Tuesday, January 06, 2009

Broken China In December 2004 we reported Ireland-based Waterford Wedgwood the world's leader maker of fine china and crystal announced it will buy competitor Royal Doulton, based in the UK. These leaders in the luxury tableware market have both been suffering due to the shrinkage of the dollar, a major market for their products. Now news comes that Waterford Wedgwood has gone into receivership, a victim of the decline in purchasing luxury goods. The company has been losing money for five years, and clearly the Royal Doulton acquisition made their situation even worse. The company has been looking for a buyer, but with no luck so far. UK-based Wedgwood has origins that go back to 1759, while Irish-based Waterford has been making crystal since 1783. Waterford bought Wedgwood in 1986. The failure is attributed to the increasing competition from good dinnerware made in Asia.  An article in The Independent (1/6/09, "The rise and fall of Wedgwood") quotes on analysts as saying "There are a lot of lower-priced alternatives so Waterford Wedgwood's products became more and more niche. They have become more and more sidelined into gifts and Upmarket and they have been overtaken by the mass production market." In addition, the brands have become obsolete, targeted at a very old audience who trotted them out when company came. In retrospect, the Royal Doulton acquisition was one of many eager acquisitions that have turned out to be ineffectual and ill-advised. We'll see many more such deals exposed I suspect the brands will survive, but much diminished and the operations will all be moved away from the UK and Ireland. 8:45:01 PM

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	Wednesday, December 24, 2008

Panasonic buys Sanyo Mergers between Japanese consumer electronics giants have been few and far between, even though you would think hat these companies would want to reduce competition by buying out rivals. These wide-ranging companies (including Hirtachi, Canon, Konica Minolta, Epson, Sony, and many others) have long pursued parallel lines of business, only with reluctance leaving even the ones in which they are minor competitors. But now Panasonic (formerly Matsushita), the world's biggest consumer electronics firm, has announced it will buy Japanese rival Sanyo Electric in a $9 billion deal. Sanyo makes, among other products, televisions, home appliances, audio and video systems, biomedical equipment, food preparation equipment, digital cameras, solar panels, semiconductors, and batteries. The move, among other things, will make Panasonic the #1 company globally in rechargeable batteries, with a 38% market share. It will also make the company a player in solar technology, an area in which Sanyo has had some success. Both of these areas are likely to do well in the near future. Panasonic is suffering in terms of income, having cut its projected income for the year by 90%. Sanyo had even more problems looming, and had been bailed out by investment banks in 2006. The buy price was less than half of what it had been earlier this year. Every indication is that even more reluctant acquisition activity is in store in this sector 8:20:26 PM

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	Tuesday, December 09, 2008

LCD price fixers "sorry" Three giants of the LCD (liquid crystal display) industry will soon plead guilty to price fixing, Korean-based LG Display Co. will pay $400 million, Taiwan-based Chunghwa Picture Tubes $65 million, and Japan-based Sharp $120 million. A Bloomberg News article (LG Display, Sharp Shares Fall on Price-Fixing Fine, 11/13/08) quotes a US official as saying: "LG Display, Chunghwa and others met several times from 2001 to 2006 in so-called 'crystal meetings' to set prices on desktop computer, laptop and television screens." Other devices affected are iPods, calculators, and cell phones. The three all supply displays to Apple Computer, Sharp also sells to Motorola and Dell. The Bloomberg story notes the ironyof bad timing. "The fines will further undermine the LCD makers' earnings at a time when a glut in the $82 billion industry is driving down prices and forcing manufacturers to scale back production plans." Bravo to the US DOJ that has been less than great on antitrust issues. These are not easy cases to win. LG's fine is the second-largest criminal fine in US history (after Swiss vitamin maker Hoffmann La Roche). There is also a consumer lawsuit still ongoing. LCD screens are $8 billion industry worldwide. Japanese, EU, and South Korean government is still investigating price-fixing by these companies in its jurisdiction. 5:59:20 PM

