I’ve never been fond of the distinction that folks make between Main Street and Wall Street, as if there were some actual divide between the “real” economy and the “financial” economy. My hunch is that the correlation between the performance of our financial institutions and the performance of our economy is fairly strong (and positive). And if anything, that correlation is becoming stronger as we move toward an increasingly service-based economy (with more than 80% of our economy now devoted to services).

Nevertheless, if there were ever a company that speaks to the general health of our economy, it is American Express. Amex is a consumer and business finance company, and scrutinizing the behavior of its customers can provide insight into the direction of the broader economy. So where the adage once was, “As General Motors goes, so goes our economy”, my guess is that could be changed to, “As American Express goes, so goes our economy.” After all, consumer spending accounts for something like 70% of GDP.

It is for this reason that I was troubled by the earnings presented by American Express (see American Express Falls), and also by subsequent comments made in the conference call.

Don’t get me wrong. I am not troubled by what Kenneth Chenault said. Just the opposite. I applaud him for being honest about current conditions. Rather, I was troubled by the content, and what it likely means for the U.S. economy.

As reported by Bloomberg:

American Express Co., the biggest U.S. credit card company by purchases, fell the most in New York trading since the Sept. 11, 2001, terrorist attacks after earnings missed analysts’ estimates and the lender withdrew its 2008 forecast.

Chief Executive Officer Kenneth Chenault said yesterday in a conference call that the business climate was “much weaker” than earlier this year and American Express was hurt in the second quarter by rising U.S. unemployment and falling house prices.

Moreover, as reported by Calculated Risk from Amex’s conference call (see here and here):

“Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades,” said Kenneth I. Chenault, chairman and chief executive officer. “Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.“

“In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.”

“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.”

“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spend across the board…The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy…we now believe the economic weakness in the US will likely worsen throughout the remainder of the year…” (emphases added by Calculated Risk)

Given this information, my expectations are that the chances for a second-half rebound are extremely remote, irrespective of what happens to oil prices (see Mish’s excellent posts on Deflation here and here). Moreover, I now expect conditions similar to those experienced by Amex to spillover to a broader swath of corporations, …not limited to housing, finance, and consumer discretionary.

For me then, this news speaks to the breadth of impact that we should expect from this recession - on both Main Street and Wall Street. My call therefore is still for long-and-deep versus short-and-shallow.

One month ago, in reference to Inbev’s offer for Anheuser Busch, I wrote (see Ambush by Inbev?):

…no way, ain’t gonna happen.

It was my opinion that the proposed takeover of Anheuser by Inbev would not be a successful one. I had several reasons for such a view. First, I thought that the deal involved far too much debt (Inbev had proposed to put only around 13% down), and in the current credit environment I thought they’d have difficulty arranging the financing. Second, it was clear that top management, and certain members of the Busch family (including August Busch, the CEO) did not want AB to be acquired. It looked as if they would attempt just about anything to thwart the deal. And third, I felt that there were so many interested parties running interference (e.g., politicians, unions, consumers) that they would eventually scuttle any deal.

OK, so back to the present. On Monday, Anheuser Busch agreed to a $52 Billion takeover by Inbev (see Anheuser-Busch Accepts $52 Billion Inbev Offer). Boy was I wrong…

That’s ok though - I’ve been wrong before and I’m certain I’ll be wrong again. However, as I mentioned in a follow-on post last week (see Inbev and Anheuser: Cooler Heads Prevail), I thought it was great news that executives at AB agreed to discuss the deal with Inbev. They finally put the interests of the shareholders before their own. As I also mentioned in that post, I have an inkling that Adolphus Busch IV (uncle to August Busch) had a little something to do with AB’s change of heart.

Now that the two parties have reached an agreement in principle, the deal is still not quite out of the woods. It must go through the regulatory channels to receive approval. But at this point, with the support of AB, I think that the Anheuser Inbev deal is likely to get the go-ahead.

Assuming that they do get the go-ahead, the issue then becomes: Will this acquisition work?

