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Capital Calls

25 March 2021 By Breakingviews columnists

Concise insights on global finance in the Covid-19 era.


– Tech in Congress

– News Corp/IBD

Pointless posts. The only thing less productive than scrolling through Twitter is hearing politicians talk about it. A hearing for Big Tech chief executives on Thursday saw lawmakers quiz Alphabet’s Sundar Pichai, Facebook boss Mark Zuckerberg and Twitter chief Jack Dorsey on misinformation and other issues on their platform. It produced mildly entertaining moments but no meaningful ones.

The tech chiefs have each testified before Congress multiple times since 2018. The impact has diminished each time. While some questions were focused on legislation-worthy issues like violent content posted ahead of the storming of the U.S. Capitol building in January, others were irrelevant. Like each CEO being asked whether he received a Covid-19 vaccine.

Substantive hearings can be effective. In 2016, after withering Senate questions on a fake accounts scandal, Wells Fargo’s WFC.N then-boss John Stumpf stepped down. For tech bosses, Congress has failed to produce similar action or any legislation. Like Twitter itself, each drop of good stuff comes with an ocean of banality. (By Gina Chon)

High value. News Corp is buying Investor’s Business Daily for $275 million. By way of context, that’s a bit more than the $250 million Jeff Bezos paid for the Washington Post in 2013. The fit makes sense for News Corp though.

IBD has 100,000 digital subscribers, meaning News Corp’s price works out to some $2,750 per customer. That is double the value of one of the 4 million subscribers to Dow Jones, assuming the News Corp unit is worth $5.6 billion per a recent Breakingviews calculation. It’s also more than Nikkei paid for each Financial Times reader when it splashed out $1.3 billion for the paper and some 720,000 subscribers in 2015.

IBD is, however, a fast-growing online brand. News Corp also says there is little audience overlap. Chairman Rupert Murdoch will be hoping the company can upcycle its own subscribers’ value accordingly. (By Jennifer Saba)

Size matters. Senator Elizabeth Warren asked U.S. Treasury Secretary Janet Yellen on Wednesday whether BlackRock should be designated a systemically important financial institution. The tag would mean tighter regulation and financial restrictions for Larry Fink’s asset manager.

Yellen demurred, saying systemic risks merited scrutiny but the SIFI designation, used for giant banks, might not fit. The $8.7 trillion managed by BlackRock is clients’ money, not its own; its funds are self-contained and, in theory, can be hived off to other managers; and the company’s capital is not at risk from funds’ performance.

These and other realities suggest watchdogs should worry about individual funds that become enormous and use leverage rather than applying the blunt-force SIFI tag to BlackRock as a whole. Still, problems at one fund could damage the reputation of many, and decisions at BlackRock unquestionably matter to markets. For politicians, Fink’s behemoth is too big to ignore. It’s not hard to imagine them deciding it’s also too big to fail. (By Richard Beales)

Burning bright. The $7 billion bidding battle for Coherent has ended, and the laser maker picked the offer with a slightly lower headline value, from II-VI, a laser component maker. It’s a reasonable choice. When multiple suitors are paying above the odds and offering part stock, the quality of the resulting combination matters to the target as well as the buyer.

After frenzied bidding, II-VI’s final shot, composed of $220 per share in cash and 0.91 of its shares per Coherent share, was the one that dazzled. Lumentum, which kicked off the bidding in January, walks with a $218 million break fee.

One problem faced by Coherent’s board was the bidders’ stock prices swung daily. Some investors may simply have marked down the stock of whichever company was in the lead, making that bid appear less attractive. Moreover, even the early offers looked value destructive. For that reason the loser, Lumentum, may yet turn out to be the winner. (By Robert Cyran)

Frans without benefits. Koninklijke Philips Chief Executive Frans van Houten is getting a good price for his domestic appliances business. Hong Kong private equity group Hillhouse Capital is paying 3.7 billion euros including debt, or more than 14 times 2020 EBITDA, according to Breakingviews estimates. Rivals’ average multiple is 11 times. Van Houten receives a slug of cash to pay down debt and can now focus on medical technology. Hillhouse CEO Zhang Lei can try to squeeze out a return by injecting digital juice into the toaster-to-vacuums group. Imagine a coffee machine that knows when to turn itself on based on your daily routine.

The question is whether the deal passes muster with the U.S. Committee on Foreign Investment, which in 2016 stopped the acquisition of Philips’ lighting business by a consortium including Chinese investors. There’s nothing strategically sensitive about blenders, even if Hillhouse puts chips inside them. Still, the history is ominous. (By Liam Proud)

Dish served cold. Japan’s contentious Covid-19 measures are sapping the patience of small businesses. Global-Dining shares surged as much as 42% this week after it sued the Tokyo government for ordering businesses to cut opening hours. The restaurant operator, whose Gonpachi eatery featured in Quentin Tarantino’s “Kill Bill: Vol. 1”, is seeking less than $1 in damages. People unhappy with the government’s pandemic response have rallied to the cause: besides the stock rally, Global-Dining crowdfunded its legal fees, Reuters reported.

Having lifted a state of emergency in certain areas on Sunday, Prime Minister Yoshihide Suga is in a tight spot. Pressure to contain the virus ahead of the Olympics is enormous, but so is stimulating spending. Consumer prices in February fell year-on-year for the seventh straight month, while Japanese households hoarded a record 2 trillion yen in financial assets as of last year. Business curfews will sting in Greater Tokyo prefectures, which analysts at Capital Economics estimate generate a third of national output. (By Robyn Mak)

Scor-settling. France’s warring couple are at it again. The $6.6 billion Gallic insurer Scor has accused its largest investor, mutual Covea, of “deceitful and groundless” behaviour after the latter complained to French authorities about Scor boss Denis Kessler. Following a withdrawn $9.6 billion takeover bid in 2018, Covea contends that Kessler bought 195 million euros of shares “for (the) sole purpose of artificially inflating the share price”. Another 16 million euros was allegedly spent on frivolous advisory fees.

The two already have previous in the courtroom. Last year Covea was ordered to pay 19.6 million euros in damages related to the failed union. But Kessler himself is under pressure, too: shares have lost 16% since the approach – compared to a nearly one-tenth rise for the STOXX Europe 600 Insurance index. If the new allegations mean Kessler goes, it could open the way for a new bid. And Scor’s relatively low 11 times forward earnings multiple, according to Refinitiv data, might also persuade higher-valued rivals like Swiss Re to have a look. An unedifying fight may still have a happy shareholder ending. (By Christopher Thompson)

Soft sell. Technology investors can be their own worst enemy. Shares in 3.8 billion Swiss franc ($4.1 billion) SoftwareONE fell 15% on Thursday after it announced slightly worse-than-expected 2020 results. Gross profit from selling cloud-software licenses and support services to companies was 730 million Swiss francs, compared with consensus analyst estimates of 743 million Swiss francs, according to Citigroup. The implication is that its European mid-sized customers aren’t spending as heavily on new technology as shareholders had hoped. Gross profit will grow by at least 10% this year, Chief Executive Dieter Schlosser reckons, which is slightly lower than the 13% previously pencilled in by analysts.

The differences seem slight, but they matter when a company is trading at 28 times forward earnings – as SoftwareONE was before Thursday’s selloff, compared with around 21 times back in October. Investors buying in at high prices do so at the risk of a sharp selloff in the event of a misstep. They have no one to blame but themselves. (By Liam Proud)


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