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European Merger, Acquisition Activity Surges

Chris Kuehl, Ph.D.

Thus far this year, the pace of European merger and acquisition activity has been setting records. There has already been a 16% increase over the first quarter of last year—some $215.3 billion. This is a faster pace than any year since 2008 and the start of the global recession.

Several factors have fueled the enthusiasm. American companies that made a lot of money in the surging stock market are the prime propellants. U.S. companies are seeing some great deals in Europe due to the strong dollar and the weak euro and pound. They have spent $114 billion on European deals already. That amount is expected to increase through the rest of the year—as long as the stock market in the U.S. keeps performing and the dollar stays strong. The reaction in Europe has been mixed: There are reasons to welcome this investment and reasons for concern about the increased U.S. influence in the business community. Political murmurs from the left and right have already focused on the loss of national icons and the fear that U.S. owners will not act in the best interests of the workers or the community.

There are three main reasons companies elect to do a merger or acquisition beyond the opportunistic rationale. The first and most common is that a company seeks to grow and decides that acquiring that growth will be faster than trying to do so organically. The theory of competition as developed by Philip Kotler, Ph.D., frequently referred to as the father of modern marketing, holds that every sector of an economy has patterns. At the top of the heap are the market leaders. Generally, only three leaders dominate in a given sector. Right behind them are market challengers that have a desire to be one of the top three and therefore they seek to replace one of them. Then there are market followers that react to the decisions by the leaders and challengers. The rest are niche players, which find a place to function that doesn’t attract the attention of the others. A market challenger often joins forces with another challenger or even a strong follower in order to make a run at the top companies.

The second reason is to essentially limit competition and to protect market share. This occurs when a company buys a rival or a company that competes in some way. It is often the most destructive motivation as there is really no intent to make the acquisition successful; the goal is simply to get it out of the way. This kind of merger or acquisition creates the most worry among the political leaders and the employees of the acquired company.

The third most common rationale is based on the desire for efficiency when companies buy upstream or downstream. They may want better control of inputs that are critical to their growth so they buy a key supplier or two. They may want more control of the distribution system as well and will buy an upstream partner.

Most of the action in Europe has been connected to the first and third motivations. This is an ideal time for U.S. companies to develop better distribution channels in Europe, so there has been quite a lot of upstream buying. It has also been a good time to exert control over key suppliers. The majority of the activity has been market challengers combining with other market challengers to either make a run at one of the leaders or to keep another challenger from making that move.


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Argentina’s Reforms Not Yet Translating into Growth

Argentina’s economy took a tumble in 2016 and, so far, 2017 isn’t looking much better, according to a recent Wells Fargo analysis.

“For now, the economy is not showing any improvement, even though administration officials continue to argue that the recovery is close,” said Eugenio J. Alemán, senior economist. “At present, the only thing that they have to offer is the fact that the economy plunged 2.3% in real terms during 2016.”

Exports and public consumption increased by 3.7% and 0.3%, respectively, as private consumption and investment decreased  correspondingly by 1.4% and 5.5%, according to Euler Hermes in its economic analysis of the South American country. And increases in production “support the view that Argentina is clearly bottoming out of recession,” Euler Hermes analyst said.

For many, the reforms implemented by the Macri administration have moved too slowly.  “Many have yet to feel the impact of Mr. Macri’s market-oriented economic reforms as real salaries failed to keep up with inflation of more than 40% last year, pushing 1.5 million people below the poverty line,” according to a March 29 Financial Times story. Argentina’s largest union has planned a one-day strike for April 6 to demand higher salaries and express its discontent with the government.

An upcoming webinar, “Doing Business in Argentina,” will look at the country from the perspective of a credit professional and a collections attorney, who will share their expertise about how to mitigate risks and what critical factors to consider for collections, as well as other tips and best practices for credit professionals.


Election Calendar

April 6 – The Gambia, Gambian National Assembly
April 9 – Serbia, President
April 16 – Turkey, Referendum to dramatically increase power of president
April 20 – Timor-Leste, President
April 23 – France, President
May 4 – Algeria, Algerian National People’s Assembly
May 6 – Niue, Niuean Assembly
May 7 – France, President (second round, if needed)
May 9 – South Korea, President
May 19 – Iran, President
May 24 – Cayman Islands, Cayman Legislative Assembly
June 11 – France, National Assembly of France
June 18 – France, National Assembly of France (second round, if needed)
June 24 – Papua New Guinea, National Parliament of Papua New Guinea
June 26 – Mongolia, President

July 2 – Senegal, Senegalese National Assembly
Aug. 4 – Rwanda, President
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President

Ill Winds Across the Korean Peninsula

Dr. Hans Belcsák

May 9 has been set as the date when South Koreans will go to the polls to elect a president to replace the disgraced Park Geun-hye. This follows a ruling on March 10 by the eight-member Constitutional Court that unanimously upheld the National Assembly’s decision to impeach her for conspiring with a confidante to extort money from big companies and then seeking to conceal her wrongdoing.

