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By Nick, April 10, 2012 1:48 am

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sheri McCoy, Avon Products’ new chief executive, should make a turnaround of the cosmetics firm a real alternative to a sale. After all, she has been running a big chunk of Johnson & Johnson, and Fortune ranked her the 10th most powerful woman in business last year. But Avon’s insistence on retaining Andrea Jung as executive chairman makes McCoy’s task look harder.

Ending the uncertainty over Avon’s leadership with such a credible hire probably gives the company sufficient ammunition to fend off takeover interest from smaller European rival Coty. And Avon has held off acting on its ongoing strategic review in order to give the incoming CEO the chance to make decisions.

Yet Jung has been the boss since 1999, and Fortune put her at number six on its list last year. In practice, having someone with such influence around full-time – potentially for a couple of years – will surely limit McCoy’s ability to make radical changes to her predecessor’s ultimately failed strategy. That’s a pity, because shareholders need a major overhaul. Until Coty showed up on April 2 with its $ 23.25 per share expression of interest, Avon’s stock was down by about 30 percent over 12 months.

Sure, Avon’s decision in December to split the two top roles was a step in the right direction, while Jung’s presence during a transition period makes sense. And McCoy will report to the board, which has a lead independent director, Fred Hassan, as well as Jung in the chair. It’s also possible that the executive chairman title means less than it suggests.

But having landed a creditably strong candidate as its next CEO, Avon’s board missed the chance to give her full autonomy, at least in its public statement. Investors will be hoping McCoy doesn’t find the corner office too crowded.

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By Nick, April 9, 2012 4:20 pm

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Facebook’s defensive purchase of Instagram raises a red flag. Online photos are supposed to be a core Facebook competence. Paying $ 1 billion for the popular picture-sharing app may boost the social network in mobile. But paying over the odds for revenue-free rivals is usually the hallmark of anxious, mature firms – not a growth company seeking to go public at a $ 100 billion valuation.

It’s impossible to say exactly what Facebook gets for the oodles of cash and stock it is handing over to Instagram, founded just two years ago by Kevin Systrom and Mike Krieger. Traditional metrics don’t apply – Instagram is just embarking on an actual business plan, and the firm was worth just $ 20 million a year ago. What it does have are lots of users – more than 30 million – and super-fast growth. More than 1 million more users signed up in 12 hours for its new Android app last week.

Facebook is clearly acquiring the firm for other reasons. People are spending an increasing amount of time connecting via their mobile phones. This shift is worrying for the formerly desktop-focused Facebook, whose own prospectus warns of the risks to its business of an increasingly mobile Internet. Most smartphones use operating systems made by Apple and Google. If Facebook doesn’t run well on these phones, rival social networks such as Google + could get a leg up.

Buying two-year-old Instagram could help give Facebook the whip hand. It hopes to use the experience it is gaining to “build similar features in our other products.” Instagram has figured out the easiest way to date of putting pictures on the web, and how to capture the attention of mobile users. These are valuable skills and tools in Facebook’s fight against other social networks.

What’s worrying for potential Facebook investors is why Mark Zuckerberg and his merry hackers couldn’t produce their own version of Instagram. He says this is a one-off. “But providing the best photo-sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.”

The precedent is worrisome, though, if it means every time a startup encroaches on one of Facebook’s presumed strengths it will need to take out its pocketbook to defend its turf. That’s hardly a robust justification for a lofty valuation.

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By Nick, April 6, 2012 10:00 pm

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Keep the mystique of the Rothschild name while managing it like a luxury brand: this seems to be the goal of the investment bank’s decision to fold its French and British arms into a single, listed entity.

In one sense, Rothschild’s shareholding structure is only catching up with operational reality. The cross-channel merger has been underway since 2003, when current chairman David de Rothschild added the leadership of the British bank to his role at head of the French arm. But the merged group’s limited partnership structure will also guarantee an airtight family control, regardless of who takes over as dynasty chief in a few years’ time.

Under the proposed deal, Paris Orleans, the family’s French-listed entity, will buy all the shares of RCB, the French bank, and most of those of RCH, the Swiss-based group that owns the British assets. This will dilute the family’s ownership of Paris Orleans from 58 percent to 48 percent of the shares – hence the changes of statute that will guarantee the Rothschilds control the group, whatever the size of their holdings.

In the French system of “commandite par actions”, the limited partners – akin to public shareholders – basically have only the right to remain silent and receive dividends. Meanwhile the general partners decide and rule. Due to the change in Paris Orleans’ bylaws, Rothschild has to offer other shareholders the opportunity to sell. But its lowball offer of a 4 percent premium suggests the family prefers minorities to hang on.

