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An arcane business structure loses its charm

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WHEN British soapmakers merged with Dutch margarine merchants to form Unilever in 1929, the logic was clear. Both firms shared a key ingredient, animal fat, and were starting to step on each other’s toes as they diversified. Unilever is one of the world’s largest consumer-goods firms. A dual-nationality company, it has headquarters in both Britain and the Netherlands and is regarded as a national treasure in both places.

Before the month is out, however, it is expected to plump for Rotterdam as its sole headquarters (Britain’s quandary over Brexit is doubtless a factor). It is not alone in rethinking its arcane arrangement. According to FTI Consulting, a business-advisory firm, of the 15 companies that have used a “dual structure” at one time or other over the past 25 years, only six remain. Some, such as Royal Dutch Shell, an oil giant, unified their structures in the mid-2000s. RELX, an Anglo-Dutch publishing firm, did so last month. BHP, an Anglo-Australian mining firm, faces investor pressure to do the same.

“Siamese twins” are typically the result of cross-border unions. Two firms agree to operate as a single enterprise, but remain incorporated and retain distinct share listings in their home countries. The shares of Unilever NV, the firm’s Dutch arm, for example, cannot be exchanged for those in Unilever PLC, its British sibling. (In contrast, many companies choose to cross-list on multiple stock exchanges, which allows investors to buy exactly the same shares in different marketplaces.)

Dual structures used to have several attractions, says Mathijs van Dijk, of the Rotterdam School of Management. Normal mergers could incur capital-gains tax, which retaining distinct companies avoids. Regulators were thought to look benignly on unions that preserved firms’ national identities. The merged entity retained access to local capital markets, since institutional investors that were required to invest within their own countries would not be forced to sell.

Increasingly, though, investors have turned against them. A big driver is globalisation; fewer institutional investors are constrained by national borders. Perhaps reflecting greater integration within Europe, Unilever is the last European dual-structure firm standing; the others have British and Australian nationality (BHP and its fellow miner Rio Tinto), British and South African (Investec, a bank, and Mondi, a packaging firm), and British and American (Carnival, a cruise company).

Investors are also aware of the drawbacks of dual structures. They are confused by the differences between twins’ share prices, which can persist for years, Mr van Dijk’s research finds, though they are linked to the same cashflows. The structure is associated with opaque governance. After a scandal over misstated oil reserves in 2004 that was partly blamed on the complexity of its dual-board structure, Shell’s investors lobbied for unification. Elliott Advisors, the hedge fund agitating for BHP to unify, argues that the dual structure limits dealmaking by complicating the use of shares for purchases. Unilever cites this as a factor, too; it wants to be able to strike deals to boost its shareholder returns. Although its choice may irk British politicians, investor logic prevails.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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