NYSE Euronext merger with Deutsche Boerse blocked by EU (BBC News)

This is a very appropriate news item, for us at least. On the agenda for tomorrow (Friday) is a discussion of economic and legal systems.

Today's business climate is one of mergers and acquisitions, though those mergers don't always meet with the approval of governments interested in enforcing antitrust laws (see here for a brief refresher on antitrust).

In class, we'll take a look at Microsoft and their troubles in the EU.

The BBC article deals with a proposed merger that's been going on for a while now. Like a lot of these, it goes beyond the merely complex.

NYSE Euronext is a merger (dating back to 2007 or so) of the New York Stock Exchange and Euronext, which was itself a merger of a number of European exchanges (not, however, including either London or Frankfort).

At one point, Deutsche Börse (Germany, based in Frankfort) wanted to buy Euronext, but was beaten out by the NYSE.

So, in early 2011, Deutsche Börse decided that they were going to acquire NYSE Euronext. At the time, the expectation was that the merger would happen fairly quickly. Per a Wall Street Journal article from a year ago:

A deal could be announced as early as next week, according to people familiar with the situation, though a host of regulatory challenges await on both sides of the Atlantic, according to competition experts.

Well, the deal isn't going to go through. The European Commission announced yesterday that the merger would violate EU antitrust provisions.

But, the US didn't have a problem with the merger, approving it in December of 2011.

The difference between the EU and the US is that EU regulators appear to be somewhat more aggressive in their enforcement of antitrust. For example:

The day after blocking the merger of NYSE Euronext (NYX) and Deutsche Boerse AG (DB1), the European Union’s antitrust chief vowed to veto other deals that hamper competition. The EU will continue to block deals “whenever necessary,”
Joaquin Almunia said in prepared remarks for a speech in Brussels today.

So, what does this all mean? There will most likely be additional consolidations in the world's markets; the London Metal Exchange is looking to be bought out soon. It does mean that, as a company looking to raise money in the equities market, that there'll be less choice as to where to list one's stock. Does that matter? In reading through the EU's press release on the NYSE Euronext / Deutsche Börse merger, they keep saying "competition is good," but it's not clear just why competition among financial marketplaces is a good thing.

Ok. Having nothing else to do, I decided to see if I could find out why. What I found was a very long and complex paper written by academic economists in 1998. I ran out of steam on about page 6 (out of 50), but if I'm reading this right, there's no good economic reason for a lot of competition. Also, prior to a single European currency and increased cross-border ownership of securtities, most world exchanges were already monopolies within their countries:

The presence of many exchanges in reality is not incompatible with this view, as exchanges were not competing with one another, at least in Europe, until a decade ago, due to different regulations and currencies that let them be monopolist in their relevant markets. In fact, in each country, either only one exchange existed or only one was dominant and absorbed the small regional ones (as in France, Italy, Spain, and Germany).

Today's story has been widely reported, but the more I think about it, the impact on businesses in general will most likely be a limited one. It's still an interesting story, especially when you look at the history behind it.

Iran and China: New Developments

For the past several years, China has worked to build trade relationships with African and Latin American countries -- Argentina, for example, as well as Sudan, Nigeria and Peru.

It's motivated (as we've discussed in the IB class) by China's growing need for raw materials -- such as recycled paper (for the cardboard boxes that Made-in-China TV is shipped in), soybeans, iron ore and gold. China has an advantage over Europe and the US here -- China isn't a former colonial power (not that the US really was a colonial power or anything, but who cares?). It's been a successful relationship. Even though Japan, South Korea and Taiwan are the biggest source of Chinese imports, China is now Brazil's largest export partner (ahead of the US); Angola, Chile, Democratic Republic of the Congo and Kazakhstan are among the countries sharing that honor.

