Valued by private investors at more than $10 billion, the future listing on the stock market of Twitter, is an eagerly anticipated event. The necessary forms have been submitted to the US Securities and Exchange Commission (SEC) ahead of the initial public offering (IPO). Twitter will be looking to avoid the mistakes made by Facebook when they were first listed in May last year. Twitter has also announced its intentions to purchase MoPub, which is a firm specialising in mobile advert exchanges.
So, what will this listing mean for Twitter? The public will now be able to purchase shares in Twitter, in much the same way as you can buy shares in RBS or Facebook. The financial performance of Twitter will come under much greater scrutiny from its shareholders, who will be interested in short term returns and long term stability. Becoming a public limited company will attract investors and is likely to provide a much larger scope for expansion for Twitter. However, as yet no details have been released on a likely date for the flotation or on the prices we can expect.
One thing Twitter will be trying to avoid is a repeat of the problems that beset Facebook and indeed of the problems that other public listings have created for giants such as Google, Zynga and Groupon. When Facebook moved to public ownership, its share prices initially fell below its IPO and subsequently Facebook lost more than half its value. More recent success in mobile advertising has restored the fortunes of this company, but Goldman Sachs, which is handling Twitter’s transition will be looking to avoid a similar occurrence. As Sam Hamadeh from PrivCo (a firm that gathers data on private companies) said:
Twitter will learn from Facebook’s flawed playbook and do the opposite … Unlike Facebook, which waited too long to IPO (until its growth rate decelerated), Twitter will IPO at just the right inflection point: while revenue grows in triple digits.
Twitter is a rapidly growing business, but still has significant scope for expansion and this move to public ownership may be just the thing. Setting the right IPO and the right date will be crucial, as a multitude of factors can and do affect the price of shares listed on the stock market. Twitter will also need to ‘focus on doing the right stuff’ to make a success of the listing and its purchase of Mopub looks to be a step in the right direction. For now, all we can do is speculate, but if the launch is successful, then the founders of Twitter are likely to bring in hundreds of millions of dollars each.
Twitte files for IPO The Telegraph, Sophie Curtis (13/9/13)
Twitter plans stock market listing (see also) BBC News (13/9/13)
Twitter files for IPO, hopes to avoid Facebook’s mistakes Independent, Nikhil Humar and James Vincent (12/9/13)
Facebook shares close 11% below flotation price BBC News (21/5/12)
Twitter fails to answer key IPO questions Financial Times, Richard Waters and April Dembosky (13/9/13)
Twitter IPO: how much is it worth? The Guardian, Juliette Garside (13/9/13)
Twitter IPO: Tech float successes and disasters The Telegraph, Gabrielle Putter and Szu Ping Chan (13/9/13
Twitter to see ‘strong demand’ for share sale BBC News (13/9/13)
Twitter IPO: Firm in stock market launch bid Sky News (13/9/13)
Questions
- What are the characteristics of a public limited company? Are there advantages and disadvantages?
- Which factors affect (a) the supply of shares and (b) the demand for shares?
- What mistakes were made by Facebook when it made the transition to public ownership?
- How does advertising generate revenue for Twitter?
- How might you go about valuing Twitter or Facebook?
- Companies such as Twitter and Facebook have hundreds of millions of subscribers. Are there network externalities of this?
- Twitter is purchasing MoPub. What type of takeover would you classify this as?
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
House prices in the UK are rising and the rise seems to be accelerating – at least until the latest month (August). They are now growing at an annualised rate of nearly 4%. This is the fastest rate for three years (see chart below: click here for a PowerPoint of the chart).
This may be worrying for Mark Carney, the Governor of the Bank of England, who is committed to avoiding a new house price bubble. 
The problem is that, under the recently issued forward guidance, the Bank of England is set to retain the current historically low Bank rate of 0.5% until unemployment has fallen to 7%. But that could be some time – probably around two years.
So what can the Bank do in the meantime and what will be the consequences?
The following article from The Guardian looks at the options.
Article
How can the Bank of England prick the house price bubble? The Guardian, Patrick Collinson and Heather Stewart (30/8/13)
Data
Links to house price data The Economics Network, John Sloman
Questions
- What constitutes a housing price boom? Is the UK currently experiencing such a boom?
