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ApprovedBusiness and financeFINANCEFinance and economics

What not to expect in 2017

IF 2016 was a year of shocks, what will the next 12 months bring? It is time for the annual tradition (dating all the way back to 2015) when this column tries to predict the surprises of the coming year.

By definition, a surprise is something the consensus does not expect. A regular survey of global fund managers by Bank of America Merrill Lynch (BAML) points to what most people believe. Following the election of Donald Trump, investors are expecting above-trend economic growth, higher inflation and stronger profits. They have invested heavily in equities and have a much lower-than-normal exposure to bonds.

So it is not too difficult to see how the first surprise might play out. Expectations for the effectiveness of Mr Trump’s fiscal policies are extraordinarily high. But it takes time for such policies to be implemented, and they may be diluted by Congress along the way (especially on public spending). Indeed, it may well be that demography and sluggish productivity make it very hard to push economic growth up to the 3-4% hoped for by the new administration. Neither fiscal nor monetary stimulus has done much to lift Japan out of its torpor,…Continue reading

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Behind the bid for Sky is a less powerful Murdoch empire

IT WOULD seem to be a stunning comeback for Rupert Murdoch and his clan. Five years ago News Corporation was engulfed by scandal. One of its British papers, the News of the World, had routinely hacked private phones. In the aftermath the company gave up a bid it had made for BSkyB (now simply called Sky), a satellite broadcaster in which it had a stake. A parliamentary report declared Mr Murdoch unfit to lead a large company. James Murdoch, his son, resigned as chair of BSkyB and chief of the newspaper division. Ofcom, Britain’s media regulator, eviscerated his leadership as “difficult to comprehend and ill-judged”.

Now the Murdoch empire appears to be striking back. On December 9th, 21st Century Fox, the Murdochs’ entertainment business, said it had reached a preliminary deal to pay £11.2bn ($14.1bn) for the 61% of Sky it does not already own. James Murdoch is ascending once more: indeed, this deal is chiefly his doing. Last year he succeeded his father as boss of 21st Century Fox, and in January he reclaimed his Sky chairmanship. But the show of strength comes with new weaknesses.

Much has…Continue reading

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France’s corporate raider, Vincent Bolloré, makes a bid for Italy’s biggest broadcaster

NO BOSS in French business can match Vincent Bolloré for swagger and aggression. Variously described by the press in France as a stubborn Breton, a ruthless profiteer and a smiling killer, the 64-year-old corporate raider has acquired interests in media, transport, advertising, telecoms and more, scattered across Europe and Africa. Opinion at home is divided between those who say his methods are too brutal and others who welcome his effect on an often dozy business world.

This week it was the turn of Italian newspapers to rant against the French “pirate” and “mercenary”. On December 13th the news came that France’s Vivendi, a media firm in which Mr Bolloré’s company, Bolloré Group, owns 20% (he effectively controls it) was racing to buy up shares in Mediaset, Italy’s biggest TV-broadcaster. Things moved swiftly. By the next day Vivendi had a 20% stake in Mediaset, up from 3% two days earlier. The Italian firm claims a hostile takeover attempt—the smiling killer’s speciality—is under way.

Mr Bolloré has long aimed at winning a share of Mediaset. Earlier this year, Vivendi had agreed a plan with Mediaset in which…Continue reading

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Alphabet’s Google is searching for its next hit

Deflated hopes

“JUDGE a man by his questions, rather than his answers,” Voltaire advised. Google has become one of the most successful firms in history by heeding that advice. It evaluates the intention of web-surfers’ queries and returns relevant advertising alongside search results. But for years there has been a lingering question about Google: can it create a new, highly profitable unit to rival its search business?

Not yet. In the past five years, Alphabet, formed as a holding company for Google and other disparate projects in October 2015, has spent $46bn on research and development (see chart). Much has gone to so-called “moonshot” projects, such as self-driving cars, smart contact lenses and internet delivered via balloons. Its British artificial-intelligence unit, DeepMind, also falls into the category of other projects. Since the start of 2015, these bets have together recorded a loss of $6bn.

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Do fiscal rules work in emerging markets?

