Newsletter, February 15, 2018
Technology, Inflation and Valuations
The “age of automation” has raised a very important question: Is technology a deflationary force? Of course, it is. Reduced cost of labor, development of asset – light businesses and improved standard of living are some of its effects. As inflation is connected to higher interest rates, so is deflation to lower interest rates. These, in turn, lead to lower discounts and higher valuations.
Corporate Taxation in US and M&As in Europe
Following the application of the Tax Reform system in US, the reduction of the corporate tax rate to 21% (previously was 35%) will provide companies with a higher amount of available capital. Therefore, the equity’s value will increase, giving the companies the opportunity to invest on M&A plans in the EU market seeking not only to find attractive deals but also to dampen their portfolio volatility.
Viewing Public Debt on a Joint European Basis
In Greece public debt reaches 175% of the country’s GDP as measured by EUROSTAT for the second semester of 2017. The percentages for Italy and Germany are 134.7% and 66% respectively, whereas the European Union countries’ public debt comprises 83.4% of total GDP. Although debt relief seems unmanageable (148 billion euros to be cancelled from Greek public debt to achieve a 100% ratio to GDP), it could be plausible through the prism of EU since it represents a very small portion (1.2%) of EU’s total debt. This step towards a fiscal union could possibly entail additional burdens for countries with a sustainable debt. Theoretically, however, all EU countries will benefit in the long run if the total public debt is held in a steady level.
Europe’s Contribution to Global Deal Making Activity
Concerning European deal making activity in 2017, the annual volume of transactions increased to $856 billion. A fundamental number of top deals were accomplished in the Energy, Mining and Utilities sector, with UK grabbing the lion’s share in M&As, with a total of $44.2billion invested across 318 deals. Noteworthy competitors to UK were Germany, which saw $30.6billion change hands across 173 deals and Denmark, with $17.1billion. These ascertainments corroborate the fact that European economy is in its era of economic recovery and grows at a fast pace.
Looking Ahead – The Major Factors Influencing European Equities in 2018
In a recent report, VRS contemplates the future course of European equities by looking at the potential key developments of economic growth, corporate earnings, inflation and interest rates. The report was distributed to international institutional investors on December 18, 2017. It is also available on the research platforms of Bloomberg, Thomson Reuters, Factset and Researchpool.
Recent Research Reports, Articles & Posts:
Companies recently followed by VRS: Fourlis, Kri-Kri, Kimberly – Clark Corporation, Nike, Adidas, National Bank of Greece, Fraport, Boeing, Airbus, Arcelor Mittal, Kellogg Company
Can the Merger Price Represent the Fair Value of the Acquired Company?
PetSmart Inc. was acquired in 2014 by BC Partners for $83 per share. The judge determined the above price as a reliable indicator of fair value. He declined any discounted cash flow (DCF) analysis based on both PetSmart’s history of unreliable short-term projections and the aggressive long-term projections created to aid the auction. On the other hand, the bidders’ competition and the presentations that thirteen of them received from PetSmart’s management reflect a fair merger price.
Moving to Online Stores
The biggest challenge along the transformation cycle of retail stores is to successfully connect their physical logistics, inventory, store systems and operations to their e-shops. Although costly, it will reward the retailer; e-commerce payments volume growth rate is expected to reach 70% by 2021 (from 20% in 2017), whereas the physical commerce volume growth rate will slightly increase from 1% in 2017 to 1.6% by 2021, according to Business Insider analysts. This has even lured some retailers, such as “Bebe” in USA, to avoid bankruptcy by totally replacing physical stores with online stores.
The Main Types of VC Funding
The Venture Capital, an alternative investment nowadays in the current affairs, is divided into three categories. The first is Early Stage Financing which includes the Start-up, the Seed and the Initial Stage Financing. The second category is the Expansion Financing which is composed of the Bridge Funding, the Second and the Third Stage Financing. The last category is the Acquisition or the Buyout Financing, which contains the Management and the Acquisition funding.
The 3 Key Standards of Corporate Value
Fair value: This value enables a willing seller to match with a willing buyer. It is the hardest value to calculate since it incorporates conditions as well as assumptions that should be acceptable from both sides and from a wider “audience” of sellers and buyers. “Fair” stands for a broader “audience” of sellers and buyers and not for a small group of potential or ideal sellers and buyers. The fair value “requires” the existence of an efficient market in terms of information with regard to the subject company. When certain conditions are met, this value can also be the one paid by investors buying the shares of a company through the stock market.
Investment value: It refers to a particular investor, for example a private equity investor or a strategic investor entering in a company with the aim to attain a return on investment over a certain time horizon. It is the value that derives this desired return on investment. It can be lower than the fair value.
Intrinsic value: It is based on the company’s potential growth as it incorporates a number of assumptions to arrive at a specific value in mind. As long as the assumptions are justified, so can be the intrinsic value. It is the “easiest” to calculate, however with this value it is less likely to match a willing seller with a willing buyer. This value is meaningful for the perfect “match” between a seller and buyer. The intrinsic value will be paid by the potential buyer who is in position to make the most out of an acquisition and / or who possesses exceptional information about the subject company.
Banks versus New Technology
The banking sector has been tremendously threatened by the technological development of the last decade. Companies of technological and digital importance attract investors and are gradually gaining a considerable market share in banking services sector. This emerging threat has driven financial institutions worldwide to the digital refresh of the offered banking services. This has been attained through collaboration with Fintech and blockchain companies to ensure better quality of the proposed services as well as reduction of the functional costs.
Tech-stock Boom or Bubble?
As of end January 2018, technology stocks represented 17% of global equity value. In fact, this percentage was close to the percentage level of the bubble highs back in 2000. As of February 10, the technology sector percentage presented a 1.77% increase. However, unlike the bubble in 2000, now, tech companies do have earnings and sales. Therefore, identifying the current tech-stock boom as a bubble could be naive.
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