What price Belgium?
Companies all over the world are going takeover bonkers. According to figures from Thomson Financial – whose parent, as chance would have it, is buying Reuters for more than £8bn – mergers and acquisitions worth just under £1000bn have been announced so far this year, which is about 30% more than in the last record year of 2000 (on a pro-forma basis).
If trends persist, some £3000bn of global companies would be bought and sold this year, which would be the equivalent of buying the state of Belgium 15 times over (if you assume Belgian can be acquired for a price equivalent to one year’s annual output or GDP – though I don’t suppose King Albert ll is a seller). Announcements of deals involving British companies as either buyers or bought total some £235bn since 1 January.
It’s proof that the animal spirits have returned to boardrooms and have also infected the acquisition committees of private equity houses. According to my banking chums, the next great British name to agree to be taken over will be EMI (probably by One Equity Partners, the private equity arm of JP Morgan).
This deal mania is also powering the stock market. Until last night, Wall Street had enjoyed its most consistent run of up-days since before the Great Crash – the Dow Jones Index closed higher 24 out of the previous 27 sessions, the longest winning streak since July 1927. The Dow is at record levels and the broader S&P 500 index is within a few points of its record set in March 2000.
In the UK, the FTSE 100 is approaching 6,600 and is nearer to its high of 6930.2 (set on 30 December 1999) than looked remotely possible just a couple of months ago when shares were distinctly wobbly.
What’s driving the market, is sentiment (no investor wants to miss out on the bull-market run) and liquidity (predatory companies and investors have more cash than they know how to use). The paradigmatic manifestation of this, according to traders, is that many hedge funds have taken off their downside “protection”: many are no longer hedging out “market risk” in the way they normally do, for fear of missing out on the big gains.
There’s a hint of irrational exuberance in the air. That won’t surprise those of you who have observed the concerns of the Chinese authorities that their economy – the engine of the world – may be growing too fast, who have noticed the problems in the US housing market and who have worried that UK house prices could also turn negative with damaging consequences for consumer confidence.
Shares in British firms certainly don’t look screamingly cheap, as shown by this disturbing chart drafted by analysts at Morgan Stanley (download Excel file). It shows the median ratio of share-price to earnings (the PE ratio) for the 350 biggest UK companies. The median is the PE ratio of the company bang in the middle if you were to rank the companies from lowest PE to highest. What the chart shows is that since 1985 there has been a sharp fall in share prices more-or-less every time that the median PE ratio has risen above 18 – and the median is currently 18.85
However, one chart doesn’t make a market rout. There are other ways of analysing British shares that don’t show them to be quite so expensive. For example, the PE ratios of the biggest British companies, those worth £50bn or more, is disproportionately low – largely because they are regarded as still a bit too bulky to face takeover bids from private equity firms. So the average PE ratio of British listed companies is under 14, which is not desperately expensive by historical standards. So don’t panic, but…
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I just keep reminding myself that it's costing the country around £1.5bn a day just to pay for our trade deficit in goods.
Gordon Brown's great British economic miracle - whatever it was - could end with the same sort of big bang that kicked off this lunacy in the first place.
Do you believe that the prevalence of hedge funds driving up equity prices with little downside protection will magnify the effects of a 'correction' or crash when it inevitably comes at some point in the future?
One chart does not make rout, but it does tell us to be careful. Consumers are in debt to their eyeballs and above, we shake off rate rises like dogs shaking off the rain drops, then we rush of our overpriced houses and work out what Chinese goods to buy next at our discounted overpriced sterling exchange rate.
There are so many factors, Iraq's mounting cost, oil demand surging (20,000 new cars a day on Chinese road - CNN article). A possible end to cheap credit if China stops re-cycling its currency and Japan/Asean slips into recession. M&A that any blind monkey can see are unlikely to create value, rather destroy it. But some analysts will make a large and quick buck.
Glad so wise articles are comign out to tryto moderate our spending and excessively risky investing.
