Another theme I’m surprised hasn’t been discussed more often will be more foreign firms trying to make acquisitions of US-based companies in the next few years. Here’s a few reasons foreign companies — and US based firms — may be interested in deals:
- The value of the dollar has never been lower at any point in the last 25 years. For a foreign company, this makes their “home currency” more valuable and easier to finance a US-based transaction.
- Despite the credit crunch, there is still capital available to get deals done.
- US GAAP Accounting is the most stringent accounting regulations on the planet. There are many other places around the globe where accounting principles are far less strict than what you find right here at home. That may be appealing to companies dealing with Sarbanes-Oxley the past few years.
- Federal officials are preparing to propose a series of regulatory changes, which would allow (and actually encourage) this kind of action to happen. Remember, foreign corporations are beyond the reach of Congress and the SEC.
Right now you’re seeing a Belgian company (InBev) purchasing Anheuser-Busch (the makers of Budweiser). Now if they can just find a way to move the Cardinals to Belgium (or at least out of the National League), that would be great.
Increased foreign ownership WILL rile some investors and MOST public officials. It’ll foster more of the “let’s keep America in the hands of Americans” feelings. But unless the United States is willing to do something about the value of the dollar, it really will be hard to stop.
And as long as corporations continue to play accounting tricks — so their quarterly earnings will keep up the illusion that business is actually growing — we should expect more and more foreign companies making a move to buy US assets. Why not?
When getting involved with foreign stocks, individual investors are often amazed at how “laid back” foreign corporations can sometimes be about missing quarterly earnings. It’s a shock to many US stockholders that most foreign companies will change — or eliminate — dividends they pay shareholders every single year. Many retired investors rely on interest and dividends for a large portion of their income. Now having an unpredictable dividend stream from investments really doesn’t foster a warm fuzzy feeling.
Here’s a terrific article from the New York Times on this very topic.
What’s your opinion? Suppose a company involved in defense products, or something security-related were to attract a foreign buyer? Should there be some policies preventing that?
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Mark-to-Market Hearings Today
by Thomas Mullooly on March 12, 2009
If you haven’t been able to make heads or tails of the credit crisis, read this.
Thursday, March 12, 2009 is the day the House Securities Subcommittee will hold a hearing on mark-to-market. The chairman of the committee, Paul Kanjorski (from Pennsylvania) seems to agree with us — mark to market standards have proven “problematic” for banks.
Mark to market (also known as fair value rules) has been only one of the contributing factors in the recent credit crunch.
Many mortgage and bond-related assets, many of which had been AAA rated previously, have been experiencing a mandatory write down in value, because of these accounting rules. Many of these assets needed to be “re-priced” nearly every day. This is how Citibank could lose $28 billion in the last quarter. Think about that number. A quarter is only 90 days long — and not all of them are business days. And yet, for a bank (or any business) to lose $28 billion is hard to conceive. That’s over $300 million lost on a daily basis during the quarter.
How can that be?
Mark to market accounting rules required that banks write down the value of assets on their books — nearly every day. Even though these assets were not bought and sold (they couldn’t be sold — the trading market for asset backed securities has been frozen for nearly a year), they still needed to be marked down.
What I expect we will hear from these hearings on Thursday is something along the lines of “there should be an exemption from a need to repriced these assets on a daily basis since there is no liquid market for these securities presently.” I also expect we will hear a proposal to improve the situation these banks are facing. It would not be a big surprise to hear testimony proposing “mark to the model” instead of “mark to market.”
Mark To A Model
“Mark-to-a-model” is a proposal that has been gaining speed. Many have argued it is not realistic to carry these securities at the full face value of the underlying security, nor is it realistic to carry these securities at zero value either (like now). What might be a better — temporary — solution is a financial “model” that can gauge the average holding period of the securities, the average duration of the portfolio and a model of the credit composition of the portfolio. At least with a model, minimal (floor) values can be placed on the securities.
What would be the result of a change in mark-to-market, or instituting mark-to-a-model?
The first benefit would be a drastic increase in the book value in market value of the securities on hand at banks. No one is trying to game the system. By re-inflating the value of many securities on hand at banks, this will automatically raise the capital ratios at these banks.
So what?
Raising the capital ratios at these banks removes the need for bailout money.
You may have read recently that banks are “hoarding cash.”
Why would the banks hoard cash — especially when lending is needed to restart the economy?
Well, the banks have been required to maintain certain capital ratios, or be declared insolvent and run the risk of being taken over by the government, or closed. So, although the banks have received capital injections, with the purpose of lending, the same banks have been “hamstrung” because they need to maintain a certain amount of cash on their books to meet capital ratios.
These capital ratios will be met if they suspend mark to market accounting, at least on a temporary basis.
It may also help to re-ignite trading in these asset backed securities. This helps improve liquidity and lending capabilities. Put another way, you cannot borrow against securities that don’t have a liquid market and do not trade. While the “marginability” of these securities is severely hampered, just re-establishing a market for these securities is a step in the right direction.
Let’s hope they don’t screw it up.
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