To market to market to buy a fat pig. When speaking to clients recently, the following companies normally come up; Brait, Famous Brands, Mediclinic, Steinhoff and Woolworths. The client's question goes along the lines of, "why has this stock gone backwards over the last year"? My answer goes along the lines of, "well they bought a company, and the merger isn't going as well as hoped".
Reading a headline yesterday from just one lap (probably the best free personal finance, investing and trading webpage in RSA), I was reminded that statistics show that more than half of M&A activity ends badly. After some googling, the internet tells me that M&A doesn't increase shareholder value for between 50% to 90% of deals. My guess for why there is such a massive gap in research results, is that it comes down to the assumptions and time periods used in the studies. In the 50's and 60's many conglomerates traded at less than their NAV, so even if you operated the acquired business badly you could sell off the parts and still make money for your shareholders. Never the less, let us assume that one in two deals ends badly for shareholders.
Looking at Brait, their purchase of New Look has been nothing short of a disaster. Last year this time, New Look was valued at around R35 billion and accounted for 30% of their NAV. From their trading statement last week, management is now valuing New Look at zero! Famous Brands recent purchase of GBK in the UK, is the reason they haven't paid a dividend recently and have piled on debt. Unfortunately GBK is currently loss-making. In Mediclinic's case, their share price has been sliding basically since the day they merged with Al Noor. For Steinhoff, they went on a spending spree last year; the jury is still out on whether all their deals were successful. Of particular importance is their move into the US through Mattress Firm, which is in a transition phase as they revamp the brand. Lastly, in the case of Woolies, management increased debt levels and issued a massive amount of shares to buy David Jones in Australia, which is taking longer than expected to turn around.
For all these companies, maybe except Brait, we could look back in five or ten years and say that things were a bit rough while the acquired assets were integrated but it turned out well in the end. For all these companies, management was using historically low-interest rates to expand the business and diversify their client base. I think in all the cases management overpaid for their respective assets but, overpaying in the short run to secure a better long-term asset is worth it? Time will tell if those acquisitions were duds or not, statistics are not on the side of management though.
Market Scorecard. Markets were back to their green ways yesterday, despite political noise on both sides of the Atlantic. The Dow was up by 0.07%, the S&P 500 was up by 0.10%, the Nasdaq was up 0.10% and the All-share was up 0.08%. Those moves higher are hardly noticeable, but green is green! The worst performer in the Dow this year, GE, had a terrible day yesterday. A turnaround plan was announced yesterday morning, which includes cutting the dividend in half and scaling back the size of their board. The stock initially rallied by 3% but as the market digested the plan from the company, the stock slipped and closed down by 7%.
Linkfest, lap it up
One thing, from Paul
From an investment perspective we are in favour of free trade, open financial markets and the free movement of people around the world. This is not some lefty, liberal instinct. Its well-grounded in economic theory and evidence. Barriers to the free flow of capital and labour are silly and inefficient.
So, if we want markets to go up, we should be against events like Brexit, and against Trump's immigration controls, and against those imposed on immigrants by our own department of Home Affairs. I'm against visas, in general. What a pain. In my view, too much is made of national identities and national boundaries. We are all human, remember? The differences between us are trivial, we are all the same species.
In the same vein, we should be suspicious of ethno-nationalism and separatist movements around the world. Sorry Cape Town, you can't form your own country down there. So, I was pleased to read that the Catalonian separatist movement seems to be running out of steam - Spain Sees Signs That Tide Is Turning in Catalonia
Byron's Beats
JP Morgan is the latest addition to our core recommended list. One of the primary reasons we invest in the sector is because we believe the adoption of new technologies will help these banks become a lot more profitable.
JP Morgan specifically has made some big investments in the fintech world. This article talks about a recent acquisition they made and their plans for it going forward.
The world of payments and banking is very exciting and ripe for disruption. However the disruption is reliant on the adoption of the banks who have already built up the brands, clients and trust - JP Morgan Chase Acquires WePay: What investors Need to Know.
Bright's Banter
Uber's founder and former CEO Travis Kalanick and Uber's largest shareholder Benchmark have agreed to take a $10 Billion investment by a consortium led by none other than SoftBank's Masayoshi Son. Masa, the man obsessed with singularity raised $100 Billion for SoftBank's Vision Fund which will focus on futuristic investments in BlockChain Technologies, Ride Hailing, Chip Makers, Artificial Intelligence, Augmented Reality, Machine Learning etc.
The Vision Fund has already invested in companies like design & chip maker ARM Holdings, WeWork, SoFi, Fanatics, Improbable, Slack etc - Uber Reaches Deal to Sell Stake to SoftBank
Home again, home again, jiggety-jog. Big data out today are GDP and CPI numbers for most European countries, including the EU zone. Our market is off to a red start this morning.
Sent to you by Team Vestact.
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