Fed Rate Cut, M&A Deal Risks, and Trump’s Push to End Quarterly Earnings

Hello and welcome back to the Market Maker podcast. And as always, we've got 3 themes that we're going to be talking about in this episode. 2 markets related, 1 M&A deal. So, you know, back on the docket, try and get some deal flow in there by popular demand. So today we're going to talk about the Fed's cut. They cut rates by 25 basis points, very much as expected, but Powell called it, the Fed Chairman, a risk management cut. And Piers, I don't remember him using that type of vocabulary ever, or any Fed official using that vocabulary. So really interested to see what you made of that. And also, you know, the Fed now focusing more on slowing jobs rather than sticky inflation. We also had the dot plots. We got some new Fed members in the mix as well. So we'll talk about that. And then the other thing this week, which was a big press focus, was of course from Donald Trump and him pushing for quarterly earnings. Earnings to be moved from reporting every 3 months to switch to 6 months. So we'll look at the context of that and also the pros and cons of making such a switch. And then finally, on the M&A front, we talked, Stephen and I, many months ago about the famous UK brand. If you're in Britain, you'll recognise WHSmith, who, I don't know if you've seen the rebrand of that, it's shockingly bad. So that is a dinosaur.

Okay. I didn't realize they'd rebranded. Okay.

I saw it in the shopping mall the other day and I was like, wow, that's just exactly the same, even in Naffa, a Naffa brand. But, um, so Argos is not too dissimilar. It's been on the high street in the UK. Very fond of that. When I was a child, used to get that big fat magazine catalog and you'd be like, for Christmas, you'd be circle, circle, circle. And your parents would buy you none of it. But so Argos, Argos's deal has fallen through. So Sainsbury's walked away from selling Argos to JD.com, the Chinese firm. And we're going to dive into what that reveals about carve-outs, Chinese M&A, cross-border investor discipline, all of these kind of strategic factors around deal flow as well. But perhaps we could start with the Fed, Piers. What did you make of yesterday?

Wow. It says there's quite a lot to talk about here. I mean, often Fed meetings just go exactly as expected and kind of, I mean, I guess on the face of it, this was the same, right? They cut rates by 25 basis points, but there's so many little sort of nuances and that kind of risk management cut, it kind of sums it all up in 3 words. I think, as you say, that's language that's never been used before. So what does that mean? And I think the Fed, as we've been talking about, they're just in a very difficult place because don't forget, like if you strip it back to fundamentals, right? What is the central bank for? Well, they got a dual mandate. So their job is to, it's price stability on the one hand. So if you translate that, that means, right, get inflation to target and keep it at target. Target meaning 2%. So that's price stability, right? 'Cause look, if you want an economy to function and kind of be in a position to grow sustainably, well then price rises need to be controlled, right? Then the other one's the labor market, right? So it's full employment is the other mandate. And so that's making sure that if you're an American, if you want a job, you can get a job and you can earn. And obviously that labor market, is a huge part of that economic engine, right? So these are the two things that they're in charge of. The problem the Fed have is both are moving in the wrong direction. So inflation is creeping back up and is above target, right? It's 2.9%, target's 2%. So it's higher than it really needs to be or should be. Okay? But then on the other hand, you've seen over the last few months, the labor market has just taken a bit of a dive in terms of its, health, notably looking at the nonfarm payrolls numbers, which have, you know, you, I mean, don't want to be sensationalist, but you could say have collapsed. And actually to the point where with revisions, we actually had a negative print for June. So that's minus jobs being created, right? And actually you can look at other little data points like jobless, initial jobless claims. That's the number of people claiming jobless benefit for the first time each week. And that's kind of on the and is at a multi-year high now as well. So look, there's concerns around the labor market and it weakening, right? So here's the problem, because if the Fed is just looking at the labor market, well look, signs of weakness, we should be cutting to stimulate, right? But then if they're looking at the price stability side, well inflation's, it's above target and it's rising. So if you just looked at that, you should be hiking interest rates. So here of course is their problem. Now, one interesting thing other than his risk management cut comment, the other, I, the kind of biggest, well, I'll read out what a couple of points that he said. So here's a direct quote. Job gains have slowed and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated. So basically just what I've said, right? But the most interesting thing I thought was the weight of risk was on the employment side, he said. So a 25 cut was justified. And then furthermore, he went on to argue that the base case is still that higher inflation is down to tariff-driven goods inflation, which will probably prove to be a one-time event. So you'll notice the absence of a particular word there. Transitory is, he's described the definition of the word transitory without using it.

