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Scotland says no: Now let the horse-trading begin

GEORGE HAY

Scotland’s landmark decision to reject independence is not the end of British uncertainty. The 55/45 split, with almost all the votes counted early on Sept. 19, leaves the U.K. intact. But the terms of the unionist victory introduce tensions which could yet lead to a national division.

U.K. investors and companies will be relieved by the result. Almost a 10th of the U.K.’s population and its GDP will now stay put. The feared economic, financial and monetary disruptions of a split will not materialize. Scottish banks, including Royal Bank of Scotland, will probably stay in Edinburgh. They will continue to enjoy the support of the Bank of England, which will set its monetary policy with Scotland in mind.

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You trash-talking the loonie?

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

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Trying to connect the dots on Fed policy? Forget it

Kevin Carmichael

The Federal Reserve’s dots are making Mizuho Securities USA Inc.’s Steven Ricchiuto crazy.

For a while now, the Fed has included a “dot plot” with its quarterly economic updates. Each policy maker’s estimate of where the Fed’s benchmark interest rate will be at the end of the year is represented by a dot on a graph. The horizontal axis represents the years and the vertical axis represents the midpoint of the target range for the federal funds rates.

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Scotland takes the low road with an unfair vote

BRIAN LEE CROWLEY

Readers of this column have an advantage over me: They will read it after the results are in on Scotland’s independence referendum. The outcome is irrelevant, however, because I want to talk about how very wrong the rules are under which it is being carried out, wrong politically, economically and morally.

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China may hold key to Canada’s stalled business spending

DAVID PARKINSON

If we’ve been having trouble finding a satisfactory explanation for Canada’s frustratingly lacklustre business investment, maybe it’s because we haven’t been looking far enough. Maybe we need to look all the way to China.

Despite the improved health of the Canadian economy and particularly exports as this year has progressed, non-residential business fixed capital investment (or capital spending, if you prefer) actually declined in the first half of the year. The Bank of Canada has consistently and repeatedly identified business investment as a critical missing link in Canada’s economic recovery; unless it kicks in, growth and job creation look doomed to stagnate, as they already have more than once since the Great Recession officially ended five years ago.

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Japan’s predicament a boon for future of energy exporters

BRIAN MILNER

This is another of an occasional series from The Globe and Mail’s Brian Milner, who visited Japan to assess the results of dramatic efforts to revitalize the world’s third-largest economy.

One commercial office building in Tokyo’s busy Uchisaiwaicho district is notable for its constant police presence. That’s because it’s the headquarters of Tokyo Electric Power Co. (TEPCO), provider of power to nearly 30 million people and one of Japan’s more reviled companies.

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Big pension fund has valuable lesson for little investor

IAN McGUGAN

When one of the world’s biggest, smartest investors gives you a tip, it pays to listen.

In this case, the tip comes courtesy of the California Public Employees’ Retirement System (Calpers), the largest pension fund in the United States, and it’s something all of us can apply in our portfolios.

The message? Forget about expensive attempts to outwit the market. Focus instead on reducing your investment costs.

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More flexible eligibility and financing rules for EI a better way to help jobless

ANDREW JACKSON

There has to be a better way of financing Employment Insurance (EI), one of Canada’s most important income security programs.

In principle, EI is a social insurance program financed by employer and employee premiums rather than from general tax revenues.

That is as it should be since only employees qualify for benefits, and since both contributions and benefits are related to the level of individual earnings, up to a maximum based upon average earnings.

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SEC’s broken-windows approach won’t work

Reynolds Holding

Wall Street’s lead watchdog has mistaken minor fraudsters for squeegee men. The U.S. Securities and Exchange Commission is pursuing petty offenders, just as New York cops used to nab pesky wipers of windshields. The idea is to nip wrongdoing in the bud. But complex rules make securities enforcement trickier than neighbourhood crime prevention. The tactic may boost the SEC’s statistics more than it strengthens deterrence.

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EasyJet dividend pledge imposes welcome restraint

Robert Cole

EasyJet just made life more difficult for itself. Good. The budget airline’s decision to improve the regular dividend imposes welcome constraints on the management. And if ever there was an industry that needs to be held to account for the financial decisions taken, it is aviation.