Until a new head of state is elected, the former Prime Minister Hwang Kyo-ahn will stay on as acting president. Unfortunately, this means that Korea is in for a few more weeks where pressing economic policy issues will be given short shrift, as has been the case during the months of rancorous protests and legislative inaction that followed the eruption of the influence-peddling scandal last October.

The political turmoil that has damaged consumer confidence and private consumption is not about to end just yet. Construction investment has been hurt by tighter mortgage rules. Business confidence has been hit by the arrest of the head of the electronics conglomerate Samsung Group, Lee Jae-yong, over corruption allegations linked to the scandal that led to Ms. Park’s impeachment, which has hit the company just as it seeks to recover from the fallout surrounding its fire-prone Galaxy Note 7 smartphone. This, too, is a cloud over the economy that will not lift right away. I do expect, though, that the incoming president will pursue an expansionary fiscal course in an effort to uphold consumption by debt-laden households and to support employment by backing faltering mainstay industries. When all is said and done, the consensus forecast predicting 2.4% real economic growth for 2017 looks fairly realistic.

The nasty fly in the ointment could be relations with China, which is the recipient of one-fourth of Korea’s exports and has become a critical economic partner. Beijing has made it quite clear that it resents Seoul’s plan to deploy a U.S. anti-ballistic system—the terminal high altitude air defense platform or THAAD—to protect its citizens from an increasingly bellicose North. It fears that the U.S. will use the system’s powerful radar to look deep into Chinese territory and monitor its missiles as well, reducing their effectiveness as a threat as well as a deterrent. To underscore its disapproval, the Chinese government has begun to orchestrate a corporate boycott against South Korean companies, for now targeting in particular the Lotte Group, which owns 100 supermarkets in China and had approved a land swap in South Korea allowing deployment of the THAAD on one of its golf courses. Chinese tour groups have been banned from visiting South Korea, and Beijing is obviously determined to ratchet up its pressure. Almost every major Korean company relies heavily on Chinese sales, so the ultimate impact of a People’s Republic of China boycott could be severe.

On the other hand, the U.S. cannot afford to relent in its determination to see the THAAD deployed, not given the existing security agreement between Washington and Seoul, not with 28,500 U.S. troops stationed in South Korea to bolster defenses against the North and act as trigger, and not with Pyongyang making rapid progress in its development of a long-range ballistic missile that is capable of targeting the U.S. Western seaboard thousands of miles away. For the longest time, various U.S. governments, including those of President Clinton and President Bush, had hoped to persuade China, North Korea’s biggest aid donor, foreign investor and trade partner, to stop what is essentially a client state from building an ever more formidable nuclear arsenal and fashioning the missiles to deliver those weapons. But China showed neither the ability nor the will to contain Pyongyang, even though lately, after years of prevarication, it has taken a few tiny steps to show that it is not exactly happy with North Korean leader Kim Jong-un’s ambitions.

With this in mind, U.S. Secretary of State Rex Tillerson, on his first trip to Asia, made it clear that “the policy of strategic patience has ended,” referring to the Obama Administration’s notion that Pyongyang can be contained, even if it cannot be prevented from becoming a nuclear power. He stressed, quite correctly, that punishing South Korea for deploying the U.S. anti-missile system “is not the way for a regional power to help resolve what is a serious threat to everyone,” and that Beijing should instead “address the threat that makes THAAD necessary.” The White House has a number of options, and for now it seems unprepared to take any of them off the table. But for the next person in the Blue House, the presidential residence in Seoul, the alternatives will be much more limited.

It is, of course, still an open question who will win the elections. For now, the clear front-runner and favorite is Moon Jae-in, a former leader of the opposition Minjoo party who ran and lost against Ms. Park and her conservative Saenuri party in 2012. Public opinion polls give him an approval rating in the neighborhood of 33%, which is more than 15 percentage points ahead of the next-most popular candidate, Ahn Hee-jung. At home, Mr. Moon has pledged to push for a supplemental budget, if elected, to crank up the sluggish economy. Internationally, his instincts appear to point him in the direction of being cooler on his country’s alliance with America and more interested in the old “sunshine” policy, which favors making nice with North Korea in the hope that this will help moderate Pyongyang’s aggressiveness.

