North America

Investors Aloud

Hello! I’ve made a new website, investorsaloud.com. It’s a bit of a work in progress at the moment, but please check it out anyway if you are interested. I hope you like it.

All the best,
Joseph

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East Asia

Examining China’s M&A Boom

An article in last week’s issue of The Economist showed that China’s outbound M&A activity[1] has risen sharply of late, up approximately fivefold since the summer of 2015 and eightfold above its average rate between 2010-2015.[2]

The article mentions that this increase could represent a troubling trend of capital fleeing China in response to China’s experiencing slowing economic growth and a gradually depreciating currency in recent years.

It then largely dismisses this theory, however, saying, “rather than sparking a stampede [of money] to the exits, it is more accurate to say that these changes [in China’s economic performance] have alerted Chinese firms to the fact that they are still woefully under-invested abroad. China’s share of cross-border M&A has averaged roughly 6% over the past five years, despite the fact that it accounts for nearly 15% of global GDP[3]”.

Implicit in these words is the expectation that a country’s share of global M&A should not be too different from its share of global GDP. Yet this overlooks several other factors that may determine a country’s propensity for engaging in M&A. These may include a country’s role in international trade, or a country’s proximity to other large economies or foreign financial hubs, or a country’s cultural and linguistic affinity[4] or political relationship with other large economies and foreign financial hubs.

China ticks each of these boxes in a notable way. It is both physically and linguistically isolated from most of the global economy beyond its own borders: East Asia outside of mainland[5] China accounts for only 12% or so of world GDP[6], while the combined GDP of the world’s majority-Chinese economies outside of mainland China is about nine times smaller than that of mainland China itself[7].

China’s political relations are somewhat fraught. 45% of East Asia’s GDP outside of mainland China occurs in China’s regional rival Japan[8], nearly half of the world’s GDP that occurs in majority-Chinese countries outside of mainland China itself occurs in Beijing’s rival Taiwan, and 25% of global GDP is from its potential rival superpower the US[9]. 

China’s propensity toward international trade is, similarly, not pronounced[10]. China accounts for an estimated 11% of international trade, compared to 15% of global GDP.

Finally, apart from Taiwan, the only notable majority-Chinese economies outside of mainland China are business-financial hubs: Singapore and Hong Kong. Such hubs historically tend towards very high M&A activity, and towards being net originators rather than targets of M&A deals[11]. China’s global share of outbound M&A might therefore be higher were these not financial hubs. If, for example, Hong Kong was considered to be part of mainland China[12], China’s outbound M&A would in most years have been meaningfully higher than it has been[13]. 

The value of China’s outbound M&A as a share of global cross-border M&A should perhaps be lower than China’s share of global GDP, then. Yet so far in 2016 it is on pace to be much higher than China’s share of global GDP. The M&A boom could be capital flight after all. 

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NOTES:

1 — Specifically, the “value of announced outbound mergers and acquisitions including net debt of targets”, according to the article. Notably, however, “announcing deals is not the same as closing them. Between losing out to other bidders and rejection by regulators, China’s investment tally could fall [below what it has announced].” “Nevertheless”, it goes on, “the trend is unmistakable. In recent years China has consistently accounted for less than a tenth of announced cross-border M&A deals; this year its share is nearly a third.”

2According to this article in the Financial Times, Chinese buyers account for an estimated 15% of the value of cross-border M&A that has occured thus far in 2016”. The Chinese offer to buy the Swiss company Syngenta, if accepted, is roughly big enough to eclipse all outbound chinese M&A in any year before 2014.

3- The article goes on to say “…Strategic considerations—acquiring technology and brands that China lacks—are more important [than moving capital out of China] for buyers [of foreign companies], both to bolster their position at home and to speed expansion abroad.”

4 – The following quote is from Clifford Chance and the Economist Intelligence Unit, from 2012: “Despite the growing need for companies to invest in new markets in order to realise their growth ambitions, more than one-half say that they are discouraged from acquiring overseas because of concerns about bridging cultural differences. This rises to 63% for respondents in the US. Many companies admit that they find the softer side of deal-making challenging, with just 44% of companies saying that they are effective at handling cultural integration as part of the transaction process.”

