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Message: <blockquote data-quote="Alice G" data-source="post: 12559" data-attributes="member: 1160">4. Managing Interest Rates in Uncertain Times [USER=1]@Jaysen[/USER]The Story:Last week, the Federal Reserve announced it was reducing interest rates by a quarter-percentage point. It’s the first time the US central bank has cut rates since the 2008 financial crash.Impact on Businesses and Law Firms:It might seem strange that the Fed is cutting rates even though the US economy is doing well. There are two reasons for the Fed’s pivot.First, interest rates are being used as an insurance policy, a pre-emptive step to cushion the economy amid growing trade tensions and slowing growth. It was well timed; the next day, Donald Trump extended tariffs to almost all Chinese imports, and this week, branded China a ‘currency manipulator’ after it allowed its currency to fall below 7 yuan to the dollar.Second, the central bank has been struggling to overcome persistently low inflation. The US fears it will suffer the same disease that has led the European Central Bank and the Bank of Japan to take extraordinary actions. In this case, cutting interest rates aims to bring the rate of inflation closer to the Fed’s 2% target.Following the latest actions by Trump against China, it is expected that the Federal Reserve will continue to cut rates further. That means reduced borrowing costs for many companies, although any benefits must also be balanced by the costs of the escalating trade war and the risk of a future recession.Law firms are also impacted by interest rates. They are businesses, which make money by charging clients for the legal services their lawyers provide. Different firms run their businesses differently. For example, the likes of Herbert Smith Freehills and DWF relied on a relatively high amount of debt to fund their costs and expansion plans in 2017/18. Compare that to the magic circle firms, with four out of the five borrowing nothing between 2014 and 2018.  5. GlaxoSmithKline and Pfizer Consumer Health Merger [USER=1550]@Sairah[/USER]The Story:Last Thursday, GlaxoSmithKline (GSK) announced the completion of its £10 billion pound transaction with Pfizer to combine their consumer health care businesses into a world-leading over-the-counter (OTC) business. Under the agreement, GSK will have a controlling equity interest of 68% whilst Pfizer holding will have an equity interest of 32%. The venture will combine GSK’s consumer health brands, such as Sensodyne and Panadol, with Pfizer’s Centrum and Advil. The venture is expected to combine sales of £9.8 billion providing annual cost savings of £500 million by 2022, with 25% of this sum intended to be reinvested in the business to support innovation and other growth opportunities.Impact on Businesses and Law Firms:Now that the joint venture is underway, GSK has said it intends to separate as an independent company through a demerger (where a business ‘splits off’ its existing business activities into several smaller components, either to operate on their own, to be sold or to be liquated). In this instance, GSK will operate globally as GSK Consumer Health Care, splitting GSK into two distinct businesses, one being consumer focussed and the other on pharmaceuticals and vaccines. It also hopes to list the consumer health business on the London Stock Exchange within the next three years. Interestingly, GSK may also be able to sell all or part of its stake in the joint venture in a contemporaneous IPO. This is because GSK currently has the sole right to decide whether to and when to initiate a separation. If the separation does take place within five years, Pfizer has an option to participate through distribution of its equity interest to its shareholders. Investors from both companies will undoubtedly want to take precautions with the future plans of this complex process, therefore it is important for them to obtain specialised commercial legal advice in various matters such as takeover bids, management buyout, share buybacks and possibly schemes of arrangement.Shareholders of GSK may not want to back out yet because, on Monday, GSK announced it is about to provide its shareholders a dividend payment of £0.19 per share in the next two days. Dividends are an important source of income to many shareholders, but the health of GSK is crucial to maintaining those dividends. Although, GSK’s earning per share are shrinking, this should not be a concern as GlaxoSmithKline’s dividend is covered by both profits and cash flow, showing a sign that the dividend is sustainable. To confirm this, tax lawyers will be needed to assess GSK’s sufficient distributable profits or reserves.6. The Falling Pound [USER=1160]@Alice G[/USER]The Story:Before Boris Johnson’s premiership, there were fluctuations in the value of sterling to the euro dependent upon Brexit developments, but it did hover against the euro at around €1.16. Johnson’s willingness to accept a no-deal Brexit has spurred the further depreciation of the pound which has now lost 4% against the US dollar since the start of July, just €1.09 against the euro at the time of writing.Impact on Businesses and Law Firms:Put very simply, the depreciation of the pound will make imports more expensive but will spell reductions in export prices. Major exporting businesses, such as UK manufacturers, might expect to see an increase in sales volume thanks to a weak pound stimulating export activity. However, this might only be the case until October 31st because UK trade relationships still hang in the balance. A weaker pound may also attract foreign investment since UK assets will be cheaper for them to purchase. The UK tourism trade can also expect to flourish since London will be cheaper to visit.However, in purely economic terms, the lowering of export prices and their attractiveness might not spell prosperity. Much of those exports rely on imported raw materials, IP, services etc. which will all be more expensive. The 2008 financial crash and initial post-referendum slumps did not result in great export economic stimulus for this reason.Inbound M&A activity due to cheaper UK assets might rise which would see law firms involved in facilitating a deal. The weakened pound may incentivise businesses who import from the UK to look elsewhere due to the increased costs of UK goods which would disrupt supply chains and result in a need for new contracts.</blockquote>

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