Effects of Credit Crunch

It can be said that ‘credit crunch’ has one of the most concerned issue to discuss since it broke out in September 2008 because of its seriousness and impacts on recent business world. The financial crisis started from the failure and bankruptcy of financial institutions in US due to sub-prime mortgage crisis. As domino effect, the crisis spread globally and has caused catastrophes to many economies up until these days.

As a huge number of companies went bankrupt, unemployment has become one of the most serious long-term consequences of 2008’s crisis. This problem, in addition, cannot be solved in short time. That is why after the crisis, the unemployment rates in some countries have not stopped increasing until now. Prominently, according to the Wall Street Journal on 17 March 2011, Spain hits the first place in unemployment rate chart of euro-zone at 20.4% which doubled the euro-zone average.

Unemployment rate of Spain 1988 - Jan 2011 (Source: Eurostat)

One of the reasons, identified on guardian.co.uk, is that Spain has depended too much on housing market, especially bricks, to grow the economy rather than developing different models. When the financial crisis occurred, the drawbacks were clearer and started to leverage.

Another consequence of financial crisis is the monetary problems and threats of rising inflation rate. These two issues were also discussed in previous blog posts. We all recognized that when remarkable financial crunches occur, the production costs will increase because of the growth in demand. In Cost Push theory, by this, inflation rate starts to rise. It does not necessarily mean that credit crunch cause inflation, but its consequences may. Due to recent escalation in costs of oil, gas and electricity, euro-zone is facing the highest level of inflation ever of 2.4% in February since October 2008. In order to lower the inflation rate, it is necessary to reduce the demand of spending. One of the most effective policies which may have immediate influence is setting higher interest rate. This is what Bank of England did to control the inflation when the credit crunch occurred. The policy has also been deeply recognized by European Central Bank (ECB). The interest rate is said to be increased in April (by Jean-Claude Trichet, a President of ECB) from its very low 1% rate which was last from 2009. This can be seen as direct solution for this dilemma, but it might not work proficiently in long-term or when supply still cannot cover demand even in possible increased rate.

Cumulus Media gets the deal to acquire Citadel Broadcasting

Hitting the news in US this week is one of the most prominent M&A activities of Cumulus Media (big radio company) and Citadel Broadcasting which is said to be a “meaningful activity” ever over the last three years by Bishop Cheen (an analyst in Wells Fargo Securities). With the total acquisition cost of roughly US$ 2.4 billion, this agreement could be “the biggest deal in years” (as titled in RadioWorld on 11 March 2011).

After more than 4 months of negotiation, Lew Dickey (Cumulus’s Chairman and CEO) finally had a deal at price of US$37/share which, according to some law firms, is a undervalued offer and unfair for Citadel shareholders. In possibility, easily accepting the offer leads to opinion that whether shareholders are cheated. That is why BODs of Citadel are investigated (by The Law Office of Vincent Wong) for breaches of fiduciary duty and other violations of state law (Business Wire, 2011). On the other hand, let’s take optimistic view, around the time of Cumulus’s announcement (on 23 February) to merge with Citadel, the share price of Citadel fluctuated from US$33.5 to US$34.75 and it has continued to increase from US$33.8 (on 3 March) to US$35.15 (on 11 March). It means that Citadel absolutely gained profits/benefits from the offer of US$37/share. From this point of view, this is really a good and advantageous transaction for Citadel, and Cumulus as well (because it helps to enlarge the size of this giant radio).

Citadel's share price movement on 22 February, 2011 (Source: Bloomberg, 2011)

Citadel's share price movement on 3 March, 2011 (Source: Bloomberg, 2011)

Citadel's share price movement on 11 March, 2011 (Source: Bloomberg, 2011)

After more than 4 months of negotiation, Lew Dickey (Cumulus’s Chairman and CEO) finally had a deal at price of US$37/share which, according to some law firms, is a undervalued offer and unfair for Citadel shareholders. In possibility, easily accepting the offer leads to opinion that whether shareholders are cheated. That is why BODs of Citadel are investigated (by The Law Office of Vincent Wong) for breaches of fiduciary duty and other violations of state law (Business Wire, 2011). On the other hand, let’s take optimistic view, around the time of Cumulus’s announcement (on 23 February) to merge with Citadel, the share price of Citadel fluctuated from US$33.5 to US$34.75 and it has continued to increase from US$33.8 (on 3 March) to US$35.15 (on 11 March). It means that Citadel absolutely gained profits/benefits from the offer of US$37/share. From this point of view, this is really a good and advantageous transaction for Citadel, and Cumulus as well (because it helps to enlarge the size of this giant radio).

