A busy summer for TMT

OF ALL sectors this summer, many of the largest and many of the high profile deals have originated from the TMT sector. Most recently, there was the Verizon $130 billion buyout of Vodafone's stake in Verizon Wireless. Total TMT buyouts of this past quarter amounted to $240 billion worldwide. Total M&A deals in this period reached $520 billion worldwide, surpassing many previous quarters. One recent notable M&A transaction is Microsoft's acquisition of Nokia phone business for 5.4 billion euros. 

So after a few uncertain years, it is suffice to say that the era of 'big deals' and corporate confidence are making a return. However, it is worth noting that TMT is a far more innovative and fast paced an industry than say, consumer retail. Given the speed of innovation (think how often the likes of Samsung or HTC or Blackberry release a new product/version of an existing product), strategic moves of M&A or buyouts are the easiest and quickest way to hedge against competition. Innovating organically could be too slow and ergo, useless. Further, I believe that such deals were not snap strategic decisions; in fact, they probably have been contemplated for a while. The time to execute them now is attractive because of a potential rise in interest rates, raising the cost of capital and - related to the previous point - due to the increased pace of innovation and the associated competition. 

After these strategic moves, I believe there could be more coming along. In the Vodafone and Verizon case, this deal could put pressure on competitors such as AT&T to make strategic moves, such as speeding up their plan to tap into the European market.  This transaction has also granted Vodafone with a considerable amount of cash. With this cash, it makes sense for them to enter into acquisitions. Conversely, Vodafone could be targeted themselves.  

Lenovo is looking to acquire in the area of smartphones and tablets. Blackberry is considering their sale. I don't think this would be an unlikely match as their is much synergy between the two. Much of their products are created for business but Blackberry's breakthrough to consumers in recent years coupled with Lenovo as a tech power could send more challenge to Apple/iOS or Android phones than Blackberry or Lenovo doing it alone. On a related note, Lenovo ended their interest for HTC over a year ago, blaming HTC's poor quality products. Nevertheless, Chinese firms, ZTE and Huawei, who are more equipment makers at the moment, could make a bid for HTC especially when HTC's shares are trading exceptionally low compared to two years ago. The question is when? I would say not this year. The HTC One - their flagship model - has been doing well and the company's outlook is not too weak. 

There has also been talk of Microsoft to sell its Xbox business  - now that Ballmer is leaving - as a stand alone one for around $17 billion. Xbox, despite its widespread popularity, actually produces one of the lowest margins and does not help to sell the company's core products. I think Xbox could be a successful entity by itself and there is plenty of room for growth, but only if it can access enough investment for R&D to survive competition. Microsoft's cash pot will no longer be accessible!

Meanwhile in Japan, Yahoo! Japan is also seeking out acquisitions to expand their mobile products for smartphones within Japan. I believe we can expect announcements here shortly; their hiring of former Goldman Sachs M&A VP, Ryu Hirayama, shows Yahoo! is serious.  

I think that one of the most interesting things about the current TMT sector is that it creates opportunities for other sectors. For example, apps have made digital advertising huge and we saw the $35 billion merger of Omnicom and Publicis to form one giant advertising house. 

JH

What's next for LVMH?

Louis Vuitton Moet Hennessy (LVMH) has the greatest number of jewels in its treasure chest in that it holds more majority stakes in prestigious luxury  brands - from Marc Jacobs to Givenchy to TAG Heuer and of course Louis Vuitton -  than any of its competitors. 

Its strategy in recent years has been one of rampant acquisition and global expansion where the group has spent more than $10 billion in 27 transactions since the beginning of 2010. Notably, Bulgari, Fendi and Pucci have all joined the LVMH family in the last two years. The group's availability of cash and cash equivalents has certainly come in handy. Its latest 'big brand' acquisition occurred in early July where LVMH acquired a 80% stake in Loro Piana, an Italian cashmere clothing house for 2 billion Euros. For a small relatively unknown family owned business, this price is high. However, LVMH can benefit a lot from Loro Piana. Why? Loro Piana is a fairly unique business focussing only on cashmere clothing - there are not many similar players in the industry. It is also a company in its early stages and thus can accommodate much growth and expansion into the future.  For example, Loro Piana achieved a growth in sales revenues of 13.1% in 2012 to 630 million Euros and no doubt can they repeat a growth rate of around 10% into the next year. Loro Piana can also go more global and expand its leather+cashmere goods products. The fact that 30% of its sales come from Asia and the region's strong demand for the brand no doubt contributed to the attraction of acquisition. Perhaps this analysis is reflected by LVMH's share increase of around 2% at the time the deal was announced. In essence, there is much synergy between LVMH and Lora Piana. 