5 — “Mainland China” in this case does not include Hong Kong, Macao, or Taiwan, but does include other Chinese islands like Hainan and Xiamen.

6 – If you also include India, Australia, and New Zealand this figure rises to 18%

7 -By comparison, even the nominal GDP of the United States is only 2.75 times larger than the combined GDP of Britain, Canada, and Australia. France’s GDP is only 3.15 times larger than that of Belgium plus Quebec. Even if you try to count the wealth of the entire Chinese global diaspora rather than just majority-Chinese economies like Taiwan, Hong Kong, and Singapore, it is still very small compared to the size of mainland China’s GDP.  If you assume, for simplicity’s sake, that there are 50 million “overseas Chinese” (the figure given, roughly, by Wikipedia), and that each has an average income of $25,000 (similar to the per capita GDP of Taiwan), then the overall income of the Chinese diaspora is $1.25 trillion — still little more than 10% of mainland China’s GDP.

8 – According to this source, “Chinese FDI in Japan and trade relations between the countries have a long history because of the relative cultural and geographic proximity between the countries (Alvstam et al., 2009). Also, China is one of the two most important trade partners for the Japanese economy. All this should, following the mainstream trade theories (e.g., Helpman, 1984; Helpman & Krugman, 1985; Petri, 1994), give favorable conditions for large inflows of FDI. In relative terms, this picture has to some extent been correct. Before the recent territorial row over the Senkaku, or Diaoyutai, Islands located between Okinawa and Taiwan, the Chinese and Japanese mutual cross-border M&As was steadily increasing with 2010 and 2011 as peak years recording 16 M&A deals, respectively (Recof, 2012). However, this trend seems to have been broken, by recording only 6 M&As in 2012, and 5 M&As in 2013.”

Japan was not even one of China’s top 10 targets of outbound M&A between 2005-2015— the biggest target for outbound Chinese and Hong Kong M&A was Britain (14.6% of the total). By comparison, 43.7% of Japan’s outbound M&A over the past 10 years went to the US. (Source: graphs from http://qz.com/465638/charts-and-maps-how-japans-companies-are-beating-chinas-in-overseas-ma/)

9- This is not to say the China’s relationships with Japan, Taiwan, or the US are nearly as troubled as many people think they are or would like them to be. Still, these relationships mean that China may have a very different outlook in foreign affairs than do many other countries.

10 – Indeed, one might expect China to account for a disproportionately large share of international trade, given its role as the ‘workshop of the world’ and its voracious appetite for imports of energy and minerals. But in fact China only accounts for about 11-12% of global trade as far as I can tell (using statistics from MIT’s Observatory of Economic Complexity), regardless of whether or not Hong Kong is included.

11-   In 2014, the largest M&A deal involving an Asian country, whether cross-border or domestic, was the acquisition of China’s CITIC Ltd. by Hong Kong’s CITIC Pacific Ltd., a deal that was worth about three times more than any other involving an Asian country that year. In 2015, in contrast, one of the biggest deals was, according to this article from Bloomberg, “China Cinda Asset Management’s (pending) $8.8 billion purchase of Hong Kong lender Nanyang Commercial Bank.” Singapore’s outbound M&A has been increasing by a huge amount in recent years too and is much higher than its inbound M&A.

12 —M&A statistics, moreso than many other economic or financial categories, tend to consider Hong Kong as being separate from the rest of the territories of the People’s Republic of China. This may be (at least partially) justified, but it can also confuse matters at times.

