Ravi Madhavan's A&D Blog

BCG on M&A in uncertain times

This BCG piece touches on the importance of "invest[ing] more in information," when contemplating M&A in uncertain times like these. The argument is that there is a need to spend more time and resources underdtanding market and competitive dynamics as a prelude to target identification and dealmaking. 

Why would Delta Airlines buy an oil refinery?

Reuters has two separate analyses of Delta's (on the surface, rather surprising) decision to buy an oil refinery. This one discusses some reasons why it might actually makes sense (key: the closure of the Trainer plant may jeopardize jet fuel supply to the three major NYC area airports, which together account for 7% of Delta flights), while this one discusses the seemingly dismal state of the refinery business (poor profits driving closures).

Inside look at Private Equity

BusinessWeek covers a key aspect of private equity: its focus on making companies more efficient.

Watson/ Actavis

Another consolidation deal in the generics pharma space yesterday, with US-based Watson Pharma buying the Swiss Actavis: summary facts, NYT DealBook story, analyst presentation. The messaging stresses the scale/ consolidation rationale, as illustrated by the following slide, as well as the management team's track record in integrating past deals. (For background on consolidation in generics, see this Goldman Sachs report - dated by now, but lays out the drivers of consolidation.)

China focus

Two powerful stories on China:

First, by way of James Fallows, this speech transcript by Jonathan Watts on Chinadialogue. Jonathan Watts is the outgoing Environment correspondent in China for The Guardian, whose book "When a Billion Chinese Jump" is required reading for anyone interested in China's future. Excerpt:

During the past few years, I have come to fear that the United Kingdom and China may be bookends on the most spectacular burst of development ever seen in human history. The carbon-fuelled, capital-driven model of economic growth, which started in my country 200-odd years ago, has spread across the planet and is now, I believe, reaching its apex here. We may well be blessed and cursed to be witnessing the era of “peak human” – at least in material terms. That is a huge and alarming prospect. It will require a complete readjustment of expectations.

In future, I believe there will be greater tension globally between conservers and the exploiters. This may become the new dividing line in world politics. We are already seeing the rise of Green Parties, which are scoring record success (albeit often from a low base) in Australia, the United Kingdom, New Zealand and Canada. 

I’ve come to see the environment not as a subject, but as a prism. That is important to stress. Mostly the environment is treated as a subcategory and posted away to a certain pages in newspapers and on the websites. But it should not be a niche interest, it should be mainstream. The ecology is the basis for the economy, not the other way around.   

Next, in this sobering analysis, The Economist lays out China's demographic challenge. The key point is that "China will have a bulge of pensioners before it has developed the means of looking after them. Unlike the rest of the developed world, China will grow old before it gets rich." Extended excerpt with the very surprising possibility of China needing inward immigration:

The shift spells the end of China as the world’s factory. The apparently endless stream of cheap labour is starting to run dry. Despite pools of underemployed country-dwellers, China already faces shortages of manual workers. As the workforce starts to shrink after 2013, these problems will worsen. Sarah Harper of the Oxford Institute of Population Ageing points out that China has mapped out the age structure of its jobs, and knows for each occupation when the skills shortage will hit. It is likely to try to offset the impact by looking for workers abroad. Manpower, a business-recruitment firm, says that by 2030 China will be importing workers from outside, rather than exporting them.

Large-scale immigration poses problems of its own. America is one of the rare examples of a country that has managed to use mass immigration to build a skilled labour force. But America is an open, multi-ethnic society with a long history of immigration and strong legal and political institutions. China has none of these features.

 

USAir/ American Airlines?

The possibility of a USAir bid for American Airlines appears to have strengthened - stories from Washinghton Post and Forbes, respectively, on how USAir has won pre-approval from American Airlines unions.

On a related note, interesting stories from Washington Monthly and WaPo, respectively, about cities abandoned by airlines (including Cincinnati and Pittsburgh) which then also lose businesses because business travel becomes difficult. When airlines were regulated, the premise was that air service was essentially a "utility," and the Civil Aeronautics Board would set routes and fares. Now that airlines are free to set routes and fares, many mid-tier and small cities are experiencing dwindling air connections. 

Extractive elites...

Excerpt (without comment) from The Economist's review of the new book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, by Daron Acemoglu and James Robinson:

“Because elites dominating extractive institutions fear creative destruction”, the authors write, “they will resist it, and any growth that germinates under extractive institutions will be ultimately short-lived.”

There are two potential candidates for extractive elites in Western economies. The first is the banking sector. The wealth of the financial industry gives it enormous lobbying power, including as contributors to American presidential campaigns or to Britain’s ruling parties. By making themselves “too big to fail”, banks ensured that they had to be rescued in 2008.

Much of current economic policy seems to be driven by the need to prop up banks, whether it is record-low interest rates across the developed world or the recent provision of virtually unlimited liquidity by the once-staid European Central Bank. The long-term effects of these policies, which may be hard to reverse, are difficult to assess.

It is tougher to argue that the financial sector has inhibited growth in other areas of the economy. Indeed, both banks and venture-capital groups play a vital role in supporting new companies. Nevertheless, it is possible that the extremely high rewards in the financial industry might have diverted talented people away from other activities that could have helped rich economies to grow more sustainably. Furthermore, those high rewards could derive from “rent-seeking” by the financial sector, in the form of fees, charges and spreads, that have acted as a tax on the rest of the economy.

 

Google/ Motorola Mobility

WSJ has some analysis on Google's Motorola Mobility acquisition. Definitely worth a read, as it brings up some of key issues surrounding which pieces of Motorola Mobility might make sense for Google.

Some good news on global poverty

The Economist reports on some positive economic news: poverty is on the decline worldwide.

Spotlight on breakups

A couple of items on corporate breakups: (1) NYT DealBook on Hartford's decision to sell life insurance and other non-core assets to focus on its core businesses (property and casualty, group benefits and mutual funds). (2) The Economist on the pressure being felt by Pepsi to split itself up (from a few months ago).