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You Will not Need to Risk too Much for Trades

When you learn about the trading profession for the first time, the business process will be clear to you. Then traders will also learn about investing money into an account using the help of a broker. And the traders will also be able to learn about the possibilities of losing most of the time of trading. This kind of information do not make any good impression to the traders and some of them do not get the right amount of courage for their own business. In this article, we are going to talk about the proper trading business. Using the right kind of approaching strategy to the trades any trader can make the right kind of trading profession. We hope all confused traders can learn from this article and improve their trading performance for the profits.

 

Make profit target from the trades

To make a profit, you will have to imagine it. No, we are not talking about the greed of making a profit from trades. The real thing required for traders is the position sizes.

Using the right kind of approaching strategy to the trades any trader can make the right kind of trading profession.

When the traders will be able to do that for their own businesses, there will hardly be any poor trades. All trades are going to have a proper plan for executions. Then traders are also going to make a proper opening and closing position from the markets. By making we meant that the whole trade will be designed properly by the traders. For that, all the traders will have to make the right kind of profit target from the trades. You will not be able to find out the right swing or trend of the chart if there is no target of making a profit.

 

Trade with low leverage

Though most of the reputed broker is offering high leverage trading account this doesn’t mean you will be placing trades with big lots. Learn to trade with managed risk so that you can easily recover the loss amounts. Online trading Australia is extremely popular and you must be careful with your trade execution. Never think Forex trading is a shortcut way to become a rich person. Just like any other business, you will have to work hard to develop yourself as a successful trader.

 

Find the swings for best position size

After defining the proper targets for the trades like 1:2, traders will be able to find position size. For that, they will have to maintain a proper analogy over the markets and the price charts. We are talking about all the things associated with the change in currency pair’s price change.

Learn to trade with managed risk so that you can easily recover the loss amounts.

At the beginning of your career, you may not be able to keep up with the news and the trading at the same time. There is no need for that. For the position traders, it is needed to maintain the proper track on the condition of financial and political regions. But for a novice trader, the swing analysis is enough to make some proper profit. If there is some more needed, you can accept help of the support and resistance levels of the price charts.

 

The risks must not be too much to handle

Like making plans for everything related to the trading approach, the traders will also have to make a risk management plan. It is important to make the trades right with proper risks. If you do not do it, the tension of the trading business will be a lot onto you. Then the trading process will not be maintained properly. Some of the readers may think about making more money. However, it is not possible to make money and keep it intact without being secure with the trading capital. Managing the risks per trade is the most micro level management for the trading business.

 

Never underestimate the sentiment of the Forex market

There are thousands of traders who have invested their money to trade in Forex. A trader may find it easy to make the profit but only successful trader knows the hard work and the practice behind it. People like to think of themselves as heroes and they often underestimate the opponents. The opponents are not small in numbers and they can play an important part in changing the trend. This article will tell why the opponents should be respected in Forex even if they are novices. It is not necessary that a professional trader is only recognized as an opponent. An enemy is an enemy no matter how small they are. Unless the mindset of a trader is unchanged and does not show respect to traders, making profit will always be hard work.

 

Market sentiment

Market sentiment plays a great role in your trading success.

It is not necessary that a professional trader is only recognized as an opponent. An enemy is an enemy no matter how small they are.

You might be wondering if technical analysis is the key ingredients to become a successful trader. Many traders in the United Kingdom have mastered technical analysis yet they are struggling hard to make money in the Forex market. The only reason they are losing money is lack of proper market analysis. You need to understand the three major forms of market analysis to become a profitable trader.

 

Developing yourself as a currency trading

This is the hardest part of the currency trading business. You don’t have any idea what is Forex trading? But there is nothing to worry about. There are plenty of websites and many brokers like ETX Capital which are offering free education to new traders. Being a new participant doesn’t mean you will have to lose money all the time. Focus on your goals and trade the market with proper discipline. Always remember to assess the sentiment of the market as it will save a huge amount of money in the long run. Try to be a smart trader to make a consistent profit from this market.

 

A big group of the novices can change the trend

If they have a huge amount of money and invest at the same time, it is possible that the trend will change. Do not laugh because the brokers apply the technique to make up fake trends. If the trend can be in your favor, it is possible to make the best use of the volatility. Brokers try to influence the volatility by depositing a huge amount of money and the trend only changes for a small time. The traders get confused and they believe it to be a good chance and place the traders to lose the money. Not all traders are professional like you and they always try to invest more money to get more profit. Respect them and know their strategies before deciding to invest the capital.

 

A formidable trader can come from anywhere

It is not necessary that a great trader will have a great history of financial trading. He can come from anywhere and make miracles happen in this industry.

If the trend can be in your favor, it is possible to make the best use of the volatility.

Try to know about the history of trading and there are many examples where people from diverse backgrounds made history. A trader who has a history of trading in share and bonds should not be more respected than the trader who does not have that kind of background. Every trader can change by working hard and knowing the patterns. Be respectful and always try to make the strategies better. Who knows if a trader from a small village is not practicing the strategy to develop a successful career? Do not take a chance and always give respect to every trader.

 

The opponents are the profit sharers

There are no people who would like to share their wealth with other traders. Always practice in the best way you can to make money. It will be hard but never give up. If there are any mistakes, your opponents will come and take away your money.

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Peace for Syria and a New Kurdistan as Regional Stabilizing Factor?

By Peter Koenig

The US will withdraw her troops from Syria. Will they really? – Let’s take Trump at his word, just for argument’s sake. Though in the meantime, RT reports that the withdrawal may be slower than anticipated, to allow Erdogan making his own “strategic arrangements”, while US troops depart. During his flash visit to the US troops in Iraq on Christmas Day, Mr. Trump already indicated that any US intervention – if necessary – would be launched from Iraq. Of course.

The US will not let go of such a strategic country with access to Four Seas, as promoted by President Bashar al-Assad, linking the Mediterranean, the Caspian Sea, the Black Sea and the Persian Gulf into an energy network. Washington had the full dominion of Syria in mind as the pivotal country in the Middle East, already when Washington first attempted to “negotiate” with Bashar’s dad, Háfez al-Ásad, in the late 1990s, and then after his death in 2000, the secret gnomes of Washington continued the process of coercion with Háfez’s son and heir, Bashar. To no avail, as we know.

Therefore, the question, “Will Syria ever Become a “Normal” Country Again?” – sounds almost rhetorical. Syria is one of those predestined countries to “fall”, decided by the empire, long before the ascension to the throne by Mr. Trump. Others include and are well outlined in the PNAC (Plan for a New American Century) – Iraq, Libya, Afghanistan, Sudan, Lebanon – and Iran. As we see, the plan is progressing nicely – and letting go of any of the ‘milestones’ within this plan – is simply not in the cards. Deviations are not tolerated. That’s presumably why James “Mad Dog” Mattis resigned as Secretary of Defense upon Trump’s announcement to withdraw from Syria. The Pentagon has its mandate, given by the Military Industrial Complex.

 

No human suffering is able to halt this project – and we can but hope that Russia and China see clear on this, that they won’t fall for promises of peace, for make-believe withdrawals, for lies and deceit.

So, war or peace (and war it is) has become full spectrum Pentagon territory, not to be meddled with. It has nothing to do with terrorism, or saving the world from terrorism – it is pure and simple ´calcule’ for profit from the war machine, from stolen and confiscated oil and gas and, ultimately but not lastly, for full power dominance of the world. The Middle East is one of those focal points of the empire that needs to be plunged into eternal chaos. Peace is never an option. Unless empire falls. But until then, the Middle East is a multi-purpose ‘gold mine’, in terms of resources, a test ground for the East-West arms race, a terrain for almost endless destruction – and reconstruction – and a bottomless source of a continuous and destabilizing flow of refugees to Europe. It’s all planned. No human suffering is able to halt this project – and we can but hope that Russia and China see clear on this, that they won’t fall for promises of peace, for make-believe withdrawals, for lies and deceit.

Will Syria ever become a ‘normal’ country again? – I opt for yes. But empire must fall. And fall it will. It’s a question of time and maybe strategy? – For hundreds of years, the Kurds are an ethnicity of between 25 and 35 million people. They inhabit a mountainous region straddling the borders of Turkey, Iraq, Syria, Iran and a tiny bit of Armenia. They make up the fourth-largest ethnic group in the Middle East, but they have never obtained a permanent nation state. Wouldn’t this rearrangement of power in Syria due to the apparent US troop withdrawals be an opportunity to find a solution for the century old Kurdish “problem”?