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	Monday, December 08, 2008

More medical deals While the current crisis has put an end to deals in many areas, there are still some areas where the chance of bargains and a belief in the long range have allowed the pace of acquisitions I to keep on track. The health area is a key one. In recent weeks, there have been a number of reasonably significant deals. Johnson & Johnson has made two purchases. First, it agreed to buy US-based breast implant maker Mentor for about $1.1 billion. Mentor is the leading makers of breast implants. #2 in that area is Allergan, the maker of Botox, and of a variety of cosmetic surgery, eye care, and specialty drugs. (Mentor, by the way, has a drug in the pipeline which will compete with Botox.) J&J also agreed for over $500 million to buy Omrix Pharmaceuticals, which specializes in of hemostasis products, which control blood loss. That's a good fit with the company's wide variety of wound treatment products. US generic maker King Pharmaceuticals agreed to buy US-based Alpharma, which makes pain medicines. THE deal is for $1.6 billion. Swiss-based Roche agreed to buy US-based Memory Pharmaceuticals, which does Alzheimer's research, a $50 million deal. Roche is already working on possible Alzheimer's cures. Roche is still persisting in its offer to buy US biotech company Genentech. Over $43 billion is on the table. Meanwhile, the acquisition of Barr Pharmaceuticals by generic drugmaker Teva is being completed. The deal was for 7.5 billion. Teva is selling seventeen duplicate drugs to competitor Watson Pharmaceuticals, in an attempt to avoid antitrust actions. Other big deals that have finally closed are Eli Lilly's $6.5 billion takeover of ImClone and Daiichi Sankyo's $4.1 billion purchase of Ranbaxy. Key drug/healthcare companies are sitting on a lot of cash and are looking for bargains. It's likely that the buying will continue. 8:19:17 PM

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	Tuesday, December 02, 2008

Brands and the (incredible shrinking) Big Three "Just how serious are they about shrinking their vast lineups of different brands and models to match the current harsh reality of the market?" That’s the key question asked in the New York Times t "Big Three May Need to Trim Number of Brands," 12/1/08). The article points out that Ford, GM, and Chrysler together have 112 different car and truck models using 15 brands (makes) in the US. By contrast, the big three Japanese companies (Toyota, Honda, Nissan) have only 58 models. A confusing array of reports are out on whether Ford will sell off its Volvo division, Both Ford and GM are in talks with the Swedish government, but it is clear that EU competition rules would make it hard for Sweden to just step in and "rescue" the companies. Beside, the fall in Volvo sales is even more catastrophic than that of the other failing GM brands. Who in their right mind would pay anything for these brands? GM has been trying all year with no success to sell its Hummer brands. It also has been thinking about selling both the Saab and Saturn brands. Pontiac may also be on the chopping block. But who wants them? But dropping brands is not so easy, even if you despair of selling them. In 2000, GM dropped its Oldsmobile brands, but it took four years and two billion dollars to make good with employees and dealers. Over the last few years, Ford and GM have sold off whatever they could. On Nov 17, GM sold its remaining stake in Suzuki Motors for around $200 million. Ford sold in 2007 its Jaguar, Aston Martin, and Land Rover brands. It has also sold most of its stake in Japan’s Mazda for $540 million. In 2006, GM sold off its stake in Isuzu and in Fuji Heavy Industries (Subaru) as well as its main stake in Suzuki). All the properties that these companies greedily snapped up in the 1990’s were sold off in a rush. All that cash went to slow down the burn rate, but couldn’t make the companies profitable. But there are still too many brands. GM and Ford spend fortunes trying to convince users to buy slight variations on the same model. The strategy of pseudo variety worked well when the Big Three rules the world, but now the excess variety doesn't protect market share, while flagship brands like Toyota's Corolla and Honda's Accord point to safe, well-engineering, constantly improved products that make car buying a lot easier. 7:47:42 PM

