Deliveroo Exits Germany – FT Alphaville Misses The Point

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Deliveroo has decided not to do business in Germany any more. OK – and FT Alphaville starts to worry about the speed with which a modern business can leave a market and country. Rather missing the point of this which is the speed with which a company can leave a country and market:

Any student of emerging markets will tell you that financing a current account deficit with imported capital always seems like a good idea. That is, until investors panic and want their money back. But what if businesses themselves were as nimble as capital? Able to shift in and out their chosen markets with the deftness and lightness of a bond trader.

Well, why is this a problem?

Put it this way. If Alphaville LLC, a theoretical manufacturer of a useless widget, had a German plant with over a 1,000 employees, a decision to close said plant would come with a wave of painful costs. There’d be expensive pensions, leases and redundancy packages to pay off, alongside writedowns of investments in capital infrastructure.

Deliveroo will probably not suffer the same problems. It has few real assets — only 4.3 per cent of its total assets were made up of property, plant and equipment at 2017’s end — and relatively few employees, thanks to the “self-employed” status of its army of “riders”. Like a trader wanting to cut their losses, Deliveroo can seemingly leave a market and reassess the opportunity when conditions improve, without incurring significant costs.

Well, that’s the problem being stated. Essentially, because it costs a lot to get out therefore there’s a certain amount of the ruin of a nation that business will put up with before it tries to get out. That is, politicians can screw up quite a lot before a company disappears.

This in contrast to portfolio investment where at the first sign of that screwing up the stocks are dumped and the money’s off down the telex wire.

Now note what Alphaville is worrying about – the ease of a company leaving doesn’t allow governments to screw up. Because business will be off like Mylene Klass attending a letter opening. Rational people think the other way around, there being greater pressure on government not to screw up will lead to government doing less screwing up. And if the fiscal incontinents aren’t able to avoid that at least they’ll be stopped sooner.

One other point to be made as well – as with employment. The easier it is to fire someone the more likely they are to get hired. Thus the easier it is to leave an investment position the more likely it is that it will be made. Something even Alphaville should understand as that’s the reason we even have secondary financial markets in the first place.

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