President Assad might seize the opportunity to accept the Kurds ‘invitation’ to enter the city of Manbij, the current Kurdish stronghold in Syria. And this despite the fact that the Kurds have often fought against the Syrian military, either alongside the US / NATO forces or alongside ISIS. It’s time to rethink geopolitics in the Middle East, beginning with Syria. After all, Manbij is Syrian territory, and Turkey has no legitimate claim on any land within Syria. Except in the case of a possible land swap.

On these grounds Syria might want to initiate negotiations with Turkey, Iraq and Iran to finally establish within the borders of Syria and Iraq (and Iran, as it were), some kind of a Kurdish territory which might over time become a fully autonomous Kurdish Homeland, what today is already called, Kurdistan. Much like Israel was carved out of Palestine, except that Israel was an artificial creation, commanded by outside forces, with the specific purpose already 70 years ago to destabilize the region. Whereas Kurdistan would be a stabilizing factor, a natural process facilitated by the countries within the region.

There are, of course, other players with high stakes in this peace process, like Russia, Turkey and Iraq – and the two rogue nations, paradoxically bound together, Israel and Saudia Arabia. Two nations that have no right whatsoever to even come close to Syria. But they continue having US support, even with the apparent US withdrawal from Syria, or because of it, as they will now play the role of US proxies in fighting Mr. Assad’s legitimate regime.

Russia would most likely prefer no Turkish interference in Syria, for example the occupation of Manbij, but would rather see Syrian control of Syrian territory with negotiated land swap deals with neighboring countries, especially Turkey and Iraq, to bring eventually the Kurdish question to a solution. That is of course just the beginning. The easy part.

The creation of an autonomous region within Syria, Iraq and Iran, called Kurdistan, might require not only an honest process and equitable division of the Black Gold, but also a withdrawal of Trukey from Kurdistan, i.e. through a land swap.

The current semi-offical Kurdistan is one of the oil richest territories of the region. At present these oil resources are divided more or less along the border divisions of Kurdistan, i.e. Iran, Iraq, Syria and Turkey. For these countries hydrocarbon is a key factor in their economy. Therefore, the creation of an autonomous region within Syria, Iraq and Iran, called Kurdistan, might require not only an honest process and equitable division of the Black Gold, but also a withdrawal of Trukey from Kurdistan, i.e. through a land swap. The development towards a sovereign Kurdistan – no time frame might at this point be suggested – would require Kurdish concessions. In other words, peace and homeland have a price. However, this price will never even come close to the benefits of independence and peace.

At present, Kurdistan’s oil reserves are estimated at 45 billion gallon, almost a third of Iraq’s total untapped 150 billion gallons of petrol. The Kurdish Regional Government (KRG), with her capital, Erbil in Iraq (pop. about 900,000), would of course prefer becoming an independent state. But that is just not going to happen out of the blue. Therefore, peace in the region and a Kurdish Homeland is worth a negotiated land and petrol concession. And when would be a better moment for such thoughts and negotiations than NOW?

The re-opening of the United Arab Emirates (UAE) embassy in Syria, may be considered a major public step to welcoming Bashar al-Assad back into the fold of the Arab League, from which Syria was banned at the beginning of the 2011 CIA induced war on Mr. Assad’s government.

There are other signs that Syria is in the process of becoming a “normal” country again. The re-opening of the United Arab Emirates (UAE) embassy in Syria, may be considered a major public step to welcoming Bashar al-Assad back into the fold of the Arab League, from which Syria was banned at the beginning of the 2011 CIA induced war on Mr. Assad’s government. Bahrain has also announced it will reopen shortly diplomatic relations with Damascus. Is this move by the UAE and Bahrain the first step of a new “Arab solidarity”? – In any case, it signals a new recognition of Syria under President Assad.

With Syria becoming a fully autonomous and sovereign country again, where diplomatic missions are being re-established and where refugees return to help rebuild their nation, and where a new Kurdistan, may just be the dot bringing peace and stability to the region. Though that may succeed only without any Atlantist interference – being handled only as a regional project.

A last thought for those who are shaking their heads in disbelief, because of the political and economic volatility of Kurdistan, due to her exorbitant oil riches which are currently spread among four countries – listen! – peak oil is a thing of the past. Hydrocarbons are rather rapidly being replaced as the key energy provider by alternative sources of energy, of which the Middle East also has plenty, but which cannot be stolen – solar energy. The East, foremost China, is rapidly developing new and more efficient ways of transferring sun light into electricity, with the appropriate storage technology that may make it possible to largely phase out hydrocarbons within the next generation.

Hence, the momentum is NOW – US troop withdrawals – to create a stabilizing Kurdistan and make Syria a “normal country again.

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About the Author
Peter Koenig is an economist and geopolitical analyst. He is also a water resources and environmental specialist. He worked for over 30 years with the World Bank and the World Health Organization around the world in the fields of environment and water. He lectures at universities in the US, Europe and South America. He writes regularly for Global Research; ICH; RT; Sputnik; PressTV; The 21st Century; TeleSUR; The Vineyard of The Saker Blog, the New Eastern Outlook (NEO); and other internet sites. He is the author of Implosion – An Economic Thriller about War, Environmental Destruction and Corporate Greed – fiction based on facts and on 30 years of World Bank experience around the globe. He is also a co-author of The World Order and Revolution! – Essays from the Resistance.

Peter Koenig is a Research Associate of the Centre for Research on Globalization.

First published by the New Eastern Outlook – NEO

Is the Trade War a Worrying Sign of a New U.S.–China Relationship?

By Qing Shan Ding

With bilateral trade between the U.S. and China estimated to be worth $710 billion a year, a blooming trade war benefits no one. The causes of this trade war go beyond issues such as intellectual properties and deficits; it reflects a bigger pattern that the U.S. is wary of a growing challenger threatening its global influence.

Despite ongoing negotiations, there are no signs to suggest the trade war between the U.S. and China is about to end. The U.S. President Donald Trump threatened to impose more tariffs on China worth another $267 billion. This is in addition to existing tariffs of $50 billion and imminent tariffs on another $200 billion worth of Chinese goods. All the proposed combined tariffs will be worth $517 billion, virtually the entire Chinese exports to America.[i] China has vowed to respond if the latest tariffs come into force.

This escalating trade war between the two largest economies in the world makes no economic sense. The trade between the U.S. and China amounts to roughly $710 billion a year.[ii] In a globalised economy, China and the U.S. are highly dependent on each other. Earlier in the year, U.S. Department of Commerce has banned U.S. companies from supplying components to the Chinese telecom equipment maker ZTE which resulted in the company being unable to function for a few months, and the impact of new tariffs has already harmed American businesses – from aircraft manufacturers to baby cot makers.[iii] The potential damage to economic growth and job losses will be severe on both sides. So what are root causes of this damaging trillion-dollar trade dispute?

The American rationale for imposing these tariffs is well documented. It started with the U.S. Trade Representative’s Section 301 investigations and concluded the alleged Chinese theft of American intellectual properties and forced technology transfers as the main justification for imposing tariffs. Donald Trump’s insistence on cutting the trade deficit with China is another motivation. However, China has already committed on greater protection of intellectual property and ending mandatory technology transfer in joint ventures. There are no immediate signs to suggest tariffs actually work, China’s surplus with the U.S. increased by 10% in August to $31 billion.[iv]

 

There must be other considerations behind this costly impasse. One of the Chinese government’s initiatives has been scrutinised numerous times in the original investigation. The “Made in China 2025” is a government industry and technology strategy aiming to build strategic capability and innovation power in prioritised sectors. Already considered as industry leaders in some sectors such as industrial robotics, high speed rail and renewable energies, it seems that the American government has started to worry China might start to challenge its global leadership in technology and innovation.[v] And the Trump administration is determined to stop China at all cost.