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	Monday, December 01, 2008

Wherein my taxes fund Citigroup's new acquisition First was the knowledge that Citigroup was in a bad way thanks to bad loans and credit cards. Then Citigroup tried to buy rival Wachovia, but was beaten out by Wells Fargo. Then came a new bailout of Citigroup by the US government, in a somewhat murky deal that covered bad assets and gave operating capital. The bailout for Citi, which protects the company from $306 billion of high-risk assets and puts $20 billion of new capital in Citi’s hands, is the biggest bank bailout ever. (And the anger that resulted when it was realized that the company was still going to spend $400 million dollars to get naming rights for the New York Mets baseball club stadium.) Now the next shoe drops. A fund owned by Citigroup has reached an agreement to buy a company called Itinere Infraestrcuturas Sa from Spanish constitution company Sacyr Vallehermosa Sa in a $10 billion deal. Sacyr is the #5 construction company in Spain, also owning oil resources and hospitals. The Itinere Infraestrcuturas Sa division owns toll roads in Spain, Portugal, and South America. Citigroup plans to sell off over a billion in highway assets to Spain’s Abertis Infraestructuras SA and Italy’s Atlantia SpA. Observers see the buy as a bargain, thanks to Sacyr’s need for cash to cover $5 billion in debt. Citi was seen as interested in expanding the ownership of toll roads across the world, a strategy that may fit in with a US move to increase spending on infrastructure. So let’s get this straight. Not only are US taxpayers paying for the Citi’s name on the Mets’ stadium buy, but we are also helping it make bets on the market as it acquires new companies, rather than trying to get its own house in order.What is going on here? 8:34:07 PM

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	Friday, November 21, 2008

Brazilian bank deals The Brazilian banking business has seen two large acquisitions over the last few weeks.Banco do Brasil, a state-owned bank, announced a deal to buy majority share in Nossa Caixa. The deal is for around $2.25 billion. The new bank will be #2 in Brazil. Three weeks ago, an even much larger deal, worth $17.7 billion, was announced. Brazilian banks Banco Itaú, said it would merge with (actually acquire) rival Unibanco. The two banks are headquartered in Sao Paulo. The new bank will be the largest headquartered in the Southern Hemisphere. Unibanco was reportedly weak due to credit derivatives. The latest deal is seen as an effort for Banco do Brasil to regain its #1 position. n September, Banco do Brasil announced it would buy two smaller banks, Banco do Estado de Santa Caterina and Banco do Estado do Piau. Further deals are predicted in a not very consolidated banking market. A Bloomberg News article ("Brazil Bank Mergers May Pick Up, Raymond James Says", 11/21/08) quotes an analysts who notes that: "Business opportunities are huge and the consolidation level is relatively low… The five largest Brazilian banks account for 65 percent of the Brazilian banking system, compared with 86 percent in Peru, 79 percent in Mexico and 75 percent in Chile." The article posits that Brazil’s #3, Bradesco, is rumored to be on the lookout to make a buy. While cash is short as in other countries, the valuations of the midsize banks in particularly are spectacularly depressed. 5:33:49 PM

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	Wednesday, November 19, 2008

DHL expresses itself out of US market We've called it often before. In a three-company oligopoly (a triopoly?), the #3 company is always at risk. That's especially true when #1 and #2 keep the pressure on, and where there is no earth-shattering innovation that offers #3 a way to restructure the market. When in 2003, German shipping giant DHL (a division of Deutsche Post) bought US-based Airborne Express in an attempt to compete in the US with FedEx and UPS, the US-based package delivery leaders (they had 80% of the market) tried by both legal and market means to keep a powerful third party out of the business. We then quoted a New York Times article (6/1/2003) that pointed out, "The battle is unusual partly because FedEx, which is located in Memphis, and UPS, which is located in Atlanta, are such strange bedfellows. The Coke and Pepsi of the cargo world, they are archrivals. But they are working toward a common goal: to shut down, or a least slow down, DHL Worldwide Express in the United States." Well, the friendly rivals lost the first battle but they now have won the war. DHL just announced they would close most of their North American operations and lay off almost 15,000 employees. This was not such a big surprise. DHL had started outsourcing some of its operations to UPS in May, including domestic air carrying and many trucking operations. The operation had been losing money form the beginning. A Bloomberg news article ("Deutsche Post's DHL Cedes U.S. Market to UPS, FedEx", 11/10/08), quotes one analyst as saying: "The reality of the lack of scale, the productivity that they have, the market reach and the brand awareness make it impossible for us to make it economically viable." The operation was losing money even during the boom, so the bust was a good opportunity to get out. And while FedEx and UPS managed to keep service strong, DHL had problems in terms of missing ontime deliveries in spite of a new 2005 Ohio-based air exchange center. Total Deutsche Post losses will exceed $9 billion. Being #3, and by a large margin, there was no way DHL could catch up, especially with increasingly strong FedEx and UPS international operations. Even FedEx and UPS have valuations of around half of what they were a year ago, but they are well positioned for the long run. With no new competitor likely (the US Postal Service is the only other competitor), UPS and FedEx will become an even more powerful duopoly. Thanks to Mike Donnelly's CEO Economic Update for catching the story. 5:32:34 PM