FROM its headquarters in Brasília, a sterile, technocratic city, Brazil’s federal government doles out money for health, education, generous pensions and artistic awards, among other things. Over the past two decades, this spending has grown by more than 185% in real terms. Over the next 20 years, its growth will be zero.

That, at least, is the intention of a constitutional amendment passed this week by Brazil’s Senate. The measure, which allows federal spending (excluding interest payments and transfers to states and municipalities) to grow no faster than inflation, is an unusually ambitious example of a fiscal rule: a quantitative limit on budget-making, which lasts beyond a single year and perhaps beyond a single government.

The best known, and least loved, fiscal rule is the euro area’s stability and growth pact. But such rules are also now common among emerging economies. According to the IMF’s latest count, 56 developing countries in 2014 had rules of some kind, including 15, like Brazil, that impose limits on the growth of public spending.

The reasons so many emerging-market governments choose to limit their fiscal…Continue reading

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European insurers and the curse of low interest rates

INSURANCE is banking’s boring cousin: it lacks the glamour, the sky-high bonuses and the ever-present whiff of danger. So European stress tests for insurers, whose results were due to be published on December 15th after The Economist went to press, have attracted far less attention than those for banks in July. Yet insurance also faces a grave threat, from prolonged low interest rates.

Insurers invest overwhelmingly in bonds, so low interest rates make their lives difficult. The last time the European Insurance and Occupational Pensions Authority (EIOPA) conducted an insurance stress test, in 2014, a quarter of participants scored poorly: they would not have met their capital requirements in the test’s long low-interest-rate scenario. The proportion jumped to 44% in an alternative scenario involving an asset-price shock. The new results are unlikely to be better. Each year of low interest rates worsens the problem. Higher-yielding bonds mature and insurers end up with ever more newer ones with low, or even negative, interest rates.

Insurers are focused on the problem. One strategy is to outsource more to external…Continue reading

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In Germany mature workers are answering to young supervisors

Who’s the daddy?

“IF THEY resented me they didn’t talk to me about it,” says a young German manager at a media firm in Frankfurt. Still, he says it was noticeable that when a subordinate 20 years older than him thanked him for buying lunch he had to swallow twice before adding the word “boss”.

Older workers sometimes begrudge being managed by a callow colleague. Precocious youngsters, too, can feel awkward about bossing their elders around. But in Germany a shortage of skilled workers means that such situations are becoming ever more common.

The country’s population is projected to shrink. Among rich-world countries, only in six nations including Japan and Greece are populations expected to decrease faster. As more Germans retire, fewer youngsters are entering the workforce to replace them. As a share of the working population the number of 15-to-24-year-olds has fallen by ten percentage points since the 1980s, says the German Federal Employment Agency. Firms competing to retain young talent are tempted to promote them earlier as a result. A paper by professors at the University of Cambridge and WHU, a…Continue reading

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What DeepMind brings to Alphabet

DEEPMIND’S office is tucked away in a nondescript building next to London’s Kings Cross train station. From the outside, it doesn’t look like something that two of the world’s most powerful technology companies, Facebook and Google, would have fought to acquire. Google won, buying DeepMind for £400m ($660m) in January 2014. But why did it want to own a British artificial-intelligence (AI) company in the first place? Google was already on the cutting edge of machine learning and AI, its newly trendy cousin. What value could DeepMind provide?

That question has become a little more pressing. Before October 2015 Google’s gigantic advertising revenues had cast a comfortable shade in which ambitious, zero-revenue projects like DeepMind could shelter. Then Google conjured up a corporate superstructure called Alphabet, slotting itself in as the only profitable firm. For the first time, other businesses had their combined revenues broken out from Google’s on the balance-sheet, placing them under more scrutiny (see Continue reading

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The management style of Amancio Ortega

IT IS a short walk from a tiny shop with peeling yellow paint in downtown La Coruña, in northern Spain, to a dazzling five-storey store, opened in September by Zara, by far the world’s most successful purveyor of “fast fashion”. In this stroll across three city blocks, the career of Amancio Ortega unfolds: from teenaged apprentice in the corner shop, Gala, a men’s clothing business, to Europe’s richest entrepreneur, the majority owner of one of its best-performing firms.

