Archive

from Breakingviews:

Mike Lynch should try to buy Autonomy back

By Chris Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Mike Lynch should try to buy Autonomy back. The software entrepreneur sealed a superb deal for shareholders when he sold the Cambridge-based firm to U.S. tech giant Hewlett Packard Co in October. But the marriage isn’t happy. Lynch was meant to be leading HP’s efforts to scale up the business. Instead, he’s leaving to do acquisitions of his own. It would make sense if Autonomy was on his list of targets.

Last summer, HP may have looked like a suitable parent for Autonomy. Lynch himself had taken the business from nothing to annualised revenue of $1 billion in the second quarter of 2011. Scalability wasn’t in doubt. HP’s new chief executive, Léo Apotheker, was a software guy who wanted to move away from the challenged core business of computer hardware. The 64 percent premium on offer showed a commitment to turbo-charging Autonomy’s performance.

But the new family has turned out rather dysfunctional. HP shareholders blew a big raspberry at the overpriced deal. The board replaced Apotheker. Autonomy staff left too. That was to be expected given the cash deal had provided a decent exit on their stock. But HP’s big-company bureaucracy and “hardware culture” was another factor, according to a person familiar with the situation.

Meg Whitman, Apotheker’s successor, has backed the strategic logic of buying Autonomy. But she will need to work very hard now to bring harmony, let alone satisfactory returns on the investment. Licensing revenue has proved very disappointing lately, HP says. Mass defections by Autonomy staff would see the debilitating loss of institutional know-how, albeit with the clarity of HP’s culture becoming dominant.

The best thing for all concerned may be for HP to dispose of the business. HP’s stock has already taken a hit. The cultural mismatch may never be resolved. Big gaps are appearing in Autonomy’s development expertise. HP seems to have other priorities.

from MacroScope:

Manifest currency? U.S. dollar’s global dominance not set in stone

Incumbency, it is often said, confers many advantages.

Sitting U.S. presidents certainly have reaped its benefits – in the past 80 years, only three have been unseated.

Most economists believe the same benefits apply to reserve currencies. Yes, the U.S. dollar may one day be supplanted as the leading international currency, the thinking goes, but that day is many decades away.

Then again, maybe not.

A new working paper from the National Bureau of Economic Research that looks more closely at the dollar's own rise to the top in the 20th century suggests, among other things, that "the advantages of incumbency are not all they are cracked up to be."

By looking at the currency denomination of foreign public debt issued by 33 countries from 1914 to 1946, the authors – University of California-Berkeley professor Barry Eichengreen and Livia Chitu and Arnaud Mehl of the European Central Bank – find that dollar-denominated bonds were nearly equal to those priced in sterling by the late 1920s. That's about two decades earlier than the date assumed by previous scholars.

When stripping out Commonwealth countries that had strong commercial and political links with Britain, the dollar overtook sterling in 1929.

from MacroScope:

Asian Americans hit hardest by long-term unemployment

Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.

Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.

Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:

Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.

from Global Investing:

Three snapshots for Wednesday

On Friday 283 companies in the S&P 500 had a dividend yield higher than the 10-year Treasury yield, at yesterday's close this had fallen to 266 but remains very high compared to the last 5-years.

Italian consumer morale plunged to its lowest level on record in May as Italians' pessimism over the state of the economy plumbed new depths.

Germany set a zero coupon on its new Schatz, the first time it has done so on debt of such maturity. The bid to cover ratio for the new bond at the auction was 1.7, compared with 1.8 at a sale of two-year debt on April 18.

The average yield at the sale was 0.07 percent.

from Breakingviews:

Long-awaited Yahoo deal heaps pressure on Alibaba

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Alibaba has finally reached a truce with Yahoo. The Chinese e-commerce giant is offering at least $7 billion to buy back its own shares from the U.S. internet group, recapturing half the stake Yahoo acquired in 2005 for $1 billion. The timing is good, since Facebook’s IPO has left cashed-up investors who could help finance the deal. But a successful outcome will heap pressure on Alibaba.

Yahoo is making some compromises in giving Alibaba what it has long wanted. The new deal will expose it to a hefty tax bill - something it had hoped to avoid. Yahoo will also give up one of the two seats it currently holds on Alibaba Group’s four member board. Still, the U.S. group will keep some upside from Alibaba shares, by holding on to half of its 40 percent stake until Alibaba eventually lists its shares.

Alibaba too is taking the rough with the smooth. It has agreed to value itself at a minimum of $35 billion, compared with the $32 billion at which it sold shares in 2011. The final price, which will be decided by a sale of Alibaba shares, may be higher. Moreover, it must come up with at least $6.3 billion in cash in the next six months. That comes just months after it borrowed $3 billion from a group of six banks to privatise its B-to-B e-commerce portal, Alibaba.com.

