Tyco 3-way split indicates quicker big biz breakups
BY MORRIS R. BESCHLOSS
PVF and economic analyst emeritus
The recent announcement of major conglomerate Tyco International Ltd.’s breakup put a further exclamation mark on the quickening pace of corporations increasingly focusing on their core businesses.
Although emanating from a medium-sized fire protection specialist almost 50 years ago, Tyco evolved into a $120-billion entity, transcending a smorgasbord of industrials and service providers, which bore little relationship to each other.
The new structure, some of which is expected to be spun off to stockholders, will consist of well-known alarm system ADT, pipe-valve-fittings, (my main area of industry expertise) and commercial security/fire systems.
This back-to-core approach has become almost torrential in the past two years, reflecting the realization that this makes more sense from the viewpoint of transparency, management, and stock market focus.
Such majors as ITT Corporation (originally International Telephone & Telegraph), oil giant Conoco Phillips, and Kraft Foods, among others, have already put this divestment strategy into play. Their subsequent financial market success is proving that identifiable parts are more valuable than the indescribable sum of the whole.
Although General Electric still stands as the prototype of the mega conglomerate, even that behemoth could eventually buckle under the pressure of stockholder valuation demands. This is reflected by GE’s depressed market value, primarily echoing the comparative value of its huge financial services division.
The original concept of conglomeration was spawned by Hal Geneen, a cost accountant-turned-CEO of ITT in the early 1960s. In his best-selling book, The Bottom Line, he espoused the concept that ultimate net profitability was the only measuring stick that mattered. He further emphasized that corporate super-size was the major dominator, and belittled brand name preference, as well as once independent companies’ sector leadership.
Although acquisitions of free-standing manufacturers, primarily, became legion in the last half-century, spurred by the 1980s leveraged buyout mania, they reached their peak in the past decade. The current return to basic values, such as “specific business sector focus” decision-making leadership, brand name reliability, and “Buy America,” have accelerated the ongoing divestiture trend.
China/India dominate global energy demand
Although this may not come as a surprise to most observers, the world’s two most populous nations — China and India — are rapidly climbing in the growing percentage of global energy demand.
This year, this Asian duo will consume 131 quadrillion British thermal units, accounting for 25% of the world’s energy consumption. That’s up from 13% in the year 2007, when the U.S. seemed to far exceed the combined Asian energy by a substantial multiple.
As an indication of how the consequential pendulum has swung heavily toward the Southeast Asian quadrant, the Paris-based Energy Information Administration forecasts that China and India alone will account for a third of global energy use by 2035.
This is not only due to a combined China/India population approaching 2.5 billion out of a world total of 7 billion, but is symptomatic of a revolutionary switch in the growth of the middle class in both of the world’s two leading population groups.
China, especially, but India, significantly, have switched from bicycles, rickshaws, and other earlier forms of locomotion to combustion-engine powered vehicles. That stupendous expansion seems only to be limited by the lack of modern highways at this time.
The underlying transition from under-developed emerging to first class world nations is proceeding with such rapidity that America’s survival as the globe’s No. 1 superpower is threatened primarily by the U.S.’s increasing economic inadequacy. But also relevant is the human productivity factor and technology that is being unleashed by China and India, as well as South Korea, Taiwan, Vietnam, Indonesia, the Philippines, and such non-Asiatic powers as Russia and Brazil.
With America destined for an unprecedented retrenchment after the November general elections to bring its unsustainable debt and deficits in line, it’s almost a sure bet that Asia is rapidly becoming the future center of economic and dynamic growth power. This transition is predestined, no matter how well the U.S. can weather the next year and a half.
The critical question to be answered by future historians may well be: “How much of its late 20th Century dominance was America able to hold on to during the rest of the 21st?”
US capital spending reduction threatens manufacturing comeback
The recent 13%, year-over-year capital spending downdraft by American factories sends a warning signal that the surprise manufacturing bedrock of America’s faltering economy may be in jeopardy.
While exports, technological upgrading on the shop floor and back office, as well as a weak U.S. currency have revived America’s indigenous fabrication sector in the past 18 months, the slowdown of in-place expansion, as well as the voiding of additional external growth has put a crimp on the domestic U.S. industry’s forward motion.
This sequence of events will further exacerbate unemployment, as business owners and general managers are experiencing increased payroll levies to compensate both Federal and state payments to the escalating unemployment reimbursement fund.
Further inhibiting both capital spending, as well as even maintaining the current U.S. workforce core, the escalating insurance premiums that all types of businesses are having to absorb in anticipation of Obamacare implementation, is already making itself felt currently.
This is proving especially onerous to retirees whose co-pay on healthcare benefits is multiplying at unanticipated rates.
With consumer demand stagnating, despite current levels that have held up better than previously expected, there is little incentive for industry to marshal its resources beyond levels that now exist. This means “just in time inventory,” increased productivity through contained labor costs and reduced risk-taking consonant with capital expenditures.
If this scenario plays out as expected, the President’s “Jobs Act” will not only be doomed to Congressional defeat, but would prove disastrous if implemented.
As long as the overwhelming majority of the business community perceives the Administration and its agencies as hostile to their successful business model, that sector will continue to amass its bottom line cash hoards, hoping that future governmental initiatives will reverse the current siege mentality.
Commercial sector rebound hits an air pocket
The overall building industry’s commercial sector (multi-story apartment buildings, retail outlets, office space, institutional edifices, healthcare and retirement sub-sectors) seems to have stalled in the recent two-year recovery, which bounced off the bottom in March 2009.