According to one employee of Zara who works with him, “the true story of Amancio Ortega has not been told.” Mr Ortega, the son of an itinerant railway worker, who started at the corner shop aged 13, had a basic upbringing: an ex-colleague says he talks of meals of “only potatoes”. He has lived mainly in Galicia, a relatively poor region with no history in textiles. Yet there, in 1975, he founded Zara—a manufacturer-cum-retailer that, along with its sister brands, has over 7,000 shops globally.  

Mr Ortega (pictured) is now 80 but he remains energetic and involved in the business (if uninterested in wearing trendy clothes). He owns nearly 60% of…Continue reading

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A cheaper currency does not always boost economic growth

IN SEPTEMBER 2010 Brazil’s then-finance minister, Guido Mantega, gave warning that an “international currency war” had broken out. His beef was that in places where it was difficult to drum up domestic spending, the authorities had instead sought to weaken their currencies to make their exports cheaper and imports dearer. The dollar had recently fallen, for instance, because the Federal Reserve was expected to begin a second round of quantitative easing. The losers in this battle were those emerging markets, like Brazil, whose currencies had soared. Its currency, the real, was then trading at around 1.7 to the dollar.

These days a dollar buys 3.4 reais, but no one in Brazil or in other emerging markets with devalued currencies is declaring a belated victory. A cheap currency has not proved to be much of a boon. Indeed new research from Jonathan Kearns and Nikhil Patel, of the Bank for International Settlements (BIS), a forum for central banks, finds that at times a rising currency can be a stimulant and a falling currency a depressant. They looked at a sample of 44 economies, half of them emerging markets, to gauge the effect of changes in the exchange rate on exports and imports (the trade channel) and also on the price and availability of credit (the financial channel).

They found a negative relationship between changes in GDP and currency shifts…Continue reading

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An early salvo in a trade war between America and China?

ANNIVERSARIES should be happier than that on December 11th, marking China’s 15 years as a member of the World Trade Organisation (WTO). On that day, China expected to be unshackled from its legal label as a “non-market economy” and attain “market-economy status”. In the event, America and the European Union refused to give it the nod. On December 12th the Chinese reacted: see you in court.

The fight will focus on the wording in the original accession agreement. The Americans and the Chinese are both confident of winning. Legal experts are divided. The WTO does not provide a clear definition of a “market economy”. And clumsy legal drafting does not help.   

The meat of the row is over the method WTO members use to protect their industries against cheap Chinese imports. Alleging that Chinese companies enjoy subsidised credit, energy and raw materials, America and the EU slap anti-dumping duties on 7% (see chart) and 5% respectively of their Chinese imports. The agreement welcoming China into the WTO explicitly gave other members licence to treat it as a non-market economy until December 11th 2016….Continue reading

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Management theory is becoming a compendium of dead ideas

NEXT year marks the 500th anniversary of the event which, more than any other, gave birth to the modern world: Martin Luther promulgated his 95 theses and called the Catholic church to account for its numerous theological errors and institutional sins. Revisionist historians have inevitably complicated the story (including questioning whether he did actually nail his proposals to the door of All Saints’ Church in Wittenberg) but the narrative remains clear. The church was ripe for change. It was sunk in corruption and divorced from the wider life of society. And by unleashing that change, Luther brought the Christian faith, including Roman Catholicism itself, a new lease of life.

The similarities between medieval Christianity and the world of management theory may not be obvious, but seek and ye shall find. Management theorists sanctify capitalism in much the same way that clergymen of yore sanctified feudalism. Business schools are the cathedrals of capitalism. Consultants are its travelling friars. Just as the clergy in the Middle Ages spoke in Latin to give their words an air of authority, management theorists speak in mumbo-jumbo. The medieval…Continue reading

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Republican plans to cut corporate taxes may have unpleasant side-effects

SINCE Donald Trump won America’s presidential election investors have salivated over the prospect of lower taxes. Mr Trump has promised to cut corporation tax, a levy on firms’ profits, from 35% to 15%. Republicans remain in charge of both houses of Congress; Paul Ryan, the speaker of the House of Representatives, wants to cut the levy to 20%. The coming reforms, though, are about more than just lower rates. Republicans want to overhaul business taxes completely. Unfortunately, this task is far from straightforward.

