Monday, June 30, 2008

South Korean company now canned tuna king South Korean food company Dongwon announced it would acquire the StarKist canned tuna company from Del Monte Foods, The deal is for $363 million. Dongwon is already dominant in canned tuna in Korean, with a 75% market share. It also owns the world's largest tuna fishing fleet. The move will make the company #1 in tuna worldwide, with further expansion plans in Europe and South America. Del Monte acquired StarKist in 2002, from Heinz Foods. The brand, with its famous "Sorry, Charlie" ads, is the #1 canned tuna brand in the US with 37% market share. As tuna costs have risen (due to scarcity), StarKist's margins have been reduced as well. Del Monte's other brands include College Inn broths, Meow Mix cat food, and Milk-Bone pet snacks. Fish, like other food commodities, are becoming more valuable, and we've seen US #2 tuna canner Bumble Bee sold off in recent years as well. It's another step in the concentration of dwindling resources into fewer hands. 8:38:16 PM

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	Sunday, June 29, 2008

Waste deal aims at market control We've written earlier about the oligopoly in the highly corrupt solid waste industry. That oligopoly just got tighter. Republic services, the #2 waste disposal company in the US announced the acquisition of Allied Waste Industries, the #3 player in that area in the US. The value of the deal is for $6.1 billion, in a stock swap. The two companies combined own over 35,000 companies (employees), including waste haulers, landfills, and recycling companies/ The combined company will compete better with the #1 player in the field, Waste Management. That company has a 35% share of the US market, while the newly united company will have 17%. One factor in the deal is said to be the high cost of fuel, which is eating into profits from haulage. The ability to direct trucks to closer landfills will save money. As usual, the big factor will be priding power. With one less major competitor, the new big two will have more control over prices. 9:14:58 PM

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	Thursday, June 26, 2008

Severstal buys Esmark Severstal, Russia's #1 steelmaker, has struck again in the US. It announced that its has won a bidding war to buy Esmark, a US steel products company in a $775 million deal. It beat out India-based Essar Steel. Esmark was willing to be bought out, thanks to difficulties sin getting financing. Severstal has been expanding: in the US, earlier this year, it bought ArcelorMittal's Sparrows Point steel plant near Baltimore for $950 million. ArcelorMittal was forced to divest the plant as part of antitrust agreement, following its 2006 merger. (Curiously, Esmark had bid for the plant unsuccessfully). And in another iron-y, Arcelor had atempted to buy Severstal in 2006, to avoid Mittal's clutches. Severstal in 2003 also acquired US-based Rouge Industries of Michigan. Esmark also has been in an acquisition mode. Since 2003 it has bought over 10 US steelmakers, including North American Steel, Miami Valley Steel Services, and others. Essar, though disappointed in this deal, has actively pursued North American companies. In 2007 it bought  Minnesota Steel Industries ($1.7 billion) and Canada's Algoma Steel ($1.6 billion). You don't have to be a Lou Dobbs to have concern over non-US companies having such an important share of a strategic industry in the US, all based on cheap dollars. It also doesn't help that with steel prices sky-high, a number of those old rust-belt steel mills might have finally become profitable once morea. 10:11:21 PM

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	Tuesday, June 24, 2008

Iron hand Iron ore giants Rio Tinto and BHP Billiton announced that they had come to agreements with key Chinese steelmakers, agreements that hike the base price of iron ore by 86% over a year ago. The combination of ever increasing demand, especially from China and India, along with the power that the three-company iron oligopoly has over the much more competitive steel industry did the trick. Iron ore is a sellers market, and there are only a few sellers. The price was the result of negotiations with Baosteel, China's #1 steelmaker, but will apparently apply to all other steel companies that buy from the two Australian iron giants. It will also apply retrospectively to all iron bought from those companies since April 1. Brazil's Vale, the third member of the oligopoly made a deal earlier this year with the #1 steelmaker in the world, Arcelor-Mittal, for a mere 70% price rise. This is reportedly the first time that the three companies have not set prices in lock step. Of course, the cost of bringing iron from Brazil to China is far higher than bringing from Australia. The combined negotiation makes for a new level of collusion between the iron miners. It also happens while BHP Billiton is still pursuing Rio Tinto in an attempt to shrink the field to a duopoly. Both companies will be worth a hell of a lot more now that this deal is signed. The thought is that the influx of cash will make the attempt to buy out Rio Tinto even harder. Iron, oil, and corn, three of the staples of the world economy, are increasing in cost at unbelievable rates. While much is made of the big oil companies and the OPEC cartel, ever tighter and scarier cartels operate in iron and in corn processing. 10:17:26 PM

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	Monday, June 23, 2008

King corn (syrup) With corn prices reaching stratospheric levels, it's only natural that these should be consolidation among the world leaders in buying and processing corn. At $7 a bushel, corn costs twice as much as it did a year ago, and with much of Iowa under water, the prices might climb even more. So when food processor Bunge announced the purchase of US-based Corn Products International for $4.2 billion (in stock) the concentration the food processing oligonomy only got tighter. While less well known than rivals ADM and Cargill, Bermuda/US-based Bunge is a close rival. It already is the dominant player in oilseeds world wide, and is one of the leaders in soy processing, and a player in corn and wheat.. Corn Products is a specialist in distilling high fructose corn syrup, the sweetener used in soft drinks and packaged foods. It is the #4 company in that field, after ADM, Cargill, and Tate & Lyle. It has global manufacturing and sales. Aside from HFCS, the company sells corn starch, corn oil, and corn gluten for various food and non-food manufacturing uses. Clients include Coca-Cola and Kellogg. The company was part of Best foods until 1999. Bunge was already a player in corn, but the Corn Products addition will make it a closer rival to the other food processing giants. The company has 450 plants worldwide. It is these companies, now loaded with cash, more than the farmers, who are in a position to benefit the most from rising food prices and increased demand for processed foods in China, India, and other developing countries. Bunge's shares have gone up by nearly 50% over the past year. The more powerful and rich these companies are, the better they are in a position to set prices and costs, and above all to influence global trade policies in their favor. 8:56:13 PM

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	Sunday, June 22, 2008

Chinese-Indian pharma deal It is significant, I think, when a company from one major Asian company buys another, with no Western company involves as buyer of seller. That' shat happened last week when the #3 Japanese drug company, Daichi Sankyo, announced a deal to buy a controlling share in Indian drug company Ranbaxy Laboratories, the #1 Indian drug firm. The deal was for around $4.6 billion. Daichi Sankyo is the result itself of a 2005 merger Japanese drug companies. Ranbaxy's specialty is generic drugs, while Daichi Sankyo specialized in patent drugs. The move is an important one, in that generic drugs are growing much faster than patent ones. Ranbaxy is growing fast, and hopes plans to be among the top five generics companies in a few years. As a Bloomberg story ("Daiichi Sankyo to Buy Ranbaxy for as Much as $4.6 Bln", 8/11/08) notes, "Daiichi Sankyo is mimicking strategies pursued by the Swiss pharmaceuticals company [Novartis] and Johnson & Johnson to weather turbulence in the branded-drug industry by diversifying into other markets. The acquisition also gives the Japanese company more reach in emerging regions including India, China and Eastern Europe." The question is why the other giants of the pharmaceutical industry have ignored generics or even sold off their generic business. It is rumored, however, that US-based Pfizer might be considering a higher bid for Ranbaxy. The interesting thing, according to a Wall Street Journal article, is the rise of India as a global power with firms worth billions. "The pharmaceutical sector is the latest example of India's and China's climb up the value chain. While China is working its way up the ladder from manufacturing and clinical trials, India is starting with high-level R&D. As this happens, Indian and Chinese companies are becoming increasingly important players in the global mergers and acquisitions game, both as targets and as acquirers." All this, the article ("Welcome, Global Pharma", 8/17/08) states, is a product of that growing fact that "Indian and Chinese scientists are rapidly developing the ability to create their own intellectual property." 8:15:41 PM

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	Thursday, June 19, 2008

Copyright creeps We have stated before that one of the trends of the last twenty years has been a frantic cycle of copyright extension. The major media companies have formed oligopolies and try to extend copyright protecting their materials. Technology is moving faster, so that the regulations are sidestepped and digital sharing grows. The content oligopolies then propose (and often get) ever more stringent laws, which create more resentment and even more copyright avoidance. Once oligopolies in movie, TV, books, and music had managed to eliminate most of the competition, they thought that their income as toll keepers would be uninterrupted. Gigantic hoards of copyright materials, including film libraries and music libraries, have been marshaled by multinational giants. But in spite of their best efforts in shaping national and international law, that stream has, in some cases, slowed down to a trickle. An excellent article by Rasmus Fleischer ("The Future of Copyright", 6/0/08) captures the paradox: Contrast today's world with the golden age of copyright, roughly speaking between 1800 and 1950. Back then, enforcement was easy. The act of reading a book was far removed from the act of printing one. Record presses and gramophones were safely distinct machines." Burt standing with tape recorders and moving on the Internet, the difference between producing a film or book and consuming it has gotten blurred. And the reaction has been a frantic pace of expanding copyrights, as Flesicher points out. "Every broken regulation brings a cry for at least one new regulation even more sweepingly worded than the last. Copyright law in the 21st century tends to be less concerned about concrete cases of infringement, and more about criminalizing entire technologies because of their potential uses." More an more the content oligopolies want to have Internet service providers, search engines, and software companies, to take on the responsibility for the actions of their users, to spy on their customers, and be fines if they refuse. The prospect is chilling: a true Big Brother watching over each person's every keystroke, and taxing us for even mentioning or criticizing a company's copyrighted products. The copyright oligopoly's real desire is to create an international police state dedicated to the protection of their rights. That's the purpose of ACTA (Anti-Counterfeiting Trade Agreement), currently being negotiated very quietly by the leading industrial nations. As Fleishcer writes, The proposed ACTA treaty would create international legislation turning border guards into copyright police, charged with checking laptops, iPods, and other devices for possibly infringing content, and given the authority to confiscate and destroy equipment without even requiring a complaint from a rights-holder. It's a horrific scenario. I'm not always a fan of the libertarian Cato Institute, but on this issue they are dead on. 9:01:00 PM

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	Friday, June 13, 2008

Organic oligopoly We've reported on it before, but here's a neat diagram showing the organic brands owned by the big multinational and national food and beverage giants. Thanks to reader Dave Pollard, edirtor of the always interesting How to Save The World blog. I'll be off on vacation for a few days. 12:30:28 PM

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	Thursday, June 12, 2008

Big Pharma and "free" trade I recently came across the excellent four-year-old Salon.com article by Adam Graham-Silverman ("Big Pharma's Free Ride", 8/12/05) that details the way in which large drug companies managed to use the CAFTA trade agreement between the US and certain Central American companies) to wipe out competition in struggling economies. The Free Trade agreement may have opened some US markets to Central American goods, but for drug companies it was a field day. As the article notes, CAFTA "requires its members to adopt strict rules on intellectual property rights, including those protecting prescription drugs. These drugs cost up to 22 times what Doctors Without Borders, which runs several AIDS clinics in Guatemala, pays for generic equivalents." The agreement also greatly extends patents for prescription medicines far beyond what is allowed in the US. "Drug companies get 20-year patent protection for their drugs from the moment they begin research and development, but they can apply to extend that time period." And it's not just countries like Guatemala and Nicaragua who are suffering. The phenomenon has a chance of boomeranging back to the US, where the drug companies have, by hook and by crook, desperately trying to tie up their drug in nearly perpetual patents: As the article notes: "The United States has limits on patent extensions and on how long companies can keep secret their test data. But if the United States' neighbors adopt different requirements, like those in CAFTA, pressure will build at home to "harmonize," or get on board with what everyone else is doing. 'People are starting to realize, yes, indeed, this is a part of grand strategy,' said Kathleen Jaeger, president of the Generic Pharmaceutical Association." One of the most typical activities of oligopolies is making sure that government actions accomplish for them what they can't gain by competing in the "open market" that they and their protectors give such lip service to. It is so much cheaper to alter a law or a treaty through lobbying and political action than by actually coming up with a new drug, a new idea, or a new product line. Free Trade is freer for some than others. 9:10:08 PM

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	Wednesday, June 11, 2008

Yet another beer deal SABMiller, the world’s largest brewing company (unless and until InBev manages to buy Anheuser-Busch), announced it would buy Russian brewer Vladpivo, located in Russia’s growing Far East in Vladivostok. It’s not much of a deal money-wise (the price is undisclosed, the assets of the company seem to be under $70 million). The deal will be SABMiller’s third location in Russia, where SABMiller is the leader (with Russian brands like Zolotaya Bochka, Tri Bogatiria, and Moi Kaluga). After Carlsberg bought up control of the Russian Baltic brand, SABMiller management may have felt it had to get even bigger in Russia. Meanwhile, the company is rolling out its Grolsch beer brand, purchased last year, in South Africa. It has also been spreading key brands like Grolsch, Pilsner Urquell, Miller Genuine Draft, and even Italy’s Peroni Nostro Azzuro across the globe as "premium" brands. In a world where it would seem that beer was at a saturation point, SABMiller saw an 11% growth in profits over the last year. 10:03:52 PM