This trade war also reflects a broader strategic shift. It suggests the U.S. is starting to re-evaluate its relationship with China. Ever since Richard Nixon’s surprise visit to China in the 1970s, both countries were committed to build a healthy relationship which resulted into one of the biggest trading relationship and two inter-dependent economies. However, in recent years, there are alterative thinking which started to emerge that treated China as a rivalry rather than a partner. The Obama administration’s “Pivot to Asia” strategy was largely interpreted in China as a move to contain its growing influence in Asia.[vi] American warships regularly challenging China in the disputed waters of South China Sea is the latest example of the two countries competing for leadership in the region.[vii] All these confrontations add further ammunitions to those in the U.S. who believe that China is becoming a threat to its global leadership.

Other ambitious projects abroad cause nothing but further suspicion. One of President Xi Jinping’s signature initiatives is the “One Belt One Road” strategy. It is a massive infrastructure programme that aims to link China with the Middle East, Europe, Africa and beyond via high-speed rail and sea shipping lanes. It is an economic and diplomatic strategy capable of transforming global trade. This initiative will enable regional collaborations to an unprecedented level and establish China at the centre of a new global trade system.[viii]

The Chinese RMB is long way away from matching the dominance of U.S. dollar. However, some might consider the growing influence of Chinese currency as another example of China’s challenge on America’s global leadership.

China’s planned internationalisation of its currency RMB is another sour spot for some China doubters. Apart from constantly branding China as a currency manipulator, the U.S. also worries about the growing influence of RMB in international trade. China sees overreliance on the U.S. dollar for the trade settlement transaction as risky for China in times of economic uncertainty. In recent years, the Chinese government has pushed the internationalisation of RMB gradually, and in November 2015 RMB was included in the International Monetary Fund’s Special Drawing Rights currency basket. China has started to use RMB to replace the U.S. dollar in some of its biggest international trade deals. Ironically, the trade war is helping to boost the use of RMB in international transactions. Despite the tariffs and depreciation of RMB, as of the end of the second quarter, overseas institutional and individual holdings of RMB-denominated financial assets totalled 4.9 trillion Yuan (US$717 billion), which means the share of RMB-denominated stocks and bonds as a percentage of total assets held by global investors increased to about 3.0%.[ix] The Chinese RMB is long way away from matching the dominance of U.S. dollar. However, some might consider the growing influence of Chinese currency as another example of China’s challenge on America’s global leadership. The dominant position of U.S. dollar in the global financial system is the product of post second world war Bretton Woods system, one of the most coveted assets of the American government.

In Africa, China already sidelined the U.S. and Europe in terms of economic cooperation, investment and wider engagement. The recent announcement of a further $60 billion investment in Africa sparked criticisms of new colonialism. Although readily dismissed by African leaders, the biggest gathering of representatives from almost every African country for a summit in Beijing, and some leaders’ claim of a new world order will no doubt strengthen the belief that China is reshaping global geopolitics and challenging American influence.[x]

It has to be pointed out that the Chinese government needs to take some of the blames for fracturing one of its most important diplomatic relationships. In recent months, China has started to downplay the Made in China 2025 policy. The excessive propaganda of this industrial policy and boasting of China’s capabilities have alarmed the U.S. and European countries, and played an unintended role of fanning the flames that led to this trade war. In China’s diplomatic cycles some officials have suggested it was a mistake for the government to promote this policy so forcefully and publicly.[xi] As a result, one of the propaganda chief was rumoured to have been forced to step down.

Beijing might have wrongly believed Trump was bluffing and was not determined to carry through his threats.[i] This inevitably led the trade tensions to escalate and now both sides are locked in a difficult situation in which no one wants to be perceived as weak.

Another major political miscalculation by Beijing is they might have misjudged the situation. The Chinese leadership seemed to have been caught off guard by Trump’s protectionist rhetoric and considered it too much as election vote winning tactics. Beijing also appeared to underestimate the growing anti-China sentiment amongst the American elite and policymakers. What’s more damaging is they could have misjudged Trump as well, simply dismissed him as a businessman that could be persuaded by offering some commercial incentives such as allowing its hotel chain to operate in China. Beijing might have wrongly believed Trump was bluffing and was not determined to carry through his threats.[xii] This inevitably led the trade tensions to escalate and now both sides are locked in a difficult situation in which no one wants to be perceived as weak.

There is no doubt the stakes are very high, as the world economies become ever more interconnected, the global supply chain could easier be destroyed by any further escalation. South East Asian countries such as South Korea and Malaysia are already victims, as their companies supply vast amount of components and other so called “intermediate goods” to China.[xiii] Certainly, many around the globe hope both countries could return to negotiation tables and reach a resolution. However, to find an agreeable compromise could prove to be very difficult. On China’s side, President Xi has position itself as a strong leader, any move that can be interpreted as weak will be perceived as unacceptable domestically.

Perhaps, the U.S. will be able to soften its stance. As the chief economics commentator of the Financial Times Martin Wolf suggested, no sovereign power could accept the humiliating demands being made by the U.S.[xiv] The demand for a reduction of the bilateral deficits by $200 billion is unrealistic; it would literally require the Chinese state to take control of its economy and artificially manage its export. The notion of U.S. gaining unrestricted access to investment in China but reserving the right to restrict Chinese investment is also unacceptable. It is ridiculous to impede China from advancing its manufacturing capabilities and stop technological innovation.

With the looming mid-term election in the U.S., perhaps, some of the suffering American farmers, one of Trump’s strongest supporting bases could persuade the administration to change its stance. This combined with some American business leaders’ warning about the dangers to jobs and growth of the trade war between the two biggest economic powers, could potentially force the Trump administration to lessen its demands.

China might have already started to prepare for the worst. The Chinese government announced it will boost domestic infrastructure spending, including a new Sichuan-Tibet high speed rail line, to offset the adverse effects of the trade dispute.[xv] The expert analysis from the Hoover Institution which suggests China’s economic growth could be reduced by only 0.3% due to the trade war could further strengthen their belief that it is a risk worth taking.[xvi] For the Chinese leadership, they have to hold on to its negotiating positions, because this trade war reminds many Chinese people of its humiliating past. In the 19th century, they were forced to open its borders and trade by gunboats and unequal treaties. What followed was a century of humiliation in the school history books, no Chinese leader, even the mighty President Xi, would survive signing a trade agreement deemed as an abject surrender.

 

Featured image courtesy: Nikki Asian Review

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About the Author
Dr Qing Shan Ding is a Senior Lecturer in Marketing at the University of Huddersfield, United Kingdom. His primary research area is Chinese consumers, studying the impact of country of origin, consumer ethnocentrism and consumer animosity. Qing also writes about modern China and its changing economy.

References

[1] http://uk.businessinsider.com/trump-china-trade-war-tariffs-267-billion-goods-2018-9?r=US&IR=T

[1] https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

[1] https://www.bbc.co.uk/news/business-45255623

[1] https://www.scmp.com/news/china/diplomacy/article/2163352/trade-war-chinas-surplus-us-grows-10-cent-us31-billion-donald

[1] https://www.cfr.org/blog/why-does-everyone-hate-made-china-2025

[1] https://www.brookings.edu/articles/the-american-pivot-to-asia/

[1] https://www.nytimes.com/2018/05/27/world/asia/china-us-navy-paracel-islands.html

[1] https://www.mckinsey.com/featured-insights/china/chinas-one-belt-one-road-will-it-reshape-global-trade

[1] https://www.scmp.com/economy/article/2163421/us-china-trade-war-helping-boost-use-yuan-international-transactions

[1] https://www.independent.co.uk/news/world/asia/china-africa-bejing-forum-investment-interest-free-loans-a8522376.html

[1] https://www.reuters.com/article/us-usa-trade-china-madeinchina2025-exclu/exclusive-facing-u-s-blowback-beijing-softens-made-in-china-2025-message-idUSKBN1JL12U

[1] https://www.scmp.com/news/china/diplomacy-defence/article/2157028/did-china-think-donald-trump-was-bluffing-trade-how?utm_campaign=Echobox&utm_medium=Social&utm_source=Facebook#Echobox=1532628445

[1] https://www.cnbc.com/2018/07/06/us-china-trade-war-other-asian-economies-at-risk.html

[1] https://www.ft.com/content/dd2af6b0-4fc1-11e8-9471-a083af05aea7

[1] https://asia.nikkei.com/Economy/Trade-War/China-to-boost-railway-spending-by-10bn-to-absorb-trade-war-impact

[1] https://www.hoover.org/sites/default/files/research/docs/18105-ferguson-xu-final.pdf

Legalised Sports Betting – What Will it Mean for the US?