America’s corporate-tax rate, which reaches 39.6% once state and local levies are included, is the highest in the rich world. But a panoply of deductions and credits keeps firms’ bills down. These include huge distortions, such as a deduction for debt-interest payments, as well as smaller scratchings of pork like special treatment for NASCAR racetracks. After all the deductions are doled out, corporate-tax revenues are roughly in line with the average in the rest of the G7, according to economists at Goldman Sachs.

Still, a high tax rate and a narrow tax base is a glaringly inefficient combination. Politicians of all…Continue reading

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Food packaging is not the enemy of the environment that it is assumed to be

ROUGHLY a third of food produced—1.3bn tonnes of the stuff—never makes it from farm to fork, according to the UN’s Food and Agriculture Organisation. In the poor world much of this waste occurs before consumers even set eyes on items. Pests feast on badly stored produce; rough roads mean vittles rot on slow journeys to market. In the rich world, waste takes a different form—items that never get picked off supermarket shelves, food that is bought but then goes out of date.

Such prodigious waste exacts multiple costs, from hunger to misspent cash. Few producers and processors record accurately what they throw away, and supermarkets resist sharing such information. But some estimates exist: retailers are reckoned to mark down or throw out about 2-4% of meat, for example. Even a tiny reduction in that amount can mean millions of dollars in savings for large chains.

Waste also damages the environment. The amounts of water, fertiliser, fuel and other resources used to produce never-consumed food are vast. The emissions generated during the process of making wasted food exceeds those of Brazil in total. Squandering meat is particularly…Continue reading

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The Federal Reserve prepares to raise interest rates again

AMERICA’S central bank tries to be predictable. When in December 2015 it raised interest rates for the first time since 2006, nobody was much surprised. The central bank had telegraphed its intentions to a tee. Similarly, if the overwhelming consensus in financial markets is to be believed, on December 14th—almost exactly a year later—rates will rise again, to a target range of 0.5-0.75%. Donald Trump’s tweets and phone calls may upend trade, fiscal and foreign policy in a matter of minutes, but Janet Yellen, the Federal Reserve’s chairwoman (pictured), is tweaking monetary policy at only a cautious annual pace.

Yet in another sense, the Fed has confounded predictions—at least, those it made itself. A year ago the median rate-setter foresaw four rate rises in 2016. None has happened yet. This might seem like a straightforward reaction to events. At the start of the year, stockmarkets sagged on worries about Chinese growth. Then, in June, Britain voted to leave the European Union, sending markets spinning again for a while. But the delay also resulted from a gradual acceptance by Fed officials that low rates have become a longer-lasting feature…Continue reading

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Charles Koch is a rare thing, a businessman besotted with ideas

CHARLES KOCH may well be the most demonised businessman in America, with his younger brother, David, a close second. Journalists argue that he is the mastermind of the country’s vast right-wing conspiracy. Lunatics have made death threats. The ultra-rich, particularly those who made their original fortunes in oil and gas, are supposed to make amends by giving their money to liberal causes. The Kochs have instead spent hundreds of millions backing conservative political causes (though Charles Koch has no love for Donald Trump), lobbying for lower taxes and attacking the idea of man-made global warming.

Mr Koch doesn’t come across as Dr Evil. True, the headquarters of Koch Industries is a collection of black boxes outside Wichita, Kansas; the security screening is rigorous. But its CEO has more of the air of a university professor. Despite his $40bn fortune, he lives in a nondescript neighbourhood in one of America’s most boring cities, puts in nine or more hours a day in the office and lunches in the company canteen. He doesn’t seem that interested in his surroundings: complimented on the firm’s art collection, he says his wife takes care of that…Continue reading

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America’s audit watchdog uncovers serious misconduct at Deloitte Brazil

ACCOUNTING scandals are nothing new in Brazil. Its former president, Dilma Rousseff, was impeached in August for cooking her government’s books. The bosses of its biggest building firms have landed behind bars for padding contracts with Petrobras, the state-run oil company. At least, governance gurus joke, all the imbroglios—and a three-year-old law against bribery—have prompted companies to replace what people used to call corruption departments with compliance offices. How ironic, then, that Brazil’s latest affair involves a firm that is meant to ensure that firms stay on the straight and narrow.