And then just for context, for anyone new to markets, the transitory was how the Fed were describing the COVID impact on the supply chain disruptions at the time and were woefully wrong in their assessment of transitory. So he's kind of As you said, saying it without saying it, which is interesting indeed.

So look, that's where we are, right? And we'll talk about the dot plot and stuff in a minute and get into a bit more detail. But market reaction was really choppy. Whipsaw is probably a decent word to use to be describing what went on with moves in both directions as traders reacted to different elements of this report.

When you were trading these sorts of things, it's interesting actually just thinking about the different participants and connecting it to actionable stuff people might be trading, but other jobs in and around this, like if you worked at Bloomberg and the FT and stuff like that, it's interesting of what perspective you choose to comment about these types of events. 'Cause I remember when I was covering the real-time live squawk, the initial perception dovish, and let's say the market rallies and the dollar drops. All the traders are going, what's the dovish, like, comment? What's the spin? And then the press conference starts and it flips on its head and he sounds hawkish. And then you're like, well, he said this. Whereas then when you look back retrospect 24 hours later, you're like, well, whipsaw, the market's actually gone nowhere. So all is expected. So it's funny how depending on whether you are interacting with the marketplace in the moment, or so let's say you're intraday participant as compared to say a longer term portfolio manager, for example, you know, is this a pivotal shift in a direction? It's interesting how the perception of how you describe this event is not right or wrong because actually it's right in the moment to describe those intricate intraday moves. So it really depends on the setting and the framing of that. Conversation.

Yeah, it just depends on the time horizon of your trading or investing, right? I mean, if you're fast money kind of hedge fund style where you are trying to profit from short-term volatility, well then yeah, you are interested in every single, you know, general price move, you know, in the sort of shorter term. And like you look at the S&P, I mean, It kind of sums it up, right? It was trading at about 6,600 going into the announcement, and then it firstly, it pinged higher, so it went up to about 6,630, right? So a 30-point rally. Okay. Then it kind of about-faced and then dropped from 6,630 down to 6,560, right? So, That's a 70-point reversal. So it rallied 30 points, then dropped 70, then it rebounded basically back to where it started. So then a 40-point bounce back to square one, which kind of sums it all up. And look, you've got to piece through all of this and try and figure out what's going on. I think if you are really good, then you can take advantage of all of those moves, the up, the down, the backup. I mean, it's very difficult. I mean, very, very most likely trying to catch each of those. You might get the first and maybe the second, but maybe the third one just kind of really runs you over. So I think it's super difficult.

When you were trading those, because you were one of those traders who traded news-driven intraday events. When you say, yeah, in that instance there's 3 opportunities there on the trade, looking back in retrospect of how you used to tackle these things, if you were successful in deploying like the first and second opportunity and came out the right side, would you even, would you psychologically, where would you be in terms of that third presentation? Or does it really depend on what was that third scenario to whether you go again or not?

I'd say it depends, but this is where really where this is what separates out the very best from everyone else. And it's the psychology in the moment. If you've made two awesome trades and you've got a lot of P&L, then most people just get greedy and go again and keep going and inevitably give half of it back.

Not the Iceman, baby.

It's those that could really, you know, and look, there's ways of managing that. I would often sort of, to kind of, I guess, scratch that itch and, you know, 'cause you just want more, right? When you are trading well, you should be trade, carry on trading. No, but so, so I'd often de-risk and start trading half of my size. If I wanted to go again, but it was like, look, I've banked a good amount here. I'll then just say, right, well, let's carry on, but at a much lower risk level so that I can't, I don't put at risk all the good work that's just been done. Right.

