Sunday, August 21, 2011

The Brand Name Sell-off

August 21st, 2011

There is a trend of companies breaking themselves up into their logical business groupings.

It makes sense. These companies currently have generalists as boards of directors, who are trying to make decisions in very specialized, rapidly changing markets, where they have no hope of being real experts in every area the company has technology, or does business.

As the business environmet tightens up, and demands more attention to detail in te efort to improve profitability (survivability), companies are breaking their divisions up before they are forced to by business reversals that result from their ignorance of the business they are in.

But what's the betting this is driven by the merchant bankers who organize this kind of activity, and suck their huge fees out of such activities? The bankers perception of value is based on "the best economic use of the corporations assets", and in many cases, this runs contrary to the US Government's plans.

So, if the corporate model says divest a business which is going to have to make unpopular moves to survive, so be it. For example, the companies that are going robotic, and firing a large number of workers. Or loibbying for the right to pollute.

Tyhe world revolves. In the 1960's conglomerates (businesses in many different business areas, with no common base) became popular, with generalists on their boards of directors. Recessionary pressure forced these companies to get back to their core businesses, and to fire the generalists.

Now, we have been through the same kind of loop again, except it wasn't polies on swags of brand names. diversification that encouraged the aggregation, but the desire to grab monopolies on swags of brand names.

Now the "brand name" bus is running off the road, and these companies are selling off these brand name companis in a falling market.

So who will buy them?

Seems to me the answer is the Chinese and the oil-rich countries. Sell their US Treasuries at the top of the market, and get into brands.

The difference between the two investoment groups is, the Oil Rich are looking for a safe haven for their money. The Chinese will be looking for brand names to label their exports to the US.

This is the nature of that willful child, Capitalism. Industry will go in the direction their shareholders dictate. The responsibility of corporate management is to operate within the law to enrich the shareholders, not meet Government objectives by reaching into shareholder's pockets.

As an alternative to human labor, robotics are becoming much more attractive. Moore's law seems to apply. That is, robots are doubling their capability every 18 months, and the costs are falling at the same speed for existing products.

Foxconn, the Chinese manufacturer that puts together all of Apple's products (iPhone, iPod, iPad, iMac) currently employs 1,200,000 people. To give you some idea of the scale of this company, there are fewer people in all the the US armed forces!

Foxconn has announced that it will be employing 1,000,000 robots by 2013.

With all those name brands on the auction block, and China ascendant in the manufacturing sector, and US Treasuries selling at a high price right now, this could be a very good time for the Chinese Government to start dumping their trillions of dollars worth of Treasuries, and make investments in companies that can give a direct foothold in the US marketplace to Chinese companies.