As stated by Lew Dickey, the combination between two companies can boost Cumulus’ financial capability and national scope in order to advance the technology and contents. In theory, M&A activities can cause serious problems when it results in monopoly or anti-competitive practices that one firm gain strong market power from M&A activities (Gaughan, 2005). Recalling the case of Yahoo! and Google in 2008, their partnerships agreement covered up to 90% of the internet search advertising market and finally, had to be ended after 4 months. Maybe, this is what many analysts are worrying about in the case of Cumulus and Citadel when they potentially own 572 stations in more or less 120 markets of which 8 are in top 10. The Motley Fool is one of those having uncertain view of this deal, saying that investors should not buy radio stocks as “Radio is dead”, “Cumulus also plans to rearrange the deck chairs on the Titanic” and “terrestrial radio will never be the same” (stated in RadioWorld on 11 March 2011). However, toward the development of technology, the merger is necessary to develop radio broadcasting industry so as to compete against internet, satellite broadcasting and handsets (as Moody’s Investors Service identified in a client note). Despite raising lawsuit notifications, this merger is, up to this point, receiving many backings from two firms’ stockholders and financial institutions leaving the good sign of potential success.

FDI in Vietnam

It can be considered that with developing and undeveloped countries, the term “Foreign Direct Investment (FDI)” is rather familiar. In simple way of understanding, FDI is possibly referred as a kind of venture capital investment in form of “a cross-border corporate governance mechanism through which a company obtains productive assets in another country” (Nifty Live Charts, 2009). From 1980s, FDI played an important role in the restructuring process of Vietnamese economy from a planned to a progressively market-driven economy (Kokko, Kotoglou and Karlsson, 2003). That is an essential participation in transforming Vietnam from undeveloped to developing country which has a growth potential and dynamic market, ranked as third for investment attraction of Asian countries.

As reported by Ministry of Planning and Investment Portal of Vietnam on 24 February, the FDI inflow is on its upward trend in spite of some economic problem caused by inflations and postponed projects. On 25 February, executive board of Phu Yen province officially sent document to the government asking to cancel $250 billion project of Sama Dubai. The project was approved in 2008, but until this time, it has not been started. This is because Sama Dubai had significantly suffered loss from economic crisis. This project was measured as a very big development aiming at transforming part of Phu Yen to modern city which was forecasted to surpass Hong Kong. The focus on this scheme caused 17% decrease in FDI attraction in 2010, compared to previous year’s.

In this year, within the first 2 months, the FDI fund of $1.15 billion was invested in 93 new projects. It is 4.5% higher than the spending in same period last year. According to analysis of FIA, Vietnam probably attracts $11-12.5 billion in 2011, compared to around $11 billion in previous year. Additionally, there are 80 typical FDI companies, such as Coca-Cola, ANZ, Ford, Toyota, Mercedes-Benz and so on, achieving 2010’s Rong Vang award for contributing around 26% to total FDI fund and 50% ($38.8 billion) to total export turnover in 2010. This might be a good sign of the development of Vietnamese economy. However, there are some existing limitations, which should be eliminated, causing hesitation of foreign investors when establishing in Vietnam. First of all, it is not easy to assess as well as estimate the growth of Vietnam because of lack of reliable data and information. This concerns with traditional behaviours of keeping everything in secret. The related data and information are rarely released to public. Moreover, when it comes to private discussion, actual situation is not totally disclosed. Like profit making businesses, authorities prefer reporting good news. And, as mentioned above, Vietnam has dynamic market, but moderately unstable. It means that investors can face many unexpected risks resulting in huge loss. Therefore, it is government’s role to make suitable and efficient long-term plans, policies and actions to stabilize the economy. Vietnam has advantage in this because it has only one Party in charge.