Looking back on gambling in 2018, it’s clear what one of the biggest and most seismic moments was. On June 14th, New Jersey Governor Phil Murphy placed the first legal bet in the state he represents. He made two wagers – $20 on Germany to win the World Cup, and another $20 on the local Jersey Devils hockey team to take next year’s Stanley Cup. Modest bets perhaps, but it was still a landmark moment. It marked the beginning of legal US sports betting and the start of a business that could be worth $6 billion by 2023.

Seven states have since legalised sports betting (Nevada, New Jersey, Delaware, West Virginia, Mississippi, Pennsylvania and Rhode Island) while a further 19 states either recently passed a bill or had one introduced. Meanwhile, professional sports leagues that were previously opposed to legalising sports betting are scrambling to get in on the action.

The long road to legalisation

Murphy’s first bet didn’t come without a struggle. The road towards legalisation began in 2012 with Democrat Senator Ray Lesniak officially raising the issue of individual states being able to determine whether sports betting would be legalised within their borders.

Before that could happen, a federal law known as PASPA (Professional and Amateur Sports Protection Act) – which prohibited states from making their own decision on sports gambling – had to be overturned. Lesniak and his allies faced tough opposition from the likes of the NFL, Major League Baseball, the NCAA and the NBA, all of which were concerned that legitimising sports gambling could compromise profits.

Victory for proponents of sports betting finally came in May, however, when the Supreme Court ended 26 years of restrictions and set the stage for Murphy’s bet just a few weeks later. It was a move that added more than £1.5 billion to the value of London-listed betting companies in the space of 24 hours. You can find out more about the initial reaction from that remarkable day and more analysis here in this insightful feature about US sports betting.

Sports leagues get on board

Despite an initial reticence to embrace sports betting, the major sports leagues are getting involved quickly. An initial hope was that they could collect a so-called ‘integrity fee’ of 0.25 per cent to one per cent of proceeds to cover the alleged additional costs associated with keeping their sports corruption-free. The gambling industry, however, has pushed back.

Speaking at a November sports betting conference in New York, MGM CEO Jim Murren said: “We’re not interested in paying an integrity fee. We’re actually offended by that concept. But we are willing to pay – and pay well – for data and sponsorships and co-branding. In-game betting is going to be so popular that to have league-endorsed data, the most relevant and current, is going to be critical.”

An organisation that’s been early to embrace this stance is the NBA. Scott Kaufman-Ross, vice president and head of fantasy and gaming for the NBA, said the league acknowledged and recognised the changing landscape brought about by the shift in legislation. “We’re going to have better results in a regulated market than an unregulated market,” he said.

The upshot is a deal with Sportradar and Genius Sports to distribute NBA betting data to sports gambling providers in the US.

Meanwhile, Major League Baseball, the NBA, WNBA and NHL have reached agreements to partner with MGM Resorts to become an official gambling partner. In the world of online gambling, one leading operator struck a deal with the New York Jets, which agreed to feature its branding during games. There’s no doubt more partnership deals will be agreed in the coming months as more brands try to manoeuvre themselves into a commanding position for when the floodgates open and online sports betting and gambling is finally legalised across the US.

A potentially huge boost to the US economy

There are numerous arguments as to how much the US stands to gain from legalising sports betting – but by all estimates, it’s pretty sizeable. Americans bet an estimated $4.76 billion on Super Bowl 52 this year – but only 3 per cent of that was done legally. The rest went offshore through international betting applications. One study claims the black market for sports betting is around $400 billion. Now that legalisation of sports betting is possible, there’s hope that this kind of money can be kept in the economy, and reinvested in public services such as schools, transport and hospitals.

An Oxford Economics report commissioned by the American Gaming Association and published in 2017 found that sports betting could contribute $11.6 billion to $14.2 billion to US gross domestic product annually, depending on the specifics of which states adopt it and what tax rates they use.

Investment bank Moelis & Company has gone further, predicting that if all 50 states follow New Jersey’s example the industry could be worth between $20 billion and $25 billion. Furthermore, the Oxford Economics report found that legal sports betting would create between 125,000 and 152,000 jobs, paying between $6 billion and $7.5 billion in total wages.

“It feels like a gold rush”

The United Kingdom, which has had legal sports betting since 1961, is seen by many as an example of the benefits legalised sports gambling can bring. The Gross Gambling Yield in Britain from 2016 to 2017 was £13.8 billion – the equivalent to £208.50 for each citizen. Online gambling has caused the industry to balloon, and now accounts for £4.5 billion annually. It’s the UK’s largest single source of gambling revenue.

In the US, research firm Eilers & Krejcik Gaming LLC estimates that online gambling could account for $9 billion of sports betting revenue thanks to the ease of access to mobile applications. As Sharon Otterman put it: “It definitely feels like a gold rush – the new industry with everybody trying to get a piece of it.”

Whatever the future may be, it offers massive potential boons for sports leagues, gambling firms and sports fans alike, not to mention to US tax coffers that are losing billions of potential tax dollars to the black and grey markets.

Summary

In short, it remains to be seen what benefits legalised sports betting could bring the US – and indeed, when US citizens can begin to enjoy them. But momentum is certainly well behind this emerging industry that’s already flourished in many other parts of the developed world.

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Media Pundits, Economic Hitmen and Duterte’s Rebalancing

By Dan Steinbock

President Duterte’s recalibration of Philippine foreign policy has the potential for greater stability in the region. But it has unleashed the wrath of media pundits and economic hitmen.

 

During President Xi Jinping’s visit to Manila, some 30 bilateral agreements were signed. A memorandum of understanding (MOU) on cooperation on oil and gas development in the South China Sea topped the list of deals in trade and investment, infrastructure, and cooperation on the Belt and Road Initiative.

Duterte’s recalibration seeks to couple longstanding relations with the U.S. with Sino-Philippine economic cooperation. It is a balancing act, not an act of exclusion. In contrast, there was an element of exclusion in the foreign policy in the Aquino era when good relations with Washington were seen to require distance from China.

Today, some critics of the Duterte policies push similar exclusionary ideas seeking to misrepresent or undermine the Sino-Philippine rapprochement. Ostensibly, this occurs in the name of Philippine national interest, yet these pundits and hitmen are affiliated by external economic and geopolitical interests.

Let’s take a closer look at just two such examples. Neither is an isolated case. More recent examples abound. And still more are likely to occur in the future.

 

Media pundits and geopolitical interests

A year ago, the Asia Maritime Transparency Initiative (AMTI), a U.S. think-tank, published a release about “A Constructive Year for Chinese Base Building.” What made the long report intriguing were the many satellite photos and aerial imagery. Yet, the pre-Christmas release did not generate much chatter.

A month later, Richard Heydarian, portrayed as an independent academic and policy adviser, released an AMTI update, “ASEAN Under Duterte: Lost Opportunities on the South China Sea” (Jan 12, 2018). Heydarian complained that “under Duterte’s watch, ASEAN has lost a crucial opportunity to hold China to account.” Thereafter, GMA News headlined his “take on PHL allowing China to do maritime research in Benham Rise” (January 23, 2018). He was portrayed as “GMA News resident analyst.” No mention was made about his author affiliation with AMTI.

 

To foster debate, the Inquirer’s Frances Mangosing released another “exclusive” entitled “New photos show China done with its militarization of South China Sea” (Feb 4, 2018). The “source” of aerial photos was not identified, but the photos were reminiscent of those published previously by the AMTI. That led to a new – this time anonymous – AMTI release based on Inquirer’s story, which noted that most images “were taken in late 2017 by an unspecified patrol aircraft from an altitude of 1,500 meters” (Feb 16, 2018). It was followed by Mangosing’s new piece, “Kagitingan Reef may be China’s ‘intelligence hub’ in Spratlys – US think-tank” (Feb 18, 2018), based on the AMTI release.

Richard Heydarian, portrayed as an independent academic and policy adviser, released an AMTI update, “ASEAN Under Duterte: Lost Opportunities on the South China Sea” (Jan 12, 2018). Heydarian complained that “under Duterte’s watch, ASEAN has lost a crucial opportunity to hold China to account.”

In reality, AMTI is a subsidiary of the Center of Strategic and International Studies (CSIS), a multimillion-dollar U.S. think-tank led by members of U.S. government, State Department, Congress and Pentagon. Heydarian is a member contributor of the AMTI, the CSIS, and Council for Foreign Relations. His Twitter account is visualized by the UK-based International Institute for Strategic Studies (IISS), which is pushing an “Indo-Pacific Age” in Asia – which just happens to be the name of Heydarian’s forthcoming book.