- What factors have led to the recent house price rises? Have these factors affected the demand or supply of houses (or both)?
- Who gains and who loses from rising house prices?
- Explain the policy adopted in New Zealand to curb house price inflation.
- Consider the merits of this option?
- Could borrowers find ways around this measure?
- Are there any other options open to the Bank of England?
Each day many investors anxiously watch the stock market to see if their shares have gone up or down. They may also speculate: buying if they think share prices are likely to go up; selling if they think their shares will fall. But what drives these expectations?
To some extent, people will look at real factors, such as company sales and profits or macroeconomic indicators, such as the rate of economic growth or changes in public-sector borrowing. But to a large extent people are trying to predict what other people will do: how other people will react to changes in various indicators.
John Maynard Keynes observed this phenomenon in Chapter 12 of his General Theory of Employment, Interest and Money of 1936. He likened this process of anticipating what other people will do to a newspaper beauty contest, popular at the time. In fact, behaviour of this kind has become known as a Keynesian beauty contest (see also).
Keynes wrote that:
professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
When investors focus on people’s likely reactions, it can make markets very unstable. A relatively minor piece of news can cause people to buy or sell in anticipation that others will do the same and that others will realise this and do the same themselves. Markets can overshoot, until, when prices have got out of line with fundamentals, buying can turn into selling, or vice versa. Prices can then move rapidly in the other direction, again driven by what people think other people will do. Sometimes, markets can react to very trivial news indeed. As the New York Times article below states:
On days without much news, the market is simply reacting to itself. And because anxiety is running high, investors make quick, sometimes impulsive, responses to relatively minor events.
The rise of the machine
In recent years there is a new factor to account for growing stock market volatility. The Keynesian beauty contest is increasingly being played by computers. They are programmed to buy and sell when certain conditions are met. The hundreds of human traders of the past who packed trading floors of stock markets, have been largely replaced by just a few programmers, trained to adjust the algorithms of the computers their finance companies use as trading conditions change.
And these computers react in milliseconds to what other computers are doing, which in turn react to what others are doing. Markets can, as a result, suddenly soar or plummet, until the algorithms kick the market into reverse as computers sell over-priced stock or buy under-priced stock, which triggers other computers to do the same.
Robot trading is here to stay. The articles and podcast consider the implications of the ‘games’ they are playing – for savers, companies and the economy.
Articles
Questions
- Give some other examples of human behaviour which is in the form of a Keynesian beauty contest.
- Why may playing a Keynesian beauty contest lead to an undesirable Nash equilibrium?
- Does robot trading do anything other than simply increase the speed at which markets adjust?
- Can destabilising speculation continue indefinitely? Explain.
- Explain what is meant by ‘overshooting’? Why is overshooting likely to occur in stock markets and foreign exchange markets?
- In what ways does robot trading (a) benefit and (b) damage the interests of savers?
The European Parliament, Council and Commission have agreed on reform to the Common Agricultural Policy as part of the EU’s long-term budget settlement for 2014–20. The CAP accounts for some 38% of the EU’s budget and, over the years, has drawn considerable criticism for resulting in food mountains and support being biased towards large intensive farms.
As section 3.5 in Economics (8th ed) explains, the CAP has been through a number of reforms since the early 1990s. Prior to that, the main form of support was that of guaranteed minimum prices backed up, where necessary, by levies (tariffs) on imported food. Any surplus of production at the minimum price was bought by the relevant EU Intervention Board and either stored or exported at world prices. The effect of minimum prices is shown in the diagram.
Assume that the EU demand is DEU and that EU supply is SEU. Assume also that the world price is Pw. This will be the equilibrium price, since any shortage at Pw (i.e. b – a) will be imported at that price. Thus before intervention, EU demand is Qd1 and EU supply is Qs1 and imports are Qd1 – Qs1.
Now assume that the EU sets an intervention price of Pi. At this high price, there will be a surplus of d – e (i.e. Qs2 – Qd2). Assume for the moment that none of this surplus is exported. It will all, therefore, be bought by the appropriate Intervention Board. The cost to the EU of buying this surplus is shown by the total shaded area (edQs2Qd2: i.e. the surplus multiplied by the intervention price). Unless the food is thrown away, exported or otherwise disposed of, there will obviously then be the additional costs of storing this food: costs that were very high in some years as wine ‘lakes’ and grain and dairy ‘mountains’ built up. If, however, the surplus is sold on world markets at the world price Pw, this will earn the green area for the EU, leaving a net cost of just the pink area.