However, we can expect to see less fashion acquisitions by LVMH in the coming year or so as the business wishes to focus on organic growth, at least in some segments. For example, the group wishes to restructure and revamp its watch and jewellery business and the plan to achieve this by giving Bulgari a make over into the long term. Watches and jewellery are LVMH's lowest revenue and profit generating area, as seen on their half-year report. 

Having said this however, acquisitions and investments by LVMH are likely to increase in the luxury hospitality sector as Arnault seeks to move into high-end hotels and restaurants. Indeed, LVMH has realised that 'luxury goods' isn't just about what the consumer is wearing or possessing but more about an overall luxury experience to suit a lifestyle; from food to place of stay on holiday. It is not so much about a product anymore, but about a produce + service. Last week, LVMH bought the 5* Hotel Saint-Barth Isle de France in the Caribbean for an undisclosed sum, to be operated by LVMH's hotel business area. There are also similar opulent resort/hotel developments in Oman, the Maldives and the French riviera  In 2016, La Samaritaine in Paris, owned by the group since 2001 will be opened as a 5* hotel.  At the end of June, the luxury group purchased a majority stake in Pasticceria Confetteria Cova, a 200 year old high-end storied cafe of Milan. This was the LVMH's first acquisition of a luxury food business and Arnault wishes to replicate Cova's popularity globally, using its heritage as leverage. Again, they have been helped by their deep pool of cash resources in this area. 

LVMH isn't the only nor the first to expand into the full luxury spectrum. For example, Robert Cavalli is buying high-end cafes while Armani and Versace is designing hotels. Such brands' ability to shift into a new business area is what keeps them interesting in the eyes of their wealthy (and frequent) customers (as well as analysts at their desks!). 

The success of the hospitality acquisitions remains to be seen but I think given the brands Arnault has chosen above are fairly unique and niche, along with having the recognisable LVMH as a parent with an already established reputation for the customers, profit margins will be high. 

Acquisitions aside, LVMH's  quarter end results to June which were released on July 26th have been mixed. China is a big market for luxury brands but sales in the country have been underperforming whereby Chinese consumers are now buying overseas -in Macau, Hong Kong, Taiwan, Dubai and Europe - rather than in the mainland as attributed to tourism and weak European currencies. This, along with slowing European sales, however is being offset by demand from South-East Asia in the countries of Malaysia, Vietnam and Indonesia. Asia is the group's biggest revenue generating region - 28% of total revenues came from Asia while the US followed in second place with 23%.  

The good news is that profit margins for Louis Vuttion  - its most prized brand has increased slightly in the first half year. In recent years, profit margins for LV has fallen and operating margin has declined from 44% to 42% between 2011-2012. In line with LVMH, Louis Vuitton sales in China declined although this was compensated by optimistic sales in Japan, US and Europe suggesting that the luxury goods sector is not so down hill anymore in the West. The strategy for Louis Vuitton for the past 10-15 years has been to expand quickly and rapidly across the globe. Consequently, growth increased by 10% but the real danger of this is that such strategy for a luxury brand is not sustainable. Continued rapid expansion makes Louis Vuitton somewhat of an expensive high street retailer rather than unique, boutique and luxurious and special. Everyday, in the city where I live, I see many many Louis Vuitton monogram and canvas bags - some fake and some real. Indeed, Louis Vuttion is rather ubiquitous but regardless of the origins of the bag, this risk has been reflected by Arnault himself who is putting a halt on the opening of new Louis Vuitton stores to maintain the exclusively. 