The airline’s new dividend policy may be only incremental. Paying out 40 per cent of taxed profit is not far away from the previous practice of distributing one-third of earnings. The company is lightly geared and has a sound record of profit growth. As a low-cost player, it is better able to cope with swings in demand that can upset airline economics. The operating margin, at around 11 per cent, is comfortably wider than most peers’, and the business tilted toward short-haul passengers.

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Scottish secession would put Carney to the test

George Hay

The Bank of England will need to be quick off the blocks if Scotland votes for independence on Thursday. The polls are predicting a narrow defeat for pro-secessionists, which is keeping markets calm. If the result goes the other way, investors and depositors will look to BoE Governor Mark Carney for calming words.

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Reality contradicts Friedman’s inflation dictum

Martin Hutchinson

In 1963, Milton Friedman declared that inflation was “always and everywhere a monetary phenomenon.” The idea was revolutionary. Inflation was commonly blamed on unions, supply bottlenecks and, in the next decade, an oil cartel. But Mr. Friedman’s dictum gradually became conventional wisdom. Current reality, however, is not being kind to the theory.

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Bayer wants to say one word to you: plastics

Quentin Webb

Bayer’s plastic float could sow the seeds for another sale. Investors added more than $5-billion (U.S.) to the German blue chip’s $114-billion market capitalization on Sept. 18 after it unveiled plans to float MaterialScience, its capital-intensive plastics and polymers business. Once again, investors are rewarding a company for adopting a sharper focus. A logical follow-up for Bayer chief executive officer Marijn Dekkers would be to quit agrochemicals and create a pure health care business.

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Poloz fires back at currency conspiracy theorists

KEVIN CARMICHAEL

It’s become well established that Canada’s central bank Governor likes metaphors. In a speech Tuesday, Stephen Poloz described the country’s flexible exchange rate as “floating breakwater across the mouth of a harbour,” and said the currency’s relationship to the price of oil is “like a dog and its master, when connected by one of those leashes that stretch and rewind.” The observant on Twitter were quick to add these to a list that includes spaghetti sauce and airplanes.

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Equity markets ignoring the red flag from commodities

ANDY MUKHERJEE

Commodity prices are a good indicator of global economic growth and monetary policy. Neither looks investor-friendly right now. Equity markets haven’t got the message.

Prices are falling for a wide variety of raw materials, from oil and cotton to corn and sugar. The S&P GSCI Enhanced Commodity Index has declined 11 per cent since the end of May. A strengthening U.S. dollar may have magnified the fall. But energy, metals and food have become cheaper in euros, yen and pounds, too.

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Peltz takes the long, hard road with DuPont

Kevin Allison

Nelson Peltz is taking the long, hard road with DuPont. The activist’s Trian Fund Management on Wednesday called for radical surgery at the $60-billion (U.S.) U.S. chemicals giant. At DuPont’s current trading multiple, though, a further split alone probably won’t boost the stock price much.

Trian, which went public after a year of private discussions, wants DuPont to split into a fast-growing agriculture, nutrition and biosciences business and a cash-focused chemicals rump. That goes well beyond the company’s own plan to offload slow-growing specialty chemicals.

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Inversion sharks are in a pharma feeding frenzy

Robert Cyran

The inversion sharks are starting to eat each other in a feeding frenzy. Acquisitive U.S. drug maker Auxilium’s attempt to buy its way into a Canadian tax jurisdiction may be thwarted by M&A machine Endo International’s hostile $2.2-billion (U.S.) offer for Auxilium. When serial deal makers start going after each other, it signals a dearth of suitable targets.

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Sony crisis may finally spur a radical shift

Peter Thal Larsen

Sony’s latest bombshell removes any doubt it is in crisis. The Japanese consumer electronics group cut full-year forecasts again after taking a $1.7-billion (U.S.) charge on its ailing smartphone business. An even bigger shock is scrapping the dividend for the first time in 56 years as a public company. The only hope is that the fear of calamity finally forces Sony to confront its problems head-on.

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Japan can look to Quebec for a solution to its work force problem

CLÉMENT GIGNAC

Back in January, we touched on the subject of Japan’s long road toward reform. As a reminder, the Japanese government’s plan, usually called “Abenomics,” is made up of three parts or “arrows”: monetary stimulus, fiscal stimulus and structural reform. At this point, the first two arrows have been shot and seem to have hit their targets. However, as has been stressed countless times, the last arrow is by far the most important and complex of the three.