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	Tuesday, November 18, 2008

Limping along This is in the way of an explanation and an apology. An apology to regular readers of Oligopoly Watch for my inattention in recent weeks and an explanation of why I have managed to avoid updating during some of the most turbulent and interesting world markets ever. First, the simple issue. A few weeks ago, I underwent a full knee replacement (my second). I've been home from my regular job, but the combination of soreness and Percocet have made writing anything hard to imagine. The recovery is going nicely, I'm cutting (gradually) back on pain-killers, and am ready to get back on the writing chair, leg propped up But surveying the accumulated pain is not easy. Up until now, my look at oligopolies and how they operate has basically been like critiquing a game. There were winners and losers, but as long as the ten plus year confidence game of acquisitions and deacquistions kept spinning, the real human pain had limits. But the spectacular disappearances of trillions of dollars, the crash of markets across the globe, and the disastrous loss of retirement savings have been appalling. The abrupt switch from market fundamentalism to corporate socialism has been all too painless. Frankly, my mind is still spinning, and I distrust any glib affirmations by those who (almost everyone) were cheerleading the bubbles for years. While the markets have been hit with a firestorm and the landscape is seemingly totally rearranged, the basic behaviors we have been tracking are all in play: even more acquisitions as the principle of "too big to fail" has been repeatedly verified; the desire to keep the once "Big Three" of the us auto business alive; the incredible power of those that have cash (sovereign wealth funds from the Middle East) and the opportunity to buy; and the rise and fall of great companies. I'll get back on the beat, but I've used the time to think a little about the major changes in corporate power and the naked way in which national governments are manipulated to maintain that power. No doubt I'll be walking straight long before the economy is. 12:52:48 PM

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	Monday, November 03, 2008

Banks to use bailout money for more acquisitions The idea of the bailout spreading of government largesse to banks was to get them making loans. But according to a news item from MSNBC News, at least some of the banks are planning on using the money to buy other banks. "Several of the banks that have received preliminary approval from the Treasury for investments have said they plan to use some of the money for acquisitions, including SunTrust and Regions Financial Corp., both of which expect to receive about $3.5 billion apiece. Even smaller institutions, like Seattle-based Washington Federal Inc., which announced a $200 million commitment from the government, plan to deploy some of the money to expand its retail franchise through acquisitions." Now it turns out that that the federal money was used by PNC Financial to make its $5.8 billion purchase of National City. "PNC said it had received $7.7 billion in cash through selling stock to the government under the program." And clearly that money went into the buyout. What the government says it is trying to do is help the stronger banks buy out the weaker ones. But as one critic notes in the article: "Meanwhile, the smaller institutions that don't get any government support will wind up walking around with a big target on their back." Is subsidizing acquisitions what the American people or their representatives in Congress thought they were getting into with the bailout bill? Is it government's role to finance the roll-up of the banking industry and to pcik teh winners and losers? 10:37:55 PM

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	Friday, October 31, 2008

Delta (finally) acquires Northwest It took seemingly forever (actually some six months), but Delta Airlines finally got the antitrust authorities to pass on its acquisition of rival Northwest Airlines. The all-stock deal (worth $2.8 billion) creates the world's largest airline, with $35 billion in annual revenues and 75,000 employees. It will continue with the name Delta. The stock swap was set before this year's stock decline, so that Delta ended up paying a third less than originally agreed on. The US Justice Department declared that the deal would not hurt competition (the two airlines share few routes) and would probably help on customer service (Northwest is usually cited as the worst, though Delta not much better). Meanwhile, a group of consumers is suing to have the merger stopped, claiming that prices and services will decline after the deal. The thought is that the ruling will give a green light to other airline mergers, including British Airlines and American Airlines. However, a change to an Obama administration may bring in a different antitrust attitude. That's why GM is reportedly trying to rush its Chrysler purchase from Cerberus Capital before the election. An AP article ("Delta completes deal to acquire Northwest Airlines", 10/30/08), quotes Kevin Mitchell, chairman of the Business Travel Coalition, as saying "A first priority of the new administration should be to reconsider the rationale behind antitrust-immunized alliances and the market power they can exercise to the detriment of consumers." Many expect a new set of layoffs and consolidation in the new Delta. One at least temporary plus for the airline is the falling price of fuel, though that may be offset by consumer and business travel reduction due to the recession. 4:48:48 PM

