Monday, February 19, 2007

EU wants everyone to do things its way

An amusing article from the FT (EU wants rest of world to adopt its rules). A European Commission paper soon to be released says the European Union should promote “European standards internationally through international organisation and bilateral agreements.” Doing so will give an advantage to European companies since it “works to the advantage of those already geared up to meet these standards”.

Yeah, good luck with that. A word to the wise: if you're trying to slip one over on someone, it's best not to announce that this is what you're trying to do.

The FT adds that the sheer size and wealth of the Union’s single market means that few corporations can afford to ignore it. “By harmonising the rules for a market boasting 500m consumers, the Union has set standards 'which partners then have to meet if they are to benefit from the single market'.”

Except, of course, that the rules for the EU really haven't been harmonized for 500 million consumers. Actual implementation of EU directives varies widely among the different EU countries, and where real harmonization would be too painful, EU directives are nebulous to the point of pointlessness. In other places (such as labor and environmental laws), EU standards place EU member states at a competitive disadvantage vis-a-vis their American, Chinese and Japanese competitors.

Sure, the EU is too big to ignore. But it's not big enough to truly set global standards, and as the size of its economy shrinks relative to the US, China, India and elsewhere, it will eventually be ignorable. That's why its more important to get the standards right, than to try to convince everyone else to go along with them.

Monday, February 12, 2007

Nasdaq and LSE: who lost?

I haven't written in a while because I was busy sabotaging an international stock exchange hostile takeover. Which brings me to this question: now that Nasdaq has admitted defeat on its efforts to take over the London Stock Exchange at £12.43 per share (with the LSE trading well above that over the past few months), who is screwed the most?

First, Nasdaq: it lost on its bid and now faces a transatlantic NYSE/Euronext monster. It still owns nearly 30 percent of the LSE. While it bought most of those shares when the LSE was trading at £11 (LSE shares closed at £12.82 today), it will be hard to unload that position. The LSE has launched a £250 million share buy-back, but this is still small potatoes against Nasdaq's holdings. Nasdaq can hold on to those shares to deter other bidders, but that likely will prevent it from making other link-ups at the same time that the NYSE is looking at markets in India, Japan and elsewhere.

On the plus side, however, Nasdaq has avoided a classic pitfall of many a merger — paying too much. If Nasdaq's board is right and the current price of the LSE is overvalued, then the hedge funds that bought LSE shares after Nasdaq announced its intentions will suffer big time. Despite the LSE's press about how it is stealing market share from New York, there are serious questions about its future profit margins, particularly (if Nasdaq is to be believed) after the EU MiFID (Markets in Financial Instruments Directive) fully comes online.

London will also look to go on the offensive, but the fact that it is a perennial prey rather than a hunter may be telling. While it has a new technology platform coming online, so does everyone else. And the LSE's share buy-back (at £12.70 per share), designed to make future takeover attempts harder, will also chew up cash that the LSE could be using on future technology modernizations. In this sense, while it is in a decent position at the moment, the LSE doesn't have the deep pockets of either the NYSE or Nasdaq when it comes to future development. While the LSE has kept out ahead of the New York exchanges because of quirks in the US system (quirks that essentially let New York operate in a hothouse, sheltered from outside competitive forces), now that New York is facing competition, it seems to be showing itself surprisingly aggressive.

So who's screwed the most? Hard to say at this point, but my guess is the LSE's hedge fund shareholders. They gambled that Nasdaq would raise its price rather than lose, and they lost instead.

Sunday, February 04, 2007

"Going private" short-changes shareholders

The FT has an article today by James Politi and Francesco Guerrera (Investors ‘short-changed’ in buy-outs) on a survey showing that private equity groups are buying out public companies at surprisingly low takeover prices. The survey, conducted by Weil Gotshal & Manges (a big NY-based law firm) shows that of 50 private equity takeovers last year, bidders on average paid only 6 percent more than the highest price the target company had been trading over the previous 12 months. In a takeover, a bidder can typically expect to have to pay significantly more than what the target company is trading at on a stock exchange -- after all, when you buy a share on the New York Stock Exchange, you are buying a right to a tiny portion of the company's profits. When you are buying 51 percent of the shares, you are buying not just a right to the company's profits, but also control of the company. (Hence the term "control premium" for the amount a bidder pays above what the company was trading at in order to take control.)

The Weil Gotschal study is interesting because it suggests that corporate boards are quite literally giving away the store in these private equity deals. It's possible, of course, that private equity groups are sniping off companies in a downward spiral, with the hopes of replacing management, restructuring the target company, and improving performance. However, given the amount of equity existing corporate officers and directors are given as part of recent deals, this seems somewhat dubious. The fear is that these equity deals are bribes to corporate officers and directors in exchange for an agreement to sell the company at firesale prices, which will then be sold back to the public at some future date at a much higher price.

The FT quotes Simpson Thacher & Bartlett partner Alan Klein as saying “They are not forcing anyone to sell. For a private equity deal to be attractive they need to put a lot of leverage on the business. A lot of institutional investors and managements can’t live with that.” But that isn't quite the whole story; the target company's board of directors often is forcing shareholders to sell. And leverage is just debt. If a leverage buy-out makes sense to the tune of a 15 percent return on assets per year, why won't institutional investors live with it?