Year: 2011

This is no way to run a currency. When Libya descended into civil war in February, central bank governor Farhat Omar Bengdara left the capital Tripoli because communications had failed and he couldn’t carry out the routine daily transactions that the Bank of Libya has to do. Next, he departed the country altogether as Muammar Gaddafi summarily appointed a replacement. Then all the bank’s foreign exchange assets, mostly held in the US and Europe, were frozen. Finally, the British government stopped a ship carrying £900m worth of brand-new dinar notes to Tripoli. As Bengdara points out, Libya is running out of money and the people will suffer.

Once again, the revolutions in the Middle East show how vital a nation’s currency is in the daily lives of its people. Let’s look at how the currencies fared.

For all these currencies, it will be a long fight back for respectability in the markets. Meantime the value of the two dinars and the Egyptian pound shrinks in the populations’ pockets.

– Tunisia’s 50 year-old dinar (TND) isn’t convertible, so it’s hard to tell exactly how it’s survived the revolution but we do know it’s taken a battering. It would be “difficult, difficult”, said central bank governor Mustafa Kabel Nabli about keeping to a deadline of 2014 for full convertibility in the wake of the crisis. Nor will it help that Moody’s has cut Tunisia’s credit rating to Baa3 and could lower it further. A big problem is the strength of the dinar depends on trade with Libya and that’s in a state of collapse.

– When the anti-Gaddafi movement began to mobilise, the 40 year-old Libyan dinar (LYD) held its own and even strengthened for a few days. When the dictator’s air force started strafing his own cities in early March, it went into freefall. The currency’s immediate future looks grim as everybody who can rushes to unload it, including expat workers like the 10,000 Filipinos who fled back home with suitcases full of suddenly unwanted dinars.

– Oldest of the three currencies, the Egyptian pound (EGP) has had a wild ride for nigh on 150 years. It was consecutively tied to the gold standard, the British pound and the greenback before it was floated in 1989, but only in the most technical sense under the Mubarak regime which kept a tight grip on the Gineih, as it’s also known. And the ride is getting wilder as tourism and foreign exchange flows grind to a halt. Trading in the currency, always thin, has also practically stopped. There’s only $35bn in reserves and it now takes nearly six Egyptian pounds to buy a greenback.

Take the UK, for example. “Only 12.5 percent of FTSE 100 directorships are held by women,” says Susan Vinnicombe, professor of organisational behaviour and diversity management at Cranfield School of Management and co-author of the school’s annual Female FTSE Board Report. Of the 1,076 directorships in FTSE 100 firms, executive and non-executive, 941 are held by men, with just 135 directorships held by 116 women. Elsewhere, in the top 101 companies in the US, Europe, and Asia, the proportion of women on the executive committee is just 15 percent, seven percent, and three percent respectively.

Momentum is gathering behind a move to increase the number of women in executive and non-executive directorships. Initially driven by the inequities of the existing situation, more recently it has become clear that there is a strong business case to be made for greater gender diversity at senior levels.

To begin with, research suggests that companies with more women on the board are likely to outperform other firms. In The Bottom Line: Corporate Performance and Women’s Representation on Boards, published by non-profit membership organisation Catalyst in 2007, Fortune 500 companies with more women on the boards outperformed those with the least, by 42 percent on return on sales, 53 percent on return on equity and 66 percent on return on invested capital.

Greater female representation on boards is also associated with improved performance on governance. Research by academics Renée Adams and Daniel Ferreira, Women in the Boardroom and their Impact on Governance and Performance, revealed that boards with more female directors were characterised by greater meeting attendance, tougher monitoring of the CEO, and better alignment with the shareholders’ interests. There are also studies that suggest that having more women on the board lessens the risk of bankruptcy.

There are other powerful business related arguments too. In a world where human capital is a prized asset, and talent driven innovation feeds into competitive advantage, it makes no sense to overlook such a large and talented proportion of the workforce.

“Against a backdrop that 60 percent of graduates in the developed world are women, and that there are a substantial number of women in the corporate talent pipeline, it is clearly a waste of talent not appointing women to the board,” says Ms Vinnecombe. “There’s a market argument too. For example, around 80 percent of key consumer decisions in the UK are made by women. Doesn’t it seem ridiculous not to have customers’ views expressed at the top of the organisation?”