As new generations disperse the family shareholders, the current Rothschilds may have wanted to protect against the risk of possible dilution or future hostile bids. The latest reorganisation means they have no need to worry. David de Rothschild will turn 70 this year. Each of the new bank’s co-CEOs – Nigel Higgins and Oliver Pecoux – can hope to have a shot at replacing him. But David’s son Alexandre, 30, is also being groomed for higher responsibilities. Whatever the name of his successor, David has made sure control remains exclusively with the family.

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By Nick, April 6, 2012 12:31 pm

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Rising Spanish yields have thrust Europe back into crisis mode. Policymakers thought the European Central Bank’s three-year loans had bought the euro zone some time, but markets are catching up fast.

The flashpoint is Spain. The country’s apparent inability to control its fiscal deficit – which was 2.5 percentage points higher than its target last year – and its decision to raise this year’s target shortfall to 5.3 percent, from 4.4 percent, has spooked investors. Bond-buying by Spanish banks helped to keep yields in check for a while. But the ECB-funded stimulus is wearing off. Yields on the country’s 10-year bonds are back above 5.8 percent.

The government’s decision to relax fiscal targets has placed it at loggerheads with the European Commission. However, the obsession with austerity may be self-defeating. The government is struggling to rein in spending by the autonomous regions, which were largely responsible for the budget spillover. Meanwhile, markets fret about growth; youth unemployment is shockingly high at over 50 percent, and the banking system is still weighed down by real estate exposures. Banks could face losses of 203 billion euros under a stressed scenario, according to Citigroup.

There are few easy solutions. The ECB could throw more money at banks to help them buy government debt. But Spanish lenders are overloaded with government debt having increased holdings by 52 billion euros in the two months to January, according to Citigroup. A full-scale bailout also looks difficult, as it would exhaust the euro zone’s recently-expanded bailout fund.

One option is a targeted bailout for Spanish banks, perhaps in conjunction with an external audit, as has already happened in Ireland. That would at least ease persistent concerns about property exposures, which in turn might lift some of the pressure on the government finances.
In the end, however, Spain will have to fix itself. Investors would probably tolerate a loosening of fiscal targets, provided there was evidence that over-spending regions were under control. Spain also needs to press ahead with reforms to boost growth. That means labour reform, and reducing the burden on employers by lowering social security contributions.

There are some bright spots: Spain has raised about 47 percent of its funding for this year, which limits the impact of high bond yields. Still, Madrid, and the euro zone, are heading for another rocky period.

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By Nick, April 6, 2012 3:03 am

By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.Golf and business often mix well. But Augusta National Golf Club, which hosts the famed Masters tournament, staunchly remains an all-boys club. That conflicts with the diversity aims of tournament sponsor International Business Machines. The difficulty is particularly noticeable this year, given the gender of the technology company’s new chief executive, Virginia Rometty.

As a private organization, Augusta can do what it likes. But with the financial logic for sponsorship fuzzy anyway, the club’s policy raises serious questions for IBM and the other big Masters sponsors, AT&T and Exxon Mobil. IBM, for one, talks about all its business, social and recreational activities being conducted without discrimination of any kind.

The company has the record to back that up, having been among the first big employers to embrace anti-discriminatory hiring practices in the 1950s. Former CEO Lou Gerstner, whose decade-long tenure ended in 2002, increased the number of female executives by 370 percent and minority leaders by 233 percent, according to the Harvard Business Review.

However, sponsoring Augusta’s annual tournament dilutes that message for the company’s 430,000 or so employees, and particularly for the women among them who aspire to follow in Rometty’s footsteps. As it happens, it also poses a tricky test for Augusta. The club has granted membership to IBM’s last four CEOs, all male. If continued, that tradition would demand the admission of one of the very few women in charge of Fortune 500 companies. But that move would break Augusta’s much longer men-only history.

When the last such storm blew up a decade ago, Augusta resisted the pressure and went two years without sponsorships to underline its prerogative. The sponsors came back, and IBM and others can argue their involvement is justified by the exclusive showcase and high-end viewership the Masters offers. But any return on the millions of dollars presumably handed over is nearly impossible to quantify. It’s largely a question of image and brand.

And that kind of benefit is in jeopardy if a sponsored event contradicts other important corporate messages. Even if IBM could make the business case, it would still be better off pulling the plug.

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By Nick, April 5, 2012 5:34 pm

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Step aside Jamie Dimon. The JPMorgan chief can usually be relied on for a feisty and fresh letter to his bank’s shareholders – one that has come to be more closely watched than others written by his peers. Even Warren Buffett has showered praise on Dimon’s epistles. This year, though, his efforts fall a bit flat. That clears the way for the pen of Robert Wilmers. The boss of regional bank M&T has a take on the state of financial markets that makes it the must-read missive of the season.