Facebook’s recent initial public offering has probably helped, by creating substantial new wealth among Internet investors. Russia’s Digital Sky Technologies, which participated in Alibaba’s last round of fund raising in 2011, is one. It just sold $1.6 billion worth of shares in the U.S. social media giant. Others who invested in Alibaba in the past, such as Singaporean state investor Temasek, may also be interested.

Once the money is raised, Alibaba founder Jack Ma must deliver growth to justify its valuation. The $35 billion at which it must raise finance is equivalent to 130 times 2011 net profit, compared with 31 times for Tencent and 45 times for Baidu, China’s two biggest internet companies by market capitalisation. Moreover, new investors are likely to one day want an exit. In closing the door on the Yahoo saga, Ma may be saying “open sesame” to another.

from MacroScope:

In QE3 waltz, Fed again steps toward easing

On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.

Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.

According to the minutes:

Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.

To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:

Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

Writes Mulraine:

from MacroScope:

Is U.S. economic patriotism hurting?

Any Americans believing that their country is being bought up by the Chinese might want to pay heed to a new report from the Vale Columbia Center on Sustainable International Investment. It says that China is a minimal player in terms of foreign direct investment in the United States and that Washington should in fact be doing a lot  more to get it to gear up its buying.

To start with, look at the magic number.  In 2010, the last year for which numbers are available, only 0.25 percent of FDI into the Untied States came from China.  Switzerland, Britain,  Japan, France, Germany, Luxembourg, the Netherlands,  Canada were all far bigger. In the U.S. Department of Commerce's report on the year, China, numbers were so small they were lumped into a category simply called  "others".

This is not enough, the Vale Columbia report says. Given China's burgeoning economic role across the globe, America can benefit from a lot:

First, FDI provides an influx of capital into the struggling economy, increasing employment at no cost to the taxpayer. Second, jobs in foreign affiliates are typically better remunerated than similar jobs in domestically owned companies. Third, keeping the US open to foreign investment demonstrates a global example for international openness. Finally, Chinese money refused by the U.S. could alternatively be directed to competitors or even the U.S.’s enemies.

(On the latter point, its worth reading our global economic correspondent Alan Wheatley's story on China's influence in Europe)

The Vale Columbia report acknowledges that Chinese FDI  is controversial - primarily because a lot of Chinese companies are state-controlled and therefore raise fears that FDI may be more strategic that profit-seeking. There is also the concern about subsidies, piracy and economic espionage.

But the gains from opening the door to Chinese outweigh the risks, the report -- entitled Economic Patriotism: Dealing with Chinese direct investment in the United States -- says, recommending a series of steps such as dumping reciprocity clauses in FDI bilateral dealings.

from Breakingviews:

Euro stocks discount lion’s share of new fear

By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s hard to be bullish about European equities. The economies look weak both inside and outside the euro zone and the single currency’s crisis only seems to get worse. But the share prices may be discounting even more bad news.

The STOXX 50 index of leading euro zone shares has lost all the tentative gains made in the first part of this year and is standing at not much more than half the level of five years ago. The total return since then, including reinvested dividends, is a depressingly high loss of 35 percent. In the United States, the total return of the S&P 500 over the same period is slightly positive.

Some underperformance is justified by Europe’s weaker economic performance and by the euro zone’s problems. The relative weakness on the eastern side of the Atlantic is reflected in earnings expectations for 2012. Thomson Reuters data indicate a 5 percent gain in the euro zone and 10 percent in the United States. The most recent economic news suggests the gap could widen.

But European share prices may reflect too much pessimism. European equities have usually been cheap by American standards; right now the discount of forward earnings multiple is above the post-1987 average. And not only is the 9.5 price-earnings ratio one-quarter less than the equivalent U.S. figure, it appears to discount no earnings growth at all in the next five years and no increase in valuation.

There could be big rewards for those brave enough to buy. If euro stocks’ earnings rise at half the post-2005 annual rate of 10 percent over the next five years and p/e ratios move only halfway back to the long term norm, then investors will earn inflation-adjusted annual returns of 11.6 percent.

from Global Investing:

Three snapshots for Thursday

The Bundesbank is preparing to stomach higher German inflation than it likes, above the European Central Bank's target level, because of the euro zone crisis, a source at the central bank said on Thursday.

Although the Bundesbank still wants stable prices across the euro zone, its latest comments show the bank recognises that upward pressure on German wage costs and property prices suggest its inflation is likely to rise above the bloc's average.

As this chart shows, historically the Bundesbank was quick to react to any signs of inflation:

The Bank of England voted on Thursday not to give the struggling economy another injection of cash as concerns over stubbornly high inflation outweighed the risk of a prolonged recession.

The number of Americans submitting new applications for jobless benefits edged down last week, easing concerns the labor market was deteriorating after April's weak employment growth.

from MacroScope:

Jobs or inflation — Is the Fed distracted?

The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.

The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.

But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.

“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”

Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.

Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.

With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.