And increasingly investors are looking at a number of aspects of company performance, she says, including gender diversity on the board. Plus there is some evidence to suggest that women tend to have a transformational leadership style that may be linked to greater effectiveness.

A number of countries have taken action to redress gender imbalance in the boardroom, usually in the form of mandatory quotas or self-regulatory targets with guidelines.

Countries in the non-quotas camp include Australia, Austria, Denmark, Germany, the UK and the US. These countries tend to have a report and explain, code-based rules approach. In the UK, for example, Women on Boards, the recent government-backed report by Lord Davies of Abersoch, recommended that FTSE 350 companies set out the percentage of women they aim to have on their boards in 2013 and 2015, and FTSE 100 companies aim for 25 percent female representation by 2015.

Quoted companies, the report said, should disclose the proportion of women on the board, in senior executive positions, and in the whole organisation. UK Governance Code will be amended by the Financial Reporting Council, with listed companies having to establish a policy on boardroom diversity and disclose performance on that policy.

Other countries have taken a tougher stance. In 2006, Norway legislated for a quota system. Private listed companies had to have 40 percent board representation of women by January 2009 or face penalties. Spain and Iceland have introduced quotas. France is considering doing so.

There is still a prevailing opinion in business, however, that board composition is something that should be decided by the individual company and its shareholders, without recourse to legislation. But if firms do not make more progress, government imposition is likely. So what can be done to ease the transition of women into senior executive and board positions? Experts offer a number of suggestions.

For a start, provide support. Nina Solli is responsible for diversity at the Confederation of Norwegian Enterprise (NHO), and was instrumental in creating Female Future, a programme designed to support getting more women into management positions and on boards. “We asked companies to sign a binding agreement with measurable goals – for example, that within a two year period they were to get two more women in management positions or on the board of directors.”

As part of the programme, women identified by participating firms as having senior management or board director potential take an examined course on board competence, undergo personal leadership training, and work on presentational and networking skills in preparation for the step up in responsibilities. “Some 60 percent of participants – out of 1,251 women participants so far – have either been offered a board position, or advanced in their career as a manager,” she says.

Chris Parke, managing director of Talking Talent, works with a range of well-known organisations, including many financial services firms, helping them retain female talent. He stresses the need to tackle some less visible barriers to progress. “Looking at organisations you might see that on performance management, women get slightly lower scores than men, or on shortlists for succession plans and promotions women often get overlooked, for example. It is often these subtle, unconscious barriers – a series of micro inequities – that need addressing.”

It is also essential to challenge management and get senior leadership buy-in. “The role of the chief executive in taking on a personal commitment to do something about this issue and not just paying lip service through a few HR KPIs is critical,” says Penny de Valk, chief executive at the Institute of Leadership and Management, which recently published Ambition and Gender at Work, a report examining the reasons for women’s lack of career advancement and possible remedies.

“Plus you need to test the board’s understanding of why this is a business issue to make sure that any intervention or investment in gender diversity is driven from an understanding that inclusivity in the organisation is good for business.”

And organisations must ensure external executive search firms are aligned with internal ambitions to build a diverse board. “When a nominations committee looks for a non-executive director they should encourage the search firm to include a diverse population,” says Dona Roche-Tarry, managing partner of European board services at global executive search firm CTPartners.

“Because some just look for specific skill sets, and that’s often where you find the challenge for women. The nominations committee needs to consider people that have strong operating experience. There are many women in the UK and globally, who, while not currently sitting on the board as an NED for a FTSE 100 or privately held £100m business, are in very significant management or executive board roles.”

Of course these are just a few key measures firms can attend to. There is no question, though, that if companies do not take serious steps to bring more women through to senior management positions and on boards, then conditions are likely to be imposed by government. Ultimately, it might benefit senior managers to remember that, rather than something to be done on sufferance, the business case for diversity suggests that greater representation of women at the most senior levels is truly in a company’s competitive interests.

