February 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

One thing is for sure. You are left in no doubt where Brendan Barber, general secretary of the TUC, sits on the issue of private equity.

In a recent speech he gave in the city, he said: “They give the impression of being little more than amoral asset-strippers after a quick buck - casino capitalists enjoying huge personal windfalls from deals at the same time as they gamble with other people’s futures.”

Meanwhile, yesterday, the Observer’s Simon Caulkin said: “When a German politician described private equity funds in 2005 as ‘locust’s’ he was mocked. But by and large he was right.” Mr Caulkin also quoted research from the Centre for Research on Socio-Cultural Change, saying that the private equity business: “instead of benefiting the mass of investors, is designed to enrich a tiny minority of partners who set up and run the funds.”

Meanwhile, also writing in the Observer, Ruth Sunderland said: “It is not clear how private equity can justify the fact that it enjoys a raft of tax breaks. These are not to the exclusive benefit of the industry, but they do work disproportionately in its favour.”

But then there’s the other side. Writing in the Sunday Telegraph, Sylvia Pfeifer had an altogether more sympathetic tone when she said: “The irony that seems to have escaped the GMB union and the Labour politicians who have jumped aboard the anti-buyout bandwagon is that the funds responsible for safeguarding workers’ pensions are the same ones that have been bankrolling the private equity boom, especially the US houses.”

She added that the UK’s pension fund deficit is tumbling down to its lowest level since 2002 according to Watson Wyatt, and that this is: “Thanks to rising equity markets and also to the performance of other pension investments - including private equity.”

The Sunday Times business editor John Waples vented his literary venom on the shrinking violets of the city. He argued that the big banks, such as Barclays and HBOS, the accountants and lawyers, all of whom do very nicely out of private equity thank you very much, have been too silent. He said: “The debate over private equity needs the voices from all the participants, and the one heard from the city has been pitiable.”

Finally, in the Independent, business editor Andrew Murray-Watson argued that: “Private equity-owned companies typically grow faster than their plc peers - which is good for their staff. For every private equity-owned company that has cut jobs, there is at least one that has added to its workforce. Take Fitness First, the gym company: in 2003, when it was sold to private equity, it had 7,000 workers; it now employs 13,500.”

February 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Debt can be wonderful thing. Just supposing a company is growing in line with the FTSE 100. The index has almost doubled in value over the last four years. So, even your average large business should have enjoyed something of an impressive growth spurt during the last few years.

If you had invested in a typical FTSE 100 business, or, even more spectacularly, a typical FTSE 250 firm in 2002, you would have enjoyed phenomenal returns. But supposing, by contrast, you had put your money into a deposit account, and saw your yield rise and fall in line with the rate of interest. You might be able to congratulate yourself for not taking a risk, but surely you would regret your reluctance to embrace the stock market

But supposing you made your investments by borrowing. So rather than investing your money, you are, in effect, investing your bank’s money. Your profit could have gone through the roof.

Typically, private equity firms enjoy 80 percent gearing, meaning for every pound they own, £4 is borrowed.

Some own large stakes in quoted companies. Other private equity consortiums own companies outright and take the firms they own off the stock market. Either way, for as long as either share prices or profits are rising faster in percentage terms than the interest they pay on loans, they are quids in.

And here is a fact that is often overlooked. The relationship between a company’s valuation and profits - known as pe ratio - should have a close correlation to the rate of interest. If the rate of interest is high, say 20 percent, then you would expect a company’s valuation to profits to be little more than a fivefold multiple (although, in practice, average pe ratios never drop so low).

And yet today, while the rate of interest remains low, pe ratios too are modest and much lower than the historical average seen over the last couple of decades.

Combine this with the enormous levels of credit sloshing around the global economy at present, and, all of a sudden private equity firms are able to buy companies at historically low valuations, when rates are low and money easy to come by.

This lucrative model can be made even more profitable if the private equity boys use the assets of the company they are buying to generate even more capital.