According to Bloomberg, Inbev will finance the purchase with $45 Billion in debt (see Inbev May Raise $4.6 Billion). That’s a whole heck of a lot of debt, leaving them little margin for error, and likely forcing them to dispose of assets to raise capital (most likely the theme parks).

The St. Louis Post-Dispatch had a nice article on some of the other cost-saving measures that Inbev will likely implement (see Inbev Faces Challenges). They acknowledge (and I agree) that it will not be an easy task for Inbev to generate value out of this acquisition. They write:

The deal is based largely on the premise that Budweiser will succeed when sent to the far reaches of the globe, and that two companies with dramatically different cultures can merge into a smoothly running global powerhouse.

My comment: As I’ve written before on this blog, culture can be the key to making/breaking a union. In this case, the cultural component is especially complex. The two firms obviously have different corporate cultures. However, because this is an international deal, those corporate culture differences are compounded by differences in national culture - how the Belgian, Brazilian, and American managers get on.

The article continues:

…the beer industry carries high-profile examples of beer not crossing borders easily, said Roman Shuster, an analyst with Euromonitor in Chicago. Brahma, for example, is a cautionary tale as InBev plans to send Budweiser into untapped markets. Brahma is a top beer in Latin America but much less prevalent elsewhere. InBev planned earlier in the decade to take Brahma worldwide, but the effort fizzled…

My comment: I do not expect Budweiser to suffer the same fate as Brahma. American-made products still carry caché abroad. They are a status symbol (for good or bad) for consumers from many countries, and a signal that a country (especially a developing country) has “arrived”.

In addition to the cross-distributional synergies that Inbev will try to generate, they will also attempt to rationalize AB’s operations:

Anheuser-Busch is expected to become considerably leaner when InBev applies its trademark cost-cutting. In a conference call Monday morning, victorious InBev executives laid out their plans to expand cost-cutting already under way at Anheuser-Busch. InBev envisions a deeper cost-cutting plan than the one A-B unveiled last month, when it was trying to fend off InBev. Anheuser-Busch’s plan to cut $1 billion in expenses through 2010 will be expanded to a $1.5 billion effort over the next three years.

The ramped-up cost cuts will include about $360 million from greater leverage with suppliers, more aggressive production efficiencies and “elimination of corporate overlapping functions” — which likely will lead to job losses at A-B’s corporate headquarters in St. Louis.

One thorny issue is whether — and to what extent — InBev executives will shake up A-B’s network of more than 600 beer distributors in the U.S. …InBev may see those distributors as ripe for cost-cutting, some analysts said. InBev has a record of tough dealings with distributors in Brazil, one of its main markets.

All told, I’m pretty happy I’ve been forced to eat my words on this one. I’m glad the two firms are coming together; otherwise, how would we get to see the fun part - how the Anheuser Inbev integration plays out. Buckle up.

Leave it to The Onion to come up with this amusing, yet sadly accurate, story (hat tip, Gene).

Recession-Plagued Nation Demands New Bubble:

A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”

…According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.

“…The manner of bubble isn’t important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct…The U.S. economy cannot survive on sound investments alone,” [Greg] Carlisle added.

Well what do you know, if you give people incentives to do something (e.g., behave irrationally), they will do it, …in excess even.

Bottom-line: Incentives work.

There’s more of the story on The Onion site. Good fun!

The New York Times and Wall Street Journal are reporting that Inbev agreed to raise its bid for Anheuser Busch to $70 per share (see Inbev Raises its Offer, Inbev Boosts Offer). This raises the premium offered for AB from about 30% to nearly 40%. As a consequence, AB has agreed to consider the offer, and has opened lines of communication with Inbev.

I applaud the two firms for ratcheting down the hostilities. I also applaud them for recognizing that this is a deal worth discussing (and considering) rather than bickering over. AB’s rebuke of Inbev’s initial offer was a blunder. Inbev followed that blunder with one of their own, by taking the issue directly to the AB shareholders, drawing the ire of U.S. politicians and consumers in the process.