Economists calculate the costs of unemployment to society in terms of the amount of aggregate income that is foregone because of resources left idle. That is a worrying number right now. Figures just released by the International Labour Organisation show the number of unemployed globally in 2010 stood at 205 million, virtually unchanged from the previous year, and 27.6 million more than the 2007 number.

Unlike other economic inputs, however, human resources do not like to be left idle. A wave of unrest, sparked mainly by the destructive cocktail of unemployment and rising prices, has been sweeping the globe since the financial crisis hit in 2008.

In Europe, demonstrators took to the streets to vent their anger in Britain, Ireland, Greece, Spain, Portugal and France, and several incumbent governments have now been voted out of power by frustrated citizens.
Halfway around the world, trade unions have been marching through the streets of New Delhi to protest against high food prices and unemployment in the run up to elections in India. In some of the world’s newer democracies where extreme cultural interests are delicately balanced, these types of demonstrations may present flashpoints to something more violent; a recent demonstration against unemployment in a fervently Muslim area of Azerbaijan is a good example.

There have been demonstrations in Algeria, Bahrain, Egypt, Iraq, Jordan, Libya, and Morocco, with citizens daring to call for regime change despite the possibility of repression. The governments of Tunisia and Egypt have fallen, while in Libya Colonel Gadaffi is fighting to hold on to power. The remaining rulers in the area are reviewing their options for retaining control, but what can governments do to deal with a problem that is global as well as local?

Some are trying to calm jittery nerves by giving people money. The Kuwaiti ruler recently announced a gift equivalent to $3,559 plus free food coupons to be given to each of the country’s one million citizens (but not its 2.2m foreign workers). The king of Bahrain awarded $2,650 to his agitating subjects, while the king of Saudi Arabia announced a package of handouts worth an estimated $37bn to improve social housing and welfare in an attempt to sideline calls for protests.

But the long term effects of unemployment on the individual go beyond the need for money. The loss of self-esteem, identity and social contact can quickly descend into depression, when life itself loses its value. Several cases of self-immolation highlight the point and show its dangers. It was an act of self-immolation by a young unemployed man who could not support his family that sparked the protests in Tunisia in January.

Following his death, several similar cases were reported in Algeria, Egypt, Iraq and Mauritania.

So money alone is not a cure. As a blogger in Saudi Arabia wrote in response to the king’s package of giveaways, “People don’t revolt because they are hungry. People revolt because they want their dignity.”
The trouble is, governments dealing with unsustainably high budget deficits are looking to reduce costs, which inevitably means cutting, not creating jobs. Many are also seeking longer term budget relief through public sector pay freezes and changes to public sector pension entitlements. Greece, Spain, Latvia and Lithuania went one step further, implementing highly unpopular, but necessary, wage cuts.

What is worrying the labour movement across Europe is the creeping loss of generous terms won from employers over the last 50 years. Like several other countries, France is moving to raise the age of retirement by two years to 67. Several countries are cutting unemployment benefit entitlements and even Germany, with the healthiest economy in the Eurozone, is reducing support for the long term unemployed and stay-at-home parents. 

By the end of 2010, the struggling Greek government was proposing labour legislation that would allow employers to pay lower rates than those set in their private sector collective agreements. Despite heavy opposition, Prime Minister George Papandreou remained determined. “We either save jobs, or businesses will close and more people will be out of work,” he said.

The hope of many governments as they shed the public sector fat that has accumulated over many years, is that an expanding private sector will be able to absorb the surplus labour, but that may not always be possible. Without the ability to devalue their currencies, some of the smaller members of the Eurozone are struggling to boost the competitiveness of their products in export markets.

In Cuba, that bombastic communist thorn in the flesh of the mighty USA, the economic crisis might just have accomplished what the threat of invasion never did.  Faced with the need to shed up to one million jobs, representing 20 percent of his workforce, President Raul Castro is relaxing laws on private enterprise, allowing foreign businesses to operate alongside state cooperatives and encouraging workers to set up their own small ventures.