So, for example, the talk is that if Sainsbury’s does fall to the private equity companies, the new purchasers will use the retailer’s property portfolio, selling up many of the bricks and mortgage assets, then lease them back, in effect using Sainsbury’s own assets to partially fund their takeover.

But there are dangers implicit in this approach.

Good times don’t last forever. The experience of 1929 tells us how dangerous highly geared investing can be. The high levels of gearing might make a fantastic business model when companies enjoy a percentage growth rate that is higher than the rate of interest on their borrowings, but suppose things flip. This is the big downside, and yet, ironically, in all the ballyhoo over private equity, and talks of asset stripping and job losses, this particular danger often seems to have been overlooked.

But, then again, as we alluded above, company valuations relative to the rate of interest are still modest by historical standards. Maybe, for the time being at least, the industry can afford its high levels of gearing and the disaster scenario is still only a remote possibility.

The danger seems to lie in the possibility that rates might go up. Today, business, governments and individuals in the US and UK are so heavily geared, that we are more reliant than ever on the rate of interest. If rates should suddenly start to rise across the board, as some fear, then the private equity model will suddenly look a good deal weaker.

Perhaps the last word should lie with credit ratings agency Moodys. It has the rate of default amongst the riskier corporate bond and loans issues in the US at a mere 1.57 percent - that’s the lowest level since 1981. But, alas, the agency expects this default rate to rise to 3.07 percent by the end of this year. If Moodys is right - and 2008 sees a continuation of this trend - there could be trouble.

February 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Here’s a game you might have considering playing with yesterday’s Sunday papers. Count the number of times the two words private and equity appear next to each other. Come to think of it, don’t bother, such is the frequency of their use, that the game gets very tedious within a few minutes.

Private equity is in the limelight; from the TUC to just about every economics and business commentator, it’s become the central talking point. And with the latest rumours connecting the US private equity groups Kohlberg Kravis Roberts Co and Texas Pacific Group with the buy-out of Texas energy giant TXU for $32 billon, it seems likely to stay in the full glare of publicity for some time.

But TXU is simply the most spectacular name yet to full under the spotlight of private equity. In the UK, the rumour mill has suggested that Sainsbury’s could fall under the hammer soon, while yesterday the Sundays were quick to spill the beans on talk that New Look is likely to be subject to a £2 billion bid.

But, while the rumours and the astonishing pace at which businesses are joining the private equity club have guaranteed high press attention, the secrecy in which the sector immerses itself is like a red flag to news and scandal hungry media hounds.

As John Waples in the Sunday Times pointed out, the industry now controls businesses employing one third of the UK’s work force. To a large extent we don’t know who the private equity companies really are, we certainly don’t know what their bosses earn, and unions fear that asset stripping, which many consider to be private equity’s hallmark, could lead to large-scale job losses.

For its part, the sector has tried to go against its natural instincts, and attempted to go public in its defence. In the UK, Damon Buffini, head of Permira, the largest private equity group in Europe, has attempted to use the tools of public relations to defend his sector’s corner.

And Mr Buffini does, in many ways, cut an impressive figure. This is no man of the old establishment, a child of expensive private schooling. He has fought his way to the powerful and highly paid job he has today from the bottom. If he was American, we would say he exemplifies the American Dream. It’s just that we don’t like too much success in the UK.

Whether private equity represents a threat to the stability of the UK economy, or is the panacea of the country’s future hopes of remaining competitive, seems to depend on your own point of view.

But, what we would say is this: there is a good and a bad side.

The unions and some media are quick to point to the Mr Hyde nature of private equity. And maybe Mr Buffini did his cause no good recently when he described the media focus on the salary levels of the sector’s bosses as a form of financial voyeurism.

There are dangers aplenty in the private equity craze, and not least in the industry’s modus operandi to highly gear the companies it owns.

But equally, private equity offers massive potential benefits to the UK.

In the UK, we love to build people up and then knock them down again. We don’t like it when people are too successful, and love it when they take a knock. This creates an environment that is not favourable to the entrepreneur.