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Even with positive news, euro zone still feeling the pinch

BRIAN MILNER

The economic news out of Europe has ranged from disappointing to downright dismal in recent weeks. Even the seemingly positive news comes with dark clouds, as the latest labour report illustrates.

Both wages and labour costs rose in the euro zone in the second quarter, which ought to ease worries that the region is heading toward economy-crippling deflation. The problem is that the wage growth is too uneven to be meaningful – workers actually took home less pay in Italy, the Netherlands and Ireland – and unemployment is still sitting close to record levels in the most troubled economies.

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The good news behind Canada’s household debt data

DAVID PARKINSON

At first blush, Canada’s latest household-balance-sheet statistics suggest that Canadians may already be falling off their much-needed debt diet. But we may have seen nothing more than a seasonal bump on the path to healthier consumer debt.

Last week, Statistics Canada reported that a key measure of consumer debt load, the ratio of household debt to disposable income, rose to 163.6 per cent in the second quarter from 163.1 per cent in the first quarter. The increase, while hardly huge, came after the closely watched ratio had declined two quarters in a row from its record peak of 164.1 per cent in the 2013 third quarter. The immediate concern was that after smartening up and pulling themselves out of unprecedented depths in recent months, Canadians were already growing complacent and slipping back into the debt quicksand.

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OECD warns of the risk of misreading risk

BRIAN MILNER

The latest global economic update from the Organization for Economic Co-operation and Development contains few surprises about the feeble global outlook or the urgent need to address Europe’s deepening woes. But financial markets should not dismiss this with their usual big yawn. The economic and fiscal dangers are rising, and with them the risks of a major correction.

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Putin’s belligerence offers Exxon some breathing room

Christopher Swann

Vladimir Putin may have given Exxon Mobil a blessing in disguise. The Russian President’s belligerence has drawn U.S. sanctions that could squelch the oil giant’s $700-million (U.S.) Arctic drilling venture. That may deprive the company of a shot at a gusher down the road. For now, though, it’s a chance to make needed cost cuts – and delay a risky project.

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Truce gives Valeant one last shot to woo Allergan investors

Robert Cyran

Valeant now gets one last shot to woo Allergan owners. The two drug companies have dropped litigation and locked in a mid-December date for a special vote on most of the target’s board members, which may set the stage for a $51-billion (U.S.) hostile takeover. Before then, the focus will be on Valeant’s M&A-free results. It’s the buyer’s last best hope, assuming Allergan doesn’t find another deal first.

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Alibaba’s small IPO hike will keep the faithful onside

Peter Thal Larsen

Pricing initial public offerings is an inexact science. Predicting how investors will value a large, fast-growing Chinese e-commerce group involves even more guesswork. That makes Alibaba’s decision to lift the maximum price for its upcoming stock market debut by just $2 (U.S.) a share to $68 puzzling.

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France will miss fiscal targets – and that’s good

Pierre Briançon

Manuel Valls is good at fashioning his own image as an energetic doer focused on economic reform. As the French prime minister brings his program to a parliamentary confidence vote, he faces both revolt from within his ruling Socialist Party and criticism from the conservative opposition. At least he is doing something on which everyone should agree: France won’t go all out to try to meet EU-imposed budget deficit targets.

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Why share buybacks should be banned

Edward Hadas

“Charlie and I favour repurchases when … its stock is selling at a material discount to the company’s intrinsic business value.” It takes courage to contradict Warren Buffett on matters related to investing, but the Berkshire Hathaway boss is leading investors up the wrong path with share buybacks.

Over the last decade, buybacks made up 60 per cent of quoted U.S. corporations’ total cash flow to equity holders, according to Thomson Reuters Datastream. It is easy to see why companies go for them. They usually pump up growth of reported earnings per share, cut back on shareholders’ tax payments and are more flexible than dividends.

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Frothy beer stocks could make for a nasty hangover

IAN McGUGAN

Investors who have fallen in love with the beer industry should sober up. At current prices, brewery stocks look distinctly tipsy.

That’s easy to forget after the sector’s monumental advance of the past couple of years. Shares in the world’s biggest brewer, Anheuser-Busch InBev NV, are up 44 per cent since this point in 2012, while the stock price of SABMiller PLC, the No. 2 player, has surged 38 per cent.