A realistic assessment of the situation hardly supports the pacifist view and the conclusion that Seoul should resist deployment of the THAAD system. Besides, the next South Korean government, whatever its stripes, cannot afford to alienate the Trump Administration when Washington remains the guarantor of its security and the U.S. is even more important to the economy than China. Korea has a bilateral trade agreement with the U.S., known as KORUS FTA, which involves an estimated 362 million consumers on both sides. It not only eliminates 95% of each nation’s tariffs on goods, but also has created new protections for multinational financial services and other firms. Last year, the U.S. exported USD 42.266 billion worth of merchandise to Korea and accepted USD 69.932 billion in imports from there, giving Seoul a trade surplus of USD 27.666 billion.

In short, the incoming Korean president will have some difficult decisions to make and the same will be true for the Trump team, as the tension clawing at the Korean Peninsula is much more likely to get worse than to improve. Korea does not want to alienate the U.S., but fears increasing retribution from China. The U.S. does not want to alienate Beijing, especially amid heightened tensions over the South China Sea, but it has lost faith with President Xi Jinping and his ability and/or willingness to get tough with Pyongyang. The Trump Administration reportedly is considering increasing financial penalties on Chinese companies in response to growing evidence of their support for North Korea’s weapons programs. This undoubtedly would risk retaliation from Beijing. And behind the scenes, South Korea is said to be in the process of creating a highly-trained hit squad, modeled on Special Forces operations in the U.S., with the mission to “eliminate” Kim Jong-un and his top military commanders in the event of war. With all options being on the table, this is a hot spot that will continue to warrant close watching.

Global Roundup

Protests begin, foreign pressure mounts on Venezuela's Maduro. Venezuelan opposition protests began and foreign pressure mounted on Friday over a court takeover of Congress that many viewed as a lurch into dictatorship. The pro-Maduro Supreme Court this week said it was assuming the legislature's functions because it was in "contempt" of the law. (Reuters)

Jacob Zuma’s move to fire the finance minister has thrown South Africa and the ANC into turmoil. South Africa’s government is in turmoil after President Jacob Zuma axed the finance minister and his deputy and shuffled 18 other cabinet members in a dramatic midnight move on Mar. 31. The aftermath of Zuma’s shuffle also reveals a decision that was taken unilaterally, excluding even the ruling African National Congress. (Quartz)

The Week in Brexit

Britain initiates Brexit, wading into thorny divorce from European Union. In one of the most consequential diplomatic events in Britain since World War II, Prime Minister Theresa May on Wednesday sent a formal notice of the country’s intention to withdraw from the European Union (EU), starting a tortuous two-year divorce littered with pitfalls for both sides. (Business Mirror)

EU says no to free-trade talks until 'progress' on final terms. EU leaders have said there will be no talks on Britain’s future relationship with the bloc until the U.K. government makes enough “progress” on the Brexit divorce—including settling its bills and citizens’ rights.(The Guardian)

Impact on banks from Britain's vote to leave the EU. Global banks have warned they could move thousands of jobs out of Britain to prepare for the expected disruption caused by the country's exit from the European Union, endangering London's status as a major financial centre. In this article, the New York Times highlights comments and reports on banks about their potential Brexit plans. (New York Times)

Why do Serbia’s presidential elections mean so much?The Serbian presidential elections aren’t important because of the ceremonial role of the president, but because if Aleksandar Vucic does not win outright, the weak and fragmented opposition could stage a revival. (Balkan Insight)

EU health chief says Brazil meat scandal is not closed. Brazil needs independent controls over its meat industry, the EU’s Health Commissioner said yesterday (Mar. 29), as he wrapped up a visit to the country rocked by an anti-corruption investigation focusing on bribery of its food-sanitation inspectors. (EurActiv)

Is the EU really that important to U.S. interests?It’s not a bad idea to challenge the assumptions underlying United States policies. It helps ensure that policymakers continue to promote U.S. interests. But on the question of whether the European Union’s existence is in U.S. interests, a recently published paper from the Strategic Studies Institute of the U.S. Army War College says “the evidence is consistently clear.” (Global Trade Magazine)

Report: Trump administration seeking NAFTA tweaks. Though President Donald Trump has called the North American Free Trade Agreement (NAFTA) a "disaster" and threatened to withdraw from it entirely, a White House draft proposal making the rounds on Capitol Hill reportedly calls for only relatively minor tweaks to the current deal. (U.S. News & World Report)

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Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations