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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 91, No. 4
Dear Client: 2014 promises to be a big year for mergers and acquisitions, with the value of deals worldwide hitting $2.4 trillion, $982 billion in the U.S. alone. Though still well below the prerecession peaks, that’s a solid 10% increase from 2013 in both cases. MERGER One reason: Abundant financial resources. MANIA A $1.93-trillion corporate cash stockpile plus buoyant stock markets, strong profit growth and low interest rates provide the wherewithal to grow. The brisker economic tempo is another, promising good returns to businesses that expand. Budget détente in Washington helps, too. After many months of disruptive partisan warfare, it’s soothing execs’ worries about fiscal cutbacks. And for smaller firms…demographics as well, as baby boomer owners seek to cash out and retire.
Washington, Jan. 24, 2014
GLOBAL FORECASTS GDP GROWTH
Among sectors ripe for consolidation: India 5.2% 4.2% Technology. Deep-pocketed, mature firms South Korea 3.5% 2.8% will aim to position themselves for future growth by acquiring the latest innovations through takeovers. Mexico 3.2% 1.3% Start-ups in Calif.’s Silicon Valley, Austin, Texas, Boston and elsewhere are more likely to find eager suitors than in some past years. Energy. With the U.S. poised to become a net exporter of oil by 2020 and decades of natural gas supplies available to be tapped, oil and gas exploration and development are fertile ground for M&A activity. Smaller operators in the oil and gas boom are well positioned to cash in while their bigger brethren seek economies of scale. Also likely to see consolidation: Utilities, power generation and mining firms. Media and communications. Sirius XM Holdings, for example, is being courted by majority owner Liberty Media. Also lots of activity among cable firms, beefing up to better compete with giant Comcast. Charter Communications’ aggressive wooing of Time Warner Cable has already spurred a $61-billion proposal…and gotten a no. Health care providers, driven partly by Obamacare. To maintain revenues, some providers will expand by taking over others…especially smaller independents… that see a sale or partnership as better than sticking out a tougher environment alone. Pharmaceuticals. Powerhouses, such as Bristol-Myers Squibb and Merck, will be on the prowl, seeking access to promising cancer, antiviral and specialty drugs. And, driven partly by expiring patents on some of their well-known profit generators, they’ll likely try to position themselves to compete better with generic medicines. And retail, especially bricks & mortar firms, as online competitors continue to strip away sales. Firms, such as American Eagle Outfitters, with not much debt, strong cash generation and good brand recognition are likely to be attractive targets. The Kiplinger Letter (ISSN 1528-7130) is published weekly for $117/one year, $199/two years, $263/three years by The Kiplinger Washington Editors, 1100 13th St. NW, Suite 750, Washington, DC 20005-4364. POSTMASTER: Send address changes to The Kiplinger Letter, P.O. Box 3297, Harlan, IA 51593.
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Jan. 24, 2014
BUSINESS Escalating wedding costs will convince more couples to insure their big day, TRENDS with policies protecting against missing caterers, inclement weather and other snafus, though not no-shows at the altar. With the average wedding cost approaching $30,000, more couples, or their parents, will be seeking such protection. Policies won’t net insurers big profits…premiums run $100 to a few thousand. But issuers hope newlyweds will come back for their other insurance needs. A better year ahead for franchise businesses, with the number of franchises growing by almost 2% in 2014, compared with 1.4% last year. Franchise sales will gain steam, too, rising by 4.7% vs. 4.3% in 2013. But hiring...holding steady at last year’s pace of 2% or so, adding about 200,000 jobs over the course of the year. Fast-food and business services chains figure to see the swiftest sales growth, with each up 5% in 2014. Fitness, senior care and education firms will also fare well. Aluminum is ready to shine in the auto market. Long used for a few parts or in pricey luxury models, the material will increasingly be called upon to cut weight, meet rising fuel economy standards and still deliver the performance drivers expect. Ford’s new F-150 pickup, the first big-sales-volume aluminum model, promises 5% to 10% higher mileage than its predecessor, plus better hauling and towing capabilities. Expect more automakers to make the switch as consumer acceptance grows. Ford’s foray into aluminum will help establish a supply chain and nudge competitors to follow suit over the next few years. That points to a steady, long-term demand rise, which will absorb some of the overcapacity that has weighed down aluminum prices. GREEN More and more home buyers are shopping for energy savings. Young buyers BUSINESS in particular are willing to pay sizable premiums for features that lower bills for heating and cooling, such as Energy Star appliances and energy-saving windows. As home prices keep rising, the drive to save on ownership costs will only grow. Builders and real estate agents will heavily promote efficiency features, especially as tougher mortgage rules and rising prices stretch many buyers’ budgets. Some homes may qualify for larger FHA mortgages to cover energy improvement costs. But energy-saving lightbulbs are in for a setback. The recent budget deal passed by Congress pulls the plug on an earlier law requiring that incandescent bulbs be phased out in favor of efficient but pricey technology, such as light-emitting diodes. Look for old-fashioned bulbs to start showing up on store shelves again, once overseas manufacturers resume shipments to the U.S. Still, most large retailers will continue to push energy efficient alternatives, which yield higher profit margins. Electric buses are poised to take off as city transit agencies and universities look to shave their fuel costs and reduce local air pollution. Their limited driving range and slow recharge times make the buses best suited to serve densely populated areas, such as downtowns and college campuses. Cities, including Philadelphia, Cincinnati and Austin, Texas, are placing orders. Ditto, the University of Utah and other schools. A handful of manufacturers will cash in on new orders: Calif.-based Ebus. Proterra of S.C. China’s BYD. And Utah’s Wave Inc., a maker of bus-charging gear. SHIPPING Funding for key water infrastructure is getting a boost. Uncle Sam’s share of costs for a long-delayed project on the Ohio River in Ill. has been hiked, freeing up for repairs elsewhere the taxes shippers pay. Recent budget legislation also provides a $1.7-billion increase in funds for harbor maintenance and other work. And more help could be on the way, with Congress overdue to take up a bill authorizing future federal spending on inland waterway improvements. The expansion of the Panama Canal…due to be completed soon…opens up the prospect of more cargo traveling up and down America’s major rivers, adding a note of urgency for lawmakers. Remember, your subscription includes The Kiplinger Letter online
Jan. 24, 2014
TRAVEL On the horizon: Less-costly international airfares and improved service. The spur: Competition from three big Middle East airlines…Emirates, Qatar Airways and Etihad Airways…all in the midst of a massive global expansion. Etihad will launch service to L.A. and Dallas this year; Qatar, to Philadelphia, Miami and Dallas. Emirates recently added Washington, D.C., and will soon serve Boston. Together they already serve eight U.S. cities and plan more frequent flights to them. New, lavish Gulf airports are convenient hubs for flights to India and China. Plus the carriers are known for their friendly staff, gourmet food and good service. The competition will sting U.S. carriers. Not only do the Middle East airlines have deep pockets, their labor costs are only about half the average for U.S. carriers, and their fleets, younger (an average of three years old vs. 14) and more fuel efficient. TELECOM T-Mobile’s aggressive marketing is likely to spell better, cheaper cell service, at least for consumers located in major metro areas. T-Mobile’s determination to nab users from rivals Verizon and AT&T will spur the two much bigger companies to sweeten their offerings. Fourth-largest T-Mobile doesn’t lock users into contracts and will pay off new customers’ early termination fees on existing contracts with rivals. The carrier gained 4.4 million users in 2013. Millions more will follow this year. But T-Mobile’s far more limited national coverage will curb its appeal, at least until it develops a recent $3.3-billion airwave deal, starting in 2015. Federal telecom regulators will tread a fine line on Internet neutrality issues over the next few years. Look for the Federal Communications Comm. to redraft regs recently struck down in court. But that doesn’t mean regulators will disallow extra fees for businesses soaking up lots of bandwidth in all cases. Odds are Internet providers will eventually persuade regulators to allow rationing future use by bandwidth hogs, such as Netflix and YouTube. No effect on the vast majority of businesses, though. The FCC will take a case-by-case approach, letting slide some carrier plans, mostly on mobile networks. For example, regulators probably won’t foil a new scheme from AT&T that allows businesses to pay extra so that their customers won’t hit caps on their data consumption when using mobile applications, such as streamed video. The FCC wants to save AM radio, where listenership has fallen to just 16%. Federal communications overseers see AM radio as vital for emergencies in rural areas as well as a provider of important local news and community programs plus local