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How the oil patch may help quash dream of Scottish independence

CARL MORTISHED

If the Scottish political mood is shifting back to a slender “No” majority at Thursday’s independence referendum (as current polls suggest), angry nationalists should not blame the big Scottish banks for threatening to move to England. Nor should they rage at some hideous cabal of Westminster Tory and Labour bigwigs for spreading scare stories among wavering Scottish voters.

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New deals point to loss of steam in M&A market

Robert Cyran

Deal-making enthusiasm is in rude health, if Monday’s merger announcements are anything to go by. Cognizant Technology Solutions may have good reasons for buying health care IT provider TriZetto. But promises of revenue synergies mixed with published materials full of jargon should provoke investor skepticism, not an immediate pop in the buyer’s shares. It’s just one symptom of simmering M&A exuberance.

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‘Hike huff’ could be much worse than the ‘taper tantrum’

Swaha Pattanaik

Last year there was a taper tantrum. Get ready for the hike huff.

Consider how the market responded to a San Francisco Fed study. The Sept. 8 document made the fairly obvious observation that investors were more dovish than policy makers. Relative to the views of voting members of the Federal Reserve, the markets expect U.S. rates to stay lower for longer, and to rise more slowly. That non-news helped trigger a rise in bond yields, a retreat in stocks, and dollar gains.

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Club Med shareholders enjoy some September sun

Quentin Webb

Club Méditerranée shareholders have been vindicated for refusing to throw in the towel. Last year, litigious investors held up a low-ball management buyout offer (MBO) for the faded French holiday group. They were eventually rewarded with a counterbid from Italian financier Andrea Bonomi. Now the MBO team, again working with China’s Fosun, are back, trumping Mr. Bonomi with a $1.1-billion (U.S.) proposal.

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Barclays incoming chairman ticks all the right boxes

George Hay

Barclays’ new chairman ticks all the right boxes. The U.K. bank has hired Aviva chairman John McFarlane to run its board, taking over from David Walker. It’s an unusually positive moment in Barclays’ post-crisis transformation.

Since the departure of chief executive officer Bob Diamond after the Libor scandal in 2012, Barclays’ turnaround has stuttered. New CEO Antony Jenkins’ efforts to get a grip have been hampered by misfortune – a regulatory volte-face on capital last year – and self-inflicted shots such as paying big investment bank bonuses in spite of preaching restraint.

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Good start, Mr. Oliver. Now keep going

KEVIN CARMICHAEL

Central banks have been crying out for help with the burden of reviving global economic growth for a long time. So when a public policy maker steps forward to contribute some assistance, as Finance Minister Joe Oliver did Thursday, the proper response is to ask, “What took you so long?”

The answer to that question in the case of Mr. Oliver is the federal government’s obsession with balancing the budget ahead of next year’s election. The $550-million that Mr. Oliver said he expects Ottawa to forego by offering the smallest of small businesses a credit against their payroll taxes is quite literally the least he could do.

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How many groats for that haggis?

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

More »

Forget Ottawa. Only the provinces can dismantle their trade barriers

TODD HIRSCH

Mosquitoes. Icy roads. Lineups at Tims. These are just a few things that most Canadians hate but have learned to tolerate. Annoying but inevitable.

Maybe we need to add to this list the barriers to interprovincial commerce. Going all the way back to Confederation, provincial governments have made various overtures at reducing these barriers to trade, investment and labour flows. Progress has been underwhelming.

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Analog’s not dead, it’s just been resting

CARL MORTISHED

Ignore Apple Watch, the digital timepiece launched this week with the ambition to become next year’s must-have personal toy. If you are a consumer technology watcher, the news is not the launch of yet another communication gizmo. The real story is the steady decline in sales at iTunes, the company’s music download business and the weird explosion of interest in the niche market for vinyl records.

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Bad for your arteries, but great for your portfolio

IAN McGUGAN

Pass the kale, will you? With McDonald’s Corp. stock hovering near a 52-week low, and soft drink consumption on the decline, it’s natural – organic, even – to leap to the conclusion that the ideal menu for investors consists of heaping helpings of herbal tea makers and artisanal tofu producers.

Except that for every tempting healthy-eating stock, there’s one that is likely to give you indigestion. Case in point: Whole Foods Market Inc., which has lost about a fifth of its value over the past two years, despite all the love it receives from umami-slurping locavores everywhere.

