Money to Eat

Chinese fund manager has won a lunch with famed U.S. investor Warren Buffett after bidding $2.11 million for the opportunity in a charity auction, more than three times what the lunch fetched last year.

More on Anheuser Busch

From the NY Times:

The board of Anheuser-Busch is planning to reject this week an unsolicited $46.4 billion takeover bid from InBev, a rival brewery based in Belgium, people close to the American company said on Wednesday.

The rejection, which has been widely expected, will formally start what is likely to become a bitter fight that may even spill over to a political debate about Anheuser-Busch, the maker of Budweiser and one of the nation’s most prominent family-run companies.

In an effort to justify rejecting InBev’s $65-a-share bid, Anheuser-Busch is expected to announce an extensive reorganization aimed at bolstering profits that will include cutting more than $500 million in costs, these people said.

For more details, go here.

Berkshire Hathaway

The Berkshire Hathaway Inc. Warren Buffet replies that he tells a prospective seller to think of the company as a work of art.

"You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever"

For a good read on the man and his philosophy, go to the above link.

Bollywood vs. Hollywood

Investment is an indicator of human desires. Entertainment has always been at the top end of the "desire", Hollywood in particular. The reason is that the industry is seductive--it is much more "exciting" to fly to Hollywood, hang out with Tom Hanks and Steven Spielberg, and eat in fine restaurants then it is to invest in life insurance companies, or furniture stores out of Omaha Nebraska. The Japanese were awash with cash and then came to invest in Paramount and Columbia Pictures--Matsushita came and left a few years later with their tail between their legs. As for Sony and Columbia Pictures, that was not successful either.

So now come the Indians. As the New York Times writes:

Reliance Entertainment, part of an Indian conglomerate controlled by the telecommunications and finance mogul Anil Ambani, is in talks to finance Steven Spielberg and David Geffen in a new venture.

Maybe the difference is that the Indians know how to make movies--at least of the Indian kind.

Busch and the InBev Deal

We have been following the proposed take-over of Anheuser-Busch by InBev, the Belgium based global beer brewer. For an interesting read on the corporate fiduciary responsibility in the battle for Budweiser read this letter from one of the Busch family members to the Board of Directors. The internet is great, isn't it?

Asia and M&A

Lotte Group announced that it was acquiring Guylian, a Belgium chocolate maker. Interesting deal and on the face of it could be a good one. Go here for more details.

In China, the largest privately owned steel company is in talks in Brazil to buy an iron ore mine.

``The Chinese steelmakers are aiming for a stable and safe supply of iron ore through taking stakes in mining companies,'' said Helen Lau, a Shanghai-based analyst at Daiwa Securities Group Inc. ``Brazilian mines are an option.''

And for knowledge based economies, increasingly foreign investment is tied to the quality of life. To see where Seoul ranks, go here. And for the top 50, see this list.

Websites at the Edge

This has little to do with foreign investment, but you might be interested in this article if you are interested to know where the entertainment part of the web is headed.

Sumitomo Mitusi

The FT Blog, Alphaville, reported the following:

"Sumitomo Mitsui bank, one of Japan’s largest banks, is in talks with Barclays to invest about Y100bn ($930m) for a small equity stake in the UK bank as part of Barclays plan to raise £4bn in fresh capital. "

I am not in such a good situation to second guess the thinking but we will discuss this type of investment philosophy this week.

China Ripple Effect

The NY Times reports:

"a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam. "

The effect might be akin to Japan's impact on the growth of the four Asia tigers in the late 1970s and 1980s as they began shedding labor-intensive industries to their neighbors....except China will create big waves that could transform countries like Vietnam and Bangladesh.

What's the Beef?

As most of you know, the above means what's the argument about? Why the friction?

Well you may remember that I discussed the importance of investor perceptions--and how the current US beef issue would affect investor perceptions toward Korea negatively. Lo and behold, Philip Bowring who writes for the International Herald Tribune wrote a critical commentary on the US beef protests and had this to say:

"The Korea which wants to buy up manufacturers in the United States - currently it has its eyes on GE's household appliance industry - as well as banks in Indonesia and golf courses in the Philippines continues to put huge bureaucratic obstacles in the way of foreign acquisitions of, for example, Korea Exchange Bank."