Personally, I think much of the credit for bringing the two parties together belongs to Adolphus Busch IV (uncle to August Busch IV, the current CEO). When this deal turned hostile, Inbev decided to offer its own slate of directors to oust AB’s current board. It so happens that one of those proposed directors was Adolphus Busch IV (I’d actually be interested to know the back-story for why he agreed to serve as a director on the competing slate). As reported by The Economist last week (business brief, sorry no link):

InBev, a Belgian brewer, intensified its efforts to win Anheuser-Busch by nominating an alternative board. The slate included Adolphus Busch IV, who wants the Busch family to negotiate with InBev. He is an uncle of Anheuser’s chief executive.

Provided that talks between Inbev and AB do not breakdown, we can now all turn our attention to where it rightfully belongs - to the issue of how Inbev will create value by bringing these two firms together. As I have mentioned in previous posts (see Ambush by Inbev and Anheuser’s First Ploy), there are lots of reasons to bring these firms together - there are some real distributional and operational synergies. However, as with any deal, achieving synergies can be difficult (see Why M&A Deals Go Bad), …especially for cross-border mega-deals of this sort (see DaimlerChrysler Post Mortem for a case in point).

Then there’s also the issue of whether or not the deal has become too rich - whether the achieved synergies will more than compensate for the premium.

Although the deal is getting friendlier, it has also gotten pricier…

I’ve been a little slow this week in keeping up with corporate news. I have been busy trying to catch up with e-mails and other, more pressing, assignments after a week’s vacation.

I spent the holiday week with my family in Cape Cod. We had a blast! And given the state of the economy, I feel very fortunate for the luxury of being able to take that kind of trip.

Although I will not bore you with the details of my trip, I do have several economic observations to share:

1. I have never in my life seen as many “For Sale” signs as I did last week, Cape-wide. Although this is not news to most of you, to behold it with your own eyes is astounding. In Manhattan, we don’t get to see many “For Sale” signs. There’s really no place to put them. So I only gain a full appreciation for the state of the housing market when I take trips outside the city. And even though I do get out of the city frequently and have seen conditions across many towns in the New York tri-state areas, I have never seen anything as bad as what I saw in Cape Cod.
2. My wife and I have been making the drive between New York and Cape Cod for the last 10 years. We have family up there, so we try to go as much as possible during the summer (at least every other weekend), and for several full weeks during the year. In my 10 years making that trip (the Deegan to the Merritt to I-95 to I-195 to Rt. 25 and then the Mid-Cape Hwy in case anyone is interested), I have never, ever encountered such light traffic en route. We frequently hit traffic around New Haven, CT; we almost always hit traffic at the Sagamore Bridge (leading onto, and off of, the Cape); and without fail, we get stuck on the FDR (both outgoing and incoming). We have not hit traffic this year at all - not on Memorial Day weekend, and not on July 4th. Again, this is probably no surprise to most of you since the highway miles driven by Americans are down for the first time in 17 years (see Americans Drive Less); however, it’s so strange to me to be able to make that drive at full speed (and in the time yahoo or google tells you it ought to take).
3. We are creatures of habit. We go to the same places every year. We like the Lobster Roll at Cooke’s. We live for the ice cream at the Four Seas. It’s ordinarily not easy to find an open table at Cooke’s during the height of the season during prime hours (12-2pm, 5-7pm). This year the restaurant was half empty - every time we went. Four Seas (a place where the line is usually out the door and around the corner) was uncharacteristically quiet. P-town was even relatively uncrowded. We saw empty parking spaces on Commercial St., the stores looked to have little traffic, the streets were not as lively, and it was even fairly easy to drive (yes drive) from one side of Commercial St. to the other. It was as if the entire island/peninsula seemed to have 1/2-2/3rds of its normal summertime population.