All of these measures will take time to translate into the creation of new jobs, and yet it seems that no one expects employment to bounce back to pre-crisis levels. In its report, Global Employment Trends 2011, the International Labour Organisation (ILO) points out that despite signs of economic recovery – the global economy grew by 4.8 percent in 2010 – there has not been a corresponding recovery in the jobs market. That raises a question about the value of the jobs that were lost. Tyler Cowen and Jayme Lenke of George Mason University in the US coined the term, “zero marginal product workers” to describe workers whose productivity may have been lower than the cost of hiring, training and insuring them, suggesting that many of the jobs lost in the recent recession were non-jobs to begin with. 

One thing is certain: for people currently out of work and struggling to make ends meet, the job market is going to become a lot more competitive and there will be many losers. Of particular concern to economists and politicians is the high level of youth unemployment around the world. ILO estimates that in 2010, 77.7m young people were unemployed across the 56 countries for which data is available, but a further 1.7m young people have simply given up and removed themselves from the labour market. They are the dangerous ones.
Those that continue the job hunt will have to become more flexible. Any lucky enough to be mobile, will find pockets of rapid job creation in places like Germany, South America and Asia. Others will have to develop new skills or use existing skills in new ways. According to a survey by the Pew Research Centre, nearly 70 percent of unemployed workers in the US have already looked outside their career or job-field choice, or are considering doing so.

For far too many, however, like Jaime Cadena, a 44 year old construction worker laid off when the property bubble collapsed in Barcelona, these options may not be available. During the boom times, a bank encouraged him to take a 100 percent mortgage, which he later discovered had an increasing payments schedule built in to the fine print. Now, in the context of a 20 percent unemployment rate and drastic cuts to the state welfare system, Cadena faces losing his home but retaining the debt, with little prospect of a good job in sight. “It’s like a terrible weight I’m forced to carry,” he told Toronto’s Globe and Mail. “I feel like the whole country’s problems have fallen on my back.”

While the intent exists on both sides of the Atlantic to police the complex financial instruments that have come under fire for causing or exacerbating the latest global financial crisis, it is perhaps unsurprising that there are disagreements over how derivatives should be regulated.

The differences between the EU and the US centre on how regulators are defining new trading platforms for over-the-counter (OTC) derivatives (contracts that are traded – and privately negotiated – directly between two parties, without going through an exchange or other intermediary, such as swaps), the ownership of clearing houses that will beused to process such contracts and whether brokers can get access to membership of a clearing house to handle OTC derivatives for customers.

In the US, the Commodity Futures Trading Commission (CFTC), the futures watchdog, is in favour of creating new trading platforms called “swap execution facilities” (SEFs) which would require participants to request price quotes from multiple contributors. This would limit the ability of dealers that have effectively long controlled the OTC derivatives markets. But the European Commission has proposed a looser definition of these platforms, which it calls “organised trading facilities.” Industry experts say this could allow the dealers’ current model to continue to exist, prompting banks to shift activity from the US to Europe to take advantage of a laxer regime, in so-called regulatory arbitrage.

Maria Velentza, head of the securities market unit at the European Commission, said in March that “our idea in Europe is not to disturb existing business models for trading of OTC derivatives.” Jill Sommers, a commissioner at the CFTC, has said that her agency was already “out of step” with proposals on SEFs from the Securities and Exchange Commission (SEC), the US’ financial regulator which is also implementing derivatives reforms under the Dodd-Frank act. “We need to be consistent, not just with the SEC but globally, otherwise we could have enormous regulatory arbitrage,” she has said.

There are other important differences too. For instance, Europe is not proposing – as the CFTC is – to place limits on the ownership of clearing houses. Furthermore, brokers are angry that, while it is relatively easy for them to become members of clearing houses as the Dodd-Frank act stipulates, the costs of doing so in Europe look prohibitive.

It appears that – yet again – there is unlikely to be a unified approach on both sides of the Atlantic as to how derivative markets should be regulated. Anthony Belchambers, chief executive of the Futures and Options Association, the European affiliate of the FIA, recognises the problems. “Clearly, there are going to be differences between the US and Europe, and some will be quite fundamental,” he says.

But this is not the only source of disagreement. Tensions are also mounting over attempts by Brussels policymakers to widen the scope of the European Market Infrastructure Regulation (EMIR), which would result in increased competition for derivatives trading among exchanges.

