Category Archives: Merger & Acquisition

Corporate Ownership, Financial Sector, Merger & Acquisition

Screwing care homes still makes the easiest money

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Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.

Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%.

£500million of debt is a popular care home sum. When private equity Blackstone acquired Southern Cross, then leading UK care home operator, it sold the freehold of the care homes, pocketed £500million proceeds, lumbered the care home business with the costs of leasing back their homes, floated the business on the London Stock Exchange and beat a rapid retreat. It took around 5 years before the rental payments bankrupted Southern Cross. Meanwhile Blackstone were able to repeat the predatory exercise with the £500million.

The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.
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Company Law, Competition, Corporate Governance, Economics, Fairness, Financial Sector, Merger & Acquisition, Political Decision, Regulation

The Final Victory of the Establishment?

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When Ebay announced its intention last week to sell off PayPal, it was giving into the so called ‘activist investor’, Carl Icahn, who had been calling for the deal for months. The Financial Times reported Icahn’s victory statement calling “for PayPal to look to consolidate the payments industry further, either through acquisitions or a merger, to fight off competition from newcomers.” That such an individual should so openly declare war on competition, with total impunity, surely means the establishment has won.

In the not too distant past such anti-competitive moves were illegal. They were recognised as against the public interest and were prevented in the UK by bodies such as the Office of Fair Trading and the Monopolies and Mergers Commission. Moreover, where such anti-competitive corporations had been established, they could be dismantled, and were, notably in the United States. Competition was recognised as the spur to innovation and improvement, which was for the common good. That lesson had been learned from the 1929 Wall Street crash and subsequent great recession.
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Audit profession, Banking, Company Law, Corporate Governance, Economics, Fairness, Financial Sector, Globalisation, Merger & Acquisition, Political Decision, Regulation

Fighting Corporate Abuse: Beyond Predatory Capitalism

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People are angry about corporate abuses: tax avoidance, asset stripping, fat cat salaries and bonuses and much else. Corporate capitalism has lost its moral compass and its social values. It has plunged the world into recession and austerity and contributed to growing social inequality. The prevailing focus on shareholder value has placed short term profit ahead of constructive investment. The current structures of corporate law and practice are clearly in need of radical reform.

And yet the underlying principles of corporate law – providing for external investment in enterprises which combine the labour of workers to produce goods and services – are not inherently wrong. They have worked over the years to increase prosperity and living standards in many countries. What is needed is a realistic and pragmatic programme to eliminate abuses and promote fairer and more productive alternative corporate structures.
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Banking, Competition, Economics, Management Practice, Merger & Acquisition, Political Decision, Regulation

More Big Six energy rip- offs

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The Big Six energy suppliers must be desperately worried. Dermot Nolan, boss of energy regulator Ofgem, is demanding that they explain to customers why they have not lowered gas and electricity prices following wholesale price reductions. They are quick enough to stick them up when wholesale prices rise; they must explain why they don’t cut them when wholesale prices fall. Not only that, but Ed Davey, energy secretary, says they need to ensure they pass on savings to customers as quickly as possible. The Big Six must be quaking in their boots. Or perhaps not!

They don’t pass price reductions on, for the very obvious reason that they don’t have to. Energy supply was privatised because of a simplistic and profoundly misinformed belief in the automatic efficiency and effectiveness of for-profit business and a complete lack of comprehension of what constitutes a competitive market.
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Competition, Corporate Governance, Corporate Ownership, Fairness, Financial Sector, Management Practice, Merger & Acquisition, Social values

Who will defend the British interest?

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British manufacturing, science and R&D, is again subject to attack with Pfizer’s proposed takeover of AstraZeneca. The deal is reported as threatening 30,000 British jobs and a substantial part the UK economy’s manufacturing added value, as well as severely damaging British leadership in drug research and production. All this, with the dogmatic encouragement of the British government. David Cameron simply affirms the government’s neutrality over the deal, but expresses satisfaction with Pfizer’s promise not to act against British interests for the first five years after acquisition – a time scale beyond which he appears to have little interest. George Osborne’s pleasure with the deal is clear in that it demonstrates yet again the extent of his business ‘friendliness’. Only Vince Cable demurs, suggesting weakly that we’ll need to look at the detail.