There are signs of a rebound in the global luxury sector but China, an enormous market for luxury goods and services will certainly have retailers in the country experience a decline in sales as Xi cracks down on luxury gift-giving to battle against corruption and misuse of public funds. For example, Swiss watch imports fell by 24% in Q1 2013 although Burberry still experience soaring sales there.  Any decline within in China could be offset by Chinese tourists visiting regions outside of the country as well as by the stronger sales in Europe and the US. For the former, Chinese tourists are attracted to buy luxury goods in Europe due to the weak currency and Chinese nationals are now account for the biggest global luxury buyer market at 25% (only 0.5% in 1995) with European nationals close behind at 24%. Major luxury retailers in the West have been equipped for this for several years now with the employment of Mandarin speakers and the likes of UnionPay but there is still scope for smaller, more boutique luxury players to follow suit. 

I believe despite the recent slowdown in Asia's luxury market, the raising middle and wealthy class with their demand for status goods - not just in China but especially in South Asia (India, Bangladesh) and South East Asia (Indonesia, Philippines, Vietnam,  Thailand)  - makes Asia the most important region for luxury brands to capitalise on, for now and in the next 5 years or so. At the same time however, ongoing challenges that affect revenues aside from growth and the crackdown in China are the volatile currency market affecting exchange rates/local pricing, rising real estate prices and high import duties/taxes increasing prices by 30%-60%. This latter point nevertheless can be partially offset by tourism/spending in the West. Finally, European high street retailers of Zara and H&M have become hugely popular in Asia over the past 2-3 years. Such brands offer far more affordable fashion pieces which imitate the styles seen on catwalks. 

In Indonesia (and rest of emerging Asia) where it is happening for LVMH, Hermes, Richemont , Kering and others

JH

Why I ditched Blackberry for Samsung and not Apple

WHEN I was 11, I got my first mobile - a Nokia 3410. Compared to the modern smartphone, there wasn't a lot you could do with it. I guess it was good for playing Snake II, Space Impact and Bantumi. Other than that, the phone's functions like reminders and the calculator weren't that exciting to an 11 year old. The good thing however about phones back then was that because they were all simple in design and functions, it was easy to choose a new phone when you needed one. This is exactly what I miss about the phones of the early 2000s.

My 2 year old contract Blackberry Bold is due up for renew and I spent/wasted a lot of time this week (re)searching for a new phone. I really do like Blackberry. Their indicator light, acceptable size, physical QWERTY keyboard and its ability to receive emails extremely easily has made me value this brand over the unnecessarily large touchscreen smartphones that grace the phone market. But as a follower of business news and tech companies, I knew deep inside that choosing Blackberry again -  even their new models of Q10 and Z10 would be a mistake. 

Blackberry, who changed its name from Research In Motion at the beginning of 2013 (to put the emphasis on the company's main product) is really a dying brand and a maker of phones in many ways. I don't think it is the 'design' of Blackberry phones that have caused their continued poor performance but it is the Blackberry software itself. The phone market is populated by touchscreens and for 3+ years, Blackberry have adopted touchscreen technology into various models, such as the Bold Touch range and the Torch range. Therefore, the physical design is not likely to be a shortfall. I believe the real shortfall lies with the software. iOS and Android are more technologically advanced than Blackberry's software. Without going into the tech. specifications, I think its fair to say that the former 2 operating systems can just 'do more' than Blackberry. This is exactly what makes iPhones and other phones that run Android more exciting and fresh. For example, many applications today are developed for Android and iOS, leaving Blackberry out. One of the reasons for this is that Android and iOS are technically superior, allowing apps with more functions and graphics to be coded. I do use apps and as a Blackberry user, I have often been frustrated when I cannot download app x for a Blackberry platform. Blackberry's newest software - Blackberry 10 - allows for Android apps to run although the developer will have to tailor some code to suit a Blackberry phone. Despite not being a fan of the huge touchscreen only smartphones, the general superiority of iOS and Android (that you can 'do more') is the main reason why I could no longer consider Blackberry. 

So now the choice was down to iPhones (by Apple) versus Android phones (by HTC, Sony and Samsung).