I got made redundant form Banking years ago and have worked in education for ages, since about 1993 I have traded shares and listen to all the left wing tripe about capitalism. Despite this in the last two year or so even the sociology teachers are thinking about investing - with all respect to them - when they finally think the market is OK and see growth - it has definitely pasted the peak!
Cut back expenditure, pay off debt and keep some reserves just in case.
GDP is much more like the earnings of a company than like the market value, so the question becomes: what P/E rating do we apply to Belgium. I was rather expecting you to do that calculation since you were talking about P/E ratings later on in the article.
Its economy is 25% manufacturing and 75% services; Tesco is mostly services and trades at 20x, BAE is mostly manufacturing and trades at 20x, so if we discount for the obvious issues involved in a takeover of Belgium, maybe 15x sounds right.
So mergers amount to only one outright purchase of Belgium. Begins to sound very nearly reasonable.
A bit of a harsh way to price Belgium at one times turnover
Brian
Given the fine brewing of beer which takes place in Belgium, I would have thought a take-over by a beer-drinking country like Australia could well be on the cards.
Even ignoring all the value in a country that isn't captured in GDP, it's absolutely ridiculous to assume a value for Belgium equal to one year's GDP. You are forgetting that a country produces a stream of payments. It's like saying you can buy an income stream paying £10 each year forever for just £10! Countries are an investment, not a consumption good.
Before everyone gets too excited about the price for Belgium, How does Belgiums p/e compare with other "companies" in it's sector?
p/e ratios for different countries, anyone brave enough to start a list?
I've worked in Brussels. Trying to get a native to work >20 hours a week is the holy grail. More like make a 1 x 0.75 gdp offer.
Yes, GDP are earnings, but you also have to decide what you mean by "owning" a country. The GDP is the combined earnings of all the people in that country (before taxes). You could imagine being a dictator and therefore be entitled to the tax raised, say 40% of this figure, but then you'd have to spend most of that on public services, or else you'd have a revolt on your hands and quite possibly a collapse in GDP. If you managed to get enough corruption going to personally skim off a few percent of this figure you'd be lucky. I think valuing a country at its GDP is therfore quite generous, it's probably worth alot less.
Every time the issue of low PEs of British companies is raised, I want to know if the recent introduction of IFRS has contributed in any way.
Well, is ther anyone out there who would like to give an informed opinion?
Being Belgian myself, it is with quite amusement I read all your posts apart from the one of Peter (nbr 9)
I do not know where you worked Peter, but I strongly disagree with your statement by making such a generality. Indeed some part of Belgium are not the most hectic economy of the world (the french speaking part, where I come from...even if I would rather state that making them work more than 40 hours a week is the holy grail) But Brussels & the flemish part are amongst the richest region in Continental Europe...I've been working in several countries in Europe & the comment I hear (before my nationality is disclosed) is always the same when people have one about this tiny country: Hard worker & very efficients. Now of course compared to the hectic London, there is no comparison, but please take care before making such simple & demagogic statement about something you obviously do not know
Julien, I have sympathy with your view. Having worked in places in Europe, I believe Brits attach a certain macho pride to "putting in the hours" and they don't realise that in alot of other countries, people have a life, because they work smarter and more efficiently, and this allows them to go home on time. I once read that once you factor in working hours, the labour productivity of places like the UK and US is not actually as high as it seems.
"Given the fine brewing of beer which takes place in Belgium, I would have thought a take-over by a beer-drinking country like Australia could well be on the cards."
Australians wouldn't know a quality brew if they fell into a vat of it and Belgians wouldn't be seen dead drinking what the Aussies call beer
As a side note, King Albert II could not sell Belgium even if he wanted to because he doesn't own its assets, a.o. the land - he's the King of the Belgians (the people, which I don't think he can sell either, at least not me *), not Belgium, where I believe HM is the Queen of the territory.
* So, in my mid-thirties, working about 40 hours a week, if someone wanted to acquire me, how rich would I be? Or should I merge?
I agree with Peter's comment above. Having worked in Belgium for many years, its only worth about £4.99 on a good day.
Paul, it doesn't seem like you added much value either, then!