Saturday, July 14, 2007

Sher Value: Take Over Fever & Diversification

The news is all over the place, a stake in EADS, Barneys under bid, Bank stakes being claimed and the list is getting to be endless. There is a plethora of equity and acquisition deals being done from the Middle East into the Western markets. The deployment of overseas investments representing money leaving the Arab world for investment abroad just this year alone has been estimated at US$40 billion, and probably does not include the reserve transactions from public sector strategic investments. It is estimated that the Kuwait Investment Authority, KIA, according to one public source, has reserves of US$213 billion, and indeed a great deal of this was rebuilt after the devastating impact of 1991 political developments in the region. My personal guess, and I emphasis only a guess, is that the reserves of the GCC countries are perhaps more than $1.2 trillion and perhaps represents the largest singular segment of investment buying power in one region.

Indeed there are a number of countries who singularly have a higher Gross Domestic Product, GDP, than the entire GCC bloc, but it's the financial reserves, especially when related to the population and the investment opportunities within the region that count. Even though the real estate and infrastructure of the region has been expanding at what seems a break neck speed, in the larger scheme of things we have to accept that the growth of financial assets and financial reserves has been more robust and consistent in the past decade than anything else. This means that financial assets and their accumulation is far outstripping the growth in say the real estate sector.

What this does mean is that even though the strong liquidity in the market will continue to fuel the real estate expansion, in addition to other elements of diversification, the need for liquidity to go overseas will be a major drive of the investment philosophy and it is something that cannot really be avoided. The acquisition of financial assets and companies is a normal behavior of this strategy.

As much as targeting mature companies in business conditions where they are either undervalued today or are likely to be great investments over the horizon the strategy again is really akin to stock picking. However, there is an argument to be made of going into economies where the business case is more of an emerging market, where companies may not have emerged into the limelight. I believe both India, and China, and other smaller economies have a number of companies who would be ripe for acquisition and actually be propelled onto the world stage through modernization and proper systems and business positioning. This is where the marvel of capital and expertise can best be applied, keeping in mind the impact of these emerging economies is massive and ignoring them would be a vital mistake.

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