Schlumberger and Cameron agree $14.8bn merger

BY Richard Summerfield

Given the current volatility in commodities, it is little surprise that we are beginning to see more M&A activity in the oil and gas space. To that end, Schlumberger Ltd announced this week its agreement to acquire Cameron International Corp in a deal worth around $14.8bn, including the assumption of debt.

Under the terms of the deal, Cameron shareholders will receive 0.716 Schlumberger shares and a cash payment of $14.44. According to a statement released by the two firms, the agreement places a value of $66.36 per Cameron share, a premium of 37 percent to Cameron’s 20 day volume weighted average price of $48.45 per share. The deal has been approved by the board of directors at both firms. Pending shareholder, regulatory and other closing conditions, the transaction is expected to close in the first quarter of 2016.

Regulatory approval could pose an issue for the two companies. In November, Schlumberger's two closest rivals - Halliburton Co and Baker Hughes Inc - agreed to merge in an effort to lower costs in a pressurised market, but the deal was blocked by antitrust authorities in the US. However, the fact that there is little crossover between the services offered by Schlumberger and Cameron may allay any regulatory concerns.

The acquisition of Cameron is an important one for Schlumberger, given the company’s standing as one of the world’s largest producers of energy equipment. In the statement, Paal Kibsgaard, chairman and chief executive of Schlumberger, noted, “This agreement with Cameron opens new and broader opportunities for Schlumberger. At our investor conference in June 2014, we highlighted how the E&P industry must transform to deliver increased performance at a time of range-bound commodity prices. With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market.”

The proposed merger of the two companies is not the first time they have been associated. In 2012 the firms established a joint venture – OneSubsea - to target the deepwater industry. OneSubsea is a supplier of heavy duty machinery which allows Big Oil firms to control the flows of oil and gas they find and bring it to the surface.

The acquisition of Cameron is expected to help Schlumberger achieve significant synergies, by lowering operating costs, streamlining supply chains and improving manufacturing processes.

Jack Moore, chairman and chief executive of Cameron, said, “This exciting transaction builds on our successful partnership with Schlumberger on OneSubsea and will position Cameron for its next phase of growth. For our shareholders, this combination provides significant value, while also enabling them to own a meaningful share of Schlumberger. Together, we will create a premier oilfield equipment and service company with an integrated and expanded platform to drive accelerated growth. By bringing together Cameron and Schlumberger, we will be uniting two great companies with successful track records, performance and value creation.  We look forward to working closely with Schlumberger to achieve a seamless post-closing integration and long term value for all of our stakeholders.”

News: Schlumberger to buy oilfield gear maker Cameron in $14.8bn deal

$1 trillion wiped from Asian markets as Chinese economic slowdown verges on meltdown

BY Fraser Tennant

In a major drop in stocks verging on a meltdown, more than $1 trillion has been wiped from Asian markets following a sharp drop in the value of Chinese shares.

Yesterday saw the biggest one-day drop since 2007 with the Shanghai Composite, the mainland benchmark index, down 8.5 percent at 3,209.91 points (erasing all the gains made this year), the Hong Kong Seng index closed at 5.2 percent (21,251.57 points), and Japan's Nikkei 225 (the region's biggest stock market), closed 4.6 percent lower (18,540.68 points) - its lowest point in almost five months.

Markets were also dragged down elsewhere in the region with the Australian S&P/ASX 200 finished 4.1 percent lower (5,001.30 points), while South Korea's Kospi index ended yesterday 2.5 percent lower (1,829.81 points).

As Chinese shares continue their fall this week, the country's slowing growth and volatile markets sparked panic among global traders, with stock markets in London, Paris and Frankfurt reacting with alarm to the crisis engulfing the world's second largest economy.

"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."

In a frenzied attempt to reassure investors, the Beijing government has made use of its cash reserves to shore up the market (a figure of at least $1 trillion as been quoted) and has given the go-ahead for its main state pension fund to invest in the stock market. 

Under the government’s plans, the fund will be allowed to invest up to 30 percent of its net assets in domestically-listed shares. By increasing demand for them, the government hopes prices will rise. So far though, this intervention appears to have done little to calm the fears of traders both within China and overseas. 

"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.

If the yuan is devalued further and Chinese citizens end up losing their life savings in the stock market, widespread social unrest may follow: a true nightmare scenario for a an under-fire Beijing government. 

News: Great fall of China sinks world stocks, dollar tumbles

‘Abenomics’ under fire once more as Q2 GDP data confirms weak Japanese economy

BY Fraser Tennant

Second-quarter GDP figures have confirmed that the Japanese economy,  the world’s third-largest, shrank at an annualised pace of 1.6 percent – a contraction that keeps up the pressure on prime minister Shinzo Abe and his economic policy package, Abenomics.

According to data released this week by the Cabinet Office, on a quarter-on-quarter basis, Japan’s gross domestic product contracted 0.4 percent in the April to June 2015 period. Economists surveyed by The Wall Street Journal forecast a 0.5 percent contraction (1.9 percent annualised).

Despite the weak economic growth, the Japanese economy actually expanded over the previous two quarters, although that expansion followed two quarters of contraction.

A slump in overseas demand for Japanese goods and more frugal attitudes toward household expenditure have been cited as the major reasons for the stagnating Japanese economy.

As well as essentially confirming that its economy is at standstill, the austere Japanese GDP data also steps up the pressure on senior policymakers to devise a fresh monetary/fiscal stimulus to bolster the economy and reverse decades of deflation.

