David Cameron does not look to German Greens for defence advice. Pity. Teutonic tree-huggers doubt the national benefits of EADS taking over BAE through a share exchange. So should he.
The titanic effort executives of both companies are putting into lobbying for the deal reflects the weakness of their rationale. EADS, a Franco-German group that mostly makes airliners, would supposedly get access to the US defence market where UK arms company BAE is strong. But BAE’s US business would lurk in a black box, safe from transatlantic tinkering. So synergies would be limited.
BAE would supposedly have access to EADS’s balance sheet. But the group’s previous deals have typically destroyed value. Why would new ones be different?
Some fans of the takeover say that EADS chief executive Tom Enders is smarter than BAE boss Ian King. That is an argument for replacing Mr King with a mini-Enders, not jamming the groups together into a Frankenbusiness.
The transaction would leave the UK as the junior partner in a defence champion dominated by Germany and France through their partnership within the EU. It is naive to imagine Britain’s national interest will always be symmetrical with its neighbours. A perceptive note from think-tank Chatham House points out that BAE programmes in armoured vehicles, warships and submarines important to the UK would look superfluous to the merged group.
We are assured that safeguards to national defence capacity would be baked in, via a golden share. Thus the business illogic of the deal is underlined. And defence companies, dependent as they are on public spending, are only quasi-commercial. Yet the BEADS proposal smacks of the hegemony of the multinational company, a libertarian delusion dispelled by the credit crunch.
Mr Cameron, so chillaxed about BEADS as to appear comatose, should sit up and start paying attention. His default position on the takeover should be disapproval, not quiescence.
Accounts prepared for international consumption have achieved a degree of uniformity under International Financial Reporting Standards, masterminded by Sir David Tweedie. But valuations pumped through this streamlined plumbing are variously arrived at. So Sir David, 68, formerly of the International Accounting Standards Board, is preparing to do battle with the obfuscators once again, as chairman of the board of trustees of the International Valuation Standards Council.
The IVSC has yet to enjoy the name recognition of supranational entities such as the UN, IMF or One Direction. Recruiting Sir David raises its profile a little while allowing him to climb back on to his hobby horse of fair value accounting. This doctrine typically requires assets to be valued in line with current market prices rather than historic cost. The difficulty for banks with heaps of duff loans is that revaluation might set up a negative feedback loop, where market prices fall further rather than recover.
Similar reservations apply to derivatives, where practices also vary. This goes beyond the traditional City divergence between researchers who value options using equations and traders who figure a derivative is worth what Dave at MegaBank will pay for it. Still, standardisation would counteract the worst practices, such as mine valuations that do not adjust for extraction risk. More power to Sir David’s elbow.
Slow with the Reddies
Doctor heal thyself. Ybrant Digital, an Indian group, has failed to come up with $175m owed to Experian for three online marketing businesses, including the website PriceGrabber. Experian is best-known as a credit-checking agency.
Apparently, Experian received letters from Ybrant’s banks saying that the marketing company could raise the money. But the testimonies of relationship bankers are hardly as dispassionate as those of professional credit checkers. Such services are only nascent in the subcontinent. All the more reason for the FTSE 100 group to do its own leg work.
Klaxons whooped balefully at the group’s Dublin HQ as the September 25 completion date neared and payment failed to materialise. Instead, Ybrant boss Suresh Reddy told Indian media that he was planning to pay $100m in equity instead of cash. But Experian wants out of the consumer end of marketing. It does not want to swap one exposure for another.
The transaction is too small to affect a vendor with a £10bn market value. If Ybrant does not find the money, another acquirer may. But the moral is clear: a deal ain’t over until the fat cheque clears.
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