At this point in time it is unclear who will defend British interests against such damaging takeover. The thirteen directors of AstraZeneca are the first line of defence. They are collectively responsible for the success of the company and will no doubt all have contractual agreements requiring them to act in the best interests of the company at all times and to declare any possible conflict of interest. However, their rejection of Pfizer’s improved GBP63bn bid was simply on the grounds that it substantially undervalued the business. That price hardly reflects the tax avoiding potential of the newly created combine, never mind AstraZeneca’s pipeline of experimental drugs and cancer treatments which is reported to be substantially superior to Pfizer’s, and the potential for stripping out and realising AstraZeneca’s assets, a talent which Pfizer has previously demonstrated.
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Accounting profession, Banking, Corporate Governance, Financial Sector, Merger & Acquisition

UK PLC For Sale

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Sir Nigel Rudd is in the news again for selling off some more of UK Plc to foreign competitors. This time he has disposed of the hi-tech railway signalling and control equipment business of Invensys for £1.7bn to German competitor Siemens, recipient of the government’s £1.4bn Thameslink rail contract, in preference to Derby based Bombardier.

Rudd has himself been mentioned a couple of times on this site. He was Chairman of Boots the Chemist and oversaw its disposal to a private equity operation, got it saddled with most of the debt raised for its acquisition, and moved its registration to the tax avoiding Swiss canton of Zug (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). The other mention was as a member of David Cameron’s special advisory committee of ten on economic strategy (see http://www.gordonpearson.co.uk/21/limits-of-economic-advice-to-the-coalition/). He was one of the asset stripping accountants on the committee. Asset stripping is in his blood, his speciality since he started out in 1982 at Williams Holdings. It is curious how our politicos reward such activity with knighthoods and ask such people for their advice.
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Banking, Economics, Financial Sector, Management Practice, Merger & Acquisition, Shareholder Value

The Cure for Monopolistic Exploitation

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After the Libor rate fixing scandal, and the PPI mis-selling fiasco, we now have hysteria over gas and electricity companies fixing market prices to their advantage at the expense of the general customer. Well of course they’ve been doing that, it’s what they do. They aren’t charities. They charge whatever the market will bear. That’s how markets work. If the markets were competitive it would be a different story and the customer would reap the benefit. But with the fixable, non-competitive markets which have been allowed to proliferate over the past thirty years, the customer loses out to the supplier. And since the suppliers are driven by the Friedmanite rule that they exist to make as much money as possible for shareholders, it’s the shareholders who really gain at the expense of customers. But since shareholdings are largely controlled by financial intermediaries, investment banks, hedge funds and the like, it is they who are the ultimately winners at the consumer’s expense.

But it’s worse even than that.
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Banking, Corporate Governance, Corporate Ownership, Economics, Management Practice, Management Theory, Merger & Acquisition

What good are Stock Markets?

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An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.

But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
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Banking, Company Law, Competition, Corporate Governance, Economics, Financial Sector, Management Practice, Merger & Acquisition

What will replace the public company?

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The public company, the corporate form that Chandler once described as the most powerful institution in the economy and which made industrialisation possible, is rapidly becoming an endangered species. Over the past decade the number of public companies in the UK has almost halved and declined by 38% in the United States. Similarly, the number of Initial Public Offerings (IPOs) has declined by over two thirds, and in the case of SMEs by more than 80%.

These statistics are quoted in a recent article in The Economist which puts the rapid decline down to the over regulation of public companies. This is the only explanation available that fits The Economist’s free market dogma. The article cites the case of Boots the Chemist as an exemplar of how ‘now it is perfectly respectable to choose to “go private”’. This is a distortion of what happened to Boots. Under the leadership of asset stripping accountant, Sir Nigel Rudd, Boots merged with Alliance Unichem which was preliminary to the opportunistic takeover by an American private equity firm, which saddled the company with the debt raised for its acquisition and moved its registration to a tax avoiding canton in Switzerland. What part of that sad story is ‘perfectly respectable’ is open to debate. The result is that a great British company was raped and pillaged for the benefit of a small number of individuals, mainly in an American private equity limited liability partnership.
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Accounting profession, Audit profession, Company Law, Competition, Corporate Governance, Economics, Merger & Acquisition, Regulation

The Criminal Company

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The threat to the world’s liberty today comes from the monopolistic power of unregulated corporates. That is exercised mainly through banks such as Goldman Sachs and financial intermediaries and traders such as Glencore. A year ago the Financial Times ran a series of articles showing how Glencore fix commodity prices for their own profit and everyone else’s loss. The Russian wheat and corn harvest being threatened by drought, the FT reported how Glencore made speculative long term proprietary trades in wheat and corn. When wheat prices failed to rise sufficiently for a profit to be made over the period of Glencore’s trade, their man in Moscow ‘encouraged’ the Russians to ban wheat exports. That had the desired effect forcing prices up sufficiently to enable Glencore to close its earlier bets at a decent return. The obvious side effect of the price rise was that the struggling millions had to struggle that bit more. That’s the Glencore way of doing business. (See http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/)

Glencore is currently in the throes of taking over of its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata is already big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and is highly influential in thermal and coking coal. Using the Glencore business method, they will together be able to create and exploit prices of all these commodities and more. And with Viterra also acquired, they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival.
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