Of course there may be no tie between US beef protests and what is happening at KEB or the desire to buy up golf courses. Is his article an exaggeration? Yes. Nevertheless, for every action there is an equal and opposite reaction. To be simplistic, there is what is, what will be, and what should be. The difference between "What is" and "What should be" provides the underlying force for so many of our actions--but such actions if not properly thought through can have unintended consequences with the result that "what will be" and "what should be" do not come together.

Philip Bowring is a respected journalist from the UK on Asian affairs. His bio is here.

Want to know what the culture is like for India's leading business group, Reliance? According to a friend of Mukesh Ambani, CEO of Reliance Industries:

“They grew up as lotuses from the filth. It makes them tough, it makes them suspicious, it makes them vindictive at times, and it makes them come out in a hurry. They always see life as, ‘Oh God, better not miss an opportunity.’

Vodafone and SK Telecom

Yesterday, we discussed the case of why someone like a Vodafone (VOD) would have interest in acquiring SK Telecom, given the relatively low market cap of SKT. The specific scenario that I outlined would be:

1. SKT sell at around 5x EBIT whereas VOD sells at 16x.

2. If VOD were to buy SKT they would need to pay a premium--maybe 30-40%--which would push the SKT purchase price multiple to perhaps 7-8x EBIT.

3. VOD shareholders would benefit as their stock could appreciate since the part of the operations of VOD that runs the SKT part would be valued more highly than the purchase price that VOD paid.

Please understand I am not advocating SKT be bought or sold--just playing "What if". I wondered what NTT Docomo was selling for and it isin the range of 7.5x EBIT--market cap of $61Mn and they generate about $8BN in EBIT over the last 12 months.

A class participant wrote the following to me yesterday:

1. I think the reasons why the mutiple of SK telecome is only 5 comapred to the example company's 16, would be many such as SK telecom company's location in terms of geopolitical position in globe, its main market's credibility, market size, local cultures, the investor's perception of the korean market where SK telecome does business and so on. So, even the example company buys out SK telecome 100%, it seems it is quite difficult to expect the multiple 5 would become 16 because the reasons listed for SK T's mutiple 5 will exist and affect in the Korea market. If SK telecome company does business in the same country market as the example company's, it would become 16. But, as far as those listed reasons are still effective in the market, i think it is quite difficult to become simply around 16 in the future, maybe 8 or9 or so.

2. Also technically, it looks so difficult to buy out SK telecome 100% because SK shares are owned by thousands of shareholders. Unless the example company suggests the really good price with much premium, the shareholders will not sell their shares. If the example company gives a really good price to buy out all the shares, the return in this buyout would not be big enough the example company are really interested in this buyout deal. If the example company raise the stock price so that SK T multiple "5" becomes "16", it would be difficult to expect any return to the example company.

Addtional extended inquiry:
is there any difference between " the example company's buying more than 50% of all SK T shares" and buying out 100% shares in terms of the change of SK T's multiple 5 ? Normally, more than 50% shares are enough to get a control over one company?

Let me try to answer them one by one.

1. Yes, country does affect the multiple. But in this case, the I believe the multiple is out of whack--yes, it is Korea. But Korea is an advanced country, with a relatively stabile economy and reasonably good protection of public investors. Of course SKT's industry is not growing and that deserves a big discount. But NTT Docomo's market is just as mature and trades at a much higher multiple as do other European telcos. VOD has a 16x multiple and it is not considered to be high--pretty low actually as this translates to a 12x PE ratio which is below average globally. Believe (the last time I looked) the Dow is trading at a 16x PE. The participant is right--probably the market would not just translate the 16x value of VOD to the SKT portion in the event that it was purchased. It would probably be something less (perhaps 12x?)--but it certainly would not be 5x. But this is what makes the investment world an interesting one. It is just my opinion against many opinions that form the market out there.