And while the UK boasts notable exceptions, such as Sir Richard Branson, most of our entrepreneurs remain small fry. Then men and women who change the world of business are still predominantly based in the US - although they are frequently not American by birth. Maybe private equity’s Dr Jekyll is that it could provide the means to redress the UK’s failure become a truly entrepreneurial based economy.

For more, read on.

February 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

When Steve Jobs and Apple made the headlines with the release of the iPhone, there was one little problem. The company didn’t own the rights to the name.

Of course, with anyone else this would have been considered a major blow, but with Apple - which seems to make a habit of running into difficulties over name ownership (after all, an obscure pop band that no one had ever heard of called the Beatles had a record label called Apple) - it seemed little more than the tiniest of ripples in its halo.

The trouble was this: back in 2000, Cisco bought a company that had registered the name iPhone. It had been in discussions with Apple over use of the name, but no agreement had been made when the product was announced , and the lawyers took over.

At the time the FT quoted an Apple spokesman as saying the whole saga was silly, and that iPhone is a generic name, with many VolP companies using it.

But now it’s all over. The two have agreed they can both use the name. What’s more, they are going to explore opportunities for “interoperability.”

So all’s well that ends well, except you know behind the smiling faces there are plenty of grimaces.

February 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Do you know what day it is today? And before the wags amongst you shout Friday, think back to all the extra hours you worked, for which you weren’t paid.

Apparently, if you were to put those unpaid hours back to back, in a normal working week, then you would work all the way from the first working day of the year to today. Consequently, the TUC has rather snappily called the day: Work Your Proper Hours Day.

Apparently, according to the government’s own labour force survey, teachers and lecturers are the occupational group that do the longest unpaid overtime. According to the TUC, these hard working teachers and lectures regularly put in 11 hours 6 minutes a week in unpaid labour. If they could get paid for this work, the TUC says that, on average, this works out at £9,500 per annum each in unpaid work.

Other workers topping the list of those who give up free time to work for their bosses without being paid, include protective service officers, corporate managers and senior officials, and legal professionals.

But, content yourself with the news that it’s getting better. Your average teacher and lecturer now work one hour and 54 minutes less in unpaid overtime than five years ago.

In fact, across the board, we appear to be giving our bosses less free time.

Today, apparently, almost 840,000 employees currently do unpaid overtime averaging more than 10 hours a week; that’s 3.4 percent of the workforce. But this is down from 4.1 percent in 2001.

Alas, says the TUC, the progress is too slow. If that rate of progress continues, it will take until 2030 before no-one regularly does more than 10 hours extra a week.

February 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

But, while we bemoan our poor productivity, maybe we have room to celebrate good news relating to one of its causes. The UK’s level of investment has often been held up as the UK’s second major economic problem. But at last, we can cheer.

The final quarter of 2006, after excluding misleading computational distortions, was the highest ever recorded. It was 3.3 percent higher than the same quarter a year ago, and 11.1 percent up on the fourth quarter of 2005.

As for the year as a whole, the news was almost most as impressive, but first we have to do some statistical jiggery pokery to appreciate how good it was.

In 2005, British Nuclear Fuel Assets were transferred to central government. This distorted the year’s reading. After removing this from the equation we find that the preliminary estimate for 2006 puts the year 7.1 percent up on 2005.

The level of investment has not risen so fast since 1998, during the height of the ICT boom.

But it wasn’t all good. While our services enjoy ever rising levels of investment, manufacturing was down in the dumps.

In fact, the quarter saw a 4.5 percent drop in manufacturing investment, caused in part by an enormous 30.8 percent drop in capital expenditure in solid and nuclear fuels and oil refining industries, and a 9.2 percent fall in capital expenditure in metals and metal goods industries.

What is called non distributive services - which includes restaurants and transport - saw a 3.7 percent rise in investment on the last quarter.

February 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

What are the two curses that are holding back the UK economy? Answer: lack of investment and poor productivity.

It seems hard to believe, but as British workers beaver away, with steam rising from their pens and keyboards, they produce less per hour than their counterparts in Germany, and a lot less than their equivalents in France and the US.

