By Zulbayar B
As a consequence of a number of
global financial crisis originated by the U.S. sub-prime mortgage crisis,
followed by a credit crunch crisis and European sovereign debt crisis, now the
world’s economies, regardless of their size and maturity, are suffering from
low growth, if they are not in fact shrinking.
Therefore, U.S. led developed nations have taken a number of measures to
support businesses and one of them was to provide low cost financing.
In order to so, those governments
have implemented (experimented) with an unconventional monetary policy called Quantitative Easing which was intended
to boost the liquidity of capital markets without affecting the inflation level
and interest rates. Businesses that were able to get low cost funding through
financial institutions have stabilized their operations and started looking
into expansion opportunities.
Companies equipped with favorable
credit ratings, sensible business plans and skilled business managers, are
being chosen to obtain lower cost funding with favorable terms, and are
aggressively engaging in merger and acquisition activities, whether it be a
takeover of competitors or suppliers in recent years.
(Picture 1) Worldwide Quarterly M&A and Number f Deals
Source: Thomson Reuters
By taking over its competitors, a
company may well be able to get a bigger market share, save operational costs, and
obtain new business knowledge or experience. For instance, let’s imagine that
“BOSA”, a supermarket chain, takes over a competitor chain supermarket “Minii
Delguur”. As a result of the acquisition, there will be a number of savings and
benefits such as a lower delivery costs for more closely located supermarkets, labor
cost savings by employing a head manager who can be shared by geographically
closely located supermarkets, and savings on overhead, by using the same
warehouses. Most importantly, there will be fewer price competitors for goods sold
in those supermarkets.
Basically, businesses seek a
synergy, which is a benefit simply explained as 1+1=3 or benefits arising from
a takeover or merger. Businesses are taking advantage of the merger and
acquisition process, and then go to institutional investors for funding.
The latest example is the
takeover bid of Anheuser-Busch InBev, producer of world
famous Stella Artois, Budweiser and Corona to acquire SABMiller which is also a
famous beverage company that produces
Peroni and Grolsch brand beers among others.
Currently, Anheuser-Busch
InBev and SABMiller own 20% and 10% of the world beverage market, respectively.
If the deal is successfully closed, then, a USD 180-250 billion company will be
created. No single company in the world is able to finance such a big deal by
itself. Accordingly, institutional investors step in and provide financing by
issuing direct loans or by purchasing their bond.
Even
though those companies’ bonds are not as reliable as U.S. T-bills, banks and
investment funds will decide whether to buy them or not once they have
evaluated associated risks and returns.
If Mongolia is able to improve
its current credit rating soon, we have many potential high growth economic
sectors such as energy, transportation and infrastructure which may attract
institutional investors.
Mongolia
|
S&P
|
Moody’s
|
Fitch
|
|
|
Rating
|
B+
|
B2
|
B+
|
|
Outlook
|
Negative
|
Negative
|
Negative
|
As mentioned in the previous
article, if the Mongolian government pays closer attention to its current debt
management situation, and improves its current credit rating, it would benefit
the country greatly and attract outside investors which would provide real
support for our country’s private sector, and lead Mongolia to an economic
growth model which is independent from China.
Zulbayar
Badral is a Chevening Scholarship recipient currently pursuing MSc in Global
Finance at the University of Westminster in the UK. Previously, he was CEO of a
consultancy firm in Mongolia and has worked in marketing, business development,
and accounting in Mongolia and abroad. You can find him as @ZulbayarB on
Twitter.