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	Tuesday, October 28, 2008

PNC buys National City   While mergers and acquisitions are lagging across the board due to lack of financing and perceived risk, financial institutions are still buying,  In this case, it strikes home for me.  My bank, PNC Financial (Pennsylvania's largest bank) announced it would buy Ohio-based National City Bank for $6.3 billion.   The  merger of the two regional banks would create the fifth-largest US bank by deposits,  While PNC managed to avoid the worst of the subprime mess, National City, accoridng to Bloomberg News, had been among the top ten subprime lenders nationally. Like WaMu and Wachovia, its folly lead to a takeover by a slightly smarter bank. National City did manage to sell off its subprime loan unit, First Franklin Financial, to Merrill Lynch in 2006, leading to that company's demise. But then with proceeds, it bought Florida-based banks Fidelity Bankshares Inc. for $1 billion and Harbor Florida Bancshares for $1.1 billion the same year,  These two loaded it down with a fresh set of losing mortgages.   Nation City has more than 1,400 branches, mostly in Ohio and Michigan.  PNC bank branches are in Pennsylvania primarily, and number about 1,350. Retail banking is likely to remain profitable, if prudently mnaged,  even in the worst of teh recession.   This rgeional bank tieup follows the move by Wells Fargo to become one of the four nationwide banks. All likelihood is mre regional bank mergers. 8:42:36 PM

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	Monday, October 13, 2008

Broken deals While certain high-profile banking deals have been confirmed (Wells Fargo's bid for Wachovia has passed federal approval), in other fields the deals seem to collapsing. The New York Times Dealbook section ("A Day of Broken Deals," 10/13/08) spots this trend. Among the almost-concluded acquisitions that have fallen on hard times just this week  are: United Technologies has dropped its $2.8 offer for ATM (and vote machine) maker Diebold Semiconductor maker Vishay Intertechnology's hostile bid $1.7 billion for rival International Rectifier Solid waste leader Waste Management has pulled the plug on its $6.7 billion offer for rival Republic Generic drug maker King Pharmaceuticals withdrew its $1.6 billion hostile bid for rival Alpharma, Pharmaceutical company Bristol Myers Squibb looks like it has dropped its $6.5 billion bid for biopharma company Imclone (famous from the Martha Stewart insider trading trial) All of these were preceded earlier in the year by the biggest hostile bid of all: Microsoft's $47 billion bid for Yahoo, that looked like it would be renewed, looks like it has been dropped. As of today, the market capitalization of Yahoo is $18.6 billion! For many companies, this is the worst time to make a deal. Credit is hard to get (so stock swaps rules), but stock prices of both buyer and seller are depressed so it's harder to negotiate a price agreeable to buyer and seller. And most companies need all the cash and credit they can get simply to maintain day-to-day operations. No doubt, this is the snd of teh furious deal making of the last two decades. 7:36:48 PM