The European regulation was originally intended to increase the robustness of the OTC derivatives market by forcing all OTC trades through a clearing house. But some policymakers now want the new rules to cover derivatives listed on an exchange, turning the EMIR text into a battleground over competition in the European derivatives market.

The inclusion of listed derivatives would break open the lucrative vertical silo model operated by Deutsche Börse where trades executed on the exchange are automatically cleared through its own clearing house Eurex Clearing. Analysts say this could affect the value of the $10bn deal. Deutsche Börse and NYSE Euronext have opposed expanding the scope of EMIR to listed derivatives while derivatives dealers and the London Stock Exchange, which is hoping to break into the listed derivatives market, have argued in favour.

Yet despite the uncertainty about how the regulatory landscape is likely to pan out in Europe and the US, derivative trading has started to pick up again – and not just in the world’s biggest and most developed financial markets. Derivatives exchanges have reported a spike in trade volume on the back of growth in Asia-Pacific and Latin America, and strength in the commodities sector. According to new figures released by the US-based trade body Futures Industry Association (FIA), derivatives exchanges witnessed a 25.6 percent increase in trading volume in 2010 compared with the previous year, with 22.3bn contracts changing hands.

In its Annual Volume Survey, the FIA said the spike was led by large growth rates in volumes in the Asia-Pacific and Latin America; the strong performance of the commodities sector; and a partial revival in the market for interest rate futures in the US and Europe. As of the end of 2010, the Asia-Pacific region accounted for 39.8 percent of trade volume in exchange-listed derivatives worldwide, compared with 32.2 percent in North America and 19.8 percent in Europe. Much of the volume increase in Asia was down to the performance exchanges in China, India and Korea, with Chinese commodity futures performing particularly strongly.

The report came a day after the Bank for International Settlements’ (BIS) Quarterly Review, which reported a 30 percent increase overall in trading on derivatives exchanges in contract terms in the same period. The BIS report found that trading volumes on international derivatives exchanges, measured by the notional amount of traded contracts, rose nine percent in dollar terms in the fourth quarter of 2010 compared with the previous quarter. It added that there was a 38 percent rise in trading of Korean equity index options, which represented 59 percent of total equity index options turnover in the fourth quarter. But trading of short-term euro interest rate options fell 16 percent from the third to the fourth quarters.

The rise in derivatives trading in Asia is fuelling opportunities for growth. The Bombay Stock Exchange (BSE) has signed a licensing agreement to launch derivative contracts with the International Securities Exchange (ISE), the US options exchange owned by Deutsche Börse, which also owns a five percent stake in the BSE. Analysts say that the move demonstrates how exchanges are using their ownership of index businesses to expand into Asia and Asian exchanges. The BSE will be seeking approval from Indian regulators to launch derivative products for Indian investors, based on ISE indices, as part of the BSE’s futures and options product portfolio.

“ISE’s indexes provide investors with equity-based exposure to highly topical investment themes, including emerging markets, widely-traded commodities and water. We look forward to working with BSE as they broaden their derivatives business with new products based on ISE’s indexes,” said Kris Monaco, head of new product development at ISE.

The BSE is not the only exchange to sign such an agreement. Early last year the BSE’s main rival, the National Stock Exchange of India (NSE), signed an arrangement with CME Group of the US. The agreement makes the Indian exchange’s S&P CNX Nifty index, the leading Indian benchmark index for large companies, available to the Chicago operator for the creation and listing of US dollar-denominated futures contracts for trading on CME. At the same time, CME will make the rights to the S&P 500 and Dow Jones Industrial Average indices available to the Indian exchange for the creation and listing of rupee-denominated futures contracts for trading in India on the NSE.

Meanwhile, the Singapore Exchange (SGX) plans to become the “multi-asset-class clearing hub” for OTC derivatives in Asia, according to co-president Muthukrishnan Ramaswami. Use of exchange-traded derivatives in Asia is growing. According to data compiled by the World Federation of Exchanges, Asian markets traded 40 percent of global derivatives last year, outpacing North America for the first time, which accounted for just 32 percent.