Okay, we know what you are thinking. We produce less per hour, because we work longer hours, but surely our total productivity is up there with the best.

Well, only partially so. If you give the average UK worker a score of 100, both for total productivity and productivity per hour it makes unhappy reading.

In terms of overall productivity, the US tops the G7 league with a score of 125. Then we have France with 109, Italy with 104, and there, smack bang in the middle sits Blighty.

But, of course, if you accept the argument we tend to work longer hours here, then in order to explain our relatively poor showing, our productivity per hour must be even worse.

Alas, the Office of National Statistics says precisely this. Again, they give the UK a score of 100. But this time, France, Germany and the US easily outdo us.

In fact, in terms of productivity per hour, France tops the poll, scoring 119, the US narrowly beats Germany into second, scoring 116 against Germany’s 115.

Perhaps a little surprisingly, the UK still sits in the middle, with Italy scoring lower on productivity per hour - implying your average Italian works even longer hours.

Bottom of the pack sits Japan, scoring just 83 for productivity per hour worked.

Previously when we published similar findings from the Office of National Statistics, we received email from readers suggesting we must have made a mistake. How could France possibly be scoring higher, they asked?

The figures become even more fascinating when you look at the historical trend.

And here, at last, we find good news. The situation is improving for the UK. Back in 1991, we were bottom of the chart for total productivity, and second from bottom for productivity per hour worked.

Perhaps of equal interest has been Japan’s fall from grace. Back in 1991, it scored 107 for productivity - easily outdoing the UK - but today it has managed just 88.

This, of course, begs the question why?

Why are we so less productive than the French.?

Back in the 1970s, we thought we knew the answer. Trade Unions were held up as the scapegoat.

Others turned to low investment. They said the UK consistently underinvests, and that’s your answer.

No doubt there’s a lot of truth in that latter explanation, but gaze even further back into the annuals of economic time, and you will find an economist called Solow, who appeared to disprove that the UK’s poor productivity was down to low investment. He took the level of change in economic growth, compared it with the change in investment, and the difference was called the residual. And the UK had a much lower residual level that most other economies. In other words, not only was our productivity low, it was worse than you would have expected given the level of investment.

This promoted a debate on the role of unions. All the more ironic then, that in today’s post-Thatcher period of union reform, we still lag behind France, with its union dominated work force.

There are plenty of possible explanations. Maybe we do worse because of the UK’s awful transport system. How many meetings get delayed, or deliveries run late, because of the M25, or several other of the similar crowded car parks that we call motorways?

Maybe the problem lies in education. We just don’t educate our kids, or train our workers enough.

Maybe the problem lies partly in our success. Our employment is much higher here than in France, and, therefore, you would expect average productivity to be lower.

Whatever the explanation, the UK must do better. To compete on the world stage, we have to produce more per worker, plain and simple.

February 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Where would the internet be without advertising? Perhaps it would still be stuck in the pre dot com crash days. Or perhaps we would be paying through the tooth for our information, just like we used to, and the world wide web would have disappeared up its own ether.

And with the internet TV age, it can only continue - right? Advertising will remain the way we get our content, it’s just that we will get even more choice - at least that’s what we assume.

But according to a report from Adams Media Research, by 2011 TV from the internet that we pay for will be worth more than twice as much as advertising funded TV.

It’s big numbers all round. The research suggests that by the end of the second year of the next decade, advertiser spending on internet video streams to PCs and TVs will approach $1.7 billion. Meanwhile, paid for movie and TV downloads will generate consumer spending of $4.1 billion.

“The internet is going to revolutionize the business of video distribution,” said AMR president Tom Adams. “But in all the excitement about product launches by Wal-Mart, Amazon and Apple, people are getting giddy about how fast it will happen. We felt it was time to develop a rational set of projections, analyzing the ad-supported and download-to-own markets for both movies and TV shows in light of what the industry has learned in the past three decades of video distribution shifts.”