Now I realize that the anecdotes that I’ve shared simply represent one person’s observations (an n of 1 as we like to say in the business), but if my experiences thus far this summer are any indication, I think we’re in for a long and difficult slog. I have never seen anything quite like it…

Well, the MillerCoors venture officially kicked off yesterday (see MillerCoors Officially Launches). It certainly will be an adventure.

As I’ve written (and detailed) on this blog before, I believe that the joint venture governance structure will strain their union (see Good Luck Miller Coors, Update: Miller Coors JV, and Now Introducing Miller Coors, JV???). At the time, I suggested that “management problems” were likely to plague the venture for years to come. We now have some details that better indicate why and how:

For example, the St. Louis Business Journal writes:

SABMiller and Molson Coors each named five members to the MillerCoors board.

From the SABMiller side:

• Graham Mackay, CEO
• Malcolm Wyman, CFO
• Nick Fell, group marketing director
• Johann Nel, group human resources director
• Sue Clark, corporate affairs director

From the Molson Coors side:

• Pete Coors, vice chairman
• Peter Swinburn, president and CEO
• Sam Walker, global chief legal officer and corporate secretary
• Stewart Glendinning, global CFO
• Dave Perkins, president of global brand and market development

MY COMMENT: Since when does an organization need two CEO’s and two CFO’s? And how long will that arrangement last? Extra managerial staff comes with extra managerial cost, …and top-level management ain’t cheap. Also, extra managers create extra managerial conflict. And with 5 representatives on the board from each side, how will they achieve consensus on critical strategic and operational decisions? The 10 final arbiters of any conflict will likely split down party lines. Managing in that environment sounds like fun! Just ask the folks from DaimlerChrysler how all that went for them.

The article continued:

While announcing the closing of the merger, the brewers did not announce a location for the headquarters of MillerCoors. The decision on where MillerCoors will locate its corporate headquarters will be a “first-level agenda issue” for the joint venture’s leadership team…

MY COMMENT: I take some comfort in knowing that location is a “first-level” agenda issue. But might that divert managerial attention away from what they’re supposed to be doing - say, running a company? Having two sets of management negotiate where the headquaters should be is not costless. Moreover, given the location of the parents’ US headquarters (Golden, CO and Milwaukee, WI), whatever location they choose will necessarily result in increased costs. For example, let’s say they choose Dallas (a rumored HQ city under consideration). If that’s the case, what happens when management from the Coors side of the business needs to coordinate with management from the Miller side of the business? It will require a whole heck of a lot of increased travel back and forth to Dallas. That ain’t free. Similarly, what happens when operations folks in Colorado and/or Wisconsin need support from management? You got it. More travel! Essentially, all they are doing by creating a new headquarters apart from the existing Colorado and/or Wisconsin operations is adding another layer of management costs on top of each of their individual operating structures. 

As I concluded in my previous posts - this deal should have been structured as an outright acquisition.

if this were an outright acquisition in which one party were able to direct the activities of the other so as to make operating decisions unilaterally and shut facilities down, then sure, I think this marriage of firms would have a fighting chance at creating a formidable competitor to Anheuser-Busch. If it were structured as an acquisition, I’d also be willing to bet that the headquarters would end up exactly where it should - in either Golden, CO or Milwaukee, WI - and not in some silly neutral site palatable to both sets of management.

Not only that, but if the deal were structured as an acquisition, the combined entity would be able to reduce management costs by eliminating duplicate managerial activities.

So once again, congratulations MillerCoors. And good luck achieving those $500 million per year in promised cost-saving synergies.

For those of you who have been following this blog, you know where I stand on Inbev’s bid for Anheuser Busch (see Ambush by Inbev?). Basically, my view is that although there are many reasons the two firms belong together, I would be surprised if the deal were to go through. It just seems to me that there are too many interested parties running interference.

My view hasn’t since changed, and it looks like Anheuser Busch will now make its first in a predictable (and myopic) set of moves by officially rejecting Inbev’s offer (see Anheuser Busch Plan Unlikely to Please Investors). Reuters is reporting that Anheuser Busch will instead offer it’s own plan to raise shareholder value that includes divesting non-core assets such as the theme-park business.