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	Monday, June 09, 2008

B/E Aerospace buys Honeywell unit B/E Aerospace, a US-based company that is #1 in aircraft cabin interiors, announced it would buy Honeywell's airline fastener and gasket unit, called Consumables Solutions. The division is a leader in replacement parts for aircraft maintenance and has a service to expedite parts, its own and others, to airline service centers worldwide. The deal is for $1.05 billion. Over the years, B/E Aerospace has bought a series of around 20 companies in the last few decades, carefully expanding its hold on the cabin interior market. It is already a player in the fasteners market, For example in 2006 it acquired Draeger Aerospace PLC, a maker of oxygen systems for airplanes, and New York Fasteners, yet another fastener company At least one reports says that B/E will have over 85% share of the airplane fastener market. The move comes s a number of airlines have announced he grounding of significant numbers of planes, while some smaller airlines have gone out of business. Honeywell says that the sell-off is part of its plan to move to more high-tech airplane parts, including enegines and landing gear, Once again, the desire for a larger company to refocus on high margins is the opportunity for a small firm to dominate a market niche. 10:18:39 PM

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	Sunday, June 08, 2008

Then there were four The number of significant players in wireless telephony in the US will be reduced from five to four, if Verizon Wireless's acquisition of competitor Alltel goes through. The move would unite the #2 and #5 players in this lucrative and highly concentrated market. The enhanced Verizon Wireless would be the new #1 company in the business, leapfrogging AT&T. The deal is for $28.1 billion in cash and debt. Verizon Wireless is co-owned jointly by Verizon Communications and UK-based Vodafone Group. Alltel, which services mostly rural wireless customers, is owned by private equity groups from TPG and Goldman Sachs, which bought the firm with an LBO only seventh months ago. Their profit in the sale is $1.3 billion. Vodafone shareholders have been trying to have the British company sell off its Verizon Wireless holdings, due to lack of dividends. The $29.1 billion deal will make any near-term dividends even more unlikely. So there is amorous pressure on the British wireless company to exit the joint venture. Verizon Wireless announced that the move would enhanced customer service. Other than making for better connectivity in some rural area, such claims should be treated with great skepticism. The further concentration of the industry will doubtless mean higher prices and even less pressure to innovate. Verizon Wireless, AT&T, Sprint-Nextel, and T-Mobile now have one less competitor, and Sprint-Nextel is fading fast, so the prospect of only three wireless companies is not out of the question. If nothing else, Verizon's Alltel buys means it has little money available for innovation, including better Internet connectivity. An article on Internetnews.com ('Alltel, Verizon Merger Not a Win-Win for All," 6/5/08( quotes telco analyst Carmi Levy as stating the simple truth: "The big need to get bigger, and the only way to protect yourself in a turbulent market is to grow…And it's easier to grow by buying than through organic customer acquisition," He also noted "When there are fewer players there is less competition, and less competition means less incentives and benefits for consumers" It is thought that Verizon Wireless wants to get this deal through the federal authorities as quickly as possible, before a possible change in the administration. 4:12:13 PM

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	Wednesday, June 04, 2008

Smucker and Procter & Gamble It headline was a little off on the New York Times Dealbook article that proclaimed "Smucker Shines to Folgers' Crystals," (5/4/08). True the US-based jams and peanut butter company made its largest acquisition ever, by buying the Folgers coffee division from Proctor & Gamble, in a deal priced at $3.3 billion. Folgers is the #1 instant coffee brand in the US. For JM Smucker, coffee seems like an extension of its shelf-stable product line. For Smucker, it is the seventh acquisition in the last few years. The company has acquired such brands as Knotts Berry Farm jams, Hungry Jack pancakes, Pillsbuty flour,, and PET evaporated milk. In fact, P & G had sold off brands like Jif peanut butter and Crisco shortening to Smucker previously, and the company has been gradually withdrawing from the slower-growing food industry into personal and household care.. But at the same time, P & G announced that after Smucker pays out a one-time dividend, I, Procter & Gamble shareholders would control 53.5 percent of Smucker, In other words, P & G is spinning off the coffee division but its current shareholders will have a majority stock position. In some sense, at least, Smucker is becoming a division of Folgers, while retaining the euphonious Smucker name. The pick-ups and discards go on. 9:52:47 PM