That doesn’t mean investors should crumple or disregard Dimon’s letter. His 38-page opus covers plenty of important ground. The sections explaining market-making and share buybacks are informative – but aren’t necessarily new either. In fact, many of Dimon’s musings rehash old ground, including his gripes about the Durbin Amendment, Basel III being anti-American and other regulation he has attacked in the past.

For those who like Dimon’s traditional brand of fire, however, Wilmers is the place to turn in 2012. What makes the M&T chief’s 22-page dispatch stand out is a thoughtful and at times blunt assessment of the industry – and beyond.

For one, Wilmers offers a sound defense of U.S. regional banks that will strike a chord in the era of too big to fail. He’s no fan of Wall Street, deriding almost three decades of “a pattern of investing in areas where they possessed little knowledge,” appearing to “seek dominance at the expense of leadership” and stating that they “continue to distort our economy.” He even dug up some provocative figures to support his case. Take this one: the top six banks, presumably JPMorgan included, have been fined $ 47.6 billion for at least 207 transgressions since 2002.

The letter does at times read like a litany of complaints. Accounting, rating agencies, government-sponsored enterprises and regulators all come in for his scorn. But it all manages to come together as a well-made argument that greed and incompetence have undermined both trust and decent leadership in the financial sector. Dimon might not agree with all the points Wilmers makes. But he’ll be hard-pressed to find fault with the tone.

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By Nick, April 5, 2012 8:06 am

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Nigerian billionaire Aliko Dangote is seeking a London listing for his $ 11 billion cement company. It is a watershed moment for Nigeria, and for Africa. There are significant governance hurdles, and Dangote’s plan to build a pan-African aggregates champion isn’t without risks. But the prospect of a FTSE 100-sized Nigerian company is worth celebrating.

Several years of strong economic growth, powered by the commodities super-cycle, have renewed investors’ interest in the world’s poorest continent. Africa has seen false starts before, but the rise of China, which has been investing heavily in the region, raises hope that Africa’s economic development might be getting some heft.

For investors, it is not easy getting focused exposure to sub-Saharan Africa. The usual suspects, miners like Anglo American and Lonmin, the insurer Old Mutual and brewing giant SABMiller – either have footprints that extend well beyond their home turf or have share prices that depend more on China’s economic growth than Africa’s. Zambeef, the AIM-listed Zambian beef producer, and Lonrho, the recently revived rump of Tiny Rowland’s century-old African conglomerate, offer direct plays on the continent. But they weigh in at less than 2 percent of Dangote Cement’s expected market cap.

While Nigeria has a poor reputation, Dangote is a company which could find good investment demand. It would easily be big enough to qualify to membership of the FTSE 100, though it remains to be seen whether it will comply with all of London’s index-inclusion criteria.

After recent debacles at the likes of ENRC and Bumi, corporate governance will be a red-hot topic. Aliko Dangote has said he would step down as chairman, however. The company is also likely to try to recruit experienced UK or European directors to supplement its largely home-grown board, which is well-regarded in Nigeria but less well known elsewhere.

There are ever-present political dangers and EBITDA margins, at 55 percent in fiscal 2011, are vulnerable. The scale of growth plan – Dangote wants to expand last year’s eight million tonnes of production capacity to 48 million tonnes by 2015 – is hardly without risk either. But if the price is right and the company meets London’s corporate governance standards, Dangote could prove a breath of fresh air from a too-often troubled continent.

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By Nick, April 4, 2012 10:37 pm

By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street shouldn’t get too excited about the latest recovery. Helped in part by a more stable Europe, investment banks have started 2012 far better than they ended 2011. They probably raked in more revenue in all areas but M&A and buying and selling equities in the first three months of the year. But false dawns have marked each of the past two years. And even if this comeback sticks, most firms will need considerably more trading and deal-making to earn decent returns.

That isn’t to say the recent improvement can be sniffed at. Fees in the first quarter from selling new bond deals shot up a whopping 87 percent from the end of the year, according to Thomson Reuters data, as investors piled back into riskier securities like high-yield debt. Improving markets also pumped up asset prices, meaning banks should – hedges permitting – record some gains on their balance sheets.

This effect in turn spurred greater fixed-income trading revenue – average daily trading volume in U.S. high-grade debt jumped 40 percent, according to Trace data. Even compensation for arranging equity deals improved, rising 27 percent, despite a lackluster market for initial public offerings.

