fortune--2020-02-12--SoftBank founder opens door to working with tough activist investor after profits fall 99% short of

SoftBank founder opens door to working with tough activist investor after profits fall 99% short of estimates

SoftBank Group Corp. founder Masayoshi Son opened the door to making at least some of the changes championed by activist investor Paul Singer, after the Japanese company reported a second quarter of losses from its startup investing.
Son called Singer’s Elliott Management Corp. an “important partner” and said he is in broad agreement with the investor about SoftBank buybacks and share value. Son said he is on the side of shareholders, especially since he is the largest stockholder at the company. The two billionaires held discussions a couple weeks ago, he said.
Son is adopting a more conciliatory stance just as he’s stumbling with his signature effort — the $100 billion Vision Fund, which made him the biggest investor in technology. The fund lost money in the three months ended in December, one quarter after the meltdown at WeWork triggered a record loss for the Japanese company. On Wednesday, Son said he is no longer targeting $108 billion for a second fund and SoftBank may finance the effort on its own.
“We are thankful that such a distinguished investor has joined us as a friend,” Son said at a press conference in Tokyo to discuss earnings. “We are basically in agreement on carrying out large buybacks when the finances allow it.”
Elliott disclosed a stake of almost $3 billion in SoftBank this month, arguing the company’s shares are substantially undervalued compared with its assets. It has advocated for a share buyback of as much as $20 billion, along with governance changes and more transparency about its investments.
The Vision Fund lost 225.1 billion yen ($2.05 billion) for the three months ended in December. SoftBank Group reported a slim operating profit of 2.6 billion yen, compared with the 344.7 billion yen average of analyst estimates.
The past 12 months have been a roller coaster for Son and SoftBank investors alike. A year ago, the company unveiled a record buyback, sparking a rally that pushed shares to the highest since its dot-com peak in 2000. Uber Technologies Inc.’s disappointing public debut and the implosion of WeWork wiped out the gains over the next few months. But SoftBank surged again in the past week after Singer disclosed his stake and Son won approval to sell his Sprint Corp. to T-Mobile US Inc.
Son focused on the positive in the presentation to shareholders and the media in Tokyo. He said the Vision Fund is on track to return to profit in the current quarter. The eight portfolio companies that are publicly trading, including Uber, Slack Technologies Inc. and Guardant Health Inc., have added $3 billion in paper profit in the current three months, he said.
“At the last earnings briefing I used the words ‘I regret’ 20 times. But after a difficult winter always comes spring,” Son said. “The tide is turning,” he added, standing in front of a slide with the same words and a crashing wave.
The most dramatic change in portfolio value since the quarter closed was Uber, whose shares have climbed more than 35% this year. That, Son said, means the Vision Fund’s stake is now worth $1.5 billion more than its investment, compared with $1 billion less at the end of December.
The Vision Fund’s overall performance was murkier. SoftBank said the fund’s portfolio remained unchanged from the previous quarter at 88 investments. It reported a gain in valuation for 29 companies in the December quarter, while 31 saw their worth decline. The unrealized gain on the investments, or the difference between the cost at which it acquired the stakes and their present fair value, shrunk to $5.2 billion. That’s less than a third of the paper profit SoftBank reported six months ago.
“Vision Fund is still going to have a lot of problems,” Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte in Singapore, said in an interview on Bloomberg Television before the earnings announcement. “They really need to focus on profitability rather than sales growth.”
SoftBank also said it is introducing new governance standards for its portfolio companies, including the composition of the board of directors, founder and management rights, rights of shareholders, and mitigation of potential conflicts of interest. The new rules will “enhance value creation and liquidity” at portfolio companies, it said in a statement.
Elliott wants SoftBank to set up a special committee to review the investment process at the Vision Fund, which it thinks has dragged on the share price despite making up a small portion of assets under management, people familiar with the matter have said.
Son’s best bet to date is still the investment he made in Alibaba two decades ago. In the latest quarter, SoftBank said it booked a 331.9 billion yen gain from the e-commerce giant’s listing in Hong Kong.
That deal turned Son’s $20 million into a stake worth over $130 billion, a spectacular return that cemented his reputation as an investor and helped him raise the original $100 billion Vision Fund. But the track record since then has been spotty. In addition to the WeWork fiasco, he suffered setbacks at portfolio companies, including Wag Labs, Zume Pizza and Brandless Inc.
Son, asked repeatedly about the second Vision Fund at the conference in Tokyo, said he still wants to raise the money but acknowledged the WeWork troubles have set back those plans. Major backers of the first fund, Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Co., have remained on the sidelines so far. He said SoftBank may start with a smaller, bridge fund so it can keep doing deals.
“A lot of our planned investors have been worried by the trouble at WeWork and Uber and we heard their feedback,” Son said. “It’s fully possible for us to carry on investing entirely with our own funds.”
He wasn’t precise about what the size of the fund would be.
“After a lot of reflecting, it seems right that the scale is somewhat reduced this time,” he said. “We can start slightly smaller for the next year or two with a kind of bridge fund and build on those results to raise a second fund.”
SoftBank has weighed contributing $40 billion to $50 billion for the second fund, people familiar with the matter have said.
“The company will struggle to fund both Vision Fund II and buybacks unless they get a large outside commitment to VF II,” Chris Lane, an analyst with Sanford C. Bernstein, said prior to the announcement.
SoftBank closed 12% higher in Tokyo before the earnings announcement, buoyed by news that the sale of Sprint to T-Mobile US Inc. won approval. The shares are up 21% this year.
SoftBank’s last share re-purchase was announced about a year ago, a record 600 billion yen.
The company’s own sum-of-parts calculation puts its total value at more than 12,000 yen a share. That’s more than double SoftBank’s actual share price, which values the company at about $110 billion. Elliott thinks SoftBank’s net asset value could be about $230 billion, people familiar with the discussions have said.
Son urged investors to focus on SoftBank’s shareholder value, which would include its stake in Alibaba, rather than operating profit, which is swayed by share price fluctuation in investments like Uber. To illustrate, he showed a slide with a famous visual illusion that can look like a duck or a rabbit depending on perspective.
“The only measure by which SoftBank, an investment company, should be evaluated by is whether shareholder value rises or falls,” he said.
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fortune--2020-02-12--Carnival cruise ship rejected by 5 nations on coronavirus fears has finally found a port to dock in

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The outcast Westerdam luxury cruise liner is headed to Cambodia to dock after Thailand became the latest nation to turn it away because of concerns over the coronavirus.
The liner will reach Sihanoukville, Cambodia, at 7:00 a.m. local time on Thursday, Holland America Line, the operator of the ship, said in a statement distributed on Twitter. The ship will remain in port for several days for disembarkation, and passengers will be allowed to go ashore, the company said.
Westerdam is now sailing for Sihanoukville, Cambodia, arriving at 7am local time on Feb 13 & will remain in port for several days for disembarkation. All approvals have been received & we are extremely grateful to the Cambodian authorities for the support:https://t.co/XYQhVOtMsk — Holland America Line (@HALcruises) February 12, 2020
Thailand had said it would consider helping any sick persons aboard but stood by its decision to bar entry, as the ordeal continued for the 2,257 passengers and crew looking to disembark.
With the Southeast Asian nation becoming the fifth country or territory to turn away the ship, the Westerdam was facing the risk of running low on food and other supplies. Taiwan, Japan, the Philippines and Guam have also rejected it on concerns over the virus, which has killed more than 1,000 people.
2,257 passengers and crew desperate to disembark a Holland America Line cruise ship after Thailand became the latest country to refuse the ship over #coronavirus concerns.
More @business: https://t.co/JElIZGvxl4 pic.twitter.com/PUEuEtSB6Q — QuickTake by Bloomberg (@QuickTake) February 12, 2020
Holland America, which is part of Carnival Corp., has said there’s no reason to believe there are any coronavirus cases on board. But Thai Health Minister Anutin Charnvirakul questioned Wednesday whether that could be known with certainty, while adding he’s ready to consider providing medical aid, food and water if asked.
“We must think about the safety of our people,” Anutin told reporters in Bangkok on Wednesday. “We’ve been told that there are no cases of infection on the ship, but how can we be sure?”
Some of the passengers taking to Twitter had said that they heard they would be allowed to disembark in Bangkok on Thursday.
We boarded the ship Jan 16 in Singapore. Guest relations on board insists we are getting off the boat tomorrow in Bangkok Thursday although the rest of the world seems to think otherwise!
We have not heard from the Captain since yesterday morning.#westerdam — Lydia Miller (@Pebblecovefarm) February 12, 2020
In a blog post earlier this week, the operator announced the ship was headed to Laem Chabang port southeast of Bangkok where passengers would end their journey on Feb. 13.
The Westerdam departed Hong Kong on Feb. 1 on a 14-day Taiwan and Japan cruise. The 1,455 guests and 802 crew members were originally scheduled to disembark at Yokohama Feb. 15. The ship has sufficient fuel and food provisions to last until the end of the voyage, according to a Holland America Line blog post.
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fortune--2020-02-12--Can’t choose a cocktail? Let the divine decide at this Victorian-era London hotel

There are people who know they like tequila and people who prefer gin, whiskey, or vodka. There are those who know they like their liquor straight up, and others who want their drinks cubed or mixed with sodas, syrups, and shrubs.
And then there are those patrons who don’t know what they like. Or, maybe, they like everything. For these guests, London’s Bloomsbury Club calls on the “Cocktail Diviner.” But who is the Cocktail Diviner, and how will he or she determine one’s drink du jour? With a touch of the finger and an open mind.
On a grey and gloomy day last month, my mind was receptive—but definitely skewing blue. So when I sat down in the swanky lower level bar of the Bloomsbury Hotel and picked up the menu, which is modeled after a set of tarot cards designed in 1910 by a Bohemian occultist, I immediately gravitated towards the “Melancholic” card featuring a woman staring out a window at windblown cypress trees. The vodka-based drink, dubbed the “Persian Mist” and concocted to represent this emotive state, featured a mixture of delightful sounding ingredients including East India cream sherry, Indonesian coffee, and Persian Damask rose blossom. What’s more, the “effect” listed on the back states rose blossom will “soothe anxieties and lift the spirits.”
“Sold,” I thought. “Maybe I should order two.”
Flip through the Bloomsbury Club’s tarot card cocktail menu to find drinks such as the Forbidden Fruit made with gin, crab apple cordial, green chartreuse, Bramley and Braeburn apples. and apple oil. Courtesy of The Bloomsbury Hotel London
But then a waiter rolled over a bodiless, turban-wearing head inside a glass box that resembled Zoltar from the movie Big—minus the goatee and torso. This was the Cocktail Diviner and he was about to instruct me otherwise.
“We wanted to try and connect drinks to an emotion, but we said, ‘How are we going to measure how we’re feeling?” says Bloomsbury Club manager Scott Gavin, who conceptualized the new menu, which debuted in November. “Then I thought it could be based on body temperature like a mood ring.”
Gavin instructed me to place my forefinger on a button, which caused the eyes of Zoltar’s cousin to flash red. When they stopped, the eyes landed on the “Secretive” card, which corresponds to a drink dubbed the “Bete Noire” made of tequila, orange liqueur, pomegranate kombucha, two different types of sherbet, and Hawaiian black salt. I skeptically turned up my nose. I was not feeling secretive.
Yet, despite my distaste for tequila, the effect of the salt appealed to me: Blackened with activated charcoal in an ancient Ayurvedic practice, it’s meant to trap and expel negative energies. What’s more, the pomegranate will “invigorate” while the kombucha promises to “repair and protect.”
“O.K., Diviner, you win,” I thought next.
Take a seat at the bar or get cozy in one of the many booths to summon the Bloomsbury Club’s “Cocktail Diviner” when choosing your poison. Courtesy of The Bloomsbury Hotel London
Like me, Gavin says most guests are receptive to whatever the Diviner divines—even if, also like me, they may not favor some of the components in the suggested drink or aren’t necessarily experiencing the disposition declared. (Those mood rings and Magic 8 Balls were always just slightly off!)
“People generally choose the drink that it lands on because it’s an experience,” he says. “Our drinks are not complicated. They’re made of ingredients that everyone knows and they can understand the flavor composition.”
That said, they’re also not necessarily scientifically sound or based on real psychology. In fact, the whole tongue-in-cheek concept was created as an homage to London’s “Bloomsbury Set” who, in the aftermath of the First World War, sought answers from the Great Beyond via séances, palmistry, magicians, and mind-riders. After finding this original set of tarot cards, Gavin decided to recreate them as a drink menu beginning with 14 drink profiles. Then, he turned to design firm Rivington Bye to help match the drinks with a variety of emotions, which were then artfully illustrated by London-based illustrator Sophie Glover. Finally, the team came up with natural, well-known effects that one or two of the cocktail’s components might elicit.
Whether or not you consulted the “Cocktail Diviner” and landed on the “Obsessive” card, its corresponding drink dubbed the Black Narcissus will “prevent passion from turning to obsession” thanks to passion fruit extract mixed with rum, vermouth, kumquat liqueur, and grenadine. Courtesy of The Bloomsbury Hotel London
“It’s an ice breaker,” Gavin says of the Diviner. “Not only between the server and the guest, but between the guests themselves. It inspires banter, a discussion, and a memory, which in this day and age is needed.”
So whether you’re feeling more “Melancholic” than “Secretive,” or just want to tap into your “Blissful” or Mischievous” side, there’s a sip out there to suit your every desire—even those you didn’t know you had.
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fortune--2020-02-12--Facebook and Twitter could face ‘substantial fines’ under U.K.’s planned new rules on harmful online

Facebook and Twitter could face ‘substantial fines’ under U.K.’s planned new rules on harmful online content