That leaves the mystery of the source of the satellite photos. In addition to CSIS/AMTI, they belong to DigitalGlobe, which is a U.S. multibillion-dollar vendor of space imagery and geospatial content. In 2016, DigitalGlobe teamed up with Amazon, which has a $600 million 10-year cloud deal with the CIA, and CIA’s venture arm In-Q-Tel which has been active in Silicon Valley since 1999. 

There is nothing illegitimate about such affiliations or the content they produce. But they are beholden mainly to U.S. geopolitical interests. Truthful journalism should acknowledge such linkages, not suppress them.

 

Hitmen and economic interests

Since 2016, President Duterte has pushed an infrastructure investment program which relies on sustained growth at close to 7% per year. The strategy is to become an upper middle-income economy by early 2020s. Yet, the effort has been almost systemically misreported internationally.

In May 2017, Philippine Department of Budget and Management (DBM) estimated that $167 billion would be spent on infrastructure during Duterte’s six-year term. A day later, Forbes released a widely-distributed commentary, which alleged that this debt “Could Balloon to $452 Billion: China Will Benefit.” The author, Anders Corr, expected the Philippine government debt of $123 billion to soar to $290 billion. Assuming that most monies would come from China and with excessive mafia-type interest rates, Corr argued that with accrued interest Philippines would end up in debt bondage as debt-to-GDP ratio would balloon to a world-record of 296%.

Like Heydarian, Corr was framed as an independent observer. Yet, according to his own testimony and that of U.S. Naval Institute, he has done “field research” in Vietnam, the Philippines, and Taiwan. He has had “deals” with Pentagon on Russia and Ukraine. In Afghanistan he has served US Pacific Command and U.S. Special Operations Command Pacific for U.S. national security in Asia.

In May 2017, Philippine Department of Budget and Management (DBM) estimated that $167 billion would be spent on infrastructure during Duterte’s six-year term. A day later, Forbes released a widely-distributed commentary, which alleged that this debt “Could Balloon to $452 Billion: China Will Benefit.”

After the 2017 Forbes debacle, Corr seemed to disappear from public debates. Now he’s back, particularly in Australia. He has urged Trump to get tougher in South China Sea, bullied Pakistan with sanctions, advocated US nuclear weapons against North Korea and blamed China for being the ringleader of global terrorism. Despite grossly failed projections, he continues to be used an “expert” by major media.

Corr also has his media trolls. In August 2017, Singaporean-based ASEAN Today, which has many references to Corr’s pieces, published his Forbes piece with the new title: “Is the Philippines heading into a debt crisis?” Maybe the idea was to divide the ASEAN Summit, which Duterte would host weeks later. Yet, the piece was signed by ASEAN Today’s editor Oliver Ward. Interestingly, Ward does not reside in Singapore, but in Boston, U.S. where he also contributes to The Hill Reporter and OpenDemocracy sites, which are funded by Soros foundations and National Endowment for Democracy (NED). Around the same time, the NED also hosted the launch of Heydarian’s critical book on Duterte in the U.S.

So what’s the truth about the alleged “debt bondage”? Let’s compare these forecasts with IMF projections. Between 2017 and 2022, the DBM estimated the debt would mildly decline. My estimate was slightly more conservative because I expect trade wars to have some adverse impact toward 2019-2020. In contrast, Corr claimed Philippine debt-to-GDP ratio would soar to 300% of GDP by 2022. In reality, IMF’s forecast is closely aligned with my projection and that of DBM. In contrast, Corr’s “projections” have nothing to do with reality (Figure).

 

 

The lessons

The moral of the story is that, in the Philippines debate about China and the U.S., independent analysts may sometimes be not that independent. Transparent initiatives may at times prove very opaque. Democracy organizations may promote anti-democratic goals. And even reputable reporters, observers and economic analysts may occasionally serve as assets for external interests – knowingly or not.

In such circumstances, mainstream news may be less about actual news than about carefully choreographed exercises of soft power.

Featured image by Sunstar Philippines

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About the Author

Dan Steinbock is the founder of Difference Group and internationally recognized expert of the multipolar world economy. He has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/

The original commentary was released by The Manila Times on December 11, 2018.

Avoid GDPR Governance Penalties and Improve Your Business with Cloud Computing

The introduction of the EU’s GDPR (General Data Protection Regulation) has made the issue of data storage, access and, ultimately, overall governance vastly more significant. Indeed, with businesses inside and outside the European Union required by law to follow the new data protection guidelines, everyone has been affected. From a financial perspective, the penalties for non-compliance can be severe. Described as “effective, proportionate and dissuasive”, the fines can be as high as 4% of a company’s annual turnover or up to €20 million/$22 million, whichever is greater.

Initial Investments Are Worth It in the End

However, even though compliance is necessary both legally and financially, many businesses have found it hard to meet the required standards. According to a survey by ICSA, 78% of organizations said that becoming GDPR compliant was a “heavy burden” on their resources. But, as is often the case in business, heavy investment can lead to long-term gains. By investing in the right software to become GDPR compliant, a company can actually improve data governance. Today, thanks to cloud computing, handling data doesn’t have to be a chore.

For businesses, the most important data issue is security. Using cloud services such as a web application firewall (WAF), a company has the ability to filter out threats before they become a problem. Beyond that, cloud security software has the power to constantly adapt to the latest threats. Because the software is based online, it has the ability to analyze information in real-time. This allows it to track data security issues such as uncovering risky users by using machine learning to establish when a threat is truly dangerous and when it’s a false positive.

Greater Control Leads to Greater Productivity


“Server – Cyber Security” (CC BY-SA 2.0) by perspec_photo88

This has two benefits in terms of data governance. Firstly, cloud security software protects any stored data. Secondly, it reduces the amount of time spent chasing false leads. By using an adaptive system that can learn to spot real threats from fake ones, a business can streamline its operation and reduce costs. In fact, this idea of streamlining feeds into the other major benefit of using cloud services: organization. Modern cloud servers not only allow companies to store data online but have greater control over the information. As well as advanced search tools that allow data to be filtered and organized in specific ways, cloud software is highly flexible.

Because data can be held on multiple virtual servers, it reduces the risk of a crash taking down an entire system or data being lost. What’s more, businesses can choose products that allow them to scale the amount of storage they use depending on their needs at a particular time. The upshot of this is that costs can be managed more effectively. Therefore, while the initial investment to become GDPR compliant may be high, it will help reduce long-term costs. Indeed, by using cloud service, a business will not only meet the latest EU data regulations but have more control over the information they store. What’s more, they’ll be able to obtain greater insights into their business which, in turn, can lead to greater efficiency, productivity and profits.

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Global Economic Outlook after Trump-Xi Timeout

By Dan Steinbock

As many hoped, the highly anticipated Trump-Xi meeting in the Buenos Aires G20 Summit resulted in a truce. The devil is in the details.

As the G20 Summit ended in Buenos Aires, the G20 official summit statement acknowledged flaws in global commerce, called for reforming the World Trade Organization (WTO) and deleted the word “protectionism” after U.S. resistance.

The statement was completed only after hours of diplomatic bargaining over the night. As far as the European Union (EU) was concerned, the U.S. was the lone holdout on almost every issue in Buenos Aires, particularly in climate change.

The G20 economies preferred a diluted final statement to further G20 division.

Tango in Buenos Aires

Following the summit’s close, Presidents Trump and Xi and their top aides met in a highly-anticipated dinner, which lasted longer than expected. Either there was magic dust in their grilled sirloin steaks paired with a malbec from the Argentine winery Catena Zapata. Or perhaps, just perhaps, reason finally prevailed.

Before Buenos Aires, Trump threatened to impose tariffs on an additional $267 billion in Chinese goods. He also indicated he would raise the existing tariff rate on $250 billion in Chinese imports from 10% to 25% on January 1.

According to early reports, U.S. and China agreed to put on hold new tariff increases. Following Buenos Aires, the White House said that, after a “highly successful meeting”, Trump had agreed to leave tariffs on U.S. products at a 10% rate after January 1, while China agreed to buy a substantial amount of products from the U.S.

