Tie Up Between GM and Ford???
COMMENT FROM breakingviews
DOW JONES REPRINTS
'Big One' Might BeDetroit's Best Bet
Tie-Up Between Ford, GM Would Cause Some Pain,But Create a Stronger FirmJuly 15, 2006; Page B16
The survival of the American car industry requires the barons of Detroit to think radically -- something they've thus far avoided doing. Now is the time for their conservative minds to consider something truly transformational: a merger of General Motors and Ford Motor.
That may sound wacky. After all, how could antitrust watchdogs ever allow such a deal? And the complexity is enormous -- probably far beyond the capabilities of both companies' managers. They're fighting for their jobs as things stand.
But it bears serious consideration. The Big One -- as a GM-Ford combination might be dubbed -- would be in a much stronger position to tackle legacy costs in bargaining with unions, suppliers, health-care providers, dealers and the government than they presently are today as fierce rivals.
The savings would be tremendous -- far larger than anything the Nissan Motor-Renault alliance presents. If a merged GM-Ford reduced costs equal to 2% of sales -- one common M&A benchmark -- the capitalized value of the savings could be some $40 billion -- well above their $30 billion of combined market cap today.
Antitrust issues would have been a hurdle in the past -- but perhaps not today.
In March, Washington approved the Maytag-Whirlpool combination despite its control of 70% of the U.S. washer-dryer market. Because GM and Ford have witnessed precipitous declines in their competitive positions, they have just about 40% of the U.S. auto market.
Moreover, as Japanese -- and even Chinese -- rivals expand production in the U.S., that decline in market share is likely to continue. Toyota's annual capital expenditure is already as large as Ford and GM combined. Yet it has fewer models to develop because it has only three global brands. GM and Ford have nearly two dozen.
Because a merger would only make sense if it eliminated entire brands -- such as Buick, Pontiac and Mercury -- further market-share losses would also be anticipated.
Of course, the unions wouldn't like any of this. They might even strike. And car dealers would need to be compensated. As a united force, though, the Big One would be well placed to negotiate with both. And it would have cash to weather many storms.
The likely alternative is a slow and painful decline. In the long run, that is probably worse for workers, car salesmen, investors -- and America.
Bring on the Big One.
The Ratings Game
Washington wants to open up the credit-rating business. Reformers hope that by increasing the number of officially recognized practitioners, future Enrons will be spotted before they collapse. Such expectations are unrealistic.
McGraw-Hill unit Standard & Poor's and Moody's Corp., the parent of Moody's Investors Service, enjoy higher margins than Microsoft. That's because they face little competition.
The two have a combined market share of more than 80%, with Fimilac SA's Fitch Ratings trailing third at around 15%.
Critics say this oligopoly has been created by government fiat. In the 1970s, the Securities and Exchange Commission required regulated financial institutions to invest in securities that had been rated by so-called "Nationally Recognized Statistical Ratings Organizations." At the time, there were seven of these. Today, there are only five.
The fact that SEC-approved raters need to be "nationally recognized" creates a Catch-22 for would-be entrants. They need to be large to receive official status, but without that status how can they grow?
A bill winding through Congress would allow any firm which has provided ratings for three years or more to apply for official recognition.
This overhaul won't change the competitive landscape. As long as raters are paid by bond issuers, the business will remain highly concentrated. Issuers are relatively insensitive to the annual cost of ratings.
But they don't want to deal with many different raters since it would be time consuming. That explains why Fitch has made little headway against its larger competitors.
The leading firms also have tremendous brand names. Despite the odd slip-up, they've earned credibility. Ratings have been a good indicator of future defaults. Investors often specify that the issuers' debt must be covered by named raters.
Reform may get rid of the regulatory barrier to entry but it won't drain the moats surrounding the rating companies.
What's on eBay
At the Allen & Co. conference in Sun Valley this past week, eBay boss Meg Whitman delivered a colorful presentation about the online auctioneer's business. A slide not on display: one showing its sinking stock price -- eBay is down 40% this year. There could be more bad news when the company releases second-quarter earnings Wednesday.
It will take time to sort out eBay's many challenges. Not least of these is what to do with Skype. Investors haven't warmed to last fall's $2.6 billion takeover of the Internet telephone firm. This business faces increasing competition and has yet to produce meaningful returns.
Meanwhile, eBay's core auction business is slowing. Revenue growth fell to a new low of 28% in the first quarter. That has had a knock-on effect on its PayPal payments system, which also faces growing competition from Google.
But with eBay's stock selling for 15 times estimated 2007 earnings before interest, taxes, depreciation and amortization, Wall Street already has priced in much of the bad news. That offers Ms. Whitman an opportunity. eBay's balance sheet is strong.
It sports about $3 billion in net cash -- enough to buy back almost a tenth of its stock.
Because eBay throws off about $2.5 billion in cash annually, it could continue returning cash to shareholders in years to come. To Sun Valley's assembled moguls Ms. Whitman referred to eBay's purchase, payment and communications businesses as the Power of Three. But to score, eBay needs to touch four bases. A buyback might do the trick.
Link to article:
HERE7/17/2006 08:14:00 AM
SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here
0 Comments:
SSG is not a Financial Advisor. Read Disclosure: HERE
--------------------------------------------------------