The U.K. is planning to crack down on damaging Internet content on social media platforms, which could face fines for failing to prevent activities such as child exploitation and incitement to violence.
The government is “minded” to give broadcast regulator Ofcom a role as internet watchdog, Culture Secretary Nicky Morgan and Home Secretary Priti Patel said in a statement on Wednesday. The proposals are yet to be fleshed out, but the regulator is likely be handed the power to fine companies such as Facebook Inc. and Twitter Inc. if they fail to protect U.K. users from harmful content, according to a person familiar with the matter.
“We will give the regulator the powers it needs to lead the fight for an Internet that remains vibrant and open but with the protections, accountability and transparency people deserve,” Morgan said.
The U.K. is trying to get to grips with ungoverned areas of the internet as it increasingly dominates modern life and exposes children in particular to the danger of harmful experiences, including abuse, bullying and terrorist material.
The announcement risks inflaming tensions with the U.S., which has already pushed back against Prime Minister Boris Johnson’s plans to impose a digital services tax on Internet giants as efforts to devise an international solution drag on.
Under Wednesday’s proposals, which would place a duty of care on Internet companies:
Online platforms must minimize the risk of illegal content appearing, especially terrorist content and online child sexual abuse; they must also remove illegal material quickly
Ofcom will safeguard free speech and defend the role of the press
Adults won’t be stopped from accessing or posting legal content that some may find offensive
The rules will only apply to companies that allow the sharing of user-generated content such as comments, videos or forums; less than 5% of U.K. businesses are expected to be affected
The plans add to a series of steps U.K. authorities are already taking. As well as the digital services tax plan, Information Commissioner Elizabeth Denham unveiled a code of conduct last month which is designed to protect children’s data online so they’re less exposed to damaging content.
Balancing Act
Harmful content represents one of the trickiest areas to regulate because of the vast amount of material posted daily on social media sites, as well as the need to strike a balance between protecting free speech and determining what content needs to be removed.
Implementation of the plan will fall to Melanie Dawes, a civil servant at the Ministry of Housing, who Ofcom said Wednesday will become the regulator’s chief executive officer in early March. Interim CEO Jonathan Oxley said the regulator shares the government’s “ambition to keep people safe online.”
“We will work with the government to help ensure that regulation provides effective protection for people online and, if appointed, will consider what voluntary steps can be taken in advance of legislation,” Oxley said.
In 2018, German Chancellor Angela Merkel’s government started enforcing the continent’s toughest law aimed at reducing hate speech and fake news — threatening to fine the likes of Facebook, Twitter and Google’s YouTube as much as 50 million euros ($55 million) if they fail to delete illegal posts.
The European Commission is also gearing up to overhaul liability rules for platforms, with a proposal due by the end of the year.
‘Substantial Fines’
The British government outlined possible measures it could take on the matter last year and called for feedback.
Among the ideas mooted were giving regulators the power to levy “substantial fines” on companies that don’t heed “clear standards” or can’t show they are meeting their duty of care to their users. While those fines aren’t part of Wednesday’s announcement, more detailed proposals and legislation will follow later in the year and are expected to include such measures, according to the person familiar.
Andy Burrows, head of online policy at the National Society for the Prevention of Cruelty to Children, told BBC radio on Wednesday his charity wants to see fines of as much as 4% of global turnover in the most egregious cases.
“That has to be accompanied as well by, we think, a combination of criminal sanctions,” he said. “They should apply both to the tech platforms as corporate entities, but we also think it’s hugely important that we see a named director scheme, where named directors have the responsibility for upholding that duty of care.”
Both the main opposition Labour Party and the Tory Member of Parliament who heads the House of Commons committee scrutinizing Morgan’s department said the government isn’t doing enough.
Tracy Brabin, Labour’s culture spokeswoman, said the proposals are “long overdue” and it’s “shameful” they’re only an initial plan, while Julian Knight, who was elected chairman of the Digital, Culture, Media and Sport Committee last month, said the proposal “fails to demonstrate the urgency that is required.”
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fortune--2020-02-13--BlackRock is donating $589 million to bolster financial inclusion

Now that its merger with Sprint has court approval , T-Mobile ’ s parent wants to renegotiate the price

Amid the shockwaves of the Financial Crisis, asset management giant BlackRock saw an opportunity. It spent $34 million to become a co-founder of a new mortgage financing company. That investment became a winning bet. Even after having culled much of that stake, BlackRock’s holdings in PennyMac Financial Services are now worth some $589 million.
Today BlackRock, the investment titan with $7.4 trillion under management, announced plans to donate those shares to a philanthropic effort aimed at boosting socio-economic mobility, especially among underserved populations across the world. BlackRock said it would earmark the remaining 20% stake in PennyMac for social-impact efforts.
“The primary objective of our work is greater financial stability, social mobility for more people,” says Deborah Winshel, managing director and global head of Social Impact at BlackRock. Winshel was previously chief operating officer at the Robin Hood Foundation, which focuses on alleviating poverty.
Roughly half of the PennyMac shares will go to the existing BlackRock Charitable Fund. (That fund was also financed in part by PennyMac shares committed by BlackRock in 2013.) The other half will go to the newly created BlackRock Foundation.
The new foundation will invest and deploy grants across asset classes that promote better savings habits and greater access to savings funds.
Addressing a savings shortage
In the U.S., the statistics around the lack of savings and uncertain access to retirement funds have become a source of alarm. A May 2019 Federal Reserve Board survey found that 39% of Americans would be unable to pay for an unexpected $400 expense. A separate survey by the Government Accountability Office found that in 2016, 48% of Americans over 55 had no retirement savings.
“The donations we’re making toda—in line with our purpose as a firm—will support our commitment to creating greater financial well-being and advancing sustainability,” BlackRock CEO Larry Fink said in a statement.
For a hint of how Winshel might deploy the new funds, it’s instructive to look at the Social Impact team’s current partnerships. Late last year, the team banded together with the likes of UPS, Etsy, Mastercard and Arizona State University, in a bid to create tools that encourage saving. Examples included prize-linked savings and automatic savings transfers, deployed to the partners’ employees and students. BlackRock committed $50 million to the project.
Other projects that have won BlackRock’s partnership include CodeDoor, a tech bootcamp in Frankfurt, and RefuAid, a U.K.-based nonprofit offering loans to migrants.
“We’re looking to scale the emergency savings work in America,” Winshel tells Fortune. “Secondly, we’re expanding into the United Kingdom…and Latin America is very important to us.”
The PennyMac investment, which yielded a 17-fold return for BlackRock, could grow even more under Winshel’s stewardship. Her team will use funds from the new BlackRock Foundation to invest in assets that will yield a return on capital, in addition to making grants.
That’s an increasingly popular model in philanthropy. The Bill and Melinda Gates Foundation, for example, is a name often spotted on venture capital spread sheets or in the ownership structures of startups battling cancer and other health crises.
“One of our goals is to help all organizations become sustainable,” Winshel says. “With grants, you give the money and it’s spent—it’s not necessarily the most sustainable support. Now the millions can be a sustainable portfolio that generates returns that we can use on the rest of portfolio.”
The foundation’s initiatives echo many of the issues pinpointed by BlackRock CEO Larry Fink in recent annual letters to other chief executives. “Society is demanding that companies, both public and private, serve a social purpose,” he wrote in 2018, pointing to issues ranging from worker retraining to retirement.
In his most recent edition of his influential letter, published last month, Fink made it clear that sustainability will be a key component of BlackRock’s portfolios going forward. The firm plans to require sustainability reporting from companies and to seek divestments from some coal companies in its actively managed portfolios.
While environmental sustainability will be important for the foundation, says Winshel, the main focus will remain on financial sustainability.
Many savers who have little or no savings are “focused on stability today so they can focus on stability down the road,” she says. “Our goal is to say, ‘How can BlackRock use its resources, its platform, its influence, its convening power to bring people resources to build a more stable today?'”
The contribution to the new foundations will be offset in part by tax benefits to BlackRock of roughly $241 million, according to the press release.
Editor’s Note: An earlier version of this article included a quote in which Deborah Winshel implied that BlackRock planned to increase its philanthropic investments in Asia. The company subsequently said that Winshel misspoke; Fortune has removed the quote.
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fortune--2020-02-13--In business vs. coronavirus, coronavirus is winning

A lot has changed in the weeks since doctors in Wuhan, China, noticed a cluster of cases involving a mysterious pneumonia-like illness. That illness—a virus thought to have spread from bats to another species before jumping to humans at one of Wuhan’s live-animal markets—has since traveled around the world with remarkable efficiency, infecting tens of thousands in dozens of countries. Hundreds have died. (So swift has this novel coronavirus’s journey been, that only recently was the disease given an official name: COVID-19.)
In that same time, Chinese scientists sequenced the pathogen’s genome and shared it online, triggering a flurry of work worldwide to beat the disease. Already, volumes of scientific papers have been published and multiple vaccines are in development.
Yet even at this fast-moving moment of international collaboration and in this high-tech age of artificial intelligence and genetic sequencing, the world’s most powerful and well-resourced governments have also resorted to some of the most blunt instruments imaginable: a mass quarantine of more than 50 million people in China and travel and visa restrictions in more than 70 countries. (Those draconian measures have had some high-tech twists: Speech-enabled drones operated by the police patrolling the locked-down streets of Wuhan; Uber drivers, as far from the hot zone as Mexico, have been alerted about potential virus-carrying passengers.) The World Health Organization, which repeatedly discouraged the curtailing of travel and trade, nonetheless recently classified the contagion as a Public Health Emergency of International Concern and said it holds a very grave threat for the rest of the world.
Trying to contain this is like trying to contain the wind. Michael Osterholm, Director of the Center for Infectious Disease Research and Policy, University of Minnesota
Businesses, meanwhile, are taking measures that are just as drastic. Some of the world’s leading airlines have announced they won’t be flying to China, home to more than 1.3 billion people and the globe’s second-largest economy, until at least April. Thousands of Chinese factories, dormant during Lunar New Year celebrations, have yet to reopen. Where does this extraordinary series of events leave us? In a sign that this may be the sort of black-swan event the business and investing worlds worry over, experts say they simply don’t know. Epidemiologists and economists alike have struggled to put numbers or context around what they’re looking at. Early efforts to benchmark this outbreak and its likely impacts against the 2003 SARS (severe acute respiratory syndrome) outbreak—also caused by a coronavirus—have been largely abandoned, given China’s larger role in the world economy, and COVID-19’s far more rapid spread.
“Trying to contain this is like trying to contain the wind,” says Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota. Like many epidemiologists, he suspects the aggressive measures to restrict movement will ultimately do little to stop the disease’s spread and may make things worse.
“I don’t know how long this is sustainable or productive,” says Amesh Adalja, an infectious disease specialist with the Johns Hopkins University Center for Health Security. “It could lead to more panic, more distrust, and make logistics difficult.”
Yanzhong Huang, a professor of international relations at Seton Hall University and a senior fellow for global health at the Council on Foreign Relations, argues the response has been disproportionate and suffered from some consequences of its execution—a severe shortage of medical supplies and beds in Wuhan, for example—but adds that the urgency of the situation forced China into extreme actions.
Whether or not global lockdown can stop the virus, the economic costs of the effort will be staggering. The wider Wuhan region’s workers, whose number more than doubles that of Malaysia’s 15 million workforce, are a vital part of the global supply chain for the automotive, electronics, pharmaceutical, and fashion industries (among others). Apple and Hyundai are among the companies that have already acknowledged disruptions to their supply chains, with the South Korean automaker suspending production at some factories owing to parts shortages.
“We have never seen anything like this,” says Yossi Sheffi, the director of MIT’s Center for Transportation and Logistics, of the outbreak’s potential. “China is a huge manufacturer of intermediate parts. Once you have factory closings, it will affect everybody.”
He notes some companies may be slow to realize that. “Supply chains are very opaque,” he says, pointing out that it took GM almost three months to realize that the 2011 Fukushima nuclear disaster had created supply issues for thousands of parts. (The company had initially estimated just 30 would be affected.)
Ron Keith, who runs a supply-chain consultancy and services firm, says the outbreak has the potential to be “catastrophic” for the electronics industry should Chinese factories not resume work in the coming days.
“What we see now is only escalation,” says Mirko Woitzik, an analyst with the risk intelligence firm Resilience360, who says the fluid situation makes it difficult to assess the likely impact. “We haven’t even reached a peak yet.” He ticks through the many challenges presented by the outbreak: quarantined workers, parts stranded at ports, trucks idled at checkpoints. “Basically you don’t know if you can produce tomorrow” he says.
Todd Lee, an economist with IHS Markit, estimates the total cost of the outbreak to the economy will range from $90 billion to $270 billion, depending on when it subsides.
Of course, a more significant human catastrophe may be in store should the coronavirus continue its quick spread around the world. Infectious disease specialists like Osterholm and Adalja say that’s a scenario we should be prepared for. How we handle it, they say, depends on the severity of the virus—something that’s a subject of ongoing study and debate. (It was recently estimated to kill 1% of those infected; by comparison, the seasonal flu kills 0.1%.) Adalja expects it may ultimately circulate like a seasonal flu, albeit a potentially more dangerous one. That is not unprecedented, though, he adds, noting we currently live with several viral respiratory diseases that can cause severe disease and “come out of nowhere.”
That requires a heightened state of readiness and more investment in research, preparedness, and prevention, says Adalja. “Coronaviruses have been on our radar since SARS, and 17 years later we have no vaccines and no antivirals against them.”
That fact has been lamented by many in the public health community who note that interest and funding to develop such crucial medicines—which are unlikely to be big moneymakers—tend to fade away as soon as the threat has passed. Indeed, that’s what happened to an effort led by Peter Hotez of Texas Children’s Hospital to develop a SARS vaccine. It got as far as animal models before the money dried up.
To prevent another outbreak, Adalja argues health officials need to become much more diligent about diagnosing unexplained infectious disease, even the seemingly mild sort: “You never go to the oncologist where they say you have cancer, but we don’t know what kind,” he says. “But we do that all the time” with infections like pneumonia and bronchitis. Adalja calls the untested sources of such infections “biological dark matter,” evoking the mysterious material that makes up 85% of the universe. For the global economy, that viral dark matter could be the source of future black swans.
By the Numbers
$40 Billion
Estimated cost of SARS outbreak in 2003
Source: IHS Markit
$90–$270 Billion
Projected cost of COVID-19 outbreak
Source: IHS Markit
253.8 Million
Number of Chinese overseas visits in 2018, up from 34.7 million in 2003
Source: UNWTO
A version of this article appears in the March 2020 issue of Fortune with the headline “The Grim Business of Containing an Outbreak.”
More must-read stories from Fortune:
—Why China is still so susceptible to disease outbreaks
—Coronavirus risks universities’ reliance on Chinese students
—Stock scammers are using coronavirus to dupe investors, SEC warns
—A new coronavirus red flag on the horizon—a stronger dollar
—WATCH: Coronavirus outbreak has disrupted global economy
Subscribe to Fortune’s Brainstorm Health for daily updates on biopharma and health care.


fortune--2020-02-13--‘Miracle’ cancer treatments could be a blessing for investors too

As pharmaceutical companies initiate human trials for potentially lifesaving cancer drugs, they often follow a well-established path. The drug’s fate at first rests on its impact among patients who have exhausted all other therapies—those for whom it could provide a miracle. If a drug shows promise within this cohort, it gradually makes its way down the diagnosis ladder, as clinicians test it against earlier stages of the same disease. With each step, the drug reaches larger populations of potential patients, and its long-term viability—both medical and financial—grows more certain.
Immunotherapy treatments are in the early stages of this march, transitioning from being last lines of defense to offering bigger, earlier breakthroughs. So-called immuno-oncology (IO) drugs are relatively recent innovations: They enlist a patient’s immune system in the fight, giving it marching orders to tackle cancer cells (rather than directly attacking tumors, as radiation and chemotherapy do). Under the right circumstances, the best IO performers can make traditional chemotherapy or surgery far more effective, or potentially even replace them, in treating many cancers.
This new paradigm has fostered tremendous optimism among doctors and patients—and among pharmaceutical firms. IO drugs were roughly a $22 billion business in 2019. Morningstar analyst Damien Conover estimates that figure will rise to $43 billion by 2023. But it could soar far higher if some therapies prove to have wider applications. (The range of potentially IO-treatable cancers has widened dramatically.)
Some of the world’s biggest drug firms have bought or developed their way into the IO world—and are seeing impressive financial results. Last year, Merck derived 24% of its $47 billion in revenue from Keytruda, its lung cancer IO treatment. By 2022, that could jump to nearly 40%, in part because Merck is spinning off some non-oncology businesses. Roche’s revenue from its lung cancer IO drug, Tecentriq, could go from 4% of the company’s $63 billion in sales to 10% in three years.
Lung cancer has been a crucial proving ground for IO drugs because it’s both common, with nearly 300,000 new diagnoses each year in the U.S., and resistant to treatment. Lung cancer immunotherapies now deliver a 20% survival rate five years after treatment—still tragically low, but well above the non-IO rate of around 6%.
Treatment of late-stage, metastatic lung cancer with IO drugs is a $20 billion market, according to Conover. If the drugs prove effective in earlier-stage treatments, the market would expand by 50%. And that’s just one type of one cancer. The prospect of using IO drugs to treat other common cancers, like those of the breast or colon, has spurred hundreds of new trials. The result is a “really broad landscape” of companies vying for breakthroughs, says Mara Goldstein, a Mizuho analyst.
The risk of failure remains high. And even when a drug proves effective, it often does so for only a small subset of patients: The chemistry behind who does and doesn’t react well isn’t always clear. Nonetheless, among the companies that can claim success so far, investors expect several to build on their early leads.
Merck (MRK, $86) surprised the market in early February when it announced that it would spin off some of its legacy drug lines, including those concentrated in women’s health, among others that had lost patent protection. It’s a sign that Merck wants to bet even bigger on oncology, making Keytruda’s performance all the more important to the company’s results. The drug’s revenues grew 55% in 2019, to $11 billion, and Merck has ongoing trials to expand the therapy to treat bladder, renal, and breast cancers, among many others. Merck currently trades at 15 times its estimated 2021 earnings, but given Keytruda’s potential, Goldstein says, it deserves a higher valuation.
Swiss pharmaceutical titan Roche earns about 57% of its pharmaceutical sales from cancer drugs. Investors have rallied to the stock recently as it became clear that Tecentriq would join those ranks, coexisting with Keytruda. Tecentriq has proved particularly effective in lung-cancer treatments when combined with chemotherapy; it’s now also used to treat so-called triple-negative breast cancers, and trials are underway for other applications. At 16 times estimated 2021 earnings, Roche’s U.S. tracking shares (RHHBY, $43) trade only slightly above the industry average.
Opdivo has succeeded for Bristol-Myers Squibb (BMY, $67) in treating melanoma and lung cancers; it now generates annual revenue of about $7 billion. Opdivo’s parent company also offers investors a way to profit from an IO drug while benefiting from greater product diversification. In January 2019, Bristol-Myers bought Celgene for $74 billion. Squabbles over the merger with activist investors and regulators depressed Bristol-Myers’s stock. But the combined companies’ performance has improved recently. And Celgene’s broad R&D pipeline brings the enterprise a range of products from outside oncology, including a drug that has shown promise in treating irritable bowel diseases. The stock trades at 11 times estimated 2020 earnings—and the company won’t require more IO miracles to attain near-term success.
A version of this article appears in the March 2020 issue of Fortune with the headline “Miracles for cancer patients, windfalls for investors.”
More must-read stories from Fortune:
—Why China is still so susceptible to disease outbreaks
—The rich own stocks, the middle class own homes. How betting it all on real estate is a wealth gap problem
—14,000 recalled baby carriers could drop infants on ground
—Stock scammers are using the coronavirus outbreak to dupe investors, SEC warns
—WATCH: Why CEOs are pessimistic about 2020 business outlook
Subscribe to Fortune’s Bull Sheet for no-nonsense finance news and analysis daily.


fortune--2020-02-13--Now that its merger with Sprint has court approval, T-Mobile’s parent wants to renegotiate the price

‘ Miracle ’ cancer treatments could be a blessing for investors too

Deutsche Telekom AG wants to renegotiate the terms for the sale of Sprint Corp. to its U.S. wireless unit T-Mobile US Inc., according to people familiar with the matter.
The German carrier, the majority owner of T-Mobile, is seeking a lower price because Sprint’s shares have slid since the deal was proposed in 2018, said the people, who asked not to be identified as the deliberations are private.
Getting one of the biggest U.S. wireless mergers ever over the finish line would be a boon to both companies. For Deutsche Telekom, the deal reduces its reliance on Europe, where carriers are struggling to grow amid fierce competition. For the chairman of Sprint owner SoftBank Group Corp., Masayoshi Son, it allows him to better focus on his technology investments and the $100 billion Vision Fund.
The renegotiation talks are expected to start soon, the people said. They would follow a victory for the companies in a U.S. court this week, when a federal judge rejected a state lawsuit against the tie-up. Now the deal is in the home stretch, with only minor approvals left to secure and final financial terms to be ironed out.
Representatives of Deutsche Telekom and SoftBank didn’t immediately return calls seeking comment.
Frequency Constraints
While Sprint’s value has dropped, SoftBank also sees itself in a good position because T-Mobile needs Sprint’s wireless frequencies or would face capacity constraints within as little as two years, one of the people said.
T-Mobile and Sprint haven’t renewed the merger agreement since it lapsed on Nov. 1, and there have been discussions regarding several issues that T-Mobile Chief Executive Officer John Legere described as “not hostile,” that month on an investor call. T-Mobile has suggested there could be new terms.
The combined company, which will operate under the T-Mobile name, will have a regular monthly subscriber base of about 80 million — in the same league as AT&T Inc., which has 75 million subscribers, and Verizon Communications Inc., which has 114 million. T-Mobile will have more wireless frequencies than any other U.S. carrier, giving it an advantage as the industry transitions to the next generation of wireless technology, the much-faster 5G standard.
Bloomberg News reported Wednesday that Sprint and SoftBank would likely have to accept a lower price than when the merger agreement was first forged in April 2018. Sprint’s monthly churn — a closely watched measure of how many customers leave — has risen to nearly 2%, which means roughly a quarter of its subscriber base is quitting the carrier each year.
The German company is likely to leverage that to negotiate a lower price, but Sprint also has valuable radio frequency spectrum without which T-Mobile US will face serious bottlenecks, a person familiar with the matter told Bloomberg on Wednesday.
The Financial Times previously reported that Deutsche Telekom is pushing to renegotiate terms of the deal, citing unidentified people familiar with the matter.
More must-read stories from Fortune:
—Stock scammers are using coronavirus to dupe investors, SEC warns
—Credit Suisse making a comeback, but spying scandal drags down outlook
—Why China is still so susceptible to disease outbreaks
—A new coronavirus red flag on the horizon—a stronger dollar
—Fortune Explains: Tariffs and trade wars
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.


fortune--2020-02-13--Why T-Mobile users are happier with the Sprint deal

This is the web version of CEO Daily. To get it delivered to your inbox, sign up here.
Good morning.
A district judge Tuesday approved the merger of T-Mobile and Sprint, which means just three companies will control 90% of the North American mobile phone market. How do mobile phone users feel about it? Fortune Analytics did the research, and found them split: 45% say they are concerned about consolidation, but 35% say they aren’t. Among T-Mobile’s current customers, 34% think the merger is mostly positive for them and only 14% think it is mostly negative. Sprint customers are less convinced: 21% think its mostly positive, while 19% think it is mostly negative.
I suspect one reason T-Mobile users are happier with the deal is because the CEO of their company—John Legere—is such a phenomenal showman and salesman. Fortune’s Aaron Pressman claims Legere “will go down in the annals of corporate history as one of the greatest turnaround stories of all time, rivaling Lou Gerstner at IBM or Steve Jobs at Apple.” He will certainly go down as one of the most colorful CEOs of our times—long hair, magenta shirts, F-bombs, Twitter wars and free pizzas all considered. You can read Pressman’s take here.
By the way, Legere’s users have the highest level of satisfaction among the four carriers; Sprint’s have the lowest. Read the full Fortune Analytics report here.
More news below.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
Coronavirus jump
Remember yesterday when China suggested the coronavirus outbreak may have peaked, but experts urged caution? Well, today Hubei province—the Covid-19 epicenter—revised its calculations and reported a massive 15,000 new cases, bringing the total up to around 60,000. The markets are, accordingly, down. Bloomberg
MWC cancellation
Mobile World Congress, one of the tech world's biggest events, has been cancelled this year because of Covid-19. The decision came after coronavirus fears led major exhibitors to pull out of the telecoms show. MWC's organizer, the GSMA industry body, desperately tried to stave off the inevitable by telling attendees they had to self-certify that they hadn't been in contact with anyone infected, but to no avail; the big names kept cancelling their attendance. TechCrunch
Date protection
Ireland's privacy regulator Helen Dixon (our profile here) has forced Facebook to postpone the European launch of its dating service, which was supposed to take place today, the eve of Valentine's Day. Seems Facebook didn't tell her office about the launch until 10 days ago, and provided no data protection impact assessment—she sent staffers to Facebook's office to collect documentation, which her office is now reviewing. Independent.ie
Jeffrey Epstein
The CEO of banking giant Barclays is under investigation over his links to Jeffrey Epstein, the deceased financier and sex offender. Jes Staley reportedly benefited from the funneling of wealthy clients by Epstein, but Barclays maintains that they only had a professional relationship, and had no contact since Staley joined the bank five years ago. The probe is being conducted by the U.K.'s Financial Conduct Authority. Fortune
AROUND THE WATER COOLER
Airbnb safety
Airbnb's new safety measures could provide extra pressure to a bottom line that's already in trouble, writes Fortune's Aric Jenkins in the wake of the firm's $322 million net loss for the first three quarters of 2019. As he notes: "These losses don't reflect new spending that Airbnb committed to late last year, to improve safety across its sprawling network of vacation rental homes." Fortune
Ivy League
The Education Department is investigating Harvard and Yale over the possibility that they received undisclosed funding from foreign countries such as Saudi Arabia and China, in the form of gifts and contracts. Education Secretary Betsy DeVos: "If colleges and universities are accepting foreign money and gifts, their students, donors, and taxpayers deserve to know how much and from whom." Wall Street Journal
Benioff's trees
The New York Times has a big piece about how Marc Benioff bent President Trump's ear on the planting of trees to offset carbon emissions (though the initiative won't bear fruit, so to speak, anywhere in the near term). As the piece says: "A personal appeal from a celebrity voice got the idea past traditional gatekeepers." NYT
Credit Suisse
Credit Suisse CEO Tidjane Thiam may be stepping down over the bank's surveillance of former executives—episodes he says he knew nothing about—but after reporting its highest annual profits since 2010, he claims his turnaround strategy worked. Thiam: "Our performance in 2019, the first full year post restructuring, illustrates how much the bank has changed since 2015." Financial Times
This edition of CEO Daily was edited by David Meyer.


fortune--2020-02-13--‘Surpassing all previous outbreaks’—markets dip as the coronavirus toll worsens