Gaddafi’s Libya
Before we went to press, the US imposed trade sanctions on Gaddafi’s regime. Whether it will have any effect is another thing. Trade embargoes don’t have an effective track record to point to, and in some cases simply stoke feelings of victimisation, personal aggrandisement and the cult of The Leader. In other words, they can even rally popular support (think Robert Mugabe et al – see below). What sanctions will do effectively with the current Gaddafi situation is close off the conduits for money to flow in and out. Applying clamps to the international financing system should cut off the regime’s access to buy raw materials and food. With Libya, we’ve been here before, of course. And there is an argument that US sanctions against Libya did help give Gaddafi the push to renounce his country’s programmes to develop weapons of mass destruction (those sanctions were lifted in 2004). So, déjà vu.

But there are increasing reports that Libya’s oil industry is now on the verge of paralysis due to the recent embargo. Western governments have, on the whole, moved quickly to freeze Gaddafi’s assets. For example, a three percent holding in Pearson, owners of the Financial Times, worth more than £250m, has been frozen.

Overall it’s estimated the Gaddafi family’s own assets could be worth up to $100bn (though for obvious reasons, reliable figures are hard to come by). Interestingly, the new trade sanctions against Libya should be a litmus test for Western banks chastened after the credit crisis. Awareness of foreign banks operating with US and UK banks has been considerably heightened and new money laundering and know-your-client laws have been implemented. Freeze first, ask questions later – a very new approach for the international financial community. Will it work? We’ll soon know.

Mugabe’s Zimbabwe
Recently the EU extended sanctions on individuals and businesses linked to human rights abuses in Zimbabwe. However, it was a mixed bag, because the EU also lifted asset freezes against more than 30 people closely linked to Mugabe’s regime. That’s partly because there has been some political reform (though not enough by some margin). Since the government of national unity came together in early 2009, Zimbabwe has absorbed more than €360m in EU aid for a whole host of social programmes including food security, despite the reluctance of some countries to relax sanctions individually. Meanwhile Mugabe has threatened to seize privately-owned companies unless “western sanctions” are fully lifted. “Why should we continue having companies and organisations that are supported by Britain and America without hitting back? Time has come for us to [take] revenge,” he has said. Mugabe has a long and successful history of playing the victim, skillfully turning up the rhetoric despite many of his people living in an economic – though slowly improving since 2010 – shambles. Recently Mugabe has switched the focus of his anger to large UK-based multinationals like Standard Chartered, which continues to operate there, despite exhortations from the international community not to operate in countries that prop up thugs. He has also ratcheted up the anger on Zimbabwean citizens who call for sanctions against the country themselves. They should face treason charges – which carries a death sentence – he recently said. Sanctions have hardly been effective in ridding this loathsome dictator from Zimbabwe. But then, if sanctions didn’t have some bite, why would Mugabe be so hugely angry about them?

Castro’s Cuba
It’s a regular occurrence. Every year the US reviews its trade embargo with Cuba. Could it finally be lifted this year? The truth is that, with so much else happening in the world, particularly the new Middle East recalibrations, the US Congress can’t work up the necessary enthusiasm or energy to do away with the embargo (though that hasn’t stopped Obama cutting some decent sized holes in current arrangements). But let’s roll back to the start, to 1960 when Cuba nationalised the properties of US citizens and corporations. President Dwight Eisenhower responded, enacting a commercial and financial embargo on the island in October 1960. “There is a limit to what the United States… can endure. That limit has now been reached,” he said. To this day this is probably the most enduring trade embargo in modern history. Fidel Castro has, like Mugabe, been highly skilful in using the embargo to claim it has scapegoated the country and its citizens. The UN General Assembly has slated the embargo as a violation of international law. There has also been concern that possible malnutrition and disease resulting from higher food and medicine prices have hit men and older people disproportionately harder (Cuba’s rationing system also gives preferential treatment to women and children). Internationally, commodities companies like Respol, Spain’s largest energy company, increasingly face the choice of doing business with Cuba – or the US. Oil prospecting off Cuba’s coast is potentially big business. But can they risk it, however attractive the Cuban oil licences look?