But, well, for context though, for our listeners, yeah, your nickname on the trading floor for a good 20 years was the Iceman. So it's easy for you to say, actually easy for anyone to do. So, But perhaps we could talk about some other of the intricacies of this release, which were, there's, you know, this is one of those unique alternate events where we get the latest summary of economic projections, i.e., this dot plot. So, so what did, what did the dot plot reveal?

So yeah, just as a reminder for everyone then, everyone at the, on the FOMC committee, they, they produce this dot plot every, at the end of every quarter. So every other meeting and each member just plots on a chart, where do you think interest rates will be at the end of 2025? Then where do you think they'll be at the end of 2026? Where at the end of 2027? And then the longer run, right? And this is really designed for the Fed to show to the world and the markets what they're currently thinking with regards to short, medium, and long-term rates. And so they update it each quarter and obviously depending on what's happened with regards to the economy and economic data, depending on, and unusually depending on what's happened with the change in the personnel within the FOMC itself, then look, you get changes in that dot plot. But really this is the Fed's what we call forward guidance. It's them really saying to us like right now, Everything we know today, this is what's going to happen to interest rates going forwards. Of course, it's just a guidance. Obviously, you know, things change, right? Economic circumstances change. So what they're saying, you know, they're basically saying right now that at the end of 2027, interest rates will be at 3%. Now, will they be at 3%? I'd say it's very unlikely. Now, I've got no idea if it'll be higher or lower. But look, stuff happens, you know, in that period of time, right? But look, it's a guide. So what's interesting for me, I think, is really it's the front end of this sort of dot plot. So it's like, where do you think rates will be at the end of 2025? That's not very far away. And so those dots are saying, because there's only 2 meetings left, right? End of October, mid-December. And so now you've got the median. So everyone has an individual dot. but then they basically take the median kind of average, right? And then that becomes the market expectation. And so the Fed cut rates last night and they are saying they're going to cut rates 2 more times by the end of the year, which is very dovish. That's why you have things like the S&P rallying initially is because this was a dovish cut. They've cut rates and then they're signaling they're going to continue to cut at each of the next 2 meetings. Furthermore, looking at the end of 2026 dots, well, they shifted down as well. So really implying that they're looking to cut rates twice more in 2026, right? To get us down to roughly 3%. So it was a dovish shift at the front end of the dot plot, the mid to back end, not much change. Okay. So that was definitely interesting. The other hilarious thing, I mean, look, I'd say if you're taking all of those committee members, whatever, 17 of them, right? It's that I've never seen a bigger divide. So you had thinking about, are we going to cut rates again into the end of the year? 2 more meetings left. 7, oh, sorry, there's 19 committee members. 7 of the 19 want no more cuts for the rest of the year. 2 members want 1 more cut. And then, what are we up to there? 9. 9 members want 2 more cuts. Right? So, so divided. And then your final member, this guy called Stephen Mirren, who has just showed up, was for his first day at the office.

Would've loved that meeting. I reckon they sat him in the corner. And he was like, he was like, guys, you know what? I'm gonna vote. You guys have your talk. And then he's just there and he's just totally isolated. Surely.

For those who don't know, he's in Trump's pocket. He's the guy Trump's just put in. 'Cause one of the committee members resigned 'cause they're retiring, but they resigned early and somehow Trump's managed to get his man kind of passed by Congress to kind of sit in the vacant seat and he's just bowled in there. And last night he voted for a 50 cut and he wants 1.25% worth of cuts by year end. So you've basically got Trump sat on the committee.

I would've loved to have seen the text message, the WhatsApp that Trump would've sent to Stevie last night. Would've loved it. He would've said, great job in capital letters.

But listen, now you look at the dot plot. And you look at the end of 2025 dots, and basically you got most of the committee kind of concentrated up on around 4%, and then you could just got this one dot that's just miles out of line with everyone, and that dot is like down below 3%, and that's Myron going, let's get the bat out and let's cut rates aggressively.