This concern was magnified by Mort Zuckerman, high-profile chairman of Boston Properties Inc., who evinced concern of a drop back to the level from which the current boomlet emanated after the economic financial implosion in September 2008.
Although the commercial property price index has regained most of its August 2007 peak, rebounding from a low of 62% up to 90% recently, the stalled U.S. economic recovery is beginning to again take its toll. This is best exemplified by comparative project sales from a year earlier, that had reached maximum momentum late this past spring. Since then a combination of deal cancellations, as well as complete lack of funding packages, have cast a pall on what looked like a promising comeback in such metropolitan area as New York City, Washington, D.C., and Chicago.
Much of the current stall is directly related to the dubious outlook of a U.S. economy caught in the web of a White House/Congressional gridlock that indicates little, if any progress, toward the resolution of unemployment or business expansion. This negative trend will be magnified by a reduction of discretionary spending, in the face of stagnating wage levels reflecting the availability of four to five bids for every available job opening.
Also discouraging future commercial expenditures are the inevitable cutback in the headlong growth of government agencies at the federal, state and local levels. Ironically, this is expected to be more severe if the Republicans seize the reins of policy-making power at the November 6, 2012 general elections. If this happens, the expectations dwell on a severe cutback in required office space, at all governmental levels. Also worrisome is the explosive growth of on-line expenditures in place of hands-on shopping.
The one bright light of the commercial upswing is the advent of apartment building, both metropolitan, as well and suburban and rural, a transition that is fast developing, while new residential construction remains in the doldrums.
New recession wave greets autumn’s seasonal arrival
The fresh air of fall’s seasonal beginning is carrying the excess baggage of a new scent of recession in the air.
Although not fulfilling the technical requirements of an official recession (two consecutive negative quarters of gross domestic product), an avalanche of downbeat statistics points to an economic shrinkage that is primarily impacting the developed nations of U.S., Europe and Japan, but also to a lesser extent the emerging nations of China, India, South Korea, Taiwan, Brazil, Russia, etc.
The current hysterical reaction in the world’s financial markets has been primarily engendered by the Federal Open Market Committee’s terse statement after a Tuesday/Wednesday periodic meeting, emphasizing that the global economy stands at the edge of “significant risks in the future.” This prior knowledge was the main reason the Fed declared a two-year moratorium on record low Fed funds rates at the last scheduled FOMC meeting, but this somber forecast was withheld at the time.
Although the two-day meeting’s primary action was “Operation Twist,” resulting in the forthcoming sell off of $400 billion of short-term Treasury debt paper (up to three years’ maturity) and buying equivalent long-term issues (six to 30 years) to flatten the yield curve, the fear of a new worldwide recession has set off alarm bells on all continents.
Although the early stages of the current global economic breakdown were initially fueled by the increasing turmoil of the Eurozon’s potential disintegration, also contributing was America’s inability to come to grips with an actual double digit unemployment rate, and a perceived hostility and lack of governmental leadership impacting the independent business sector that controls two-thirds of the potential hiring capability of a 153-million-strong workforce.
With the White House’s “Jobs Act” gaining practically no support from decision makers, the confidence of the American public has joined the record plummeting of the financial markets that yesterday closed below the abysmal bottom, reached after a nasty swoon in August. At present, there are no discernible factors that would call for short-term optimism.
West Texas intermediate/Brent Crude disparity
The margin between West Texas Intermediate crude oil and the internationally-priced Brent Crude used to be relatively simple. West Texas Intermediate is the lighter, easiest to refine, “sweet” crude primarily stocked at the huge central reserve in Cushing, Okla. Brent Crude traditionally refers to the heavier type that reflects the oil extracted from Mideast OPEC sources, as well as other global production wells spread around the world.
With the bulk of the so-called West Texas Intermediate stored in the U.S. Southwest coming from Gulf of Mexico deep sea wells, and more recently at the apex of the Canadian/American pipeline, the latter tends to reflect refinery demand for conversion to gasoline and other derivatives used in the American markets.
What has become so confusing is that the traditional surge of American demand, combined with the easier-to-refine WTI had it more expensive for years. The cheaper Brent sour crude emanating from worldwide sources was cheaper, and used primarily in Europe and Southeast Asia.
However, the margin never amounted to more than $2 a barrel, making the world price of Brent Crude and WTI practically the same until the last couple of years. Now the margin between the two types has widened to over $20 a barrel. This makes Brent crude more expensive for the following reasons:
• With U.S. driving sinking to multi-year lows, the Cushing-based inventories have never been higher, keeping the price per barrel purchased by the refineries substantially subdued, between $80 to $90 a barrel.
• On the other hand, both production shortages, and ongoing geopolitical problems, like the Libyan and Nigerian turmoil have developed into intermittent spot shortages elevating the universal Brent prices to well over $100 a barrel.
This is a major windfall for the refinery sector, which can buy the raw crude ‘cheap’ from Cushing, then sell the refined product closer to the world market price, and keep the difference on their balance sheet. This has kept gasoline prices at the pump elevated. It also has refining company stock prices flying high, a reversal of the long-term period when the price margins between Brent and West Texas Intermediate were practically non-existent.
That has also allowed refineries to maintain, upgrade and expand their facilities on-site, without initiating additional establishments, with costs in the billions and time of construction close to a decade. That’s why the once-eagerly-anticipated increase in U.S.-based new oil refineries has totally disappeared from the radar screen.
Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.