On December 5th it emerged that America’s Public Company Accounting Oversight Board (PCAOB) fined the Brazilian arm of Deloitte, the biggest of the “Big Four” accounting networks, $8m, for what Claudius Modesti, the watchdog’s director of enforcement, called “the most serious misconduct we’ve uncovered”. Deloitte is the first of the Big Four to be accused of failing to co-operate with a probe by the PCAOB, created by the Sarbanes-Oxley act of 2002, itself a response to a massive accounting scandal at Enron, an energy giant. The firm will also have to pay 5.4m…Continue reading

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South Korea’s chaebol bosses face parliament

FOR the South Korean public, the sight of nine of their most powerful business chiefs, who are rarely seen, submitting to a day-long grilling by South Korean MPs on December 6th was remarkable (eight of them are pictured). During the hearing, broadcast live on television, the heads of CJ, LG, Hanwha, SK, Samsung, Lotte, Hanjin, GS Group and Hyundai, all family-owned conglomerates, or chaebol, denied they had sought favours in return for the billions of won they paid into two foundations controlled by Choi Soon-sil, a former confidante of President Park Geun-hye. (As The Economist went to press, Ms Park faced an impeachment motion by parliament over her ties to Ms Choi.) Samsung’s Lee Jae-yong, whose 20.4bn won ($17.6m) grant was the biggest, was the most intensively interrogated. On many minds was the last time big bosses were thus summoned, during an inquiry in 1988 into the corporate funding of a foundation run by then-dictator Chun Doo-hwan. Six of those tycoons’ sons were among those testifying this week.

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An epic legal battle with big implications for litigation funding

FOUNDED by former African American slaves, the west African country of Liberia has produced an insurance case that has bounced between the courts of several countries for a quarter of a century, condemning the claimants and their opponent to a generation of legal bondage. At long last, the saga might just be drawing towards a conclusion. It may also leave a legacy: to shift the calculus when third-party litigation funders assess the risks they face.

In the early 1990s, Liberia’s biggest importer, Lebanese-owned AJA, sued Cigna, an American insurer, in the federal court in Philadelphia for refusing to pay out over property damage incurred during Liberia’s civil war. AJA won, but a district-court judge overturned the verdict with a “judgment notwithstanding the verdict”—a rare device that can be employed when a jury is deemed to have deviated far from the law (in this case by failing to acknowledge a war-risk exclusion). The judge’s move was upheld by a higher appeal court.

Livid, AJA applied to Liberian courts and in 1998 won a judgment for $66.5m (now worth double that with interest). Cigna counter-sued, and in 2001 won an…Continue reading

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The oil industry is bouncing back after OPEC’s meeting

PROUDLY, they call themselves elephant hunters. They are the geologists who scour the treacherous depths of the Arctic, or Brazil’s Atlantic pre-salt fields, or offshore west Africa, or the deep waters of the Gulf of Mexico, hoping to bag giant oil discoveries that can generate billions of dollars of cash for their firms over a span of decades. In some cases, they get naming rights. The Gulf of Mexico is peppered with fields named after geologists’ wives (risky if they are duds), or their favourite albums, bands, stars and football chants. They are part of the industry’s folklore. The question is, are they a dying breed? 

Several prospective deals announced this month, from the deep waters of the Gulf of Mexico to onshore Iran, suggest that the industry may be shying away from expensive forays into uncharted territory, and taking a more cost-conscious approach to exploration and production. It remains to be seen whether they can maintain their discipline if oil prices recover. But, for now, “they’ve all gone back to the drawing boards,” says Andy Brogan, an oil-and-gas specialist at EY, a consultancy.