ads. The feds’ plan: Ease restrictions on where signal towers can be built. Let stations use signal repeaters to clean up distortion and ensure clearer reception. And allow simulcasts on low-power FM signals in the hope of reaching new listeners. DATA The shift to debit and credit cards with embedded chips will pick up steam SECURITY in the coming months. This summer, consumers will start to receive cards with chips automatically, rather than only if requested. And many more terminals… ATMs and retail checkouts…will be compatible with EMV (the Europay, MasterCard, Visa standard for integrated chip cards). Recent data breaches at Target and others have given the move to the more secure technology new momentum. Plus retailers and banks are increasingly aware of the Oct. 2015 deadline for them to switch. After that, those that don’t use EMV technology are liable for fraudulent charges. Big companies that wait too long run some risks, finding themselves at the back of the line for testing and certification and open to attack while they wait. Uncle Sam is determined to make firms adequately safeguard consumer data, despite court challenges brought by two companies that the regulators have charged. Odds are the courts will agree that the Federal Trade Comm. has authority to insist that companies toe the line on privacy protections or face the consequences. Businesses seen as negligent in fulfilling privacy promises will be in trouble. For instant online access and searchable archives, go to kiplinger.com/start
Jan. 24, 2014
HIGH Expect a spike in piracy in the Pacific Ocean near China this year and next. SEAS More military confrontations with pirates, too, as China and others… Vietnam, Thailand, Malaysia and the Philippines…hike their naval presence in the area. The ships will be there for strategic purposes as China and Japan continue to tussle over a chain of disputed islands, but they’ll serve as de facto pirate patrols as well. More than half of the world’s shipping passes through the Asian Pacific... including plenty of oil...much of it to and from China via the South China Sea. The lucrative bounty has kept pirates risking their lives despite the patrols. But... As word spreads of robbers being executed on the spot, piracy will fall. By 2016, a significant drop-off in occurrences of high seas thievery… good news for businesses and consumers. They pay higher prices across the board to underwrite stolen goods plus higher premiums for theft and liability insurance. HEALTH States face mounting pressure to allow consumers to rate physicians. CARE In five years or so, most states will have databases and reporting systems, despite widespread opposition from medical societies that stalled most earlier efforts. This time, as consumers are asked to take more responsibility for health care decisions and pay more out of pocket themselves, they’ll demand quality-of-care measurements. Minn. and Wash. have strong systems and will likely be models for others. TAX Investigations into political favoritism by the IRS will end with a whimper: TIFF No smoking gun and no criminal charges from the Justice Department, and no House or Senate panel recommendations that can pass in a divided Congress. That won’t stop Republicans from trying to make an election issue out of it. The IRS did slow approvals for more conservative groups than liberal groups seeking status as tax exempt. But much of the backlog is gone, and most groups won the exemption that they sought. Now the tax agency must address another backlog…applications for tax exemptions from charities. They piled up as the federal tax agents focused on processing applications from the 501(c)(4) organizations that it had questioned. POLITICS Single-party domination will remain the norm in about two-thirds of states... Even if, as expected, the numbers retreat a bit from a 60-year high. At the moment, one party controls the legislature and governor’s office in 36 states. Republicans have the upper hand, holding the reins in 23 states heading into Nov. Though Pa. and a couple of other states are likely to return to divided government this year, a big change in the numbers isn’t likely anytime soon. Expect the “out” party to go all out to gain a foothold before reapportionment following the 2020 Census. Don’t be misled by headlines about record numbers of independent voters. Most who apply that label to themselves still lean toward a particular party. The number of self-described indies changes depending on how the major parties are perceived at any given time. The current 42% figure hints at much discontent. But the number comprises 16% who say they are independent but lean GOP and another 16% who say they are independent but tilt toward the Democratic Party. That leaves about 10% of all voters who are truly up for grabs on Election Day.
Yours very truly,
Jan. 24, 2014
THE KIPLINGER WASHINGTON EDITORS
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Published on Jan 27, 2014