AMR’s analysis points to a period of experimentation 2007-2009, during which the ad-supported model will predominate. But, as significant numbers of homes connect their TVs to the internet, consumer spending on downloaded movies and TV shows should expand rapidly and exceed ad spending substantially by 2011.

February 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Meanwhile, talking of the internet, maybe it’s time to spare a thought for traditional media.

Or maybe we don’t need to.

It may seem hard for you to believe, sitting there reading this literary gem, but, according to research from KPMG, only 13 percent of people surveyed said they use the internet as their primary source of news.

On the other hand, 44 percent of respondents cited television, followed by newspapers with 28 percent; 14 percent of respondents indicated the radio.

Perhaps it’s not surprising. After all, the research was looking at primary sources of news. So, while, no doubt, you look forward to each day’s installment of IABN with bated breath, there’s a good chance your daily fix of news comes from other sources too.

KPMG surveyed 3,000 people aged 18 to 65#43;, from the UK, the US, Germany, Spain and the Netherlands.

But we are not all Luddites when it comes to our news. Only 37 percent of respondents from within the category that KPMG calls generation Y - that’s the under 25’s - chose TV as their main source of news. Meanwhile, 30 percent of these generation Y people opt for the internet first.

KPMG also found that, on average, 32 percent of respondents, who are 35 and over, use newspapers as their primary news source, with only seven percent preferring the internet.

Strangely, in the US only five percent of Generation Y use the internet as their preferred news source, but the same group has the highest usage of social networking sites and metaverses, such as MySpace and Second Life, with 52 percent participating.

But, the over 65s are not complete technophobes. KPMG found that one in four of the over 65’s now own either a blackberry, a digital music player, a digital video player, or a handheld games console.

Sean Collins, global head of Media and Telecoms practice, said: “The way in which Generation Y interacts with technology and media will be the driver for continued change and consolidation within these industries. Traditional attitudes to copyright and intellectual property will be challenged and new business models like MySpace, Flickr and YouTube will continue to emerge.”

February 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Manufacturers seem to have reason to celebrate. Orders books are brimming over. At least levels have hit a 12 year high, or so says the CBI in its latest Industrial Trends survey.
Actually when you examine the figures, it’s not quite so spectacular. The CBI index is drawn up by asking manufacturers how order books compare with 12 months ago. Some say they are better, others worse, and the balance forms the index. So if the index is below negative, it means most are saying levels are down on last year; if is positive, most are saying they are better.
And for February, the index hit plus 4. That’s the highest level since June 1995.
Not that plus 4 amounts to a runaway success. At that miserly level, an awful lot of manufacturers are still saying things are no better.
Even so, Doug Godden, CBI head of economic analysis, appeared to be beaming, when he said: “This is an upbeat survey continuing the trend of manufacturing recovery that started in early 2006.”
But, as ever with these things, there’s a catch.
Manufacturers have been reacting to the improving climate by upping prices. The CBI index for manufacturers’ average price dwarfs the order book index. In fact the CBI industrial trends price index stands at plus 19.
Paul Dales at Capital Economics said: “This survey provides more evidence that strong demand is supporting firms’ attempts to raise their prices in order to recoup the profits lost during last year’s squeeze on energy prices.”

So while many look forward to falling consumer price inflation in the coming months - thanks to many of the one-off costs that caused recent peaks falling out of the equation - other pressures, with prices charged by our manufacturers in the vanguard, are building.

But while, with February being the exception, the CBI has repeatedly reported on a dismal manufacturing performance over the last few years, (February’s reading was the first time the index had gone positive at all since August 2004), the Chartered Institute of Purchasing Supply has had a much more bullish story to tell.

With the CIPS purchasing managers index, a score of 50 representa expansion in the sector. Back at the beginning of this month, the CIPS index hit 52.8, meaning the index had been 50 or more for the nineteenth consecutive month.

Much of the recent improvements in the manufacturing sector have come from abroad, with a resurgent eurozone acting as a boost to the UK. This is despite the high value of the pound