Everything isn’t rosy, however. Fees from completed mergers fell by a quarter, U.S. equity trading volume was 8 percent lower and banks will again have to take annoying hits to revenue because of improvements in their own liabilities. Even allowing for these, net income should be much improved. Jefferies, for example, posted a 60 percent increase in earnings on a one-third jump in revenue for the three months to February.

But it will still leave most banks almost certainly wallowing in mediocrity. Jefferies eked out only a 9.5 percent return on equity, probably below its cost of capital. And Goldman Sachs may generate a mere 11 percent return even though FICC revenue could almost treble to $ 3.7 billion, analysts at Credit Suisse estimate.

That’s better than in recent quarters and justifies the bank’s recent run-up toward book value. But it’s hardly stellar. With Europe fragile, restrictive regulation trickling in and a history of economic fits and starts, Wall Street still hangs in the balance.

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By Nick, April 4, 2012 1:09 pm

By Daniel Indiviglio

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Washington may just hold a $ 23 billion fix for the nation’s cash-strapped states. That’s the upper limit of what could be raised if local governments were allowed to tax online retailers, according to the National Conference of State Legislatures.

Unfortunately, a pre-Internet court ruling currently forbids states from forcing sellers to collect such tariffs. That’s why last week Georgia became the latest state to resort to contorted ways around the rule. But a federal solution would be better – and luckily a bipartisan group of senators appears to have hit on one that even giant web retailer Amazon supports.

That’s no mean feat. The online mega-store has been a vocal opponent of earlier attempts to introduce a tariff on web purchases. The problem stems from a 1992 Supreme Court ruling calling for a federal directive to force out-of-state vendors to collect sales tax on mail orders. So in most states the onus is on the consumer to pay up, which means no one ever does.

To date, only individual states have tried to kick-start the process, as Georgia did last month. They argue that advertising and links with locally based affiliates effectively created an on-the-ground presence which made their wares liable to be taxed. But these schemes were often only aimed at the largest retailers and would constrain their ability to work with local companies.

Congress’s Marketplace Fairness Act avoids those pitfalls. It also eschews the flawed origin-based model, which would tax sales in the state where a cyberstore is based. That would mean some states would collect levies grossly out of proportion to the size of their population.

Instead, the legislation would distribute the monies collected based on each state’s inhabitants’ spending. And it would also smartly exclude Internet retailers with less than $ 500,000 in annual remote sales who might struggle to collect the tax. Including all retailers above that threshold, rather than just web titans, is what has helped secure Amazon’s support. It also charges its marketplace sellers for collecting sales tax for them, though swears it doesn’t generate a profit from that service.

Such backing may make the budding congressional bill easier to pass. That would give states the chance to claw in some much-needed cash. Sure, even as much as $ 23 billion won’t repair all their busted budgets. But it would certainly help.

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By Nick, April 4, 2012 3:40 am

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

No-one can accuse the Financial Services Authority of avoiding big targets. Indeed, the UK watchdog has trained its sights on one of the City of London’s most prominent dealmakers by fining Ian Hannam the best part of half a million pounds for passing on price-sensitive information about his client, Heritage Oil.

The penalty looks harsh given that the JPMorgan banker’s slip was accidental, and nobody traded on the tip. But even if Hannam – who has resigned in order to take the case to a tribunal – can get the ruling overturned, corporate advisers will have to re-think how they work.

Hannam is no stranger to controversy. As chairman of capital markets at JPMorgan he has been responsible for persuading a string of emerging markets mining and oil companies to list their shares in London. This has led to an inevitable clash between the business practices of oligarchs and the corporate governance standards expected by UK institutional investors.

This is not the first time that shares in Heritage Oil have attracted the FSA’s interest: two years ago, the regulator fined the chief executive of Genel Enerji, the Turkish oil company, almost 1 million pounds for trading on the basis of inside information about an oil discovery in Kurdistan. Nevertheless, the FSA’s case against Hannam looks sparse. It rests on two emails he sent in the autumn of 2008. The first alerted a potential bidder for Heritage – Hannam’s client – about a possible rival offer. The second signalled Heritage’s progress in finding oil. Hannam did not trade on this information, and there is no evidence that the emails’ recipients did either.

Without the trail supplied by the emails, there would be no case. The FSA maintains that simply passing on inside information constitutes a breach: it has successfully brought two similar “insider non-trading” cases in recent months. It also makes the point that somebody of Hannam’s seniority and experience should have known better.

Hannam’s defence, which he is expected to bring to a tribunal at some point next year, rests on two arguments. First, he was authorised to pass on the information – stirring up auctions is what companies hire advisers to do. And second, the information was not sufficiently specific to count as price-sensitive. Yet even if Hannam is cleared, the name of one of London’s most high-profile investment bankers has been tarnished. That message will not be lost on other corporate financiers.

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