And just to maybe simplify, so with the dot plot, you're looking at where are interest rates by the end of this year? Next year, 2027, and then what they call like the longer run. And one of the main things here is that as you start to predict time further out, the dispersion of the dots generally gets wider because the future becomes more unpredictable. Just like you were saying though, we're two meetings away from the end of the year. You're absolutely right. Like the fact that there's so much misalignment and yet the visibility to year-end is so close, Typically what you'd see at this time of year with a dot plot going into end of year is super tight with these, this group of members and it's not. So yeah, it really goes to show how divisive things are at the moment on the board.

But, but also last point, a function of how it's really difficult cuz you got inflation going up and the labor market deteriorating, you know, that's so really whilst it is divisive and political, you know, also the economic backdrop. Lends itself to having this kind of division, I would say.

Okay. Well, look, segue into Trump then. And he was all over the news once again, or should I say the news was all over Trump because he was coming out talking about how we should move to a 6-monthly reporting mechanism. And he was saying how all the benefits that that would have. And so yeah, maybe just outline this for me. What's Trump saying? And context, because I think for a lot of people this might be like, wow, like this is big change. And I saw a lot of people might, you know, I look at LinkedIn a lot. I'm fairly, I'm very active on that platform. There was loads of talking heads going, this is such a bad idea. Yeah. But I think that was quite one-dimensional. So yeah, break it down for me.

Look, this is quarterly earnings, right? We're so used to those words. It's quarterly earnings season and this is in the US. By law, the large companies have to report their performance. And so we've got it coming up, right? In a few weeks' time, we'll have Q3 earnings. So once we get past September, final month in Q3, these companies have to start reporting and delivering all their financials. And they also like to give us forward projections. And yeah, it's just for investors, it's awesome. Because you get a real kind of insight every 3 months into how these companies are performing, right? So from a trader's point of view, it's just really valuable info. What Trump's saying is, look, whilst it might be good for the investment community, Trump's proposing that, well, hang on, it's a real nightmare for these companies because it's so expensive to, you know, hire people and teams and experienced CFOs and stuff to produce these reports once every 3 months. For the benefit of people externally. It's just really expensive and takes up a large capacity within the business. And Trump's basically saying, wouldn't it be better if that capacity was spent on actually running the business? The press obviously, as usual, plowed in and jumped all over this and very much framed it as, hang on, this is Maverick Trump shooting from the hip. 'What an idiot, ridiculous idea' kind of framing. I think I wouldn't be wrong in kind of surmising that's the approach of the press here. And as you said, lots of people, look, if you don't like, it's very political, right? If you don't like Trump, anything he says is stupid. So that was the response. The thing is, if you step back and just take a breath, This isn't a radical idea at all. And in fact, the whole of Europe, all the big companies in Europe do not have to report earnings. They, they report every 6 months. The legal setup is to report every 6 months. So look, there's been some, there's been some trial and error on this. Like for example, the UK moved to quarterly reporting in 2007. By 2014, they were like, Yeah, that wasn't a great idea. Let's move back to semiannual. So in 2014, UK moved back to semiannual. The EU moved back to semiannual in 2013. So they scrapped quarterly over a decade ago. Right now, what's interesting though is some of the big gun European companies do still report quarterly just because It's kind of what the US does. And look, we want to play in that big boys' game. So look, we better, you know, for investors' sake, we're going to kind of follow suit, right? So actually, and look, the SEC, interestingly, who are the regulator, they've said that they're prioritizing this proposal, meaning, you know, they're taking it seriously and going to look into it. So, and look, Barack Obama himself, questioned this and actually suggested it back in 2015. Right. So it's not a stupid idea. The whole of Europe do it anyway. And yeah, it was just interesting. I felt it was a really, really, really good example of press bias and a good example of why you've got to be careful when you're digesting news. And you've just gotta think about, is there, could there be bias here? And do I just need to kind of dig into this myself and kind of analyze it myself from kind of first principles before kind of jumping to any kind of conclusions?