On December 1st BP, a…Continue reading

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A Dallas public pension fund suffers a run

The mayor and Dallas’s finest

BANK runs, with depositors queuing round the block to get their cash, are a familiar occurrence in history. A run on a pension fund is virtually unprecedented. But that is what is happening in Dallas, where policemen and firefighters are pulling money out of their city’s chronically underfunded plan, and Mike Rawlings, the mayor, is suing to stop them.

At the start of the year the fire and police pension fund had $2.8bn in assets. Since then nearly $600m has been withdrawn from the plan, of which almost $500m has been taken out since August 13th. That is an alarming acceleration; in 2015 total withdrawals were just $81m.

Even at the start of 2016, the plan was just 45% funded, and was expected to become insolvent within 15 years. When some workers take out their money, they get the full value of their benefits; leaving a smaller pot to be shared among the remaining members. (The city estimates that the funded ratio has fallen to 36% after the withdrawals.) As in a bank run, it seems rational to withdraw your money if you worry that all the benefits won’t be paid.

The crisis…Continue reading

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Winners and losers from the Trump stockmarket rally

SELL on the rumour, buy on the news runs one version of a hoary stockmarket adage. And it certainly applied to last month’s presidential election. Before the poll, many investors were concerned about the risk that Donald Trump might become the 45th president. But as soon as the result was confirmed, they piled into shares. American equity mutual funds enjoyed four consecutive weeks of inflows, the longest streak since 2014, according to EPFR Global, a data provider.

One driver of the rally was Mr Trump’s planned fiscal stimulus. Investors believe this will lead to bigger deficits; hence the rise in bond yields since the election. But they also hope it will boost the American economy. That may explain why the Russell 2000 index of smaller companies, which tend to have a domestic focus, has outperformed the S&P 500 since the election (see chart). If this goes on, such stocks may become known as the Trumpettes.

Another factor was the planned cut in corporate-tax rates. The official American corporate income-tax rate is 35% (rising to 39% when state taxes are added). Standard & Poor’s, a ratings agency, reckons…Continue reading

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Glencore stuns the oil-trading business with a deal to take a big stake in Rosneft

Wild celebrations between Putin and Sechin

GLENCORE, a Swiss-based commodities company, and its biggest shareholder, the Qatar Investment Authority, are set to take a €10.2bn ($11bn) stake in the Russian oil giant Rosneft, giving them 19.5% of a business targeted by Western sanctions since Russia fuelled a war in eastern Ukraine in 2014. The unexpected deal, the largest in an ambitious Russian privatisation plan, delivers Vladimir Putin and Igor Sechin, Rosneft’s boss, a victory. The Russian state will keep control of the company, while filling a gap in the 2016 budget.

The transaction will also stir up old jealousies in the oil-trading business, which, as one industry participant puts it, is in “a pissing match to be top dog with Rosneft”, the world’s second-biggest crude producer. Last year Glencore was forced by the commodities slump to suspend its dividend, sell assets and issue $2.5bn of new shares. Its acquisitive boss, Ivan Glasenberg, had not been expected to make such an expansive move so soon.

In a statement Glencore said it will put only €300m of its own equity into the deal. The rest of the…Continue reading

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Italian banks after the referendum

THE first casualty was Matteo Renzi’s hold on office. As he had promised, Italy’s prime minister resigned on December 7th, three days after voters rejected his proposals to overhaul the constitution. The second is likely to be a planned private-sector recapitalisation of Banca Monte dei Paschi di Siena, the country’s third-biggest bank and the world’s oldest. As The Economist went to press, the scheme’s chances looked slim. A government rescue was reportedly being prepared.

Monte dei Paschi has been in trouble for years. It has already had two state bail-outs and frittered away €8bn ($10bn) raised in share sales in 2014 and 2015. Its stockmarket value has dwindled to €600m, having fallen by 85% this year (see chart). Its non-performing loans (NPLs), even after provisions, are 21.5% of its total; the gross figure is 35.5%. In July it fell ignominiously short in European stress tests, ranking 51st of 51 lenders. The European Central Bank, its supervisor, asked it to raise more capital by the end of the year. This week the bank asked for more time.