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	Sunday, October 05, 2008

Wells Fargo: New King of the Hill? Last Monday, it looked for sure that Citigroup had managed the deal of the century. Buying Wachovia at a dirt cheap price of around $1 a share, and arranging that the FDIC would make much of the uncollectible mortgage debt disappear at taxpayer expense. But in came California-based Wells-Fargo as the white knight. Wells Fargo, which had managed to avoid the worst of the orgy of bad loans and derivatives, had managed to keep profitable and even raise dividends while other banks were shaken, In fact, it was just announced that Wells Fargo had outdistanced Citigroup to become the #3 bank by market value. Quite a trick, since according to Bloomberg News, Citigroup had a market value twice as large as Wells Fargo's two year ago. In any case, Wells Fargo was in a position to bid seven times as much for Wachovia ($15 billion) as Citigroup offered. It also, in a move likely to win general public support, it will decline the FDIC handout at the same time. The Wells Fargo offer is for all Wachovia operations (including stockbroker A.G. Edwards and its Evergreen mutual funds), whereas Citigroup's bid excluded those non-banking operations. If Wells Fargo managed to complete the purchase, it will become a top tier national bank, leapfrogging both Bank of America and JP Morgan Chase in terms of deposits. Wachovia's East Coat operations will bring it new territory as most of its banks are in the West and Midwest. While both Wachovia and the FDIC are pleased by the counterbid, Citigroup claims it had a final deal and is taking the matter to court. And the usual conclusions are well stated an International Herald Tribune article ("Wells Fargo to pay $15.1 billion for Wachovia", 10/9/08): A sale to Wells Fargo would further concentrate Americans' bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Wells Fargo would control more than 30 percent of the industry's deposits. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors. 6:46:09 PM

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	Monday, September 29, 2008

Another one bites the dust This time, as we noted yesterday, it's Wachovia Bank, the #3 bank in the US in terms of deposits. This time the buyer was Citigroup, and the price was $2.6 billion in stock. Like the other recent buyouts, this is a panic price, one arrange=d by the FDIC. Citigroup will take over some $312 billion in loans, with over $40 billion plus known losses. In fact, Wachovia is only selling its commercial banking assets, and a much shrunken company will hold on to its asset management department, A.G. Edwards brokerage, and its Evergreen mutual fund family. A.G. Edwards is the third largest brokerage after Bank of America's Merrill Lynch and Citigroup's Smith Barney. Wachovia had grown dramatically over the past few decades from over 100 acquisitions. But it chokes on one recent acquisition, that of private mortgage lender Golden West, the #2 non-bank mortgage lender after the doomed Countrywide. Wachovia paid top dollar ($25 billion) for the company at the height of the real estate bubble in 2006, and that company proved to be full t the top with disastrous adjustable-rate mortgages (ARMs). The buy will give Citigroup 3,300 branch offices in 21 states to add to its current 1,000 branches. It will now have 10 percent of the deposits, and the international-oriented bank will become even more than ever a US national retail bank. But Citigroup itself has its own serious bad mortgage problems. Even so, it must have found it impossible to hold back when rivals JP Morgan Chase and Bank of America were snapping up distressed properties. According to a New York Times article ("Citi-Wachovia: a Banking Behemoth Is Born," 9/29/08), "Now just three banks - Bank of America, JPMorgan and Citigroup - control nearly a third of the deposit base in the United States." The days of mid-tier banks in the US looks to be nearly over. The big keep getting bigger, even though bigness has proven no cure for greedy and stupid decisions. 11:40:38 PM

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	Sunday, September 28, 2008

JP Morgan'a turn The current financial crisis seems to be a great opportunity for those who have cash and the ability to make a snap decision, that is, the ones that didn't get stuck holding too much bad paper/ As we pointed out before, Bank of America managed to acquire both Countrywide (private mortgage bank) and Merrill Lynch (broker and investment bank) at bargain prices. But JP Morgan Chase, close rival to Bank of America, is following suit. It acquired key assets of failed investment bank Bear Stearns at fire sale rates (a mere $270 million). Just this week, it managed to buy the key assets of Washington Mutual, the country's #1 savings and loan. WaMu's bankruptcy turns out to have been the biggest bank failure in US history. The deal was for a piffling $1.9 billion, paid to the Federal Deposit Insurance Company (FDIC), which had the bank in receivership. JP Morgan outbid other suitors, and was in a position to keep the bank doors open with an infusion of cash and operational expertise. That's a small fraction of what WaMu would have commanded even a few months ago. By the time JP Morgan had stepped in, the stock of WaMu had slumped by over 90%. Clearly the bank has serious problems, including a large portfolio of poor to uncollectible mortgages. But it also has real assets: $307 billion in assets and $188 billion in deposits. As with Bear Stearns, the real estate alone is probably worth the price JPMorgan paid. The purchase means that WaMu customers will see no loss of service or risk of money losses. On the other hand, WaMu stockholders, debtors, and the private equity owners of its holding company were wiped out. As with the Bank of America deals, I have to wonder whether such a diversified, huge financial company can be managed. Unless JP Morgan is planning to spin off or sell off assets, it's hard to imagine that JP Morgan Chase won't get into the same kinds of difficulties as Citigroup has, or as indeed WaMu got, with its hell-bent explosive growth for a local S & L to a giant national bank over the past decade. And speaking of Citigroup, it now appears that it is bidding against Well Fargo Bank to take over Wachovia. Is that the next shoe to drop? You have to wonder. The major banks all grew rapidly when economic times were good. Now they are expanding when times are tough. It seems every course leads to more and more concentration. 8:57:16 PM