On the pros and cons side, there was probably like 3 that stood out to me that perhaps we could talk about. One was this, the Trump framing was about shortism. Sort of focus on a management perspective. For me, when I read that, I was like, are you telling me an extra 3 months is counteracting shortism? So that, you know, as, you know, being Amplified, being still fairly nimble in size, I would say that, you know, decision, decisions for us, fine, we're small and agile, but for these big multinational companies, there's no way that an extra 3 months is going to address the shortism. So I thought that was a pretty pretty weak hand he was framing there.

That is the weakest advantage to this idea. I think the cost saving is definitely straight up for sure. This stuff's expensive to do, right? So it'll save you money. I do also think that it would free up management sort of capacity in a small way, whereas you've only gotta go through this rigmarole every 6 months rather than every 3 months. So I think they are definite straight out positives from a business perspective internally and running and operating your business. Yeah. From a strategy point of view, 3 or 6 months, it's the same, isn't it? I mean, you're not going to, yeah. So they're the pros.

And then on the cons side, one of them was that I thought was interesting was about US multiples. Because these are listed entities we're talking about and US markets trade at higher valuations, partly because of the, you mentioned about investors, investors can be retail, they can be institutional, both of which are going to probably prefer greater transparency to invest their capital on whatever scale. What do you think of that one?

Yes and no. Look, I think from a governance perspective, Western markets, governance is at its best, and this is a very positive thing from an investor's perspective when it comes to your kind of the risks involved in investing money in Western and particularly US companies, right? So yes, the transparency of a quarterly earnings cycle is good for that risk and that governance side. Is that the main reason why US multiples are higher than others, I'd say no, that is not the main reason. It might be a very small part of it, but the main reason is the US is the biggest and best and mightiest economy, and there's more growth potential. They grow faster and they're taking over the planet when you're looking at big US tech. And look, that's why they trade at higher multiple.

Can I just double check? Are you replacing Stephen Myron at the Trump White House? Our second hike advisor. Is this what this episode's about? Is this some sort of like an interview process or—

Let's cut, baby, cut.

And then the final one on the cons before we move on to the M&A deal was, I'm not sure I have a distinct answer on this, but this idea of longer term, given AI, given cloud systems, whatever it might be, basically technology, what technology is allowing, and we're seeing this very much in a trading, in an execution sense, big data, actionable, automated, algorithmic-led systems. At what point does it, do you get full transfer of transparency where there is the mechanics are that doesn't matter quarterly, semi-annual, annual, you get a pretty good pulse of a business in real time almost.

I've never really thought about this. And so it was only when this kind of story popped up and everyone started to kind of think about pros and cons and this one kind of cropped up, I was like, wow, okay, that's interesting. So, and the more I think about it, the more I think it's probably the direction of travel, which is obviously the opposite to what Trump is suggesting here. But I go back to, in my opinion, the biggest con of quarterly reporting, the biggest problem is the, the time and cost internally to get this stuff done. Now, if you can use AI to automate most of this, well then actually that's a really big bonus. So if that is possible, that removes the biggest problem of it. And so, yeah, can you move to a more real-time kind of reporting or barometer of how businesses are performing? I mean, the thing is, right, you're going to start to, if this is the direction of travel, the best companies on the street, they're going to start to do this and they're going to do it because they're like, hey, we've got nothing to hide here. Check this out. You can see how we're doing day by day. And so when companies start to do that, it's going to drag everyone else, right? It sets the precedent. And so I think for that reason, you're probably going to get that move, but I can't— it's going to take a long time, I think. I think that's like over the next decade that might happen.

The kind of second-order impact then, what about sell-side? Products they're selling.

Yeah.

I mean, they, they, well, you know, there's, there's different players here, isn't there? Sell and buy side. But there's a lot of buy side hedge funds that their most optimal strategies are in and around earnings season. Yeah. So the more frequent the better because they're trading these mismatches in price and expectations. Mm-hmm. And then the other side, on the sell side, they sell an awful lot of equity research and the more things are changing or the more disclosure there is for fundamental analysis on these firms, the better, right?

I've got a counter to both of your points.

Okay.