2. Usually one can buy 100% shares of a public stock by making a tender offer--this is a direct offer to the shareholders to purchase their shares. While not all shareholders will necessarily tender, there are typically what we call "drag along" rights, meaning that if the purchaser takes a substantial majority of the shares (80% range but depends on local law), then the other shareholders are forced to tender their shares for purchase. The price offered for the shares is typically at a premium to the price in the market so shareholders usually do tender their shares. I would imagine that the tender offer price would not be based at a 16x multiple, but at a good premium to the existing mutiple. You do see recalcitrant management objecting to the tender or purchase offer---see the current case of Yahoo vs. Microsoft. Note that in the Microsoft case they did not go directly to the shareholders for the shares but first sought management and BOD buy-in through the offer. Please also note that in Korea it is not possible to tender for all of the shares since I believe foreign ownership in telcos is restricted to either 49% or 51% (forget which one).

Lastly, a company, if it can, should try to purchase 100% of the shares, though there are many instances where a majority is enough (e.g. JV partner's resources, local market acceptance, employees, capital etc.). You do not have full control until you have 100% of the shares, since with a minority investment you always have to consider the interests of the minority shareholder (or face a lawsuit and related damaging publicity). I will explain this later in class through a case study.

Anheuser-Busch

For interesting reading on the acquisitions and the choices that the Management of Busch have, go here.

More on BP in Russia

The Economist reported:

"WHEN your Moscow office is raided by Russia's security services, a court in Siberia imposes an injunction on your staff and your work permits are denied, you can tell you have upset someone."

This does not mean that you pack your bags and head to places where there is only the promise of good corporate governance. But your eyes always have to be open. We will discuss more.

Annheiser Busch

The largest US beer maker, Annheiser Busch, may be sold to Belgium based InBev. What is the thinking of Busch shareholders?

"InBev's overseas clout is a key reason for investors to view favorably any bid for Anheuser, which faces a mature U.S. market and competition from foreign beers and wine. To diversify, Anheuser bought 50 percent of Mexico's Grupo Modelo and 27 percent of China's Tsingtao Brewery Co Ltd <600600.ss>.

"A takeover would expand the globalization of their franchise, and we like that," said Duncan Richardson, chief equity investment officer at Eaton Vance, the 10th biggest Anheuser shareholder with 5.5 million shares as of March 31."

To read the article, go here.

The NYT reported last week:

"BP, the huge British oil company, on Friday rejected demands from a group of Russian billionaires to fire the head of the lucrative TNK-BP natural gas venture, deepening a conf
rontation between shareholders as the country’s biggest state-controlled oil companies seek a stake in the venture. "

As the developed countries need more and more resources, you can expect more problems like this. What is the way to avoid this? Ensuring an alignment of interests and deal structuring. Easier said than done but we will review some basics this week.

Business Insight

Was asked the question, "How do you gain business insight?" At the risk of assuming that I have such insight, it is clear that the best way is to experience as many different business situations as possible. If you have a graduate degree in real life experiences, you will naturally develop this ability. Second, you should have the responsibility of money and investment--after all, if you are not in a position of losing (or gaining) on an investment for either yourself or your company, then there is not that much accountability to what you do, I think. But not all people who come out of school can gain this position advantage.

One other way is to continuously listen to the masters. This does not mean reading the newspaper to see what the "experts" are saying. We will discuss the newspaper as a filter to information (when putting money at stake, you should avoid filters). One way is to read directly interviews with people of accomplishment--this is one way to avoid the "filter" effect. Also online there is increasingly good access to great video. Want to see what Warren Buffet is like and how he thinks? Go to http://www.charlierose.com/ and in the video archive section, click business and then scroll to Buffet. You can see a number of notable business people talk about what they are thinking today. This week I invested 30 minutes of my time to see the interview with Richard Branson--one of the boldest entrpreneurs of this century. To think like a great one, it helps to understand how the great ones think.

Agriculture Business

Someone in class asked about the agriculture business. Yes, it certainly is in an up-cycle. What do you think the financial profile and business model of the usual farm is? For background on current events in agriculture, go here, if you are interested in the subject.