What a way to kick off a week: Multi-billion-dollar business deals and trillions of dollars in assets changing hands.
Charles Schwab announced that it had reached an agreement with TD Ameritrade in an all-stock deal valued at about $26 billion. Under the terms of the transaction, TD Ameritrade stockholders would receive 1.0837 Schwab shares for every TD Ameritrade share, a 17% premium. The merger would serve roughly 25 million clients and manage more than $5 trillion in assets. The brokerage firms experienced double-digit gains on their stocks once the news broke.
At around the same time, European luxury juggernaut LVMH Moet Hennessy Louis Vuitton confirmed that it struck a $16.2 billion acquisition of Tiffany & Co. As part of the arrangement, LVMH will pay $135 for each Tiffany share, which is up from the original offer of $120 a share in October.
The purpose of mergers and acquisitions (M&As) is to grow and expand a business. Charles Schwab wants to increase its share of the brokerage market, while LVMH wants to have a greater presence in the jewelry sector. Unlike in previous years, most of 2019 had been relatively quiet in the M&A front, but with interest rates coming down once again, it might foster a surge in M&As.
With a fourth round of quantitative easing (just don’t call it QE4), lower interest rates, and a swelling balance sheet, Wall Street is being flooded with cheap money again. Does this mean every synergy will yield tremendous results? Well, if there is another spike in M&As during the boom phase of the business cycle, it might not be a sure thing and it may fall short of their intentions. We have seen it before: Daimler Benz bought Chrysler for $37 billion in 1998 only to sell it for $7 billion in 2007. Quaker Oats acquired Snapple for $1.7 billion in 1994 only to sell it for $300 million more than two years later. AOL and Time Warner merged in 2001 but the union was dissolved eight years later.
The Austrian School of Economics purports that there is a limit in the size of companies. Legendary economist Murray Rothbard posited, for instance: “Ultimate limits are set on the relative size of the firm by the necessity of markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses.”
Put simply, the larger a business is, the more confused economic calculation becomes.
A New Tariff in Town
President Donald Trump has repeatedly claimed that China is paying billions in tariffs, filling up U.S. government coffers. But is this accurate? No. The Chinese government and the private sector do not pay these levies. So, who does? U.S. importers. And the latest data from the U.S. Customs and Border Protection prove just that.
According to a Federal Reserve Bank of New York study, U.S. companies and consumers paid $40 billion in tariffs because 25% was added to the import price of Chinese products entering the United States. If Chinese businesses were the ones paying the tariffs, then they would cut their prices by 20% to 25% – they have only dipped 2% since June 2018.
So far, the U.S. economy has gotten away with paying higher prices for goods emanating from Beijing. The Commerce Department reported that consumer spending edged up 0.3% in October. The main factor is that Americans’ incomes are steadily rising, so the gains in their wallets allow them to afford the additional penalty at the store.
But what about businesses? Analysts are concerned that both higher tariffs and U.S.-China trade uncertainty will limit capital spending. The Bureau of Economic Analysis (BEA) found that capital expenditures (CapEx) slumped by an annualized rate of 0.6% in the second quarter of 2019, and Morgan Stanley discovered that CapEx tumbled to its lowest level in two years last month.
The global economy can only hope that Washington and Beijing really do reach a deal next year.
Go for a Run
Another day, another run on a Chinese financial institution. Doomed. You’re all doomed.
Liberty Nation recently reported on bank runs in the world’s second-largest economy. It turns out that these are not isolated incidents. It is starting to become a bit more common in China as the economy plunges, the central bank distorts financial markets, and the government’s Ponzi scheme house of cards begins to fall.
Depositors are getting spooked by the funding crunch and the bailouts of other institutions. Customers of Yingkou Coastal Bank were no different as they attempted to withdraw their capital from the bank in northeast China. Like the case of Baoshang Bank, government officials were on the ground and attempted to dispel rumors of a money crunch.
Yingkou delayed its inevitable demise after it raised deposit interest rates to appeal to depositors. The rate was already high, so applying this policy will only exacerbate its insolvency. Unless Beijing gives it a huge cash injection, Yingkou does not possess the capital to dole out these interest payments.
This has been a common theme for smaller banks in China. They send interbank rates higher and raise borrowing costs, making self-funding in the short-term funding market unsustainable. Perhaps this is the plan for Beijing: Swallow these organizations by either nationalizing them or making them get absorbed by the larger players. By doing this, you temporarily limit the economic fallout and prevent an outbreak. Unfortunately for Beijing, you are only postponing the day of reckoning.
Pass the baiju.
Read more from Andrew Moran.