Pre-empting the test results, Monte dei…Continue reading

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Europe’s nastiest takeover battle reaches its second anniversary

THE life of a predator can be fraught. Expend too much energy on hunting your prey and even success can be costly. Saint-Gobain, a French maker of glass and other building materials, might be learning that lesson. It mostly grows by snapping up smaller fry, but an attempt to buy a midsized Swiss rival, Sika, has gone on for two years. It could take as long again for Swiss courts to resolve the most intractable corporate struggle in Europe.

Pierre-André de Chalendar, Saint-Gobain’s CEO since 2007, was doubtless impressed by Sika’s high returns on its business selling industrial adhesives, mortar and construction chemicals. Its annual return on capital over the past decade has been an attractive 12.6%, more than double Saint-Gobain’s 5.1% (see chart). So when in 2014 the current, fourth generation of the Burkard family, which founded Sika in 1910, offered to sell 52.4% of the voting rights in their firm, Mr de Chalendar bit.

The family investment is kept in a body called Schenker-Winkler Holding (SWH) which, following the death of the matriarch in 2013, the dynasty agreed to sell to the French firm for SFr2.75bn…Continue reading

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Insurers grapple with cyber-attacks that spill over into physical damage

AS HACKERS wreak havoc with depressing regularity, the insurance industry finds itself forced to contemplate a whole new set of risks. They range from the theft of millions of credit-card numbers from American retailers to the disabling of the power grid, as happened in Ukraine last December. The dedicated “cyber-insurance” policies that companies offer against data breaches have become relatively routine. But the risks they insure under other policies are also affected by cyber-risks—and they are still struggling to understand this so-called “silent” cyber-exposure.

Insurance that protects firms who suffer data breaches has been on offer for around 15 years. It is much harder to put a precise value on, for example, stolen health records than on a property or car. Insurers sidestep the problem by covering only the direct costs that a company incurs from a hack. Typically, these include hiring a specialised forensics firm to work out exactly what was stolen, notifying affected customers (which 47 American states currently require), short-term business interruption and fines.

The industry will be shaken up by new EU data-protection…Continue reading

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Siemens and General Electric gear up for the internet of things

IT DOESN’T take long to walk from Siemens’s old headquarters in Munich to its new one, inaugurated in June: the German industrial conglomerate has built it right next door. The design is cutting-edge, as are the building’s environmental features. It is packed with energy-saving sensors; channelled rainwater is used to flush the toilets.

General Electric, Siemens’s big American rival, will soon have a new base, too. But it takes three hours to drive from the old site in Fairfield, a Connecticut suburb, to the new one in Boston. Its building will also boast plenty of green technology, such as a huge canopy made of solar panels, as well as spaces that the public can enter, including co-working areas and lounges. There will be laboratories both for internal startups and some from outside. 

The two industrial giants aren’t so much showing off as signalling transformation. Both firms are going through the most profound change in their corporate histories, attempting to switch from being makers of machines into fully digital businesses. GE’s chief executive, Jeff Immelt, says the plan is to join the world’s top ten software firms…Continue reading

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Sell-side share analysis is wrong

“SELL-SIDE” analysts, whose firms make money from trading and investment banking, are notoriously bullish. As one joke goes, stock analysts rated Enron as a “can’t miss” until it got into trouble, at which point it was lowered to a “sure thing”. Only when the company filed for bankruptcy did a few bold analysts dare to downgrade it to a “hot buy”.

Economic research shows that there is some truth to the ribbing. The latest figures from FactSet, a financial-data provider, show that 49% of firms in the S&P 500 index of leading companies are currently rated as “buy”, 45% are rated as “hold”, and just 6% are rated as “sell”. In the past year, 30% of S&P 500 companies yielded negative returns.

Profits forecasts made more than a few months ahead have a dismal record of inaccuracy. According to Morgan Stanley, a bank, forecasts for American firms’ total annual earnings per share made in the first half of the year had to be revised down in 34 of the past 40 years. Studying their forecasts over time reveals a predictable pattern (see chart 1).

In theory, a diligent share analyst should do his own…Continue reading

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