This is the web version of the Bull Sheet, Fortune’s no-BS daily newsletter on the markets. Sign up to receive it in your inbox here.
Good morning, Bull Sheeters. The markets are awash in red this morning. It’s looking like a classic risk-off day. Here’s why.
Market movers
They’re calling it the deadliest day yet. Coronavirus infections soared overnight, up 45%, to more than 60,000 cases worldwide. The repercussions can be felt far from Wuhan. Yesterday, organizers of the annual telecoms trade show Mobile World Congress, an event that brings tens of thousands to sparkling Barcelona each February, pulled the plug after a string of big-name cancelations.
This morning, the Asian and European markets across the board are down, as are the U.S. futures. What’s up? Typical safe havens: the dollar, gold and bonds. If there’s any silver lining it’s that the equities sell-off is fairly orderly. So far.
It’s not all virus news that’s upsetting investors. Corporate results are weighing on stocks. The two are intrinsically linked as more companies with exposure to China drop bad news on the markets. This morning it was Nestle’s turn. The Swiss foods giant wound back a big sales target, citing China uncertainty. In the past week, a parade of luxury goods brands have made similarly skittish statements.
Afterwards, stocks sink. And the cycle continues.
“Prepare now”
Over the past week, the markets had been remarkably sanguine. And that’s despite the coronavirus death toll and infections rates climbing.
But as the news takes another grim turn, it’s worth re-examining what’s at stake.
China accounts for 16% of global economic output. As Bain & Co. points out, its economy is seven times larger than it was in 2002-03 during the SARS outbreak. “The cost of novel coronavirus pneumonia will surpass all previous outbreaks,” Bain projects, before adding: “Prepare now.”
Why’s that?
Because an increasing number of global companies are highly reliant upon the Chinese consumer or its workers, or both. Multinationals are banking on China as a sales-growth engine (think autos, beer and luxury goods brands). Or, they’re highly reliant on its factories and supply chains (think tech manufacturers) to make products they ship around the world.
And so when China catches a cold, the global economy suffers.
We’re not quite a month into this crisis, and economists are beginning to run the numbers on what it will mean for the Chinese economy, as the chart below shows.
***
This is merely the short list. The economists and analysts above are calculating anywhere from a 0.2 percentage-point drop to as much as 1%. These forecasts could change again as the situation remains fluid and fraught.
We still don’t know, for example, when the epidemic will peak, when the rest of the country will return to work, and when it will get back up to full production. We also don’t know how long it will take to jumpstart the supply chains, and, as we’re hearing from multinationals, what impact it’s having on sales this quarter, and what to expect going forward.
The longer the coronavirus contagion drags on, the greater likeliness China’s problem becomes a global one. Stay tuned for more risk-off days.
***
Have a good day everyone. I’ll see you tomorrow.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
Today's reads
Hell in a handbag. Back in 2003, during the SARS epidemic, Asia’s well-heeled consumers barely missed a beat. They went back to stocking up on $2,500 Gucci handbags and $300 Hermes scarves once the outbreak threat passed, and the sector bounced back quickly. That's unlikely with the current coronavirus, Adrian Croft reports in Fortune. Chinese buyers now account for 35% of the $300 billion global luxury goods market, and much of its growth. The coronavirus is also eating into the $110 billion personal fortune of luxury goods magnate Bernard Arnault.
Thiam’s swansong. Credit Suisse this morning reported its highest annual profits in almost a decade, buoyed by fourth-quarter earnings that outgoing chief executive Tidjane Thiam said were a vindication of his strategy, the Financial Times reports. It wasn't all rosy, though. The investment bank business swung to a larger than expected loss and shares sank as much as 3%. Thiam, 57, was forced to step down last week following a boardroom battle with chairman Urs Rohner as a spying scandal overshadowed his turnaround plan.
Sanders backlash. Former Goldman Sachs CEO Lloyd Blankfein took to Twitter to criticize Bernie Sanders after his New Hampshire primary success, saying the Democratic frontrunner will "ruin our economy and doesn’t care about our military. If I’m Russian, I go with Sanders this time around.” It's no secret Wall Street and Sanders don't see eye to eye. Investors though seem to be betting Sanders, despite his early success, is unlikely to advance to the White House.
Market candy
$165 million. That's the amount Jeff Bezos paid for a Beverly Hills mansion on nine acres, setting a record for a Los Angeles-area home. The property, designed for Hollywood film titan Jack Warner in the 1930s, was described by Architectural Digest in 1992 as the “archetypal studio mogul’s estate,” built in Georgian style with expansive terraces and its own nine-hole golf course. The Amazon founder is on a shopping spree befitting the world’s richest man. Bezos, who recently cashed out $4.1 billion of Amazon shares, has also reportedly entered the art market, setting a record for artist Ed Ruscha at a Christie’s auction with a $52.5 million purchase of “Hurting the Word Radio #2”.


fortune--2020-02-13--Long relationship with Jeffrey Epstein sparks fresh regulatory probe into Barclays CEO Jes Staley

Barclays Plc said British regulators are probing Chief Executive Officer Jes Staley’s account of his ties to Jeffrey Epstein, the financier and convicted sex offender who died last year.
It’s Staley’s second run-in with U.K. regulators since joining the bank in 2015. In 2018, he was fined for his attempts to uncover a whistle-blower.
“I deeply regret having had a relationship with Jeffrey Epstein,” Staley, 63, said on a conference call as Barclays reported fourth-quarter results. Barclays said the CEO retains the “full confidence” of the bank’s board.
Epstein died in prison after he was arrested last year on charges of sex-trafficking minors. Staley, a former senior banker at JPMorgan Chase & Co., was among a swath of prominent financiers whose ties to Epstein came under the spotlight after his arrest. Starting in 2000, Epstein regularly brought Staley business when he ran JPMorgan’s private bank and the two were close professionally, a person familiar with the matter said last year.
“The investigation is actually focused on transparency, and whether I was transparent and open with the bank and with the board with respect to my relationship with Jeffrey Epstein,” Staley said on Bloomberg Television. “It’s clear in my own mind, going all the way back to 2015 when I joined Barclays — I have been very transparent with the bank and have been very willing and open to discuss the relationship that I had with him.”
The probe started in December, Staley said. The lender’s shares fell 2.6% at 8:46 a.m. in London.
The revelation of the probe overshadowed the bank’s fourth-quarter results. Barclays retained its profitability target for 2020, while warning it will be challenging to achieve given macroeconomic uncertainty and low interest rates. The investment bank, the centerpiece of Staley’s strategy since he took over in 2015 — and a frequent target for criticism by activist investor Edward Bramson — posted revenue in line with analysts’ estimates.
“The regulatory review is bound to raise questions regarding potential repercussions for Staley,” said John Cronin, an analyst at Goodbody in Dublin. “This could put Barclays on slightly weaker ground in the context of any renewed push on the part of the activist shareholder.”
Epstein Fallout
Britain’s Financial Conduct Authority and Prudential Regulation Authority confirmed Staley was being investigated, and declined to comment further.
At the beginning of his tenure at Barclays, Staley repeatedly and improperly attempted to unmask the identity of whoever sent letters to members of the bank’s board and another executive. After a year-long regulatory probe into that matter, Staley kept his job, though the FCA and PRA said he failed to behave “with due skill, care and diligence.”
That scandal resulted in a 642,430-pound personal fine ($833,167), about 10% of his annual income. It also resulted in a $15 million fine for the bank from New York regulators.
A Barclays spokesman, Tom Hoskin, said on Thursday’s conference call that “there’s always the option to make an adjustment” to Staley’s compensation, given how pay is deferred for the bank’s directors.
Staley said on Bloomberg TV that his professional ties to Epstein dated to 2000, when he took charge of JPMorgan’s private bank, where the financier was already a client.
Repercussions from the Epstein scandal continue to roil the business and political worlds, given the his decades of cultivating ties to U.S. and British elites. Prominent business people with ties to him include billionaires Glenn Dubin, who has since retired from his hedge fund, and Leslie Wexner, whose L Brands Inc. apparel empire is in talks to be broken up.
Staley helped arrange JPMorgan’s 2004 acquisition of a majority stake in Dubin’s hedge fund, Highbridge Capital Management, a deal that helped elevate Staley within the bank. At the time, Staley ran JPMorgan’s asset management unit.
Staley visited Epstein in Florida when he was serving his sentence following a 2008 guilty plea of soliciting prostitution, in one case with a minor, according to a New York Times report last year. As recently as April 2015, just before he joined Barclays, Staley and his wife visited Epstein for several hours at his private Caribbean island.
Staley said on Thursday that his relationship with Epstein “began to taper off as I left JPM and contact became much less frequent in 2013, 2014,” before ending in 2015.
“Obviously I thought I knew him well, and I didn’t,” Staley said.
More must-read stories from Fortune:
—Stock scammers are using coronavirus to dupe investors, SEC warns
—Credit Suisse making a comeback, but spying scandal drags down outlook
—Why China is still so susceptible to disease outbreaks
—A new coronavirus red flag on the horizon—a stronger dollar
—Fortune Explains: Tariffs and trade wars
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.


