Home' Trinidad and Tobago Guardian : July 5th 2015 Contents JULY 5 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOCKS | SBG9
In this photo taken May 28, 2015, a Chinese stock investor reacts as
prices fall at a brokerage house in Fuyang in central China's Anhui
province. China's latest stock market boom began after the state press
said last summer stocks were cheap. Investors took that to mean Beijing
wanted prices to rise; and might prop up markets if needed. The
benchmark Shanghai Composite Index has soared 140 per cent over the
past six months, though it has suffered stomach-churning drops along
the way, most recently a 6.5 per cent plunge May 28. AP
Deal makers from New
York to London had a
busy first half of the year,
and mega-mergers drove
Companies around the world announced
mergers and acquisitions worth US$2.3 trillion,
according to figures from data provider Dealogic,
the second-best half-year total on record and
the highest amount since 2007, when US$2.6
trillion of deals were announced.
The tie-ups included 31 deals worth US$10
billion or more, accounting for 39 per cent of
the total. That s the largest share since the
second half of 1999, at the peak of the dot-
The second half of the year is also off to a
hot start, with a US$37 billion deal by Aetna
Inc. to buy fellow insurer Humana Inc.
announced early Friday.
The rush to merge has been driven by low
borrowing costs and steady but unspectacular
growth in the US economy, which have sent
CEOs hunting for new ways to expand sales
and boost earnings. Companies from ketchup
maker Heinz to oil producer Shell have joined
the M&A throng this year.
"The mega-mergers, the big deals, have come
back into favour," says Neil Dhar, US capital
markets leader at professional services firm
Of course, what s good for Wall Street isn t
necessarily good for Main Street.
Mergers typically push up stock prices---at
least for the company being acquired---and
generate healthy fees for the investment banks
and law firms that advise on the deals. But
they can also mean layoffs and less consumer
choice. And there is no guarantee that the deals
will work out for investors in the long run.
None of that is slowing the pace of mammoth
Shell s US$82 billion purchase of gas company
BG Group is the biggest deal announced so far
this year. The combination will boost Shell s
oil and gas reserves by 25 per cent and give it
a bigger presence in the fast-growing liquefied
natural gas market.
In the US, the biggest deal announced is
Charter Communications bid for Time Warner
Cable, part of a broader consolidation among
cable and media companies as technology and
costs shake up the industries. The deal is valued
at US$80 billion, including debt.
The burst of deals has come against a back-
drop of ultra-low interest rates that have reduced
the cost of financing transactions for acquirers.
The Federal Reserve has kept its benchmark
interest rate close to zero for more than six
years, making it easier for corporations to borrow
cheaply in the bond market.
Even if the Fed increases rates later this year,
as many economists expect, the enthusiasm
for deals will remain, says Bill Wolfe, a senior
vice president at Moody s Investors Service.
"Even with an increase, rates are still going
to be relatively low," Wolfe said.
Another reason that deal-making is likely to
stay robust is that modest economic growth
in the U.S. continues to make it difficult for
companies to boost profits on their own.
That s a problem for CEOs, because their
pay is typically linked to their ability to increase
earnings, says Wolfe. As a result, senior exec-
utives have an incentive to do deals and keep
their companies growing.
But that can hurt rank-and-file employees
who lose their jobs, particularly if a deal involves
companies in the same business.
When HJ Heinz Co, the food company owned
by Warren Buffett and Brazilian investment
firm 3G Capital, announced its US$45 billion
acquisition of Kraft Foods in March, it made
no specific mention of job cuts. Yet, the com-
panies did say that the deal would generate
US$1.5 billion in annual savings, coming, in
part, from "cost reductions."
"There are a lot of reasons why a larger
organisation may be more efficient, but there
can be a cost to society," said James Angel,
associate professor of finance at the McDonough
School of Business at Georgetown University.
"Efficiency sounds great to the CEO or the
shareholders, but if you re the guy who gets
the pink slip, that s pretty painful."
For investors, too, deals aren t a sure thing.
Company cultures can clash and the most tal-
ented employees might become unsettled and
leave. Ultimately, if the distractions are protracted
enough, it will hurt the bottom line.
One of the biggest flops was AOL s US$166
billion takeover of Time Warner, a much-her-
alded deal announced in 2000.
Soon after the merger, AOL s subscription
revenues plunged as broadband connections
replaced its dial-up services. That forced Time
Warner to absorb billions of dollars in charges
to account for the diminishing value of the
Time Warner ended up spinning off AOL in
May 2009, nine years after the tie-up. AP
World stock markets mostly drifted lower Friday ahead
of Greece s weekend referendum, while China s main
stock benchmark plunged as government efforts failed to
reassure panicky investors.
KEEPING SCORE: European stocks were mixed, with
France s CAC 40 falling 0.6 per cent to close at 4,808.22.
Germany s DAX dropped 0.4 per cent to 11,058.39. Britain s
FTSE 100 declined 0.7 per cent to 6,585.78. US markets
were closed in observance of Independence Day.
GREECE VOTES: Investors are awaiting the outcome
of a weekend referendum in Greece on whether to accept
more budget cuts in exchange for new bailout loans. The
government says a "No" vote will put it in a better bar-
gaining position for new terms, while European officials
and the opposition say a rejection could lead to Greece s
exit from the euro. Markets in Asia will get the first chance
to react to the result of Sunday s vote.
CHINA SELL-OFF: A Chinese market rout deepened
as investors dumped shares in spite of government meas-
ures this week aimed at restoring confidence, such as
cutting fees and easing rules on borrowing money for
trading. The China Securities Regulatory Commission,
the market watchdog, said late Thursday that it s launching
an investigation into suspected stock market manipulation,
state media reported, an indication that the government
is trying to halt the market slide.
ANALYST VIEWPOINT: "Policies take time to work
their way through the system before sentiments can be
more permanently altered," Bernard Aw of IG Markets in
Singapore wrote in a commentary. "For now, the mood
is verging on panic."
ASIA: The Shanghai Composite Index ended down
5.8 percent at 3,686.92. The index has plunged 29 percent
since hitting a peak of 5,166.35 June 12. Hong Kong s
Hang Seng fell 0.8 percent to close at 26,064.11, while
Japan s Nikkei 225 edged up 0.1 percent to 20,539.79.
South Korea s Kospi slipped 0.1 percent to 2,104.41 and
Australia s S&P/ASX 200 retreated 1.1 percent to 5,538.30.
ENERGY: Benchmark U.S. crude fell US$1.41 to US$55.52
a barrel on the New York Mercantile Exchange. Brent
crude, a benchmark for international oils used by many
U.S. refineries, fell US$1.75 to US$60.32 a barrel in Lon-
CURRENCIES: The dollar fell to 122.78 yen from
123.09 yen late Thursday. The euro rose to US$1.1100
Let's make a deal:
drive M&A frenzy
World stocks drift lower ahead
of Greek vote; China plunges
FILE: In this May 26, 2015,, file photo, trader Peter Tuchman, left, works the post that handles
Time Warner Cable on the floor of the New York Stock Exchange, after Charter
Communications announced it is buying Time Warner Cable for US$55.33 billion. Companies
around the world announced mergers and acquisitions worth US$2.3 trillion, according to
figures from data provider Dealogic, the second-best half-year total on record and the highest
amount since 2007, when US$2.6 trillion of deals were announced. AP
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