Best Way to Ensure Competition

A deal long in the making, the acquisition of one global mining company by another, won't happen. It has been sideswiped not so much by the credit markets (just two weeks ago BHP insisted it was going forward notwithstanding) -- it has been sideswiped by the competition policy of the EC.

I refer of course to BHP Billiton, the Anglo-Australian company that had planned to buy the Rio Tinto Group with a share swap at 3.4 to 1.

As I noted back in June, when world credit conditions looked a lot better than they do now, even then the stock of the target company was trading at a level below that suggested by the 3.4 to 1 ratio suggesting that even then the market was concerned that regulators would scuttle the deal.

BHP is the larger of the two concerns, but Rio has the more illustrious history. Rio traces its origins to Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.

At any rate, the deal faced scrutiny from regulators in several of the countries in which both companies did business, including South Africa and Australia. But it was the EU that did the scuttling, by making unexpectedly severe demands in terms of the assets that would have to be sold off by the combined entity.

I'll use my humble blog to express baldly an opinion. Scuttling mergers is NOT the best way to ensure competition. There are several reasons for this. One of them is that the predictable action of authorities along such lines preserves incumbent managements against the threat of takeover -- and that the threat of takeover is a valuable deterrent to laziness or self-dealing by incumbents. I'm not making any such charge against the Rio Tinto management, by the way. I'm only saying that in general when authorities act as those in the EU have done, they remove a worry from corporate managers -- and the public needs to have corporate managers worry. Takeovers are among the things they should be worried about.

The best way of ensuring competition is to look for barriers to entry and then lower them. Why is some well-capitalized industrial company somewhere not even now putting money into a start-up iron ore mine? Because the market demand for iron ore doesn't make it profitable? or because there are administrative barriers? If the latter, then the EU might look into how those barriers can be lowered. That would give existing managements more, rather than less, to worry about

I didn't see it coming

In a sudden fit of humility, suitable perhaps for a Sunday morning, I've decided to remind you of a prediction I made a month ago that has proven false.

Crude oil prices.

I noted the ongoing fall of crude oil prices. They had been at around $150 at their mid-summer peak, but by last month had dipped into the upper $90s.

With my customary brilliance, I said, this has "likely gone as far as it is going to go."

Oops. It has lost another $30 per barrel. And, even better, the fall has shown up in the price of gasoline at the pumps. I'm delighted to have been wrong.

The effective halving of the price of crude might be the only thing keeping our economy going at all at the moment, given the credit squeeze and consequent Wall Street meltdown.

The credit squeeze

There's quite a perceptive Lex column in today's Financial Times.

The item that especially caught my attention concerned activist investors and the effects of the present credit squeeze on their strategies.

The columnist means by "activist investors" not the folks who are interested in, say, a businesses' carbon footprint or whether it does business with Burma. He means the investment funds that seek to make a profit off of pressing managements for changes -- telling the managers, sometimes through the mechanism of an actual or threatened proxy fight, that they should merge with somebody, or sell off non-core subsidiaries, or initiate a stock buy-back program, etc.

This has become a more difficult way of making money than it used to be. The reason? In order to do this, you have to start off with a substantial chunk of a company's stock, and you (the activist) would generally acquire that chunk with borrowed money. Obviously, as money gets harder to borrow in relevant quantities this gets more complicated.

But that's not the worst of it. For as credit gets tight, its harder to make the case for dividend pay-outs or stock buy-backs. Management push-back against such proposals will be more vigorous.

The spin-off of non-core assets gets more difficult, too. Spin them off to whom? Who is buying these days?

"Many activist funds" the FT tells us, "may be in for a long, hard slog."