So assuming AB rebuffs Inbev (which looks likely), where do we go from here? The most likely scenario is that Inbev takes its case straight to the shareholders (another blunder) and turns this into a hostile affair.

Why would that be a blunder you ask? Because if you thought Anheuser Busch didn’t want this deal to go down, just wait until the politicians (and the mal-informed, misguided American public) get into the game and cry foul. All that will do for Inbev is raise its costs with little change in the end result - a failed bid for Bud.

At this point, if Inbev (and it’s bankers) were thinking about the best interests of its own shareholders, they would abandon the bid and move on. This is a no-win battle.

And even if by some miracle Inbev does win the fight, it still loses the war. If Inbev is able to wrestle Anheuser Busch away from AB’s shareholders, in the end the additional expense incurred during the bidding process, coupled with the many concessions Inbev would be forced to make as the owner of AB, will condemn their union to years and years of sub-par returns.

For Inbev then, the best response is probably just to walk away now.

Mish had an excellent post today on layoffs and the economy (see Job Cuts Increase Economic Stress). In that post he focused on the most recent spate of job cuts and what that means for our economy. I agree with Mish, and many others, who have pointed out that unemployment is a lagging indicator of recession. Therefore, not only can’t we rely on unemployment statistics to predict when we will enter a recession, but we can’t really look to unemployment statistics to gather insight into when we’ll come out of a recession.

However, that’s not what I’d specifically like to write about today. The focus of my post will be on how this recession has affected the job prospects of graduating MBA students, and how current students are likely to be affected moving forward.

Interestingly, few Stern students had difficulty finding jobs or had offers rescinded. In fact, most of them seemed to have weathered the storm just fine (for now at least). Nevertheless, I found the article Tips for College Graduates Seeking Work from yesterday’s Chicago Tribune fascinating. The column began:

It could be a long summer for college graduates looking for work…Although the college labor market could remain positive overall…some companies have rescinded offers. Other employers that delayed hiring may continue to hold off on recruitment through the summer.

I will not argue with the author of this article. I mostly agree. However, some of this information seems at odds with the data as I experienced them here at Stern. Let me explain why.

Earlier, I suggested that Stern students did just fine this year. And that’s true. In fact, none of my 150 or so students had a job offer rescinded, and most of those who were seeking employment found it relatively easily. But to understand why, you must understand the hiring cycles at Business Schools.

For the most part, the recruiting season begins in the Fall. It is usually finished by early Spring. So many of the students I had spoken with were locked in early on - they had accepted job offers in Fall 2007 and Winter 2008. By the time the real turmoil began (after the Bear Stearns collapse in March, 2008), most of my students had already been hired, as were, I suspect, graduates from most business schools.

But it’s true that it will be rough going for those who graduated without jobs, and even some of those who graduated with jobs (i.e., some will show up to start their new jobs only to find out that they don’t exist anymore). But the overall numbers for the graduates of 2008 will largely look ok. Unfortunately, they don’t tell the whole story. They are also a lagging indicator.

The students who will really, truly feel this recession are the graduates of 2009 (and maybe even the graduates of 2010). I expect the job market moving forward to be abysmal, and for the hiring season of 2008-2009 to largely be a bust.

In April, BusinessWeek published a wonderful section on the employment outlook for 2008 business school graduates (see Graduating Into a Recession, and especially the article It’s Looking Grim for New Grads). I’d encourage you to take a look - there are some neat facts in there about the earnings potential of those who graduate during recessionary periods. In the section they claimed that the goings would get tough for 2008 grads. Personally, I think they were slightly off on timing. We ain’t seen nothing yet.

So fear not for the grads of 2008, but for those of 2009, …and beyond.

Several months ago I promised to keep tabs on notable bankruptcies of 2008 (see More Failure for Fodder). Well, we’re nearly half-way through the calendar year, so I thought I’d continue to make good on that promise.