Saddam Hussein’s Iraq
At the end of 2010 the UN Security Council voted to lift the vast majority of sanctions imposed on Iraq during the era of Saddam Hussein. It was quite a journey from 1991 – when Hussein first dispatched his forces across the Iraq-Kuwait border – to December 2010 when sanctions were, more or less, lifted. “Iraq is on the cusp of something remarkable – a stable, self-reliant nation,” said US vice president Joe Biden at the time. However, the combination of air attacks on the country and sanctions had a devastating impact on much of the population, with an estimated death toll of infants under the age of five between 700,000 and 880,000. Iraq is a case in point of how many who belonged to its brutal regime could – if they had influence or money – buy their way around many of the measures. “Smart” or “targeted” sanctions were developed against Iraq’s rulers: personal computers, tractors, x-ray equipment for airports and hospitals, irrigation, sewage and water filtration systems, medicine plus cars for personal use; all such items were waved through as opposed to military or “dual-use” goods. Sanctions busting is taken seriously in the UK. In February 2011, two ex-directors of one of the UK’s largest privately-owned companies, bridge building operator Mabey & Johnson Ltd, were both jailed and fined for sanctions offences relating to contracts involving the construction of prefabricated bridges in Iraq. It was discovered that Mabey & Johnson had agreed to pay kickbacks to the Iraqi government to help them win a €4.2m contract for 13 bridges through the Oil-for-Food Programme.

Thomas Jefferson’s trade problem
Trade sanctions were deployed as far back as the 18th century when US President Jefferson established an embargo – at the time called ‘discriminatory duties’ – on all US trade with Europe to protest against attacks on US merchant ships. Like so many sanctions, it proved ineffectual – and dramatically curbed US trade in commercial centres like New York and Philadelphia. Both suffered profoundly as a consequence. In fact, the reduction of America’s cotton exports was actually welcomed by many UK merchants, many of whom had warehouses packed-to-bursting with US cotton; previous oversupply fears were promptly wiped out. By early 1809 the US Embargo Act was lifted and trade with all ports was resumed – except with Britain and France.

For many years India has been a willing recipient of overseas investment in order to bolster its economy, provide funding in a market where western debt structures are underdeveloped, and to bring its business operations up to speed with international standards.

The figures bear this out. According to the Indian Ministry of Commerce, investment by foreign companies in Indian businesses has grown rapidly in recent years, from just under $9bn in 2006 to $34.4bn in 2008. The origins of these funds are principally based in the US and the UK. During the period 2001-9 the US and the UK together made total foreign direct investments (FDI) of $11.5bn, accounting for 14 percent of all FDI for the period.

Traditionally, the bulk of all FDI since 2001 has been pumped into the services sector, the figure of $84bn is indicative of the amount of investment in new infrastructure and continued development. Computer hardware and software as well as telecoms have also benefitted, with $9bn and $6.3bn of all FDI respectively.

Clearly India continues to be an attractive proposition for foreign investors and it is easy to see why. GDP projections for the next five years vary between four percent and as much as eight percent, and at an enterprise level, according to Reuters, since 2005, Indian companies achieved an average growth of 8.6 percent per annum. As a rapidly emerging market, investment in India holds great potential upside for those who can penetrate the market at the right moment in the cycle.

Today, the huge amount of investment received by India over the past decade is beginning to bear fruit. Despite the fact that more than 70 percent of the 1.2bn population of India is based in the rural regions, India boasts some 55 billionaires – 22 more than in the UK – a clear sign that India’s business environment is booming. Furthermore, years of inward investment in India has helped create a multitude of successful enterprises that, in turn, have begun to look to expand their geographical reach beyond the Indian Ocean.

To put this into perspective, in 2001 Indian outbound investment was less than $1bn, but by 2006 it had reached $10bn and the following year it had doubled again. In 2007, overseas investment by Indian businesses had eclipsed the total amount of outward investment by Indian companies since the country gained independence in 1947. This growth continued in 2008, when, according to Reuters, India made $24bn of outbound acquisitions.

And since many Western nations have been impacted severely by the recession, these countries are happy to be on the receiving end of investment from a nation in which economic growth has proved relatively resilient to a global economic downturn.