Although I think both are really good points, but there is a counter. So for hedge funds, right? Yeah. Hedge funds, they will trade quarterly earnings season short term. They're like equity long-short strategies in the earnings season exploiting volatility, right? So if there's less earnings seasons, well then bad news. However, you could Flip it. If there's less earnings seasons, you could say there'll be bigger surprises. If it's every 6 months, because we haven't had an update for 6 months, it might be that there'll be bigger surprises, meaning more volatility on the particular earnings event, possibly, which could make up for the less frequency. Maybe that's one counterargument. I'm not sure I'd buy that argument, but anyway. It is a counter. The other one then is, yeah, equity research. Is this going to kill equity research as an industry who make a lot of revenue generating quarterly kind of reports and analysis in around these earnings? But you could argue for investors, if you are now going to get only an update every 6 months, don't these equity researchers become even more valuable? Because they're the ones talking to these businesses, you know, week in, week out and issuing reports. So I actually think they're going to be fine. And in some ways they could become an even more valuable part of an investor's process because we're getting less insight from the companies directly.

Okay. I'm going to counter your counter. I saw a chap who It comes from, you know, decent quality. And he shared a piece talking about an academic research paper dated this year, and it talked about basically the consequences of abandoning a quarterly reporting model. This was the white paper, right? And actually dropping quarterly reports leads to lower market volatility. Now, I've not read the paper, but that's the headline takeaway. Like with all academic research, obviously there's ways to spin things. Of course, it's not always the purist of analysis. So I don't know that, but yeah, I mean, we could go on, but yeah, it's really interesting. Yeah. All right. Well, look, just let's move the show on to the final talking point, which was, yeah, the fate of Argus is kind of moved from the high street into your local Sainsbury's, which I'm sure you've seen over the years, but the fate of Argus looks in somewhat peril. So what is the latest? Update here.

So this is JD.com, who are, were looking to buy Argos off Sainsbury's, right? So firstly, JD.com, an important part of this, they're a Chinese company. Okay. They're a massive, but in some respects, the Amazon of China, right? So it's like direct online retail kind of logistics around same-day delivery, you know, right across mainland China, you know, huge $150 billion revenue business, right? Massive, massive. But they're the one thing that they're Amazon without the AWS, basically. Now look, they're trying to buy Argos, right? But the deal's fallen through and there's a few elements to this, which is quite interesting. Firstly, the kind of headline news was that There's material. So JD pushed for, so hang on, let's step back. The way these processes work, right? Sainsbury's Argos is underperforming within the kind of Sainsbury's kind of overall business. Okay. It's non-core, right? Sainsbury's is a supermarket selling groceries. Argos was an acquisition which They don't sell groceries, but the idea was let's get Argos into our Sainsbury's stores and then actually that will save a lot of money from the kind of old Argos model where they had their own kind of stores, right? We'll just bring it in-house and this is going to be a real great cost saver. What's happened is that actually Sainsbury's are growing at double digit overall, but Argos themselves are, well, it depends. They're kind of growing at single digit, but actually if you take into account exceptional one-off items, they're actually losing money. So I think they lost, if you take into account those items, they lost about £14 million. That's Argos on their own. Sainsbury's do report, they separate out and report the Argos figures separately. And look, those one-off items are probably the cost of getting the infrastructure and building the Argos setup within Sainsbury's stores, right? If you take that cost out, they are growing, but single digits. So it's a bit of a drag. So look, Sainsbury's have decided, look, let's divest this and let's spin this off. Okay. But so fine. They begin the process, they put it up for sale, right? And people are interested. All right, let's see your bids. And then fine. JD come in and say, right, we're interested. You know, let's go into, we'll give you, we'll give you kind of a term sheet, which basically means, right, we're interested and we're going to buy. Obviously there's been a little bit of look at the financials and they'll put forward a price they're going to buy it for. Okay. And this is kind of a term sheet. And then you normally enter into an exclusivity period where now JD and only JD are in the running and they might get like, depends, 2, 3 months of exclusivity, giving them time to now do deep due diligence in order to then check that this thing they're buying is actually what Sainsbury's are saying it is. And so they'll do financial due diligence, right? So are all those numbers that Sainsbury's are saying, are they correct? They'll do things like legal due due diligence, commercial due diligence, lots of due diligence. And then, and it's during that process that often things crop up. It's like, oh, okay, I didn't quite realize that. I didn't quite realize this. And it can often lead to then what ends up being a change in price from the buyer's point of view. So JD have come and said, look, because of these things we found in due diligence, we aren't prepared to pay what we said on the term sheet. We're going to pay you less. Now this gets reported by Sainsbury's saying that JD pushed for, quote, materially revised terms and commitments, not in the interests of shareholders. Just means they're offering a lower price now. And so Sainsbury's have then got a choice. They either say, oh God, all right, fine, fine, we'll sell it to you for cheaper. Or they can go, actually, you know what? No, we're not selling it for that price. Sod you. We're sticking to our guns. And the second one has happened, right? So that's the kind of top-level news.

