Asset stripping only ends well for the new owners.
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Asset stripping only ends well for the new owners.
This is about prorogation. Brexit could be even worse!!
No, it means UK companies are cheap for foreign investors to purchase.Boro Boy wrote: ↑Thu Aug 29 2019 10:55pmOn the serious side: it's not just about numbers! It's about prospects for future growth, any external investment is telling us that the prospects post-Brexit are rosy!
They are putting their money where the prospects are so I'm kinda guessing that means they know what they are doing!
...but having a good starting point always helps!pabenny wrote: ↑Fri Aug 30 2019 8:42pmI'm not a CIC member.
That said, it seems to me that the next 2-3 months will see quite some volatility in the markets, largely driven by uncertainty. Is that enough to demand a change in investment strategy? I don't think so. Maybe it presents opportunities for active traders - which CIC most definitely isn't. Does the near term volalitiy change fundamentals? I don't think so. The outturn may do so - but not the day to day gossip.
So my view as a long term investor, is that the present short term political turmoil can be largely ignored.
David Wighton: Weak pound is not the key factor in UK firms falling to overseas buyers
What was it that attracted Li Ka-shing to Greene King, the pubs group for which the Hong Kong billionaire has agreed to pay £4.6 billion? Maybe he was impressed by the Ultimate Big Combo of scampi, chicken wings and house-fried tortillas at its Hungry Horse pubs for £9.29. Certainly Greene King is just the sort of stable business that Mr Li likes.
Many commentators saw another appeal. Since the Brexit referendum the pound has fallen by almost a fifth against the Hong Kong dollar, making Greene King look much cheaper to Mr Li. And if it looks cheaper it must be financially more attractive. Right?
Er, no. This is one of those widely held beliefs, all too common in finance, that appear self-evidently true and on closer examination turn out to be largely, if not wholly, false.
What is true is that the price in dollars is lower. But presumably what Mr Li is interested in is the value, or how much he is paying relative to the earnings the business produces. Because the earnings are also in pounds, they fall in line with the price of the company in dollars. He is paying less and getting less. The value is unchanged.
Ah, you might say, but sterling is artificially depressed by Brexit gloom. Once the cloud is lifted the pound will rebound and Mr Li will have a bargain. Quite possibly. But if that is Mr Li’s motivation he would just be taking a punt on currency movements and there are much easier ways of doing that than buying 2,730 Hungry Horse, Chef & Brewers and Farmhouse Inns employing 38,000 people.
In the case of a UK-focused business such as Greene King, most economists would agree that movements in sterling should make no difference to foreign buyers. What about UK companies with overseas earnings? When Kraft Heinz bid for Unilever in 2017 it was seen as an attempt to use the weakness of sterling to grab Unilever’s foreign earnings on the cheap. The likes of Sir Vince Cable — the former business secretary and a one-time economist who should know better — got into a real flap about the threat that sterling’s fall posed to the UK’s corporate crown jewels.
This ignored one rather obvious point. When the pound slumped after the referendum, Unilever shares rose to reflect the higher sterling value of its foreign earnings. Stock markets are pretty efficient at this sort of thing. Kraft Heinz was indeed trying to get Unilever on the cheap, but not because of currency movements.
Many bankers and corporate bosses think the economists are wrong. Larry Slaughter, executive vice-chairman at Bank of America Merrill Lynch, says: “For a private equity firm operating in dollars, if the pound falls against the dollar then UK assets are better value.” According to another top banker, chief executives can get very focused on the headline price of a deal. If that falls because of currency movements they can feel more confident. “There is an emotional side to it.”
Even some sceptical economists believe that exchange rates can be important in deals where the target company has internationally transferable assets. Consider a UK company with technology that it sells only in the UK. If sterling falls, its share price should be unaffected. Yet for a foreign company planning to exploit the technology around the world, the value of the UK company would have risen in sterling terms.
This may in part explain the figures last week showing that UK technology start-ups have seen a 50 per cent jump in new funding to a record $6.7 billion (£5.5 billion) this year, more than half coming from US and Asian funds.
The theory is also supported by the £24 billion acquisition of the UK chip designer Arm Holdings by Japan’s Softbank just after the referendum. The Softbank chief executive, Masayoshi Son, said that he pressed the button partly because of the fall in sterling.
Maybe. But one of his advisers says that the comment had more to do with trying to justify what looked a very high price. And some economists have cast doubt on the role of currency even in high-tech deals. Marc Waldhof of the University of St Andrews looked at Swiss acquisitions in the UK and the US over 20 years and found no link at all between exchange rates and deals in any sectors. Many other economists have also struggled to find a relationship.
This seems a bit odd. Even if economists are right that currency movements should not matter in theory, many corporate bosses and bankers say that they do matter in practice. And they are the ones doing the deals. So why is there no evidence?
According to the head of European deals at a top Wall Street bank, the reality is that while exchange rates can be an influence, the effect is very weak. “It is a third-order factor. It is that little cherry on top.”
That may be partly why the slump in sterling since the referendum has not led to the surge in deals some predicted. Cross-border purchases of UK companies have actually fallen relative to acquisitions of all European companies since the referendum, according to Dealogic.
A recent flurry of bids suggests that the pattern is changing, says Mr Slaughter, with US private equity firms in particular looking for UK bargains. If a no-deal Brexit leads to a further big fall in sterling, he predicts that more buyers will “take advantage” of the currency effect.
Other bankers are not so sure. One reckons that the main flow of deals will be in the opposite direction, with UK companies buying foreign targets despite the drop in sterling.
Another top adviser agrees that medium-sized UK companies focused on the domestic market will be vulnerable to foreign bids after a no-deal Brexit. “But that has nothing to do with currency. It is because they are so cheap relative to earnings compared with other markets.” The fall in sterling should be irrelevant for overseas buyers, he says. “But if I was advising them I would still try using the currency argument to encourage them to do the deals,” he adds. As a joke. I think.
David Wighton, a former business editor of The Times, is a columnist for Financial News
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