Since taking office in December 2012, prime minister Abe has struggled to bolster economic growth, with his audacious Abenomics revival program so far failing to turn the Japanese economy around.

Commenting on the Cabinet Office figures, economics minister Akira Amari stated that the government did not have any concrete plans as yet to introduce a new stimulus package but would concentrate for the moment on pressuring companies to direct their profits toward raising wages and capital expenditure.

Responding to Mr Amari’s view, Hiromichi Shirakawa, chief Japan economist at Credit Suisse, said: “If weak private consumption persists, that would be a further blow to Abe's administration, which is facing falling support rates ahead of next year's Upper House election. This could raise chances of additional fiscal stimulus."

Although economists do expect economic growth to pick up in Japan in the second half of 2015, for now there is considerable pressure mounting on prime minister Abe and his government to take steps to boost the economy, sooner rather than later.

News: Japan economy shrinks in second quarter in setback for 'Abenomics'

Banks in latest $2bn FOREX settlement

BY Richard Summerfield

Nine major world banks have agreed to pay a $2bn settlement to conclude a class action brought in a New York court over the recent foreign exchange rigging (FOREX) scandal.

For the banks involved, the ramifications of rigging the market in their favour continue to mount up, with fines already exceeding the $10bn mark. However, almost as harmful as the fines and settlements has been the damaging effect of the scandal on the reputations of the banks involved.

The firms involved in the FOREX fixing conspiracy, including HSBC, Barclays, BNP Paribas, Bank of America, JP Morgan, Citibank, Goldman Sachs, RBS and UBS, have been pilloried, and heavily sanctioned in recent years for their roles in the scheme. As a result of the FOREX controversy – amid other notable financial scandals – confidence in the wider financial services sector appears to be almost at rock bottom.

In May, five of the banks - Barclays, Citicorp, JPMorgan Chase, Royal Bank of Scotland and UBS - pleaded guilty to felony charges relating to rigging foreign exchange rates. In 2014, the Financial Conduct Authority in the UK fined four of the five firms a total of £1.1bn. The fifth bank, Barclays, is still under investigation.

According to Michael D. Hausfeld, chairman of Hausfeld, a global claims firm acting on behalf of US investors, the most recent settlements are a key victory for those wronged investors. “As a result of lengthy, hard-fought negotiations, we have obtained historic recoveries on behalf of US investors,” wrote Mr Hausfeld. “Apart from the monetary component, each defendant has agreed to provide substantial cooperation, which will assist investors in their continued litigation against the non-settling defendants. While the recoveries here are tremendous, they are just the beginning. Investors around the world should take note of the significant recoveries secured in the United States and recognise that these settlements cover a fraction of the world’s largest financial market," he added.

Furthermore, as part of the settlement, the rebuked firms have agreed to help investors continue their legal action against a further 12 banks - Credit Suisse Group AG, Credit Suisse AG, Credit Suisse Securities, Deutsche Bank AG, Deutsche Bank Securities Inc., Morgan Stanley, Morgan Stanley and Co, Morgan Stanley and Co. International, Bank of Tokyo-Mitsubishi, RBC Capital Markets, Société Générale, and Standard Chartered.

Undoubtedly, the increase in fines and settlements reflects the increasing regulatory scrutiny banking groups have found themselves subject to in recent years. For those targeted banks, the enforcement actions – and settlements - will likely continue for some time.

News: Currency rigging lawsuit settlements rise past $2bn - lawyer

Google to become Alphabet following reorganisation

BY Richard Summerfield

Over the course of the last decade or so, Google has played a pivotal role in the lives of billions of people. Though the company began as a mere search engine, today Google has become a global conglomerate offering everything from video hosting to high speed fibre broadband, restaurant reviews to ‘smart’ home heating systems, and self driving cars to venture capital investments.

However, going forward this is all going to change, as Google will soon become a wholly owned subsidiary of a new holding company, Alphabet. “Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company called Alphabet,” said Google chief executive Larry Page in a blog post on the company’s website.

In creating Alphabet, the company caught many analysts and investors off guard. But it is important to note that there will be no material change for consumers or investors going forward. Google’s fundamental businesses – and its experimental ‘Google X’ division – will remain the same under the Alphabet banner.

Indeed, Google's core units – search, YouTube, Android and maps – which account for almost all of the company’s annual revenue of around $66bn and its $460bn stock market capitalisation – will remain within the Google subsidiary. However, Google itself will have a new chief executive, Sundar Pichai, who had been senior vice president in charge of products. Mr Page and Google co-founder Sergey Brin will run Alphabet, Google’s new parent company. Other subsidiary  companies including Nest and Calico will sit alongside Google.

Though the move was unexpected, it has been heralded as a positive step. The reorganisation of the sprawling and diffuse Google business marks the first time that any of the major Silicon Valley powerhouses has attempted to streamline their units. Companies such as Amazon and Facebook, which themselves have acquired a litany of tech start ups in recent years, will surely watch Google's reorganisation with interest.

Investors have almost universally supported the realignment of Google's business. Shares of Google Class C stock rose more than 4 percent on Tuesday morning, the day after the announcement was made. The move is expected to bring greater balance-sheet accountability and reduce Google's spending on speculative endeavours. As Mr Page noted, “We plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.”

How the reorganisation will affect Google’s antitrust battles in Europe remains to be seen, however.

News: Google morphs into Alphabet; investors cheer clarity