To wake up this morning and find the Dow index of US shares above 9,000 and see copper and oil prices surging tells us that the stock market believes that not only is the worst of the downturn over but we are headed for better times.
That makes us all feel good. But I think the post-global-financial-crisis world will be rather different. You don’t go though a crisis like that and come out as if nothing has happened. We might be headed for better times but they will also be different times and, as I will describe later, the latest Macquarie Airports shuffle reflects this.
One clear change has happened. The days of borrowing big and making major takeovers are gone. The companies that succeed in coming years will be those that know how to manage a business. In many cases global companies will find that they can’t effectively manage businesses all over the world and they will sell out where they find their head office skills base does not add value. This week AWB announced plans to sell out of Brazil. Going to Brazil was an idea conceived in a different world. All Australian businesses operating overseas will need to assess whether over the long-term they add value to their global operations or whether the global operations are a vital part of the total value adding machine. The ultimate decision may depend on the market value of the assets.
In the US we are seeing the merger driven GE struggling, because it was built on the Jack Walsh culture of making money by takeover. These days you must be able to run businesses well and devise ways to either cut costs and/or generate revenue via new opportunities and better use the skills base. Sometimes those opportunities will come because you can better manage another company that does not have those skills. In that case the company with management skills will seek to buy cheaply, usually funded with equity.
This is old-fashioned good management and it was thrown out the window in the heady days of high gearing and the “what’s the next deal” culture.
Traditional institutions will continue to play their irrelevant profit guessing games but the clever institutions will be out there discovering just who has the management skills to prosper in this environment.
In a minor way we are seeing that happen with the plan by Macquarie Group to sell its management rights to the listed Macquarie Airports. In this new world splitting the management task makes no sense. Like GE, Macquarie Airports will not make its money by finding new airports to buy, but rather by looking hard at its assets and management skills base. It’s a new game.
The fund that owns the infrastructure assets should also manage the total business including the capital structure, provided, of course, it’s big enough to justify investing in the skills base.
In theory infrastructure manages itself but in practice that’s not right and it has to be well-managed in the same way as any other business.
In the longer term the stock market that comes out of this change will be much more soundly based. Those companies that don’t have the management skills to win in this world will be acquired cheaply by those that have that skill – subject of course to the ACCC and global competition regulators.
This article first appeared on Business Spectator.
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