Politics

Poison Pill Protectionists

By, 03/19/2007

According to Investopedia, a Poison Pill is: "A strategy used by corporations to discourage a hostile takeover by another company. The target company attempts to make its stock less attractive to the acquirer."

The practice of damaging one's own company to keep from being acquired is usually the equivalent of cutting off the nose to spite the face. And if that's true, then protectionism is the poison pill of capitalism.

Sure, you can "save" your economy from losing some jobs in the short run by swallowing a bit of hemlock and disallowing global investment and mergers. But in doing so you're eviscerating the very thing you set out to protect. Misguided as ever, political protectionists think more regulation is the key to better economic policy. The truth is that more regulation makes a country less attractive within the international economy.

A new protectionist bill is being introduced in the US Congress. Larry Kudlow writes, "If this thing ever passes the House and Senate, it would easily knock a thousand points off the Dow." Maybe that's hyperbole, but there's no doubting increased trade barriers will have a detrimental impact on the global economy.

A Very Terrible Idea...
By Lawrence Kudlow, Kudlow's Money Politics
http://www.kudlowsmoneypolitics.blogspot.com/

Most people don't fathom the perversity of efforts to "protect" wages. Such things are almost always political and make no sense economically or socially over the medium to long term. Why stop at providing benefits to people who lose their jobs due to globalization? Why not provide benefits to people who lose their jobs due to increases in technology too? Aren't there just as many jobs lost because of technologies that increase worker productivity, thus requiring less people to do the same amount of work? It's amazing that technology doesn't have the bad name that globalization does when you think about it.

Protecting American Wages
By The Editorial Board, International Herald Tribune
http://www.iht.com/articles/2007/03/18/opinion/edglobal.php

The bigger question should be: after more than a full century of technology "destroying" jobs through globalization and technological breakthroughs, (harkening all the way back to the industrial revolution), shouldn't absolutely everyone be unemployed by now? Instead, we're seeing multi-year lows in unemployment, wages and household net worths go up and a higher percentage of ‘white collar' jobs than ever before.

It turns out a free market economy is pretty darn dynamic. The last 100 years can attest to that. Yes, people do sometimes get displaced; yes, sometimes whole industries can be lost as technology and globalization march forward. But to try and protect against such things is utter folly. Over time, societies adjust far better than any centralized system can.

We're happy to report, so far, merger- and buyout-mania rages on at record pace despite political threats to curb international deals or block private equity bids. As this happens, equity supply will continue to shrink, pushing up stock prices. Notice, too, these deals aren't isolated to a couple industries, the trend has been fairly agnostic to sector and region. Everyone's getting in on the act. Here are a few examples from today's headlines:

1. EGL Agrees to CEO's Higher Buyout Offer
By Padraic Cassidy, Marketwatch
http://www.marketwatch.com/news/story/egl-inc-agrees-higher-buyout/story.aspx?guid=%7B65E9172A%2DE779%2D4AD9%2DBC41%2D2903857B8CC6%7D
2. Clayton Dubilier & Rice to Buy ServiceMaster at 16% Premium
By Mike Maynard, Marketwatch
http://www.marketwatch.com/news/story/clayton-dubilier--rice-buy/story.aspx?guid=%7B2346944F%2D48D2%2D4B69%2D91C1%2D3E2AE3300C84%7D
3. Hercules Offshore to Acquire Todco for $2.3 Bln
By Padraic Cassidy, Marketwatch
http://www.marketwatch.com/news/story/hercules-offshore-acquire-todco-23/story.aspx?guid=%7B8EA46E3E%2DF80F%2D4411%2D8A72%2D732CC2323D53%7D

The boom will keep going so long as stocks remain cheap. As we've said many times before in this space, when the yield on stocks is significantly greater than the yield on bonds, two things generally happen. One, companies buy each other; two, private equity companies buy public companies. Both are for the same reason: you can borrow at a marginal rate cheaper than the yield on the assets you're buying…instantly increasing profits. This will continue until equity valuations are brought back to a more appropriate level. (Note: if long bond yields remain near today's levels, and earnings simply remain flat, stocks would still have to move up a lot before we reach those levels, to the tune of +40% in the case of the S&P 500.)

The only thing that can stop this wave of prosperity is government—an entity so perverse that it's apt to poison the economy it's trying to serve.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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