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Cracks appear in cyberspace’s heir-tight security

Reynolds Holding

Cyberspace’s heir-tight security is getting a welcome hack. Social networks like Facebook and other online companies enforce privacy rules even after account holders die. That can leave e-books, e-mail and other digital remains beyond loved ones’ reach. Passwords in wills can help, but the forgetful deserve protection, too. A new Delaware law is a start.

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The worst is yet to come for Europe’s refineries

CHRISTOPHER SWANN AND FIONA MAHARG-BRAVO

Life has been tough enough for Europe’s refiners. Weak fuel demand and wafer-thin margins have led to a rash of facility shutdowns. More capacity from the Middle East and Asia is expected to flood the world market. U.S. firms like Phillips 66 have access to cheap crude and will weather the storm. Rivals across the Atlantic don’t, and won’t.

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Could the biggest IPO in history be a bargain?

IAN McGUGAN

Meet Jack Ma, the funniest billionaire in the world.

The man behind Alibaba, the Chinese Internet giant, had institutional investors rolling in the aisles in New York earlier this week when he reminisced about visiting the United States 15 years ago to unsuccessfully plead for $2-million (U.S.) from venture capitalists. Now, he added, he’s back to ask for just a little bit more.

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Scottish consumers will pay the price if banks exit

George Hay

Scotland’s largest banks have moved to head off a crisis. Royal Bank of Scotland and Lloyds Banking Group say they will shift their Edinburgh-domiciled operations to London, should Scots vote for independence on Sept. 18. That’s a step towards financial stability – but not if you’re a Scottish consumer.

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America’s inversion aversion coming to a head

KEVIN CARMICHAEL

Burger King Worldwide Inc. says its decision to buy Tim Hortons Inc. and put the new headquarters in Canada has little to nothing to do with avoiding U.S. taxes. That’s good, because President Barack Obama quite likely will make good on his threat to create a regulatory thicket to deter such acquisitions.

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If I had $100-billion ... How to restore Ottawa’s fiscal health

GLEN HODGSON

Many of us know the catchy tune by the Canadian band The Barenaked Ladies, If I Had A Million Dollars, but how about multiplying it by 100,000 times? Each year, approximately $100-billion leaks out of the federal government’s revenue-gathering system, more or less unseen by the public. As the song says, that amount of money would buy a lot of Kraft Dinner.

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Cuba’s policies have hurt GDP more than U.S. embargo

Martin Hutchinson

Cuba’s own policies are worse for its economy than America’s embargo. The Caribbean island estimates the cost of Washington’s disfavor at $117-billion (U.S.) over 55 years in current terms, or $3.9-billion in lost exports last year – more than $200-million in rum and cigars alone – according to a presentation made to the United Nations on Sept. 9. That sounds like a lot, but more of the damage to GDP is probably self-inflicted.

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Ferrari to put Marchionne turnaround skills to the test

Neil Unmack

Even thoroughbreds have to retire. Luca Cordero di Montezemolo ran Ferrari for 23 years, overseeing a golden era last decade when the carmaker won six consecutive Formula One titles with driver Michael Schumacher. Now Sergio Marchionne, chief executive officer of parent company Fiat, is taking control. Ferrari will be a big test of his turnaround skills.

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Hostile Dollar General a measure of M&A eagerness

Kevin Allison

Dollar General’s hostile $9.1-billion (U.S.) tender offer for fellow discount retailer Family Dollar is the latest in a record string of adversarial deals this year. As long as investors reward buyers, the unfriendly tactics are likely to continue.

Unsolicited or hostile bids have accounted for $545-billion of a total of about $2.2-trillion of mergers and acquisitions announced so far in 2014, according to Thomson Reuters data. The figure, which includes debt, surpasses the previous year-to-date high-water mark of $489-billion, set in 2006. Adversarial deal making accounts for about a quarter of this year’s total in dollar terms. When the last M&A wave peaked in 2007, it was more like a fifth.

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Microsoft’s Minecraft splurge is so 2006

Robert Cyran

Microsoft’s harbours are still mined with Steve Ballmer’s bombs. Paying more than $2-billion (U.S.) for Minecraft’s Swedish maker looks like something from the playbook of chief executive officer Satya Nadella’s predecessor. Using cash to attract attention and users to Microsoft’s hardware is so 2006. Better to focus on its leading businesses, not distractive gadgets.

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