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	Tuesday, June 03, 2008

Market research merger Another service area gets concentrated, this time in the area of market research powerhouses. UK-based Taylor Nelson Sofres (TNS) and Germany-based GfK have announced a merger of equals, based on a stock swap. The deal will establish the world's #2 market research firm with the name Gfk-TNS, with a combined income of $3.9 billion in 2007 and coverage of 111 countries worldwide. The largest market research firm is Dutch-based Nielsen Company, which formerly had the company name VNU, which it changed in 2007. Nielsen had revenue of $4.7 billion last year, so the combined company would be nipping at its heels. The #2 international advertising and publicity firm WPP (based in the UK) had offered several hostile bids earlier this year to buy TNS for around $1.9 billion, but was refused. There is talk that cash-rich WPP may try to buy the combined GfK-TNS. WPP already has a smaller market research division, called Kantar. This is yet another case of service companies growing to build a worldwide reach to serve global clients and to establish a comfortable an unchallengeable second place in their niche. 5:31:11 PM

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	Monday, June 02, 2008

Bayer: Addicted to cartels German-based Bayer AG, the #2 European chemical company and the #14 pharmaceutical company in the world has been at the nexus of an increasing number of cartels. The areas have mostly been in various forms of synthetic rubber in over-the-counter drugs, and they have happened across the world. To give an example of what these cartels involve, one US indictment for price fixing charged executives from Bayer and other companies with:  Participating in meetings among major rubber chemical producers to discuss the prices of rubber chemicals to be sold in the United States and elsewhere; Agreeing, during those discussions and meetings, to increase prices of rubber chemicals to be sold in the United States and elsewhere. A EU charge held that the conspirators "a) agreed prices to be charged for products in an indirect way by agreeing 'target' prices and 'roll-over' prices, b) shared customers by using 'non- aggression' agreements, and exchanged sensitive commercial information relating to prices, competitors, and customers." ("Synthetic rubber cartel - fessing up pays off for Bayer," www.openbrief.com, 1/23/08) Here a short list of fines Bayer has paid over the last few years: 2001: Bayer subsidiary fined by the EU for participating in a citric acid cartel 14 million euros (that followed a $50 million US fine in 1997) 2004: Bayer paid $66 million to settle a criminal charge in the U.S>for being part of a global conspiracy to fix the prices of ingredients used in making synthetic rubber. 2005: In Brazil, Bayer along with a number of other drug companies, were fined for forming a cartel to fight against generic drugs and spread disinformation about them. 2005; Portugal found Bayer guilty of fixing prices in collaboration with four other drug companies (including Johnson & Johnson and Abbott) for Portuguese hospitals. 2006: Bayer, along with Unipetrol, Shell, Dow Chemical and others, was fined by the EU for price-fixing in synthetic rubber. 2007: Canada fines Bayer over $3 million for cartels in rubber chemicals and in aliphatic polyester polyols, used for polyurethane. 2008: Bayer was involved in another cartel, for NBR (nitrine butadiene rubber), a commonly used synthetic rubber. It got off without a fine in the US by informing on other members of the cartel, 2008: the EU fined Bayer 29 million euros for the same cartel (along with rival Zeon) in the specialized area of NBR. 2008: 16 companies including Cooper Tire & Rubber announced a lawsuit against Bayer, Unipetrol, Royal Dutch Shell and others alleging a European rubber cartel. 2008: Bayer was fines over 10 million euros for conspiring with German pharmacies to set minimum prices for its over-the-counter drugs, including aspirin. Also pending are accusations of cartels for pesticides in India, and for over the-counter drugs in Europe generally. Do we seem to have a pattern here? Part of a corporate culture? Cartels are notoriously difficult to uncover and prosecute, so one can only imagine what others were smoothly executed so as not to leave traces. If you are interested in a whole litany of other Bayer issues, check the website of the Coalition against Bayer Dangers at www.CBGnetwork.org 8:31:20 PM

