25/02/2009 - 22:00

Making the best of being cut to the core

25/02/2009 - 22:00


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Big companies’ behaviour in tough times is often predictable, but it’s just the market at work.

Making the best of being cut to the core

THE recent news that Qantas was cutting its premium brand out of New Zealand routes and replacing it with Jetstar struck me as a typical response.

There are numerous examples of multinationals reacting to financial turbulence by trimming or cutting at the periphery - part of a pattern of behaviour that is probably part of the reason why the arrival of foreign companies is often greeted with a degree of cynicism within the markets they invest.

Qantas will argue its not cutting back, but dropping from full-service to discount is definitely that in my mind. I'm sure the New Zealanders will agree with me.

Other recent and more extreme examples of this type of behaviour are available. Take for instance, German carmakers, which have virtually wiped out production in new factories established in better times in Eastern Europe. They are among a bunch of big manufacturers pulling out of the former Soviet Bloc countries.

Cutting to the core is an expression that comes to mind and we've noted it many times in Australia, let alone a very peripheral market such as Western Australia.

Earlier this decade we saw US gas pipeline and power generation players withdraw en masse from Australia. That was one of the primary reasons the now-defunct Alinta could grow from a WA gas retailer to a national infrastructure player.

Earlier, the US investment banks, brokers and management consultancies set up shop in WA before withdrawing to Sydney and, in many cases, pulling out of Australia altogether.

It is one of the truisms about so-called geographically diversified companies that, when troubled, many will return to the core businesses they know best, usually ones situated closest or most familiar to upper management.

This is not a criticism of foreign intruders or a parochial statement, merely an observation of the way markets work.

Local people can benefit in two ways from this phenomenon. They play a role in a newcomer's arrival, and they can pick up the pieces when they leave.

In the first instance, it might be the sale of assets or the provision of expertise that helps a foreign group entering the local market, often at or near its height when prices are high.

In the latter case, they may buy-back assets at a reduced cost or simply restart operations anew, presuming all non-compete clauses have reached their use-by date or no longer apply.

Of course, sometimes this behaviour looks sharp or vulture-like. That is especially the case when local sellers have undermined the performance of the multi-national in conflict with their original agreements.

That is not the case in the majority of instances, but it does happen and distrust of local talent is one of the reasons why multi-national head offices often decide to cut and run from a market.

Usually, though, the local player simply knows their market best, including being able to sell high and buy back low based on their close relationship with customers and familiarity with competition.

At a multinational and national level I have seen some of Perth's best operators do this, often more than once. It's a skill in its own right, to be able sell and buy back at a profit, often while earning an income as an employee or consultant in the interim.

For instance, I think we'll see many of the businesses and assets bought by foreign companies jettisoned as they have to pare back debt or reduce their costs.

Of course, what is happening in foreign investment today is in stark contrast to that formula. At the moment, the boot is on the other foot, with sellers being Australian companies flogging core assets to foreign entities at fire-sale prices. To me this is a more permanent arrangement because the foreign buyers, in this case mainly Chinese, are acting strategically.

They are buying key assets at a time when other parts of their economy are receding quickly, including their own capital imports.

I guess that's what happens when a large and patient enterprise, like a government that has no pressing electoral cycle, can choose to expand investment in new markets, even when its customer base and revenue is shrinking.

Traditional multinationals, the ones owned by shareholders and subject to less long-term investment cycles, don't have the luxury of such a strategic outlook.

A question for all of us is, what do we prefer, those who come in the good times with wads of cash and desert us when the going gets tough, or those who appear to be capitalising on our pain to take up long-term positions?

Both models have economic dangers, maybe it's just we've learned to live with the former, and believe that we can exploit it better.

Philanthropy HITCH

LAST year I wrote a piece on philanthropy and the quiet revolution in a sector in which Australia has struggled to keep pace with other rich nations such as the US.

One of the drivers of increased private giving was the creation of Prescribed Private Funds by the Howard government, which took away much of the complexity that existed under prior rules governing the establishment of private charitable foundations.

According to the Centre for Independent Studies, more than 800 PPFs have been registered, with a total value of about $1.3 billion, since 2001.

This has been a major success. One testimonial on this came from Ron Manners who established the free market education institute called the Mannkal Foundation as a PPF overnight after years to trying to get the idea started under the old rules.

But Mr Manners is among those who worry about proposed new rules from the Rudd government that could make PPFs very unattractive to those who propose giving their wealth to charity.

One of the proposals is that a certain amount of the fund, possibly as much as 15 per cent, would have to be given away each year. By prescribing such activity, the government would doom a lot of PPF hopefuls because of such inflexibility in the way they want to arrange to spend their own wealth.

Not only would it mean that donors would be driven by the financial year rather than sensible decision-making, but such a mandatory target would make it difficult for PPFs to be long-term sustainable vehicles.

The government should not be discouraging people from committing to charity when they are feeling rich enough to do so.


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