65 cheap insurance over travel

Oligopoly Watch
The latest maneuvers of the new oligopolies and what they mean

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  Brands and the (incredible shrinking) Big Three

  "Just how serious are they about shrinking their vast lineups of different brands and models to match the current harsh reality of the market?" That’s the key question asked in the New York Times t "Big Three May Need to Trim Number of Brands," 12/1/08).

  The article points out that Ford, GM, and Chrysler together have 112 different car and truck models using 15 brands (makes) in the US. By contrast, the big three Japanese companies (Toyota, Honda, Nissan) have only 58 models.

  A confusing array of reports are out on whether Ford will sell off its Volvo division, Both Ford and GM are in talks with the Swedish government, but it is clear that EU competition rules would make it hard for Sweden to just step in and "rescue" the companies. Beside, the fall in Volvo sales is even more catastrophic than that of the other failing GM brands. Who in their right mind would pay anything for these brands?

  GM has been trying all year with no success to sell its Hummer brands. It also has been thinking about selling both the Saab and Saturn brands. Pontiac may also be on the chopping block. But who wants them?

  But dropping brands is not so easy, even if you despair of selling them. In 2000, GM dropped its Oldsmobile brands, but it took four years and two billion dollars to make good with employees and dealers.

  Over the last few years, Ford and GM have sold off whatever they could. On Nov 17, GM sold its remaining stake in Suzuki Motors for around $200 million. Ford sold in 2007 its Jaguar, Aston Martin, and Land Rover brands. It has also sold most of its stake in Japan’s Mazda for $540 million. In 2006, GM sold off its stake in Isuzu and in Fuji Heavy Industries (Subaru) as well as its main stake in Suzuki). All the properties that these companies greedily snapped up in the 1990’s were sold off in a rush. All that cash went to slow down the burn rate, but couldn’t make the companies profitable.

  But there are still too many brands. GM and Ford spend fortunes trying to convince users to buy slight variations on the same model. The strategy of pseudo variety worked well when the Big Three rules the world, but now the excess variety doesn't protect market share, while flagship brands like Toyota's Corolla and Honda's Accord point to safe, well-engineering, constantly improved products that make car buying a lot easier.

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  Wherein my taxes fund Citigroup's new acquisition

  First was the knowledge that Citigroup was in a bad way thanks to bad loans and credit cards. Then Citigroup tried to buy rival Wachovia, but was beaten out by Wells Fargo. Then came a new bailout of Citigroup by the US government, in a somewhat murky deal that covered bad assets and gave operating capital.

  The bailout for Citi, which protects the company from $306 billion of high-risk assets and puts $20 billion of new capital in Citi’s hands, is the biggest bank bailout ever.

  (And the anger that resulted when it was realized that the company was still going to spend $400 million dollars to get naming rights for the New York Mets baseball club stadium.)

  Now the next shoe drops. A fund owned by Citigroup has reached an agreement to buy a company called Itinere Infraestrcuturas Sa from Spanish constitution company Sacyr Vallehermosa Sa in a $10 billion deal.

  Sacyr is the #5 construction company in Spain, also owning oil resources and hospitals. The Itinere Infraestrcuturas Sa division owns toll roads in Spain, Portugal, and South America. Citigroup plans to sell off over a billion in highway assets to Spain’s Abertis Infraestructuras SA and Italy’s Atlantia SpA.

  Observers see the buy as a bargain, thanks to Sacyr’s need for cash to cover $5 billion in debt. Citi was seen as interested in expanding the ownership of toll roads across the world, a strategy that may fit in with a US move to increase spending on infrastructure.

  So let’s get this straight. Not only are US taxpayers paying for the Citi’s name on the Mets’ stadium buy, but we are also helping it make bets on the market as it acquires new companies, rather than trying to get its own house in order.What is going on here?

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  Brazilian bank deals

  The Brazilian banking business has seen two large acquisitions over the last few weeks.Banco do Brasil, a state-owned bank, announced a deal to buy majority share in Nossa Caixa. The deal is for around $2.25 billion. The new bank will be #2 in Brazil.

  Three weeks ago, an even much larger deal, worth $17.7 billion, was announced. Brazilian banks Banco Itaú, said it would merge with (actually acquire) rival Unibanco. The two banks are headquartered in Sao Paulo. The new bank will be the largest headquartered in the Southern Hemisphere. Unibanco was reportedly weak due to credit derivatives.

  The latest deal is seen as an effort for Banco do Brasil to regain its #1 position. n September, Banco do Brasil announced it would buy two smaller banks, Banco do Estado de Santa Caterina and Banco do Estado do Piau.

  Further deals are predicted in a not very consolidated banking market. A Bloomberg News article ("Brazil Bank Mergers May Pick Up, Raymond James Says", 11/21/08) quotes an analysts who notes that: "Business opportunities are huge and the consolidation level is relatively low… The five largest Brazilian banks account for 65 percent of the Brazilian banking system, compared with 86 percent in Peru, 79 percent in Mexico and 75 percent in Chile."

  The article posits that Brazil’s #3, Bradesco, is rumored to be on the lookout to make a buy. While cash is short as in other countries, the valuations of the midsize banks in particularly are spectacularly depressed.

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  DHL expresses itself out of US market
  
  We've called it often before. In a three-company oligopoly (a triopoly?), the #3 company is always at risk. That's especially true when #1 and #2 keep the pressure on, and where there is no earth-shattering innovation that offers #3 a way to restructure the market.
  
  When in 2003, German shipping giant DHL (a division of Deutsche Post) bought US-based Airborne Express in an attempt to compete in the US with FedEx and UPS, the US-based package delivery leaders (they had 80% of the market) tried by both legal and market means to keep a powerful third party out of the business.
  
  We then quoted a New York Times article (6/1/2003) that pointed out, "The battle is unusual partly because FedEx, which is located in Memphis, and UPS, which is located in Atlanta, are such strange bedfellows. The Coke and Pepsi of the cargo world, they are archrivals. But they are working toward a common goal: to shut down, or a least slow down, DHL Worldwide Express in the United States."
  
  Well, the friendly rivals lost the first battle but they now have won the war. DHL just announced they would close most of their North American operations and lay off almost 15,000 employees. This was not such a big surprise. DHL had started outsourcing some of its operations to UPS in May, including domestic air carrying and many trucking operations.
  
  The operation had been losing money form the beginning. A Bloomberg news article ("Deutsche Post's DHL Cedes U.S. Market to UPS, FedEx", 11/10/08), quotes one analyst as saying: "The reality of the lack of scale, the productivity that they have, the market reach and the brand awareness make it impossible for us to make it economically viable." The operation was losing money even during the boom, so the bust was a good opportunity to get ou