Posts Tagged ‘Qantas’

Are pirate (oops, we mean ?private?) equity getting reckless?

Thursday, November 23rd, 2006

Yesterday, news of Qantas (the Aussie national icon) being stalked by private equity electrified the Aussie market. At one point, fuelled by rumours that a takeover deal could be worth up to $5.50, Qantas shares shot up to a high of $5.25.

We are simply amazed at the audacity of private equity nowadays. It seems that no public companies are safe from these marauding hordes. Do they want to take over Qantas just to prove that they can?

As we said before in Qantas rose on takeover rumour, there are substantial legal and political challenge for the takeover deal to succeed. To even contemplate such an endeavour, the share price of Qantas (before the release of the news) would have to be at such compellingly discounted level that the private equity can still offer a higher price that is economical. We doubt it is so for Qantas. We cannot understand what value these private equity see in Qantas at such an exorbitant price. Why would they even want to bother to borrow so much money (note: debt increase the risks further) to go through so much trouble and risks for so little? We scratch our heads in wonder. Perhaps these deals are structured to benefit the CEO, directors and fee-chargers (read: Macquarie Bank) much more than shareholders and investors? If the deal succeeds, we can imagine Qantas being slashed, burned and plundered mercilessly in order for this daring adventure to be worthwhile for the pirates.

It looks to us that this year?s rise of the private equity phenomena could be an indication that the world is still sloshing with too much liquidity (money and credit). Private equity siphon up a lot of debt and its easy availability may lead to situations where lenders underestimated the risks. As this article said,

WESTPAC’S David Morgan last week urged caution about the torrent of private equity deals, saying the inflated asset values, highly geared takeovers and rising interests rates paralleled the boom and bust conditions of the 1980s. What is unclear about the debt-fuelled private equity bubble, however, is who will be left wearing the losses when it ends.

Indeed, financial regulators around the world are getting concerned. As this article mentioned,

THE collapse of a large buyout firm was “inevitable” and could threaten the stability of the British economy, Britain’s main financial watchdog has warned as it becomes the latest international regulator to focus on the private equity industry.

As investors, we take heed of this phenomenon as a warning.

Qantas rose on takeover rumour

Wednesday, November 8th, 2006

Yesterday, as reported by the Australian Financial Review (AFR), there were rumours of Qantas being a takeover target. Consequently, the share price shot up from $4.20 to $4.31. At one point, speculators were trading Qantas shares at the record high of $4.36.

We marvelled at the foolhardiness of the speculators who, based on this gossip, rushed to buy Qantas shares. Anyone who knows what they are doing will know that it is highly unlikely that Qantas will be taken over. Firstly, the law forbid any foreigners from owning more than 25 per cent of Qantas and all foreigners can hold a total of only 49 per cent of it. Secondly, we doubt there is any good value for Qantas shares at this level of price.

Needless to say, if any private equity company wants to buy up our holding of Qantas shares, we will gladly sell it to them.

Transference of wealth from West to East

Monday, October 23rd, 2006

According to media reports, Qantas recently announced that they are outsourcing their ?IT applications support and maintenance operations to global services companies Satyam Computer Services Ltd and Tata Consulting Services.? Furthermore, ?Chief executive Geoff Dixon said the transition to Satyam and Tata, which would take place over 15 months from November, would mean the loss of up to 340 Qantas IT positions.?

We were dismayed to hear that. Our immediate dismay laid in the poor souls who have lost their jobs. But our greater dismay laid in the long-term big picture trend that is going to affect our country for our future generations. The news from Qantas was just one of the incremental steps in the current macroeconomic trend towards the massive transfer of wealth from the West (mainly the spendthrift countries: US, Britain and Australia) to the East (mainly India and China). The West?s bubble economy set the stage for the beginning of its decline. Virtues like thrift and hard-work were forgotten, giving way to greed and profligacy. What started of as a trickle soon developed into a flow, which then formed a gush. Eventually, the dike will be overwhelmed and a final collapse ensued.

All right, we may be exaggerating about what may happen in the future, but our hyperbole served to illustrate a truth?the West is getting economically poorer and poorer while the East is getting economically richer and richer. How is this happening?

It all began with the outsourcing of manufacturing to the East. This common myth was often believed in the West: They sweat, we think. The assumption was that we will push the base, labour-intensive and low-level jobs to the East, while we concentrate on the more capital-intensive, high-level, technologically advanced and value-added jobs. Pundits will point to the fact that the Eastern economies consisted mainly of producing goods while the Western economies consisted mainly of providing services.

It is this kind of complacency that we wish to shake off. As the West manufacture less and less, its manufacturing industries got more and more hollow. As the manufacturing industries migrated to the East, technology hitched a ride along as well. As the East manufacture more and more, they learn from us more and more. As they learn more, they moved up the technological ladder, create better products and move up the value-added chain. With the wasteful and spendthrift ways of the West, more jobs get outsourced to the East to protect corporate profits while the real wage of West stagnate and even decline. As the trend continues, Western skills, know-how, capital and industries get increasingly eroded. This erosion is a portent for the eventual loss of wealth by the West.

Now, let?s examine this issue at the grassroots level, where the frontline battles are fought daily. Qantas?s decision to outsource its IT jobs to India is just a small example of a wider trend. In Australia, university enrolments for IT courses are pathetically low. Who would want to learn a skill for a job that you believe has got no future and is going to be outsourced eventually? With less and less people wanting to learn IT, no wonder there?s an outcry of an acute IT skills ?shortage? by businesses in Australia. We believe the IT skills ?shortage? is a humbug?business whinged on the lack of IT skills and yet, on the other hand, not willing to pay the price to acquire them in the first place. We believe that if nothing is done about it, one day, we will not even have an IT industry to whinge about!

Lately, we heard that Satyam (the company which Qantas outsourced its job to) is the same Indian IT company that is drawing people from the West to learn from its training campuses in India. Hey, aren?t the East supposed to sweat while we think?

Meanwhile, as investors, we are more willing to trust our wealth to grow faster in the East than in the West.