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	Sunday, June 01, 2008

Disney-Pixar deal: happily ever after? Two and a half years after the Walt Disney Company bought animation firm Pixar for $7.4 billion. The question then was "will it last?" At least for now, the deal can be claimed as one of the rare smooth acquisitions the media business. That's according to an article in the New York Times today ("Disney and Pixar: The Power of the Prenup", 6/1/08). The media landscape is littered with badly implemented mergers that have caused big problems, including Paramount's takeover of DreamWorks and NBC's takeover of Universal. Steve Jobs, Apple CEO and then also CEO of Pixar, stipulated some tough conditions for Disney and CEO Robert Iger. Part of the deal was that Pixar not be swallowed into the Disney world entirely, but be able to act semi-independently. That included not only retaining benefits and the Pixar management structure, but also not having to become "disneyfied" in a host of other ways. As the article notes: "Mr. Iger also agreed to an explicit list of guidelines for protecting Pixar's creative culture. For instance, Pixar employees were able to keep their relatively plentiful health benefits and weren't forced to sign employment contracts. Mr. Iger even stipulated that the sign on Pixar's front gate would remain unchanged." The result has been remarkable harmony and an investment that is paying off well for Disney. In fact, Pixar and President John Lassiter, have taken over much of the Disney's traditional animation operation and have streamlines it and made it newly profitable. Not least of that has been Pixar's cooperation with Disney in merchandising its movies (action figures, amusement park rides, straight-to-DVD sequels), most recently and very profitably with the animated feature. "Cars." That effort has brought billions of dollars in non-theater sales. The story quotes one Pixar exec as saying "It took about a year before there was a collective letting down the guard…Initially people were thinking, 'Is something going to happen?' " As far as Disney list of promises went, the exec said: "We've never had to go back and look at it. Everything they've said they would do they have lived up to." The lesson that might be drawn -brutal absorption of an acquired company may not be as effective as letting the integrated company adapt more slowly, while making use of its strengths to help through the rest of the company. In this case, the acquired company has become a key part of Disney's recent increased profitability. In fact, Iger "won some early support at Pixar by talking candidly and clearly about the lessons he learned when his previous employer, the ABC television network, endured two takeovers." The kinder, gentler acquisition seems to have worked well. 9:09:01 PM

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	Thursday, May 29, 2008

Anheuser Busch on the block? The most notable news of the past week for beer drinkers has been talks of a bid by global beer company InBev for US beermaker Anheuser-Busch. It is though that InBev (#2 in the world in volume) and the #1 US company could link up, with a megabusiness that would control one out of every four beers sold in the world as well as over half of the US beer sales. InBev, which originated the 2004 union of two other beer giants, Belgian-based Interbrew and Brazil-based AmBev, owns such brands as Beck's, Bass, Labatt, and Stella Artois, and has a truly global reach, Originally a merger of equals, control of InBev has decidedly gone over to the Brazilians. Beer is already very concentrated, with five companies controlling two-thirds of the beer sold worldwide. A series of mergers, most recently the divvying-up of Scottish & Newcastle between Heineken and Carlsberg, keeps making for ever more beer consolidation. At the same time, InBev is also considering buying SABMiller, the #2 US brewer and the #1 by volume in the world. Anheuser-Busch, with an estimated price of $45 billion, won't be sold off without a fight. With an iconic US brand (whatever you think of their beer), the company, there is likely to be both a popular outcry, strong labor resistance, and perhaps even some real antitrust regulation> InBev has had serious labor problems in Belgium, where it has tried to increase work hours and close plants. On the other hand, InBev has a very small current share of the US market, which might blunt antitrust action. It's another case of the decline of the dollar making a US company very affordable for a company that has a non-dollar income. 8:53:17 PM