13 – In 2011, 2012, and 2013, Hong Kong’s outbound M&A was about 25-40% as large as mainland China’s, even though Hong Kong’s GDP is only around 2% as large as mainland China’s. Singapore’s outbound M&A, meanwhile, was 1.5-22% as large as mainland China’s during 2011, 2012, and 2013, while Singapore’s GDP was also only about 2% as large as mainland China’s.  (Source: Global Financehttps://www.gfmag.com/global-data/economic-data/value-of-cross-border-maa-by-region-country?page=2)

M&A Table

I made this chart in order to find correlations between outbound M&A activity (as given in column I, at the right end of the chart) and the factors in the four leftmost columns of the chart. Column I’s closest linear relationships are with columns E and F — though Japan is an outlier in both cases. Admittedly, though, this chart does not include enough countries or enough years of M&A to say much.

Column B is based on the regions Europe, North America, and East Asia. For example, the USA’s figure in column B is equal to the GDP of Canada plus the GDP of Mexico divided by the GDP of the world. Column C is based on two “super-regions”: the North Atlantic (including Europe and North America) and the Indo-Pacific. The US scores much lower than China in Column B – because North America minus the US has a much smaller GDP than East Asia minus China – but scores much higher than China in Column C, because the US is not far from Europe.

Column D is based on countries in which the majority language(s) is the same: China’s figure in column D, for example, is equal to the combined GDP of Taiwan, Hong Kong, and Singapore – the only other majority-Chinese economies – divided by the GDP of the world.

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North America

The Eternal Question

 

…Should I buy a treadmill?

According to Statista, wholesale consumer treadmill sales in the United States have fluctuated around one billion dollars per year since 2007; they dropped to 800 million dollars in 2009 after the recession and have gradually risen back up since. There are some reasons, though, why treadmills — or, perhaps, stationary bikes, ellipticals, rowing machines?, etcetera — could still be the “next big thing”:

home_category_treadmills
1. Headphones 

Treadmills, I don’t need to tell you, are loud. As you use them, people living in the same home or apartment as you are often annoyed by both their noise and their vibrations. If you use them while watching television, you will probably have to turn the volume on the tv way up, which will bother people around you even more. You may even be bothered by the loud noise yourself; indeed if you make a habit of going on the treadmill with the tv blaring at full volume, you may damage your ears in the long run.

Wireless headphones, then, could make treadmills much more appealing. And high-quality wireless headphones are for the first time going to be widely owned within the next few years — or months.

2. Netflix 

Sorry Wolf Blitzer, I don’t want to see your face ever again. From now when I am on the treadmill I am going to watch Netflix or last night’s Raptors or Warriors game (nobody tell me who won!). Hey, that actually makes exercising sound pretty good: it’s a great excuse for me to binge on tv.

3. Televisions

The year is 1995 and I am building an exercise room in my house. I decide to put a big tv in front of the treadmill, so I spend hundreds of dollars on a large television with a big behind, then a few hundred dollars more on a cabinet set to hold this voluptuous television. Wow, this is so expensive, and takes up too much space in this room! Maybe I should just wait until 2015, when I can get a 32 inch flatscreen LCD tv for less than $300 (down from $1600 in 2005) and mount it directly on the wall.

In fact, tv’s have now become so skinny that they can be attached directly to the exercise equipment. This could potentially allow people to move their exercise equipment outdoors in some cases, taking advantage of the space and fresh air in their backyards. Combined with wearing wireless headphones so as to not annoy one’s neighbours, this could make purchasing exercise equipment more reasonable.

4. Occulus!

Is virtual reality coming at last? Recently people have begun to believe that it is. If it does become advanced and widespread, then it may require a means to simulate movement in order to create a more dynamic virtual experience. Treadmills are an obvious candidate for such a simulation. Virtual reality may benefit from treadmills, therefore, and treadmills may benefit from virtual reality. Of course this might not actually end up happening, but it is worth speculating on nonetheless.

5. Fitbit 

Fitbit, the Apple Watch, Stepcounter apps, etcetera. Devices that let you know, in real time, what a lazy bum you really are could change the exercise industry in a big way. I know that I spend too much time sitting in front of a computer or television, and have been thinking about downloading a new app that has your phone alert you whenever you have been sitting down for more than an hour at a time. (I probably won’t download it, but I have been thinking about it!).

