that the average deal produces higher combined profits or increases the wealth of the acquirer’s shareholders. McKinsey, another consultancy, reckons that firms pursuing large deals between 2010 and 2019 had only a coin-flip chance of creating excess shareholder returns. Enough to put average Joes off dealmaking, but not budding Neutron Jacks. Those chances of success are further reduced by the circumstances in which the latest crop of deals were struck. Times of frenzy, like last year, are particularly bad for matching suitable buyers and sellers. Dealmaking tends to snowball as chief executives, keen to expand their dominions (and compensation), watch others make their moves and are unable to stand idly by while competitors make hay. Unprecedented competition from private-equity funds only intensifies the urge to move fast. Compounding their zeal are the middlemen. Investment bankers, who get paid by the deal rather than by the hour, convince them anything is possible: flattery is hard currency in the market for advice.There are few brakes on this train. Where activist investors might agitate on the sell-side of a transaction for a higher price (often successfully), this kind of scrutiny is less common on the buy-side. Strong shareholder dissent in reaction to Unilever’s abortive $66bn bid for gsk’s consumer health-care division in December 2021 is an all-too-rare example of owners holding trigger-happy management to account. Today the division, called Haleon, is listed on the London Stock Exchange, valued at around half of Unilever’s offer.The result is ambitious deals made at high prices. Lower asset values are already exposing the flawed logic of some struck at the top of the market. In August Just Eat Takeaway.com, a European food-delivery firm, announced a write-down of the value of Grubhub, its distracting American misadventure, by $3.3bn, barely a year after completing this $7.3bn deal.As equity markets tumbled this year, the shotgun weddings announced in 2021 were being consummated. After the thrill of courtship begins the hard task of post-merger integration. This complex process is the domain of consultants, organisational charts and budgeting, rather than clandestine negotiations and punchy projections. It is being turned on its head by a mix of inflation and slowing growth. Bosses bet big that high prices would be justified by higher profits. They are now running new businesses in a new world. Buyers tend to overestimate the operational benefits of lumping two firms together (“synergies” in corporate speak). Often promised but seldom fully delivered, these projections persuade bosses that the pin factory is better in their hands than those of private-equity’s financial wizards. Scale was the idée fixe of dealmaking during 2021. Such deals are usually predicated on heavy cost cutting, which is far harder while inflation rages. Add current supply-chain chaos to yo-yoing input costs, and managers soon find their powers waning. That difficulty is apparent at Warner Bros Discovery, an American media giant formed in April 2022 through the merger of Discovery and WarnerMedia. In an industry among the worst at realising such targets came a promise of $3bn of annual savings. Rising costs and cyclical pressures on advertising revenue mean that integration will be more difficult than planned. Expectations for ebitda in 2023 are now $12bn, rather than $14bn when the merger was announced. The response of David Zaslav, the firm’s boss, has been to tighten the screws even further (see next article). Labour is often the first cost bosses turn to, even if heavy layoffs grow the chance of rifts between new bedfellows. Many of the most spectacular blow-ups have involved cultural transplant-rejection at the highest levels, though as in aol and Time Warner’s ill-fated $165bn tie-up in 2001 this is usually a symptom rather than cause of strategic mismatch. Yet the real risks occur further down the food-chain as labour markets continue to convulse. The ability to retain good workers (“talent” in the integration dictionary) is critical. It comes high on the list of reasons why deals succeed in a recent survey conducted by Bain.The war for talent has quickly turned into a great hiring freeze in the technology sector, but elsewhere labour shortages are the norm. Significant challenges await the integration of Canadian Pacific Railway and Kansas City Southern, a $31bn deal announced in September 2021 which is awaiting its final regulatory stamps. The merger in 1968 of Pennsylvania and New York Central Railroad provides a warning from history. Shortly before the new entity’s bankruptcy in 1970, an internal report laid bare the role of high staff turnover in its failed integration: 61% of train masters, 81% of transport superintendents and 44% of division superintendents had been in their job for less than a year.The dealmakers of 2021 entered the present inflationary period with a high bar to clear in order to justify the top-of-market deals they struck. As of now the mega-disasters of this wave of mega-deals are matters of speculation, though no one doubts they will emerge. Even this will not be enough to convince bosses to kick their dealmaking habit, at least while corporate balance-sheets remain strong, and activity has been remarkably resilient in 2022. Until bosses can be persuaded of other uses for their profits, new challenges mean only new types of deals. At least this year there may be a few bargains to be had. ■ More
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