One of the Chinese trade relationships that is currently troubling to the US is the Chinese relationship with Iran, based, of course, on oil. It goes beyond imports and exports; China has invested heavily in refineries and pipelines in Iran. Moreover, the Iranian government has proposed a system of rail links between China, Iran, Afghanistan, Tajikistan, Kyrgyzstan.

Trade sanctions (banning trade in strategic materials) against Iran have slowed, but not stopped trade between China and Iran.

What exactly can the US do here? Not much. The UN can make agreements, but China is going to act in their own interests. Neither the US nor the EU wants to see Iran with nuclear weapons, but it doesn't appear that the Chinese care.

Don't forget that the Chinese own a lot of US government debt [1]. And, the US exports a lot to China as well -- luxury products [2] such as wine and ginseng roots, but also basic raw materials, such as recycled paper and soybeans.

The batteries in my crystal ball need to be recharged, but I don't see much changing here. It's a tenuous balancing act between the EU [3] and the US, first, China second, and Iran, third. One solution might be for the US to take out Iranian nuclear facilities, making sure to give China plausible deniability. That could get very very messy, though. There's some indication that the Iranian government isn't all that stable, and changes there could very well make a peaceful solution possible. The US would probably have to concede in principle on Iran's right to peaceful nuclear use, though, which would be politically suicidal for the current administration.

Taking a broader and more long-term perspective, though, look at China's trade strategy overall.

China's motivations here are complex. At first glance, the whole point is access to resources. For example, the Democratic Republic of the Congo has copper, Iran has oil, Brazil has wood pulp, etc. China is also investing heavily in infrastructure development in its African and Latin American trading partners. They're thinking long-term. Remember, the Chinese are the folks who have kept track of the (more than 3 million) descendants of Confucius over a 2,500 year span.

Not everyone sees China's growing ties with Africa/Latin America to be a Big Problem; some believe that US influence in Africa is broader based and more likely to be lasting.

But, as we remeber from The Godfather, "it's only business." Trade appears to be the real motivation, with politics being only a means to an end.

It's clear that China isn't in this for their health; China cut off imports of Argentine soybean oil after Argentina imposed retaliatory tariffs in response to accusations that China is dumping textiles and kitchen appliances in the Argentine market.

Another indication that the Chinese government isn't seeing these relationships as one-sided are developments earlier with loans to Zimbabwe:

Deputy Prime Minister Arthur Mutambara says the Chinese want all loans to
be repaid before loosening its purse. According to the Mutambara the Chinese
President Hu Jintao revealed to him during a brief meeting at the World Economic
Forum in Switzerland that he considers Beijing relationship with Harare as
’business partners’ and not ’friends’.

If nothing else, the complexities of trade and politics between China and the rest of the world will give us something to think about for a very long time to come.

Notes

[1] There is some indication that Chinese purchases of US debt declined after the late 2008 economic meltdown. They still hold a lot, though by now China holds enough Treasury securities that it's probably unlikely that they could afford to unload them.

[2] Western luxury products are big in China, though most of these are imported from Europe.

[3] Europe trades a lot with China, too.

WTO Hong Kong Meeting: Setting the Bar Low

Following arecent meeting of the trade / commerce ministers from the US, EU, Brazil, India and Japan, a general consensus was reached -- that the December meetings of the WTO in Hong Kong will likely not result in much in the way of new agreements. The issue of US / EU agricultural subsidies will be on the agenda, but is unlikely to be resolved, while the richer nations will proabably ask for concessions from the lesser developed countries in areas such as access to markets.

Trade ministers dampen down expectations

The question is, though -- is this necessarily a Bad Thing? One's automatic reaction is to say, yes, that we want diplomatic talks (be they military, political or economic) to move towards resolution of conflict.

However. WTO / GATT negotiating rounds have been on a more-or-less continouius basis for over 50 years now, and there's no question but that progress has been made. The trade barriers we saw prior to WWII just aren't there any more.

[We'll leave out here the deeper philosophical issues over whether free trade is a Good Thing].