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	Sunday, September 21, 2008

Bank of America - too enormous to fail The recent bid to acquire of Merrill Lynch by Bank of America is just the latest step in a vast expansion of what was once NationalBank, a North Carolina regional bank that acquired California-based Bank of America in the 1889s. . It also is a change in strategy, away from being known as consumer bank. As we noted in a 2007 post: While BoA is second among US banks to Citigroup in assets, it is far ahead in:   * retail deposits (be far the biggest of all (and almost five times bigger than Citigroup)   * ATMs (Twice as big as its nearest rival, and almost six times bigger than Citicorp)    * Credit card balances (#1, and 50% bigger than Citigroup) Over the past four years, the company has acquired large assets including MBNA (the leading credit card issuer) and FleetBoston, the largest bank in New England. A few months ago, it acquired the remaining shares of the sinking Countrywide Financial, the largest private mortgage issuer in the US. And now BofA is bidding for investment bank- brokerage firm-Merrill Lynch. The $49 billion bid represents a steep discount from Merrill's highst valuation, as that firm was about to sink into bankruptcy. The two deals will increase BofA's liabilities to $2.5 trillion. The question is why? Why does BofA want to take on such risky assets, creating a far larger and harder-to-manage company. In addition, BofA's own credit card holdings would have to be riskier than ever. One of the key areas where BofA will now be #1 in the world is in wealth management, a combined fund worth $2.5 trillion. Curiously, BofA sold its international wealth management division to Swiss bank UBS a decade ago. Now it will surpass UBS in teems of cash under management. What's really crazy is that in both deals the amount of bad debt in the mix is unknown, and only coming out quarter by quarter as mortgages default and leveraged paper becomes worthless. But what it does is put the bank into a position of offering a fill gamut of financial services, a model that has failed over and over again, and caused large companies (like Citigroup) to retrench and exit some of its businesses.. The big benefit, and it looks like the new Bush administration bailout plans come in, is that BofA will be more than ever "too big to fail." No matter how reckless the acquisitions were, in the light of the fact that taxpayers will, it seems, swallow up much of the bad debt while allow BofA and other megabanks to hold on to the good debt, the move to buy Merrill suddenly appears as a stroke of genius. A Bloomberg News article ("Too Big to Fail' Metric Makes Bank of America, JPMorgan Safer," 9/22/08) points this out Bank of America in Charlotte, North Carolina, and New York- based JPMorgan and Citigroup may also get an immediate benefit from the Bush administration's plan to buy $700 billion of bad mortgage investments from financial companies. 8:41:44 PM

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	Wednesday, September 17, 2008

The Titanic goes down, the captain sails off What can we say about the events of the last few days? The AIG buyout, a complete about-face from the laissez-faire policies of the administration, indicate once again the power of being #1 in your field, of being of mammoth proportions, of being Too Big to Fail. As we have seen again and again, big companies are usually not well managed companies. Many of them are only good at one thing, getting bigger. And the frenzy to bring in ever greater profits from an ever larger company leads to shortcuts and, eventually, fraud. The bets minds of a score of major financial companies staffed with the best MBAs and economists money can hire, all made the same stupid risky bets, even though the fact that the real estate bubble would burst had been obvious for at least two years. Yes, it looks like the shareholders of AIG have lost a lot of money, but by this point only the Pollyannas (the ones that actually believed the company's lies) were holding the stock. But the captain who drove this Titanic onto the iceberg got away in the first lifeboat, a luxury yacht at that. CEO Martin Sullivan received $47 million this summer to console himself for being drummed out of the company. He will also, reportedly, "provided an office and an assistant until the end of December." I wonder if the Fed will make sure that part of the contract is fulfilled. AIG, like Citigroup and Merrill Lynch, was a disaster waiting to happen, with lax regulation and absolutely no antitrust enforcement. How many more companies will this "free market" administration have to rescue with nonexistent taxpayer dollars? GM, Ford, and Chrysler? WaMu and Wachovia? Maybe ExxonMobil and General Electric will be next. How will the Fed be ablke to tell the difference between companies that deserve bailout (Bear Stearns) and those that don't (Lehman Brothers)? Is it the one that has behaved the most recklessly the one that gets the big money rescue? 7:21:30 PM

