The Bigger the Ship, the Better the Chance of Survival



Investor sentiment is still skyrocketing as U.S. President Donald Trump continues his victory lap and investors revel in the fanfare.

The markets are behaving as though the White House’s as-yet undetailed economic policies will cure all ails from the simmering uncertainty around French, Dutch and German elections to the biggest pain for CEO’s – technology disruption.  The C-suite is using toppy stock prices to lob deals, which must surely demonstrate a sign of confidence.

But what if some of the cleverest minds in the world are pursuing deals and investment out of fear and necessity rather than confidence and companies are really just building Noah’s ark before the storm? It leaves me pondering: Is scale the only way to survive the next decade and should investors play markets by riding a wave of mergers and acquisitions?

It’s undeniable that global sentiment is growing in a complete reversal from the financial crisis malaise, when the euro zone moved at a snail’s pace with no hint of inflation, while the U.S. hunted for ever-elusive escape velocity for its economy.  The Philadelphia Fed Index last week surged to 43.3 from 23.6 in January, the highest level since 1984, signalling roaring animal spirits.  Meanwhile, here in Europe, the conservative Lloyds Private Bank investment sentiment index climbed to its highest since April 2016.

Investors last week also chased U.S. stocks to record highs.  Some would argue it’s all related to Trump but what happened to the discount for risk? Populist politics are creating significant uncertainty for the C-suite, not to mention the threat of technology disruption to traditional business models.

Why bother with difficult targets? 

Allianz’s Chief Financial Officer, Dieter Wemmer, last week told CNBC scale would matter in the future, particularly around the key business units of property and casualty insurance in some markets.  Allianz has been cited recently as a bold acquirer of big but tricky assets to pin down – including Generali in Italy and QBE Insurance in Australia.  The insurer won’t comment on transactions but investors can ask – why bother with such difficult targets? Is the German company merely being prudent if it chases insurance giants in two important markets?

Internet disruption has been cited by insurance companies as one of the biggest challenges, with the CFO of Aviva, Thomas Stoddard, telling CNBC recently that online disruption was still costing the company money, rather than providing new revenue.

Well, let’s put it all together…the sector isn’t just contending with technology disruption, but the interest rate outlook is changing thanks to Trump reflation lifting yields, which has huge ramifications for the valuation of insurance investments and the pace of economic growth drives demand for insurance products and pricing.  And then there is the minefield of regulation.  No one really knows what’s coming but bulking up bolsters survival chances.

Media and pharma under fire

It’s the same story for media companies.  Digital is destroying profits but content demands for expensive news and entertainment continue to grow in an effort to hold on to subscribers. Now there is a new threat: A combative Trump determined to question the credibility of news organisations, the heartbeat of many media organisations.

Pharmaceuticals have also come under fire from Trump on drug pricing.  While not everyone in the sector is innocent, there is a broader trend of generics ruining profits and the ability to use those proceeds to plough into research and development.  And what about auto companies? Who knows if Trump will take a sledgehammer to the low-cost global supply chain that has taken years to build as they too face disruption from new technology.

It’s no coincidence given all the complex challenges confronting companies that mega-cap deals are accelerating.  Not all will succeed, as seen on the weekend with Kraft Heinz folding on its Unilever advances, but that is the nature of large takeovers.  Small, dynamic and nimble companies had the edge post-financial crisis – now they may simply be prey in a world where only companies with the deepest pockets, brand power and strategic prowess survive.

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Source: CNBC


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