Investments in the UK and Europe
Looking at the figures in more depth, according to Corpfin/Experian, from the beginning of 2007 to the date of publication, there have been more than 239 investments by Indian companies in UK and European businesses, with a combined value of more than $27.8bn. And considering that in nearly half of these transactions the consideration was not disclosed, the total value of these deals may be up as much as 50 percent higher than this tally.

Drilling down to the individual deals it becomes clear that there is a healthy spread both in terms of sector and segment. In total there were seven deals with a total consideration above $1bn. These were:

– Tata Steel’s $8.1bn acquisition of Anglo-Dutch group Corus, Europe’s second largest steel manufacturer
– The $1.6bn acquisition of Germany’s REpower Systems by wind-power operator Suzlon Energy
– Tata Motor’s $2.3bn purchase of the Jaguar and Land Rover brands from the Ford Motor Company
– The acquisition of automotive parts company Valeo France by the diversified conglomerate Hiduja Group Ltd
– Sterlite Industries’ takeover of mining company Anglo American Zinc, for $1.4bn
– Hinduja’s acquisition of KBL European Private Bankers for $1.8bn

But eclipsing these, the largest transaction in this period was the $10.7bn acquisition of Zain Africa BV, a Netherlands-based mobile telecommunications provider, by Bharti Airtel Ltd.

Slightly lower on the scale, there were some 20 deals in the $500m-$1bn segment. The combined value of these deals was in excess of $5bn, with the pick of these transactions being HCL Technologies’ $794m acquisition of Axom Ltd and the acquisition of the Grosvenor House Hotel group by Sahara India Pariwar for $734m.

The $100-500m segment also recorded a great deal of activity, with $3.1bn transacted across 19 deals.

Investments in North America
According to Corpfin/Experian, since 2007, Indian companies made 206 investments in the North American market, totalling more than $22.3bn. And considering that approximately 35 percent of the deals did not have disclosed values, the total value of these transactions may be as much as $34bn.

In the $1bn+ bracket, seven deals accounted for $15.9bn of the total transacted value. These were:

– Aluminium manufacturer Hindalco Industries’ $6bn acquisition of Novelis
– Essar Steel’s $1.56bn takeover of Canadian group Algoma Steel
– The purchase of General Chemical Industrials by Tata Chemicals
– The takeover of US power distributor InterGen by diversified industrial group GMR Infrastructure
– Oil and Natural Gas Corporation’s $3bn acquisition of Kosmos Energy
– Religare Enterprises’s takeover of investment firm Northgate Capital

Looking along the scale, there were three acquisitions in the $500-$1bn range, with a combined value of $1.3bn, in addition to a further 16 deals in the $100-$500m range, carrying a total value of more than $3.2bn.
In view of the success enjoyed by India, South East Asia now looks set to be the new kid on the block when it comes to M&A. According to Mergermarket, the value of deals in the Asia-Pacific region (excluding Japan) totaled $89.4bn for the first three months of 2010, representing an increase of almost 93 percent over the same period a year earlier.

This was against a wider backdrop which saw European M&A activity continue to decline, with the value of European deals falling 5.7 percent during the same period. Furthermore, the US market dipped by 26 percent to $148bn for the quarter.

Further evidence to suggest that South East Asia may be the next growth market comes from Cass Business School’s M&A Research Centre, which published its annual M&A Maturity Index, which gauges a country or region’s ability to attract and sustain M&A. The index, taking into account several financial, socio-economic, financial, political and and regulatory factors into account, concluded that the region was rapidly approaching the levels of maturity and sophistication enjoyed by its European and North American counterparts.

This move towards maturity is visible in the figures. According to Experian/Corpfin, there were 87 investments in UK and European companies by South East Asian businesses in 2010. This compares with 72 the previous year. The total value of these deals was $24bn, almost double the 2009 value.

Looking ahead
Using M&A as a key performance indicator, we can see that India has benefitted from over a decade of investment into the country’s business community and is now committed to repaying the compliment by investing in overseas businesses, principally in Europe and the US. Going forward, all the signs point to South East Asia as being the next growth region, and, once the regulatory environment becomes more stable, we should expect to see a surge of outbound acquisitions originating from this region.