Many people have certainly been begining to use apps that show them how many “steps” they have taken every day, and in the spirit of self-competitive self-improvement have started to walk more in order to up their scores. This could, perhaps, lead to an increase in people purchasing treadmills.

 6. Millenials 

A large share of young people continue to live at home with their parents, or else on their own in small apartments or homes (often partially supported by their parents) where they do not have much space. As the large millenial population continues to age, however, they will depart from the nest, leaving behind bedrooms that can house exercise equipment. Some millennials will also be beginning to move into larger homes, where they may begin to buy equipment too. Or maybe not.

7. Real Estate

If you live in a 750 square ft. apartment space, then a typical high-quality treadmill will take up about 5 percent of your floor space. That’s no good; you will need more space in your home before thinking seriously about spending the $3000 or more that high-quality treadmills often cost. So, will indoor space in North America become cheaper?

It might, thanks to evolutions in transport (cheaper gasoline, hi-tech cars, Uber-style carpooling, driverless trucks, e-commerce with home delivery, etc.), communications (the modern Internet), and home construction (robots helping to build homes — it’s a scary thought, but get ready for it), which could make it easier for humans to spread out across cities, across suburbs, and across the countryside than ever before. E-commerce and e-commuting may also help bring home prices down by allowing some commercial real estate to be converted into residential.

8. Delivery

Good-quality exercise equipment tend to be among the more difficult-to-transport types of consumer goods. In most cases they are heavy, bulky, awkwardly shaped (and unable to fold up) and delicate. Getting them up a flight of stairs into a spare bedroom, or up many flights of stairs into an apartment building, can be a very difficult experience — and a costly one if you are employing delivery-men. If shipping and delivery-men become cheaper, then, it could be a boon to the industry, therefore.

Both, perhaps, can be expected. Delivery-men costs may fall as a result of the price of labour in general being squeezed by the double-whammy that is automation and outsourcing. Shipping costs, meanwhile, may fall because of cheap oil (if prices do not rise back up), falling labour prices leading to falling truck driver prices, innovations in trucking (smarter trucks, self-driving trucks, etc.), and the rise of the e-commerce and home-delivery industry (led, currently, by companies like Amazon).

If, moreover, self-driving trucks really do become commonplace, it could lead to much cheaper home delivery by allowing goods to be dropped off at local storage sites near the homes overnight while there is no road traffic, and then brought to the buyer’s home during the day.

9. Home Offices

Because of the Internet, in the years ahead many more people are likely to work from home, or from offices or coworking spaces close to home. This may free up time for people to go to the gym more often, lessening their need for things like treadmills. On the other hand, it may make people more likely to exercise at home, increasing their need for things like treadmills. Will it make people more likely to buy treadmills, on balance? I am not sure, but it is a possibility worth considering.

In addition, as home office spaces continue to shrink in size as a result of getting rid of fat desktop computers, printers, scanners, computer desks with pullout keyboards, and filing cabinets, and replacing them with more versatile laptops, tablets, and flatscreen desktops, there may be more space available in the home for treadmills.

10. Seasons 

In theory, treadmills should be seasonal goods: if you live in a place like Canada then you don’t really need one during the summer when you will probably prefer to exercise outdoors instead, and if you live in a place like southern California then you may only really need one during the summer when it is boiling outside. In practice, however, the high cost of shipping and delivering treadmills has prevented seasonal home rentals of treadmills, as has the fact that many people living in hot climates still do not have air conditioning and so do not want to work out indoors in the summer. 

The continued spread of air conditioning and the ability to more cheaply deliver treadmills, therefore, could perhaps lead to a situation where more people seasonally rent treadmills. In theory, at least, this could save people money as well as space in their homes. In fact, it may just be possible that long-distance shipping will eventually become cheap enough for a treadmill to become like the opposite of migratory bird, being used in a cold climate during the winter and then being shipped south to a hot climate for the summer.

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On the other hand, there are reasons why such a treadmill “revolution” may not come to pass. But I am too lazy to discuss them right now; I think I will go for a long walk in front of Netflix instead.

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