The White House also said that China has agreed to start purchasing substantial U.S. agricultural, energy, industrial and other products from the U.S. to reduce the trade imbalance; and that the US and China agreed to try to reach an agreement on several trade issues “within the next 90 days.”

The first impression is that the Trump-Xi Summit may have achieved a critical truce, de-escalation of tensions, and possibly a path toward a long-term compromise.

The timeout came at the 11th hour.

Three trade-war scenarios

Last October, Roberto Azevêdo, Director of the World Trade Organization (WTO), said that the trade war between the U.S. and China was far from over. The speech preceded the release of the WTO Indicator, which suggested that trade growth is likely to slow further into the fourth quarter of 2018 and below-trend trade growth in the coming months.

Three scenarios illustrate the rising economic stakes of Trump’s tariff wars that have rapidly expanded from a bilateral trade conflict to a potential global trade war.

After a sharp upswing in 2017, both exports and imports in Asia had held up very well year-to-date, with continued double-digit growth in many economies. But since the onset of Trump’s tariff wars in spring, elevated uncertainty has haunted the global economy.  

According to WTO, merchandise trade volume growth was expected to reach 4.4% in 2018, which is still below the 2017 level. But as Trump’s tariffs have escalated tensions, a fall in business confidence and revised investment decisions may soften the outlook. Moreover, a full trade war could derail trade recovery for years.

According to the UN, global investment flows were projected to resume growth in 2017 and surpass $1.8 trillion in 2018. Thanks to U.S. neo-protectionism, they fell to $1.5 trillion last year. The current status quo looks even gloomier; especially with the trade tensions and central banks’ planned normalization.

Three scenarios illustrate the rising economic stakes of Trump’s tariff wars that have rapidly expanded from a bilateral trade conflict to a potential global trade war.

In this Global Trade War Scenario, China’s GDP could take a hit of 1%, but the U.S. GDP would suffer a 2% impact.

Last July, U.S. and China imposed 25% tariffs on $34 billion of the other’s imports and levies on another $16 billion. In this $50 billion Muddling Through Scenario, the tariff’s economic impact would have been limited to 0.1% of Chinese GDP and 0.2% of U.S. GDP, respectively.

Recently, Trump has threatened with further tariff escalation. In the ‘America First’ Scenario, the stakes will quadruple to $200 billion, with soaring collateral damage. In China, it could shave off 0.4% of GDP; in the U.S., 0.8% of GDP.

If the stakes of the White House’s tariff war would escalate to $500 billion – Trump’s pre-Buenos Aires goal – the potential collateral damage would increase tenfold from the first scenario. In this Global Trade War Scenario, China’s GDP could take a hit of 1%, but the U.S. GDP would suffer a 2% impact.

How will these trade war scenarios impact global growth prospects?

Three global scenarios

As the global economy has passed its peak, thanks to rising interest rates and global trade tensions, each trade war scenario implies different growth prospects (Figure).

Sources: Difference Group (WEO/IMF growth data)

In the Muddling Through Scenario, both full trade war and ‘America First’ prospects are avoided. A good start would be a bilateral tariff truce starting in early 2019. But it is predicated on successful bilateral diplomacy that will lead to positive prospects in the second half of 2019. In this case, global growth prospects would remain close to the OECD/IMF baselines at around 3.5%-3.9% – possibly even higher.

In the ‘America First’ Scenario, neither truce nor diplomacy would prevail. After spring 2019, continued friction would result in progressive escalation and spillovers in global economy. As a result, global prospects would dampen as world GDP growth in 2019 would sink to 3% or worse.

In the Global Trade War Scenario, diplomacy would fail, while ‘America First’ escalation would spread across the world economy. Risks to global outlook would overshadow world GDP growth, which would plunge to 2%-2.5% for several years to come – which would translate to plunging world trade and investment, and new geopolitical conflicts.

High stakes

After Buenos Aires, the Global Trade War scenario has been temporarily suspended. Yet, the ‘America First’ scenario has not been fully reversed.

We’ve been there before. After the Trump-Xi Florida summit in April 2017, U.S. and China announced a 100-day action plan to improve strained trade ties. Yet, only two weeks later, Trump issued a memorandum, which directed Commerce Secretary Wilbur Ross to investigate the effects of steel imports on national security – and that became the first shot in the bilateral trade war last spring.

With the truce, the Muddling Through scenario prevails momentarily but it can easily reverse back toward escalation, even global trade war.

If the White House and the Congress fail to achieve a decent compromise in the Trump trade wars, the complications would degrade global economic outlook for years to come.

The stakes are historical. Failure should not be an option.

Based on Dr. Steinbock’s briefing on the Trump-Xi meeting and its impact on global growth prospects on December 2, 2018.

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About the Author

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/ 

2018 Global M&A: A Bad Year for Shareholders?

By John Colley

In this article the author sheds light on why the likelihood of success, in terms of shareholder value creation, is further diminished during an enormous spending spree. He concludes that the various corporate governance measures designed to ensure there is alignment between boards and shareholder interests, although better than nothing, are far from being fully effective.

 

Year 2018 may become a global record year for the sheer volume of mergers and acquisitions, possibly approaching the previous highest of $4.6 trillion in 2015. Driven by high corporate profits, large cash balances and the ease of lending, corporates have spent like never before. Real costs of borrowing are around zero after tax relief and inflation. In the U.S.A., the spending spree has in addition been driven by significant tax concessions and a relatively strong dollar. The business environment outlook is also benign with only Brexit a significant shadow together with other global moves towards protectionism. How will shareholders fare during this enormous spending spree? Certainly, if large corporates have access to significant funds there is a temptation to spend it rather than distribute to the shareholder. History suggests the likely outcome is destruction of shareholder value on an industrial scale.

 

Shareholder Value Destruction

We do know that business prices relative to earnings have been increasing steadily ever since 2008,1 largely consistent with the increasing availability of funds for acquisitions. In effect the availability of more money is chasing prices higher to the point of almost certain shareholder destruction. In recent months we have seen Comcast, a U.S. global telecommunications conglomerate, acquire Sky, a European cable operator with 23 million customers, for £30.6bn. This was over 100% more than the previous undisturbed share price. Comcast shareholders immediately sold shares wiping £10bn off the Comcast share price indicating the extent of overvaluation they felt the deal demonstrated. On a lesser scale, Coca Cola has just agreed with UK-based Whitbread on the acquisition of Costa Coffee, a chain of predominantly UK-based coffee shops, for £3.9bn. This is around £1bn more than the expected IPO would have raised. The bid was also significantly above other buyer interest possibly also by £1bn. Coca Cola thought it was buying a “scalable coffee platform” to develop a global position. Instead they are buying a business with 88% of its sales and 95% of its profits in the rapidly maturing UK market. It is their first move into hot beverages. Some may say 20 years too late in view of the speed of the coffee market development.

 

Research

Research is relatively clear and unambiguous on the success or otherwise of large scale mergers and acquisitions activity. Study after study finds that 60% to 80% fail to meet expectations and around 60% destroy shareholder value.2  Around half of all acquisitions are sold off again within 5 years. We also know that the performance of so-called mega deals is worse. When prices are reaching current heights, the likelihood of success in terms of shareholder value creation are still further diminished. In effect, very few of the recent mega deals will create value and the vast bulk will be value destroying. So why do shareholders let boards commit to so many deals which are not in shareholders’ interests? What motivates boards to take such major risks? 

 

Board Motivations

Boards do it as they see more power, status, and ultimately pay arising from the increase in size of the business. They also have a different outlook on risk when managing shareholder money rather than their own. They are well aware they would not see these benefits from giving the money back to the shareholders. Ultimately they have a significant conflict of interest, which is not aligned with the best interests of the shareholder. As for shareholders, they appoint boards to increase the value of the business and their shares. The job of the shareholder is not to run the business. In effect, the shareholders recourse is once boards have failed when they can fire the CEO and Chairman. In 2017, GE CEO Jeff Immelt was fired after 17 years in charge during which he completed transactions to the value of $126bn (advisors benefitted to the tune of $6bn). In 2018 the succeeding CEO, John Flannery, wrote $44bn off those transactions representing the extent of shareholder value destroyed. He was also duly fired as shareholder confidence in GE Leadership was lost.

Announcement of deals is normally surrounded by much hype and euphoria particularly from the many constituencies who will directly benefit. This includes target shareholders who usually see a highly priced exit, and the many advisors such as investment banks, accountants and lawyers.