From 1992, there was a gradual move towards lowering intervention prices and paying farmers direct aid unrelated to current output. From 2004, the main form of support became these direct aid payments. Annual payments to each farm were based on the average support it had received over the three years from 2000 to 2002. At the same time, payments to large farms were gradually reduced, with 80 per cent of the money saved in each country being diverted to rural development. Payments were also made conditional on farmers making environmental improvements to their land.
A problem with this system is that farmers who had high average output in the years 2000–2 have been receiving the same large payments ever since, while farmers who had small yields in those years have received correspondingly small payments.
A proposal two years ago by Dacian Cioloş, the EU Commissioner for Agriculture, was for flat-rate payments per hectare. But objections were raised that this would benefit inefficient farmers who would receive the same as efficient ones. In the end a compromise agreement was reached which saw a capping of the amount of payment per hectare. The result is that the most intensive farmers will see a reduction in their payments by some 30% – a process that will happen gradually over the period 2014–19.
In addition it has been agreed that 30% of the direct aid payments will be conditional on farmers adopting various measures to protect the environment and wildlife.
Farmers will have to be ‘active’ producers to receive direct aid payments. This is designed to exclude businesses such as airports or sports clubs, some of which had been receiving support under the previous system.
It was also agreed to provide 25% extra support for five years to farmers under 35 in an attempt to attract more young farmers into agriculture. Other details of the settlement are given in the EU documents, videos and articles below.
Webcasts
The great shake-up of the Common Agricultural Policy EPP Group in the European Parliament (25/1/13)
Planned reforms of Common Agricultural Policy under fire BBC News, Roger Harrabin (24/6/13)
Mixed response to compromise CAP deal RTE News (26/6/13)
Farm reforms may not increase food production, warns MEP europeandyou, Diane Dodds MEP (26/6/13)
Articles
Big farms to see European subsidies slashed The Telegraph, Rowena Mason (26/6/13)
Common Agricultural Policy deal agreed at last RTE News, Damien O’Reilly (26/6/13)
CAP Reform: MEPs, Council and Commission strike deal FarmingUK (27/6/13)
EU agricultural overhaul puts onus on farmers to be green Financial Times, Joshua Chaffin (26/6/13)
CAP reform deal agreed in Brussels Farmers Guardian, Alistair Driver (26/6/13)
‘Bad for farmers and wildlife’ – CAP reform reaction Farmers Guardian, Alistair Driver (27/6/13)
EU documents
Political agreement on new direction for common agricultural policy Europa Press Release (26/6/13)
CAP Reform – an explanation of the main elements Europa Press Release (26/6/13)
Press release, 3249th Council meeting : Agriculture and Fisheries The Council of the European Union (25/6/13)
Questions
- Why will a system of agricultural support based solely on direct aid not result in any food mountains?
- Show in a diagram the effect of high minimum prices (plus import levies) on an agricultural product in which a country is not self-sufficient (and is still not made so by the high minimum price). How much will be imported before and after the intervention?
- What are the arguments for and against making direct aid payments based solely per hectare?
- Find out how sugar quotas have worked. What will be the effects of abolishing them by 2017?
- What ‘green’ measures are included in the agreement and how effective are they likely to be?
- Consider the arguments for and against removing all forms of support for agriculture in the EU.
- What are the effects of (a) price support and (b) direct aid payments unrelated to output for EU farmers on farmers in developing countries producing agricultural products in competition with those produced in the EU?
- Why may the environmental measures in the new agreement be seen as too weak?
Valued by private investors at more than $10 billion, the future listing on the stock market of Twitter, is an eagerly anticipated event. The necessary forms have been submitted to the US Securities and Exchange Commission (SEC) ahead of the initial public offering (IPO). Twitter will be looking to avoid the mistakes made by Facebook when they were first listed in May last year. Twitter has also announced its intentions to purchase MoPub, which is a firm specialising in mobile advert exchanges.