For me, iPhones and iOS are still the most aesthetically pleasing phones and operating systems on the market. However, between the iPhone 4, iPhone 4S and the current iPhone 5, there have not been that many variations in design or internal software at all. This argument holds for the iPad and iMac ranges. Whether Apple is guilty of patent thickening is debatable, but the truth is that iPhones have become boring, unexciting and still overpriced because the brand is 'Apple'. I am wondering if Apple still has the same innovative foresight as it did under Steve Jobs. Probably not is the answer. Because of this (lack of innovation and variation in their products), I am not convinced that I can be fulfilled with an iPhone.

So next, my search turned to the Android phones. 

Sony was easy to ditch as the design of the Xperia range didn't quite appeal to me. It is too rectangular and 'sharp'. 

HTC's latest phone - HTC One and Samsung's Galaxy S3 and S4 became the serious contenders. First thoughts? Well, the HTC One's serious silver slick design and its frontal 'Beats' speaker attracted me to the phone immediately. One the other hand, the S3 and S4 are both technologically powerful, yet they are not as aesthetically pleasing and definitely the least premium feeling phone (with a plastic casing) in their category. After much pondering, watching various Youtube phone reviews and copious visits to various phone shops, I decided to settle with Samsung for their technology and all their extra functions over the HTC (and also Apple). The S4 is lighter, has a bigger screen, a faster processor, an improvement of 5MP in its camera to 13MP and a better resolution. But the S3, only one year older then its successor, it not that inferior. Therefore, (unlike most people), I didn't think it would be worth paying an extra £12+ per month to upgrade to the S4 and settled for the S3 in the end.

Perhaps my thoughts have been reflected in the companies' recent financial results. Blackberry's results coincidentally were released today. Their Q1 results for June 2013 ended (fiscal year 2014), revealed that although revenues reached $3.1 billion (up 15% from previous quarter) and global shipments of smartphones were up by 13% to 6.8 million, they still made a huge operating loss of $84 million. Even with the roll out of new products and services over the next year and the global roll out of Blackberry 10, I am not convinced in this competitive environment that Blackberry can turn fortunes around so easily. I would anticipate another loss in Q2. However, perhaps they can be helped by the adoption of BBM on to iPhones and Android. BBM is more user friendly and established compared to other instant messengers like WhatsApp or PingChat. It wouldn't be a bad idea either for Blackberry to 'combine' their traditional QWERTY keyboard with a full touchscreen using microfluidics technology (by a joint venture) as seen below. However, like Dell, I think Blackberry would really benefit from a buyout and going private for a few years. It has little prospects of competing with Apple, Samsung, HTC among others even with the launch of Blackberry 10 and its future successor operating systems. It would be a good time for Blackberry shift its focus out of  smartphones and into business services. 

This quarter has really belonged to Samsung, who has become the most profitable mobile company in the world, (finally) beating Apple. In Q2 2013, to June month end, Samsung's phones made an operating profit of $5.2 billion ($7 billion for the entire company). This has mostly been driven by strong demand for Android devices from Asia and LATAM as well as its new S4. Samsung has also succeeded with rigorous cost controls, high volume of production and high wholesale prices. 

Apple's iPhone profit was $4.2 billion ($6.9 billion overall for company). This figure has marked the iPhone range as 'underperforming',  reflecting poor sales of the iPhone 5 globally including China, and strong competition from the likes of Samsung. Samsung now accounts for the biggest share of the global smartphone market at 27.7%. Nokia is in 2nd with 15.8% while Apple is in 3rd, accounting for 8% of the global smartphone market, their smallest market share in 3 years. (Blackberry does not rank in the top 5). This, coupled with a lack of innovation and unsuccessful attempts to gain significant market share in emerging markets due to their high price of phones, has made Apple less and less of a darling company. In Sept. 2012, Apple's share price hit a record $700 odd but now it is trading at 40% less. Until a brand new innovation - that is not an adaptation of its existing products - the story for Apple is likely to remain the same. According to Tim Cook, this is likely to happen in autumn 2014. The 'Apple watch' is likely to be one of these, but I will be curious to see what else there is...

JH