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	Monday, May 26, 2008

Airfares up Last week, my friend Michael Donnelly, editor of the CEO Economic Update, asked why American Airlines had announced that it was cutting flights, with no mention of raising fares. Given the fact that airplanes are fuller than ever, why couldn't American make fare boosts and be sure to be followed by the few other US air companies. As he put it "The free market answer would be to first increase your load capacity, but ultimately raise prices in line with your costs. Obviously demand will fall, but you can't sell a seat for less than it costs to get there. Case in point: Oil prices goes up, Gas stations raise prices, demand falls. What gas station has kept prices low and instead closed down pumps or 12% of its stations? None, it makes no sense." He challenged Oligopoly Watch to come up with a reason why American was not behaving like the leader in an oligopoly, namely "signal[ing] to its cartel partners that it was about to raise prices, and it was willing to cut flights to maintain those prices." I'll admit I was somewhat puzzled, but I did point out that American had used the tactic that many oligopolies prefer over raising prices, that is, cutting costs. They have squeezed their workers with threats of layoff; they had gotten rid of all amenities for flyers; and they had been adding annoying fees, capped off with the recent announcements of charging for any check luggage. But no sooner had Donnelly asked his question than United responded, raising fees on many round trip routes by $60. And of course, the signaling worked to perfection, with American and Delta on board, and Northwest "considering" the move. The $60 raises, interestingly, do not apply on routes that have competition form Southwest Airlines. AirTran also announced more modest raises (up to $25). Now, the airlines are treading a fine line. They obviously need the money and airlines tickets are underpriced, given the spike in fuel costs, On the other hand, with summer coming on, a serious rise in prices may well cut discretionary travel faster than the airlines want, The idea is to tread the fine line between flying full flights with too low ticket prices and flying half-full flights at a higher ticket prices. That's why the stealth fee rises, which are less likely to be taken into account when planning a trip, have been the preferred tactic. The fear is that raising prices will accelerate the bleeding, not staunch it. 4:00:12 PM

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	Wednesday, May 21, 2008

Consolidation in the office supplies business Netherlands-based Corporate Express MV, which is the #1 direct distributor of office supplies in the world, announced plans to acquire rival French office supplies company Lyreco. Privately-held Lyreco is in the same business-to-business sector of the office supplies business, also has a wide international presence, and claims to be the leader in that area in Europe. The deal is for $2.7 billion, much of it in stock. The move comes even as US-based Staples, the world's #1 retail chain for office supplies, has been making a hostile bid for Corporate Express. Staples had been offering around $2.4 billion for Corporate Express, which has a major presence in the US. For Staples the bid was an attempt to broaden its market with large corporations. But the new company would prove too expensive for Staples to take over. Corporate Express has been hurt by the decline in the dollar, but its stock price has risen since the Staples bid. As a BusinessWeek article (Corporate Express buying French rival for $2.7B", 5/21/08) puts it, "Analysts said the move was a crafty way for Corporate Express to take advantage of its share price -- which has nearly doubled since Staples began courting it -- to thwart the American company." It is generally considered that the Corporate Express paid too much, but that it would do anything to avoid being taken over by Staples. 8:13:30 PM

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	Monday, May 19, 2008

CBS buys CNET: Hail Mary time? CBS this week announced it would buy Web site company CNET Networks in a deal worth $1.8 billion. CNET is best known for its technology news site, cmet.com. CNET also owns web sites ZDNet, GameSpot.com, TV.com, Chow and Search.com. Cnet.com is the 17th-busiest Web site in the US, and one of the biggest independent Web companies still on the market. This is the largest Internet acquisition by CBS. A year ago, CBS CEO Les Moonves announced to the New York Times that "We are not going to spend $1.6 billion on YouTube," referring to Google's then-recent acquisition of the video site. But CBS has paid even more for less? CNET's revenue comes mostly from online advertising, and it has income of around $405 million last year, along with sales growth of 10%. It has a solid Internet sales force that CBS can use with some of its other properties. On the other hand, its stock value has sunk by 50% since 2006. Is this a sensible move? As a Fortune article skeptically noted ("Does purchasing CNET really help CBS?" 5/15/2008): "CBS management touted various "synergies" that the acquisition will unlock, but on the conference call with investors Thursday, executives offered few specifics." CBS has a spotty history with the Web. An internetnews.com article ("Is CNET The Right Fit For CBS?" 5/15/08) quotes another analyst as saying "We do not see a strategic fit in this combination other than CBS is trying to increase its exposure to the Internet," But as the Fortune article points out, CBS is more dependent than its rivals on advertising, and buying CNET only extends that vulnerability, albeit in a different medium. If, as seems likely, the current recession brings a prolonged decline in ad spending, the move may prove to be a bad one. The article quotes on analyst as saying "One of our concerns about CBS has been that management might pursue expensive acquisitions to offset concerns about secular trends in the company's core broadcast television and radio businesses…The CNET deal underlines this concern." So, is this just a "do something" move by a company whose stock price is down by over a third over the past year, and whose prospects, especially for its flagship TV network look dim? 5:31:18 PM

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