George Kerevan: Marriage of convenience may prove inconvenient
MOST dream mergers between big companies end in hubris. Sometimes the partners quarrel before they get to the altar. Think IBM and Sun Microsystems, Deutsche Telekom and Qwest, or EMI and Warner.
Then there is today’s on-off romance between Glencore and Xstrata, which now has Tony Blair playing matchmaker.
Even if a corporate marriage is consummated, divorce often follows. In 1998, Daimler Benz merged with Chrysler to create Daimler Chrysler, in a deal worth $37 billion. On paper the logic was obvious: create a transatlantic car maker that could dominate both markets.
Nine years later, Daimler sold Chrysler to Cerberus Capital Management, a company doctor, for $7bn. It was the usual story of two halves not making a business whole. The managers of upmarket European Daimler clashed with those in populist American Chrysler.
Could it be the same for BAE Systems and EADS? The paper plan looks encouraging: combine BAE’s strength in defence with the Airbus commercial jet business owned by EADS, and create the world’s biggest aerospace company with the marketing and financial clout that follows. As for culture clashes, the Brits, French and Germans have spent 50 years co-operating successfully in building aircraft, from Concorde to the Typhoon.
But there are other – possibly fatal – impediments to this merger. For BAE, it is designed to provide shelter from contracting defence markets by linking up with a builder of commercial jets. Is this the same BAE that explicitly abandoned the commercial airliner business in 2006, pulling the plug on its new regional jet at Prestwick?
And what new commercial work will BAE (with only 40 per cent of the new firm) actually get?
In America, they are rubbing their hands at the merger. While the Europeans are trying to integrate their organisation, US companies will be hustling Washington and Beijing for contracts.
Damned if he did, damned if he didn’t
Ben Bernanke and the US Fed have pushed the nuclear option of a third round of quantitative easing (aka printing greenbacks) following last Friday’s downbeat figures for job creation in America. The surprise is that QE3 is open-ended. The Fed will spend $40bn every month for as long as it takes till US employment figures improve. That makes any action by the European Central Bank seem puny.
The obvious question is why did Bernanke move less than two months before the presidential election? The Republican contender, Mitt Romney, has been loud in his opposition to any QE3, dismissing it as inflationary. By intervening now, Bernanke risks being seen as a friend of the Obama White House.
In fact, Bernanke was damned either way. If the Fed had waited till after the election, Bernanke could have been accused of knuckling under to pressure from the Republican side, which would have lost the Fed credibility. Besides, Bernanke has little to lose – Romney has already intimated he won’t renominate the Fed chairman when his term expires in January 2014. Even Obama may not get him confirmed again by a new Republican Senate.
Meantime, Thursday’s announcement of QE3 has sent share prices soaring around the globe in anticipation of faster American growth. The Fed will buy mortgage-linked debt, hoping to lower mortgage costs to stimulate house building, while forcing investors into other assets, lowering their yields as well. Which leaves two places to put your money: under the bed or in equities.
Will QE3 work? On the up side, by promising to spend unlimited dollars, the Fed may shock American investors and businesses into being confident again. On the down side, oil prices rocketed on news of QE3, suggesting inflation ahead. Warning: six months after QE1, Brent crude had climbed by 20 per cent; while six months after QE2 it was up 38 per cent.
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Wednesday 19 June 2013
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