Studying the aftermath of major transactions during the immediate following years is instructive regarding the success or otherwise of the deal. If the deal does not meet expectations, corporates are not keen to admit to their failure. However, for major deals it is very difficult to suppress or disguise significant underperformance. Announcement of deals is normally surrounded by much hype and euphoria particularly from the many constituencies who will directly benefit. This includes target shareholders who usually see a highly priced exit, and the many advisors such as investment banks, accountants and lawyers. The bidder shareholders are normally presented with a rationale supporting the deal which projects increasing shareholder value. Most major deals require shareholder approval. However is the presented case optimistic and what is the likelihood of it being achieved? That will become apparent over the following years.

 

Overpaying

What we do know is that businesses significantly overpay to the extent of passing all their future synergies from merging with the target to the target shareholders. Typically we see share price premiums of 30% to 40% over the undisturbed share price prior to any bid. This premium reflects the current value of the business plus future benefits. However currently this premium looks to be increasing not just with the 100% plus paid by Comcast for Sky. The price paid by Coke Cola looks extreme and seems unlikely to be recouped.

AB InBev, the world’s biggest brewer bought the second biggest SABMiller in 2016 for $107bn, more than 50% above the undisturbed share price. Two years on the share price is down over 40% as the business struggles with $108bn of debt and the dividend has just been cut. Competition authorities forced the sale of all the acquire businesses in North America, Europe and China.

Trade buyers are often willing to pay whatever it takes to capture a target unlike the more disciplined financial buyers. Indeed in most bidding situations which involve both trade and financial buyers, the trade buyers usually heavily outbid the financial buyers. Trade buyers often feel that the target may not become available again, or could be acquired by a competitor, and so pay whatever is necessary aware that they ultimately may be destroying value.

 

Integration

Another key source of value destruction is the integration period. Integration is an inward looking process in which staff jockey for a reducing number of positions. Uncertainty reigns as it may take some time to determine who goes and who stays. During this period key staff may leave as they want to control their own destiny. Often, the younger more dynamic staff moves leaving those who may have more difficulty moving. Indeed competitors, aware of the uncertainty, will target staff with attractive offers to lure them away. The impact can be significant.

Many acquiring businesses have not fully thought through their integration plans resulting in protracted and defective integration. The people negotiating the deal are quite different to those charged with integration who are often only introduced late in the progress.

During this highly vulnerable integration period it is common to also lose market share. Customers may be uncertain about the new ownership. Sales people may be more concerned about their jobs than keeping customers happy. Again customers are normally targeted by competitors during this period and lured away. In recent major acquisitions the London based software house Micro Focus acquired a bundle of businesses from Hewlett Packard (HP) for $8.8bn in a cash and paper deal in 2017 (These businesses included Autonomy, a big data UK-based business previously bought by HP for £11.7bn. Ninety percent of the value had already been written off the business in a year). In 2018, around a year after the deal with Micro Focus was done, U.S. sales collapsed by 12% as many of the U.S. sales force left. With no new pipeline for U.S. sales Micro Focus’ share price crashed by 46%.

A similar situation occurred in the £11bn merger between two Scottish fund managers Standard Life and Aberdeen Asset Management in 2017. The objective of the merger was to lower costs by saving £200M to better compete with the lower cost passive tracker funds. However, there was a major haemorrhage of investment funds as clients took their money elsewhere. The share price of Standard Life Aberdeen has now collapsed 40% since the merger took place.

Many acquiring businesses have not fully thought through their integration plans resulting in protracted and defective integration. The people negotiating the deal are quite different to those charged with integration who are often only introduced late in the progress. Deal makers are dominated by finance and legal personnel whilst integration requires operational people who know how to run the business. The more protracted the integration period the greater the prospect of lost market share and key staff. This period should be kept to a minimum. Indeed it is an advantage of Private Equity that they very rarely integrate businesses.

 

Corporate Governance

In view of the apparent divergence between the actions of the board and the interests of the shareholders then, what measures are in place to attempt to create some form of alignment between these divergent interests? Clearly these vary in almost every country. As a general principle it is apparent that the more concentrated the shareholdings, the more influence shareholders wield. In the UK, listed shareholdings are quite concentrated in the hands of institutions, fund managers and pension schemes. As a consequence, boards can meet a significant percentage of their shareholders in a few meetings. It was London-based institutions which recently voted down Unilever’s plan to move its head office to Holland in an apparent protectionist measure, where courts are resistant to foreign takeovers. This would also entail leaving the FTSE100 Index which attracts many passive investors. This was following the Kraft Heinz $143bn bid for Unilever a year earlier.

 

Non-Executive Directors (NEDs)

In some corporate governance regimes, NEDs are appointed to ensure that the position of the shareholder is considered when making important decisions. NEDs are also there to ensure compliance with laws and listing requirements, offer advice and ensure that values and ethics are upheld. However there remains some scepticism as to their effectiveness. They are normally chosen by the Chairman although this is usually after consultation with the CEO. Neither is likely to select people who might “make waves”. Indeed, NEDs often have a number of similar positions which means they can spend only limited time on any business. Whilst their contracts may stipulate two days a month many will try and keep it to board meetings and little more. They are rarely from the industry in question and so may have little grasp of the competitive dynamics. Information fed to them is carefully filtered and managed to achieve the desired effect in terms of actions and approvals.

NEDs are also there to ensure compliance with laws and listing requirements, offer advice and ensure that values and ethics are upheld.

Remuneration is significant in relation to responsibilities which may encourage NEDs to ‘tow the line” and not make stands against potential high risk decisions. Famously the late Richard Cousins resigned as NED of Tesco in protest at the Booker Diversification deal at a time when Tesco was struggling in its home markets. However that is a somewhat rare event. NEDs rarely resign even when facing serious value destroying decisions. The chairman apart they rarely meet shareholders to understand and represent their views. There is some evidence to suggest NEDs may not always entirely understand the position of the business. Certainly recent casualties such as Carillion suggest that NEDs had limited insight into the finances over quite a protracted period prior to the business entering liquidation. Again the specialised nature of the contracting industry may have played a part.

 

Conclusions

Overall, the various corporate governance measures designed to ensure there is alignment between boards and shareholder interests are better than nothing. However, they are far from being fully effective. Meanwhile, surplus cash and the ability to readily borrow at almost nil cost are driving acquisition activity and prices steeply upward. The prospect of current mega deals creating shareholder value are thin indeed. Shareholders are unlikely to benefit from the current acquisition binge and boards may find there is a day of reckoning to come when the outcome of these deals is known over the next few years.

 

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About the Author

John Colley is Professor of Practice in Strategy and Leadership, Pro Dean, at Warwick Business School. Following an early career in Finance, John was Group Managing Director of a FTSE 100 business and then Executive Managing Director of a French CAC40 business. Currently, John chairs two businesses and advises private businesses at board level. Until recently he chaired a listed PLC.

 

References

1.https://www.bcg.com/en-gb/publications/2017/corporate-development-finance-technology-digital-2017-m-and-a-report-technology-takeover.aspx

2.Martin RL. (2016). M&A The One Thing You Need to Get Right. HBR Org. https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right

Private Equity: Past Performance is Not a Guide to the Future

By John Colley

With risks being inherent in  investing especially in today’s business climate where they are emerging at ever-increasing speeds, there seems little prospect of previous performance being achieved again in the future, take for example the case of private equity. As the author argues, the sheer volume of money at PE’s disposal is slowly degrading the key elements of PE value generation – PE is becoming a victim of its own success.

 

There is little doubt that Private Equity (PE) has performed well since the 1980s when it first emerged. Whilst there is always conjecture over the extent,1 there seems little doubt that it has outperformed the main stock market indices over that period.2 Consequently, the returns are attracting significant money to the industry from rich individuals and institutions such as pension funds. The number of partnerships has quadrupled over the last 20 years and current “dry powder” is now estimated at $1 trillion, and with a similar amount being raised through new funds. Ironically, funding is now being rejected as there are insufficient suitable investment opportunities. This creates a problem for the PE industry as the model is focussed on raising funds to buy, improve and sell businesses. At this point, funds plus profits less the partners’ commission are returned to investors. The lack of suitable targets and the sheer volume of money raised are resulting in the original premise of the industry being stretched. This is increasingly resulting in the dilution of the disciplines which have made the industry so successful; PE is becoming a victim of its own success. As funds generally have a life cycle of 10 years before performance is assessed, it may be some time before reducing returns become apparent in industry performance studies.