Can that go two ways though? They say what you're saying here is there's a degree of board discipline where they've gone, I'm not going to accept that. I don't know who the next buyer is, but we're going to go with it. Surely the market could reward or punish you in that scenario.

Well, this is it. Well, initially it rewarded them because the Sainsbury's share price popped 5, 6% off the back of this news. Look, to start with, the market is saying, okay, we like this. We like how the board at Sainsbury's is dealing with this. They're not backing down. They're strong, they're solid, they're holding firm. This This is our price, take it or leave it. And it kind of, it sends a message to the rest of the market. So either what happens now? Well, either JD go, all right, let's rethink this. Maybe we can up our bid a little bit more and get closer back to what we put on the term sheet in the first place. Or, you know, there may be other buyers out there that might be prepared to come in. And if other buyers do come in, That's a really positive sign because those buyers will know that the board have held firm. And so if they're still interested, well then, right, it's much more likely that Sainsbury's are going to get the higher price. That's the positive story. The negative one is everyone just vanishes and no one's interested now. And Sainsbury's, you're joking, aren't you? There's no way anyone's going to pay that price. And they end up not being able to. So this is that kind of that gap in valuation, the valuation gap, right? That is probably the biggest reason why most deals fail.

That cross-border element. I'm assuming that when it's Chinese entity investing in a strategic asset like a BP, for example, that's a problem, or a GlaxoSmithKline. When it's Argus, is that a different kettle of fish? And so what, and what is the, What signals have we had off of recent behavior from someone like JD.com, which I'm assuming is quite active on the acquisition front?

Well, look, so that's, you made that last point. I did a bit of digging. So right, who have JD acquired? And you know what? No one. They've basically made almost zero international acquisitions. They've, and in fact they've only made a one, two, three, they've only made a few, a handful within China. It's really weird for a company of this scale to have had such little acquisition kind of activity on their kind of strategy. Now they did try and they had a look at buying Currys, which is a kind of another retailer of electronic goods, big one here in the UK, right? They had a look at buying Currys a couple of years ago and Interestingly, they pulled out of that as well and didn't come back to the table. So if you're expecting JD to now counter and come back with a higher bid, I don't know. You look at that Curry's situation and that's not what happened. They just walked away. So it's interesting, but you are right to point out the political— there's a few things that went wrong with this deal. Number one is, look, Chinese companies trying to buy international companies, generally speaking, their ability to do so has become more and more difficult because of the political environment. And in fact, China's outbound M&A deals, I'm talking about the whole country now, not just JD, has declined 31% year on year. It's just way harder. And look, this is a function of Trump as well, right? Trump has made that whole political situation, he's put it on everyone's front page. Okay? And so it's harder for China buy particularly Western companies because governments get involved and it becomes a national security risk in inverted commas. Like everything just gets thrown into that bucket. Is Argos a natural national security risk? Look, you can take both sides of that argument, right? You could say, well, no, they're innocent. They just sell stuff. But then the fearmongers out there will say, well, yeah, they're selling electronical goods the whole of the UK are buying, what are they going to put in those goods and are they going to be able to spy on us and all this kind of conspiracy theory stuff, right? It's an issue. And so actually what you're finding with China, they're kind of retreat as a, generally as a nation, they're trying to, they're actually pivoting more to doing deals with countries where it's more kind of investor friendly, where the geopolitical relationship is different. So doing deals in places like Hungary and Turkey and Thailand and Saudi and the UAE, there's way more deals happening in those types of territories rather than the West because of that political situation. But look, there's also deal-specific stuff that's just, this is a tricky one. This is a very tricky one for divesting this business because of the whole strategy they had when they bought it. That Sainsbury's strategy, how can we cut costs here? Let's bring Argos in-house. Let's bring the Argos shop into the Sainsbury's store, reduce our footprint, reduce our cost. The problem is now you've got to extract it again. So for a buyer, that's a really significant cost, extracting these Argos little stations within Sainsbury's and setting them back up. Well, if, well, unless their idea is let's not, let's move away from physical entirely. And obviously JD are the specialists. They're the Amazon of China, right? So from a logistics point of view, maybe they're strategy is to not go back to stores and actually let's rip this stuff out of the Sainsbury store and just bung it all in warehouses and we'll just do it all online. I assume that was their play, but obviously the costs involved in extracting that is a real issue here. It's just made, yeah, so it's a separation complexities is the kind of lingo you would use. And that's certainly something that's probably been a bit of a sticking point Yeah.