Below you can find a list of what I see as the “noteworthy” bankruptcies of 2008 (please note that this is not an exhaustive list):

• Aloha Airlines (airline)
• ATA (airline)
• Bear Stearns (banking)****
• Blue Water Holdings (auto)
• Buffets Holdings (restaurants)
• Education Resource Institute (insurance)
• Empire Land (real estate)
• Eos Airlines (airline)
• Fashion House Holdings (retail)
• Fortunoff (retail)
• Friedman’s Jewelers (retail)
• Fred Leighton Holdings (retail)
• Frontier Airlines (airline)
• Goody’s (retail)
• Legends Gaming (casino)
• Lillian Vernon (retail)
• Linens n’ Things (retail)
• Kimball Hill (real estate)
• Landsource Community Development (real estate)
• Matrix Development Corporation (real estate)
• PRC LLC (business services consulting)
• Propext (textiles)
• Quebecor World (USA), Inc. (office services/printing)
• Red Envelope (retail)
• Sharper Image (retail)
• Silverjet Airlines (airline)
• Sirva (moving services)
• Skybus (airline)
• Steakhouse Partners (restaurants)
• Tropicana (casinos)
• Wickes Furniture (retail)
• Vicorp (restaurants)
• Ziff Davis (media)

One thing that is clear about these 33 high-profile bankruptcies is that they have occurred in industries that are close to the struggling consumer. That is no surprise. But from here, I would expect bankruptcies to become more broad-based as this recession spills over to the broader economy.

From the previous recession, there were 289 total bankruptcies in 2000 and 383 in 2001 according to Bankruptcydata.com, …far more than this year’s projected 180 (if current numbers persist). I fully expect us to exceed 180 by year’s end. I do not expect us to reach 289 this year. My current estimate for 2008 calls for about 225 bankruptcies. However, I would not be surprised to see 2009 challenge the 383 mark from 2001.

In addition to the bankruptcies of 2008, I came across some interesting statistics from the Bankruptcy Insider (at the deal.com). The Bankruptcy Insider documents 475 cases of corporate distress since Jan. 1, 2008 (compared with 753 cases of distress for all of 2007). Cases of distress can provide a forward-looking estimate of bankruptcy.

So this is the state of the 2008 bankruptcy scorecard so far. Unfortunately, there’s likely many more to come.

When I first heard the rumors several weeks ago that Inbev was considering making a play for Anheuser Busch, I thought to myself, “no way, ain’t gonna happen.” So you can imagine my surprise at Inbev’s unsolicited bid on Wednesday for the largest brewer in the U.S. (see Inbev Makes Bid for Maker of Bud).

It’s not that I thought that such a marriage couldn’t work - there are some real distributional, and even some operational, synergies here. It’s not that I thought AB was too big to be bought, as many firms have the wherewithal. I just thought that in the current economic environment a deal of this size would be unlikely in the absence of the buyer putting up a significant amount of cash. After all, $46B is a non-trivial sum of money, and from all accounts Inbev plans to finance all but about $6B with debt. If the accounts I read in the press are correct, that makes for a 13% downpayment. Hey Inbev, it’s not 2005 anymore!

There are other forces working against Inbev in this deal. For one, it seems the Busch family does not want it to happen. It’s likely that they will take whatever measures they deem necessary to try to block it (witness their courtship of Modelo - see AB Approaches Modelo to Block Inbev). Add on top of that the newfound protectionist sentiment in the U.S. toward AB (see Hands Off Our Bud or Politicians Oppose Bid). I gotta tell ya, I never realized that AB was a source of national pride, and before yesterday I had no idea that brewing was considered a strategic national industry.

For all these reasons, and despite the fact that I think it’s not a half-bad combination (especially for BUD shareholders who would receive a 20-30% premium for their shares since rumors first circulated), I think this deal faces significant headwinds.

So my priors still haven’t changed - no way, ain’t gonna happen.