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	Monday, September 15, 2008

The deal of the century? No, not that one. We'll get to the Bank of America Merrill Lynch deal when the dust has settled. The one that has us going is Best Buy's acquisition of Napster. Why did the #1 US electronics retailer see a need for buying the (now legalized) file-sharing company. Once plagued with law suits from music companies and rescued from bankruptcy, Napster now arranges for legal downloads and subscriptions to digital music and downloads to AT&T cellphones. For Best Buy, it's partly a reaction to the steady decline in CD sales. While the big money at BestBuy comes from computers, flatscreen TVs and audio equipment, but sales of CDs, DVDS, games, and software have been an important part of the business. As online delivery becomes important in all those areas, BestBuy needs to hang on to its position, even expand it. Best Buy is finding itself more and more in competition with Wal-Mart on the one hand and Amazon on the other. Both companies are expanding their MP3 delivery services, and Best Buy feels pressure to get on board. The price wasn't too bad either, at $120 million. BestBuy already uses a Rhapsody, a major Napster competitor, for downloading MP3 files. Presumably they think the Napster subscriber list (claimed to be700,000) and software is a better deal for them. The problem as we see with this vertical move that it puts Best Buy in competition with Apple iTunes. That's a big deal since Best Buy is the only licensed outside vendor of Apple's iPhone and is a major iPod reseller as well. In this way, two companies that had a clear relationship in the food chain (vendor and dealer) now will have afar more confused relationship. 9:57:55 PM

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	Tuesday, September 09, 2008

De-verticalization in the energy industry A recent New York Times Dealbook article ("A Big Year for Small Energy Deals", 9/5/08) notes that "it appears that while the total volume of energy deals is down so far this year, the number of energy-related deals is up significantly." In other words, the money value of the acquisitions is lower than year ago, but the actual amount of deals has risen by 20 percent. One reason for this is that petroleum deals have always had problems getting loans from banks, due to the high volatility of the industry. But with cash flow high, oil companies are readier than ever to consolidate. It's just that the big multibillion dollar deals have slowed. In the past few months, among many other deals: BP bought some properties from the US's Chesapeake Energy ($1.9 billion) Italy's Eni bought Canada's First Calgary Petroleum ($866 million). GDF Suez bought oil and gas assets from Dutch oil company NAM ($1.56 billion). Royal Dutch Shell acquired Duvernay Oil, a Canadian -based natural gas producer ($5.9 billion) ConocoPhillips acquired a 50 percent interest in a joint venture with Origin Energy of Australia, which produces coal-bed methane ($8 billion) India's ONGC bought UK-based Imperial Energy for $2.6 billion Here are some of the trends I see. The big Western oil companies, Shell, ExxonMobil, Bp, were once involved in a vertical command of the industry, from exploration to exploiting and maintaining oil fields to delivery to refinery to retail. Over the years they have move away from that stance, trying to get out of less profitable layers of the business. That means that Big Oil is getting out of retailing (ConocoPhillips, the latest.  just sold its 600 US service stations to a privately held firm for $600 million). They are getting out of risky exploration and exploitation projects in Russia, Africa, and Central Asia. (Note that Chinese and Indian companies are taking on those risks). The bigs are buying developed fields in Western countries (US, Australia, Canada, North Sea). That leaves the field open for smaller companies and especially non-Western companies to take up the slack. The point is that the big energy companies will make money however perilous retail or exploration may be and however bad things get in Nigeria or Russia. They will still be in the middle, as long as there is no big move to build more refineries. 8:48:01 PM

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