So to, so there was a really great summary that, that you had in your notes. So to kind of bring all this together, because I know a lot of students are in their banking application stresses at the moment. So in order to put this together and articulate it, there's really four major themes, right? With this one. So there's investor appetite for non-core carve-outs. And even here, one of the things we were discussing was even a failed deal can go two ways, but in this case, boost sentiment if it signals potential divestitures. So they've held firm, they're going to go again. You know the bottom line now. So a new buyer coming in, you've got a set price. Strategy's worked so far. So connected to that is the disciplined nature of the board walking away. You know, it's an unattractive bid or scenario. We don't want to participate. Number 3, you just mentioned it there, carve out complexity. And so untangling the Argos kind of mess from Sainsbury's success, almost. There's an execution risk. I guess that's the word that would get used in these M&A conversations a lot. And then on that execution side, certainty is quite key. When you are entertaining a potential partner to tango with. So buyers with what you've described as a fairly patchy track record, you add in the cross-border nature, there's regulatory concerns, it lifts the complexity again, which already is looking like a, a not a slam dunk, easy thing to pull off in the first instance from a deal mechanics perspective, right?

Yep. Correct. And I might add one more thing here. This is expensive stuff. Like due diligence is really expensive. And obviously JD would've instructed M&A advisors and all the rest of it, but you're going to have lawyers and the cost outlay they've had to already do to conduct this due diligence process will be in the millions. Right? Multiple millions we're talking here. Now they've, because Sainsbury's have said no, they've got a decision to make. 'Cause either they're like, okay, fine, we'll just take the hit. All that money we've spent is for nothing. We've basically thrown it down the drain 'cause we're walking away. We're not gonna do the deal. The point is coming back to the deal for them is now way cheaper than another rival. Right? Although interestingly, other rivals could go to these same due diligence providers and basically say, look, you've done half the work already. How about we come on board now? We'll pay you a bit more, but it'll be at a discount, you know, than it normally would be. But so DD costs are a really big, big thing in these processes and often can be one of the reasons that sees companies come back to the table with a slightly higher bid because all that sunk cost would be a waste otherwise.

Cool. Well, look, we'll wrap it there. If there's any questions at all, as per usual, I think on YouTube, definitely Spotify, you can leave a comment. So please do. I do know as well from the statistics that not everyone follows and subscribes to the show. So please do. Much more coming in future. And also for any students who are in application season, hopefully this discussion was helpful for both from a macro and a deal mechanics perspective, but also there is the ongoing LSE AIC series that we've been dropping episodes the last 2 weeks. The last one was particularly great for thinking about, okay, I don't have to secure an internship just through applying through the front door. There was some really cool tactics on how to go about securing it through the back door. And so I strongly suggest you also check that out as well, but wishing everyone a great weekend. Thanks, Piers, as always.

Thanks a lot.