 

Trade Buyers

If one contrasts the performance of corporate trade buyers with PE then the advantage is obviously with PE. PE adheres to certain disciplines, in this way avoiding the value destruction so frequently experienced by corporates. It is known that around 60% of corporate deals destroy value and 50% are re-sold within 5 years. 60% to 80% materially fail to meet expectations.3 There are a number of reasons for this including simply paying too much, often to avoid competitors acquiring the target company. The rationale that it won’t become available again can drive the price up. There is often a significant disconnect between what a business is worth and what has to be paid to buy it.

Timing is also an issue as when to sell is determined by the seller to maximise proceeds. The business has usually been prepared for sale with reduced costs and deferred investment.

It is known that around 60% of corporate deals destroy value and 50% are re-sold within 5 years. 60% to 80% materially fail to meet expectations.

Integration is often problematic as it is a very inward looking and stressful process frequently resulting in lost market share and key employees. It rarely goes to plan. Plans are often rudimentary, lacking detail and produced as an afterthought late in the acquisition process when the operational people are introduced to the process (acquisitions are almost invariably dominated by financial and legal people). Synergies from integration are frequently overestimated to justify the high price necessary to win the bid. Assumptions about subsequent performance are often optimistic at best and provide little leeway for error. 

The PE Approach

In contrast, PE looks at many potential deals and chooses to run only with those able to deliver an adequate return, usually 2.5 times the original investment. This may be one in ten of those examined. The key question of who will ultimately buy the business from PE also has to be answered at the start of the process.

PE is disciplined over what the business is worth and what they will pay. They also construct a very clear strategy to add value which only occasionally involves integrating businesses. This approach avoids much execution risk. As the partners keep 20% of any gain, they treat the investment as their own money and carefully align the management to the shareholders cause by giving them a significant proportion of the equity which can be anything between 15% and 40%. In contrast, corporate management have very little real “skin in the game”. Hence, there can be a tendency to treat the money as if it belonged to someone else.

PE businesses are funded predominantly by high interest debt which provides a strong incentive to manage cash and costs carefully. This approach minimises expensive borrowings and increases equity value. Efficient cash management also leads to great care when making investments. Unless investment opportunities will be high yielding and low risk then they will not proceed. Working capital management and cost control are the real hallmarks of PE with generated cash used to reduce debt rather than invested in risky capital schemes or acquisitions. Similarly, executive pay and bonuses are tightly controlled so that the value of the equity is maximised. This allows both PE and management to share in capital gains when the business is sold. The business will be sold on a multiple of earnings so in effect, the increase in earnings through reduced bonuses and salaries is multiplied by the sale multiplier.

PE businesses are funded predominantly by high interest debt which provides a strong incentive to manage cash and costs carefully. This approach minimises expensive borrowings and increases equity value.

However, the key critical difference is that PE requires a clear and simple strategy. Whether it is expansion of a winning format, perhaps rolling out a new technology or marketing concept, major cost reduction, or entering new market segments, the strategy has to be clear.

The vast bulk of PE’s activities are “buyouts” which involve acquiring divisions and companies that corporates no longer want. This might be due to underperformance or that they are no longer categorised as core business. Either way, they are corporate off loads which PE simply runs better.

 

The Threats to PE

However, the key elements responsible for PE’s historic success are coming under stress. They are being diluted under the weight of available investment funds and the lack of opportunities which fully meet the disciplines. In effect, the net has to be spread wider to include opportunities which previously would not have made the grade. The result is lower grade acquisitions and investment strategies, higher prices, and less management equity involvement which may mean less “skin in the game” and commitment.

1. Pricing

First of all, the “wall of money” chasing opportunities have pushed up prices over the last 10 years. In the U.S., prices have increased by almost 50% since the financial crisis whilst in Europe the increase has been more modest at 10% to 15%.4 In the U.S.A., debt to Ebitda has increased from 3.5 to 5.0. The higher debt risk makes the industry much more exposed to recessions, trade downturns or higher interest rates. Higher prices make it harder to achieve historic levels of return. We know that acquisition prices tend to follow deal volumes and hence any subsequent loss in confidence or restricted liquidity will bring volumes and prices down, to which PE will have a significant exposure. 2018 is likely to reach an all-time high on deal activity (previous high was 2015 at $4.7Tn). Can the market continue going higher or is it set for a fall?

2. Management Equity

As prices push higher, the PE model is still looking to achieve a hurdle rate of return on investment. One way to maintain this return is to ascribe less equity to management. In effect, PE keeps more of the generated return.

The higher debt risk makes the industry much more exposed to recessions, trade downturns or higher interest rates. Higher prices make it harder to achieve historic levels of return.

Hence, management are being given less equity to motivate them. A consequence is that management may be more willing to go elsewhere for a better opportunity, or become more focussed on bonuses and salaries which are often not aligned with equity performance. This is a sad feature of listed corporate businesses. A consequence is likely to be reduced management focus and energy in pursuit of equity.

3. Integration Risk

Another issue is that in the earlier part of 2018, there has been a move towards “buy and build” type of strategies which are currently making up a majority of PE acquisitions.5 In effect, this is a variant of “roll up” strategies in which a number of businesses are acquired in a particular industry sector. The objective is to reduce overhead and distribution costs through integration, and increase market power through greater market share and influence. There are two problems with this approach; firstly, it drives up prices for remaining businesses in the sector as the choice of opportunity becomes limited to an industry and sector. Others in the same sector may also follow to create competing scale and scope economies and market power. Secondly, integration is necessary to create synergies which introduces significant execution risk. The loss of key staff and market share becomes much more likely.

4. Secondary Acquisitions

There has necessarily been a major move to acquiring secondary acquisitions. In effect, PE is buying businesses from other PE houses that have already been through the PE process. A consequence is that there is likely to be less potential for improvement as cash and costs will have been squeezed. Another value-adding strategy will be needed. In addition, there may be the issue of motivating management who have acquired affluence through their equity involvement in the previous deal. Secondary acquisitions have increased rapidly in recent years. It is likely that “less has been left on the table” following previous PE activity and that returns are likely to be lower.

 

Conclusions

For each of the key areas in which PE generates value, there is evidence that the modus operandi is becoming diluted with implications for the extent of future value creation. In effect, the PE model has reached capacity limited by acquisition availability and too much money chasing limited opportunities. Higher target prices is bad news for PE as it means more debt risk, and a greater likelihood that they may have to sell into a market with lower multiples in the event of a downturn in deal activity. Greater numbers of secondary deals are likely to also result in lower returns as much of the opportunity on cost reduction and cash control have already been exploited. Similarly, readily available value-adding strategies have already been applied. “Buy and build” strategy introduces execution risk which PE has done well to avoid in the past. Certainly, corporates have found this area to be a ready means of destroying value. Can PE really avoid the same fate? Reduced management alignment through more limited equity participation will also introduce greater risk in retaining and motivating key management. What we are seeing is the sheer volume of money at PE’s disposal slowly degrading the key elements of PE value generation. There seems little prospect of previous performance being achieved again in the future.

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About the Author

John Colley is Professor of Practice in Strategy and Leadership, Pro Dean, at Warwick Business School. Following an early career in Finance, John was Group Managing Director of a FTSE 100 business and then Executive Managing Director of a French CAC40 business. Currently, John chairs two businesses and advises private businesses at board level. Until recently he chaired a listed PLC.

 

Reference

1. “Private Equity Benchmarking: Where Should I Start?,”Towers Watson, 2012,  https://www.towerswatson.com/-/…/Towers-Watson-Private-Equity-Benchmarks.pdf?

2. https://www.investopedia.com/ask/answers/040615/how-do-returns-private-equity-investments-compare-returns-other-types-investments.asp

3. Martin RL (2016), “M&A: The One Thing You Need to Get Right,” Harvard Business Review, https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right; Christensen et al (2011), “The Big Idea: The New M&A Playbook,” Harvard Business Review, https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook

4. Financial Times Alphaville, 2017.

5. “Bain and Company’s Global Private Equity Report 2018,” https://www.bain.com/insights/global-private-equity-report-2018/.

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