Ok. So GATT / WTO has moved slowly, yet continued to make progress. But I'd also make the argument that the issues being negotiated are important ones (the US agricultural subsidies have been around since the 1930's; the EU's agricultural subsidies are driven, by part, from famine expereinces in WWI and WWII). If these are important issues, doesn't it make some sense to move slowly, so that whatever solution is ultimately arrived at is one that all parties concerned can live with? The ag subsidies are an important issue. But, are they such an important issue that we need to rush to settle the issue or is it so important that we need to move slowly, so that whatever answer we reach is the best one?

Your thoughts????

Economic growth vs. inflation in EU

Today's news is appropriate. The ECB (European Central Bank) is keeping interest rates steady, despite pressures to cut rates to stimulate the European economy (which is facing the same energy-related problems as the US). From Business Week:

European Central Bank leaves rate steady

The euro is not just maintaing its strength against the dollar, but continuing to gain. Venezuela is shifting its reserves from US gov't securities to dollar-denominated deposits and is looking to increase it's euro holdings; is this Chavez's paranoia or a Good Idea????

Your comments?

Nowegian Election Results

As we discussed last night in International, Scandinavian values are a bit different from ours. Specifically, there's a very strong sense that nobody should be in need. The result -- a social safety net that includes free education, health care, etc [this is the article Ashley was referring to]

This is, in part, financed from Norway's oil revenues (they're the world's 3d largest exporter of oil), but you'll find the same philosophy and similar programs in the rest of Scandinavia. As we discussed last night, this is different. Not better, not worse, just different. Remember that this social welfare system is funded by tax revenues, and Norwegian tax rates are very high.

The election.

Centre-Left Bloc Wins Norway Poll

The right-center party, under Prime Minister Kjell Magne Bondevik, lost to the left-center Labor Party, led by Jens Stoltenberg. It wasn't an issue of safety-net vs. no safety-net, just how far the social welfare system should go

In the news coverage, pay attention to the references to "blocs" -- specifically, neither Labor nor the Christian People's Pary can form a government unless they form a coalition with one or more minority parties.

One factor that didn't come into the elections was EU membership; Norwegian voters have rejected membership, and there doesn't seem to be a lot of sentiment for joining. In fact, Norway gets a lot of the benefits of EU membership (more on that in a couple of weeks), withough having to give up control over fishing rights. A 2004 article from The Economist, though, sees the matter somewhat differently:

The Norwegian Option

Your thoughts?

Random thoughts about technolgy and Microsoft

Seems that the iPhone is now out; Apple and Motorola have developed a phone that will allow you to store and play 100 tunes.

Apple unveils iTunes phone

This I'd never have envisioned, but the entire point about major change is that it's something that we couldn't imagine in advance. Did any of us need a computer of our own before Bill Gates and Microsoft????

Speaking of Microsoft.......they filed another appeal today in the long-running battle between Microsoft and the EU over anti-trust issues. In this case, on of the major issues is whether or not Microsoft will have to open up its source code. We'll be talking bout this tonight in International; for the Principles folks, this is a good example of how any international involvement adds a huge amount of complexity to your external environment.

Microsoft Files Appeal Against EU Ruling

China and Oil

Ok. The last question I asked you Monday night was this -- where is China going to get the oil needed to fuel (so to speak) its economic growth? They don't produce it themselves. There's oil in Iraq, there's oil in North Central Asia. But, there's lots of folks who want this oil -- the US and Europe, for one; India is also in the market.

China and India Vie for Kazakhstan Oil (8/16)
China Ups the Ante in Its Bid for Oil (8/22)
Uncertain Saudi Supplies Hold Key to China (8/23)

So, is everything gloom-and-doom? Not necessarily. One of the world's 5 most populous countries (China, India, Brazil, and the US being the others) has found an alternative.

Homegrown Fuel Supply Helps Brazil Breathe Easy (6/15)

Your thoughts ??????