fortune--2020-02-13--Impact investment has an incentive problem

This is the web version of The Loop, Fortune’s weekly newsletter on the revolutions in sustainability. To get it delivered daily to your inbox, sign up here.
Good morning.
In the final issue of The Loop 2019, Katherine Dunn wrote about “climate gaps”—the gap between what scientists say needs to be done to tackle climate change and what is being done; between what policy makers decree and what business leaders actually implement.
Earlier this week, I spoke to Clean Energy Ventures founder and managing director Temple Fennell on another climate gap: the disconnect between what nouveau-green fund managers say they’re going to invest in and the stocks that they actually keep in their portfolio.
“The reality is if you look at the portfolios of certain members of the Ceres Investor Network, they describe themselves as interested in clean energy, for example, but there are very few that have made a single dollar commitment during the time they’ve been a member of the network,” Fennell says.
Fennell suggests a large part of the problem comes down to timelines, that members of Ceres—a U.S. nonprofit that advocates sustainable investment practices—and other impact investors are still driven by profit and the need for quick returns on investment.
Short term investment strategies emerged as the dominant discourse in the 1980s, when Wall Street became more active in pursuing clients and investment switched from being driven by the buyers to being fueled by the sellers, who craved instant gains.
But it’s not just stock brokers. Managers, executives and the entire business community is built around year-long strategies that pay bonuses for good performance at the end of twelve months.
The problem with impact investing is that it doesn’t fit in with that 52-week cycle. Returns on climate investment are realized years in the future, if at all, and risk is harder to measure over that time.
“What we need is to figure out a compensation system where you’re not just compensating managers for generating short term alpha but rewarding them on a rolling basis,” where a bonus is paid out in installments so that even once a manger leaves a fund, they can still collect or lose part of that compensation depending on the impact of their decisions, Fennell says.
It’s hard to imagine that being a popular model for people in the business, but if you know any impact funds operating that way—let me know.
Eamon Barrett
Eamon.barrett@fortune.com
CARBON COPY
Good luck
Oil and gas giant BP has announced a net-zero carbon emissions plan, pledging to offset the emissions of its business by 2050, including the “majority” of future emissions from the oil and gas it sells to customers (who later burn it.) The pledge doesn’t appear to include future emissions from crude oil sales. BP says it will invest more in oil alternatives and less in oil and gas, but will likely still be in the industry by 2050. Financial Times
Official offsets
A group of U.S. senators also introduced a bill that would require the U.S. to achieve net-zero greenhouse gas emissions by 2050. If the bill passes it would be left to the Environmental Protection Agency (EPA), currently headed by a former coal lobbyist, to carry out its edicts. While some environmental groups back the bill others say it isn’t tough enough and won’t establish the proper legal framework to ensure the goal is carried out. The Hill
Peddling pangolins
It’s been suggested that pangolins are the intermediate carriers of the novel coronavirus that began in Wuhan and is henceforth to be called Covid-19. Different theories have named different animals as the spreaders, but if it is pangolins that could prove a victory for the scaly anteaters, which are trafficked into China for their use in traditional medicine. Animal rights groups have pressured China to do more to enforce its ban on pangolin sales. A health epidemic might do the trick. National Geographic
Looking ahead
The U.K. government’s Department for Work and Pensions has proposed an amendment to the Pension Schemes Bill that would require pension funds to disclose how they are investing to combat climate change. The bill, if it becomes law, would enforce the currently voluntary Taskforce on Climate-Related Financial Disclosures framework, which is chaired by Michael Bloomberg. U.K. pension funds managed some $2.8 trillion in assets as of 2018. Wall Street Journal
IN CASE YOU MISSED IT
Energy emissions plateaued in 2019, as advanced economies gave up coal by Katherine Dunn
Looking to cut emissions, Europe eyes a ‘sustainability’ tax on meat by Adrian Croft
Why investors are cooling on Casper and other ‘direct-to-consumer’ brands by Lucinda Shen
Click here to oust the board— Inside the A.I. startup that’s transforming activist investing by Adrian Croft
CLOSING NUMBER
5.5 times
Roses make up 30-50% of the 20-25 billion retail value of cut flower sales in Europe and roughly half of those roses are flown in from Kenya. Kenya actually dominated 38% of the EU’s entire flower market, shipping over 150,000 tonnes per year. Air freighting that many flowers doesn’t sound environmentally friendly but, surprisingly, importing roses from Kenya creates a carbon footprint 5.5 times smaller than ordering the same flowers from the Netherlands. That’s because Dutch greenhouses are heated with gas, while Kenya tends to be naturally warm. Dutch growers are, however, 50% more water efficient.
You can thank me for those fascinating flower facts when you're stuck for conversation on a Valentine's date tomorrow.


fortune--2020-02-13--Airbnb’s bottom line is hurting. New safety efforts could make matters worse

Online travel platform Airbnb is routinely hailed as a Silicon Valley standout—a tech company generally admired by the public, with a clear vision to scale into new businesses and revenue. It’s already valued at $35 billion, and headed toward an initial public offering later this year—and until recently, it was turning a profit.
This week, the story got a little messier. The Wall Street Journal on Tuesday reported that Airbnb had a net loss of $322 million in the first nine months of 2019, down from a profit of $200 million during the year-earlier period. While the company did manage to post a profit in its third quarter, which ended in September—traditionally the strongest period for travel companies—that profit was $266 million, down some $71 million from the same period a year earlier.
Perhaps more ominous: These losses don’t reflect new spending that Airbnb committed to late last year, to improve safety across its sprawling network of vacation rental homes.
When contacted by Fortune asking about the accuracy of the Journal‘s numbers, a representative at Airbnb acknowledged the request but did not confirm or deny the Journal‘s reporting. The company did not respond to Fortune‘s request for comment in time for publication.
Last fall, six weeks after Airbnb announced its intention to go public in 2020, the company was hit by a wave of bad publicity about its safety practices, involving a fatal Airbnb house party shooting and a viral exposé documenting a widespread scam on the platform. The company responded to the backlash with promises to verify 100% of its 7 million-plus listings and its hosts for quality and accuracy, and to implement 24/7 hotlines around the world to field complaints from neighbors, among other measures. CEO Brian Chesky said the commitments were part of a package that would involve $150 million in spending over the course of 2020 dedicated to addressing safety issues.
The safety spending was announced in December; the Journal‘s numbers and Airbnb’s third quarter end in September.
Analysts estimate Airbnb’s annual revenue at between $4 billion and $5 billion. After Chesky announced the $150 million commitment in December, he discussed the safety spending in an interview for a story I wrote profiling the company. Chesky said that due to that spending, the company “redid the budget… which, when you land on a plan, to find another $150 million is not an easy exercise.” Fortune noted that the spending could eat into future profits—and that’s before accounting for any revenue lost due to removed listings from its strict safety overhaul.
Hunter Walk, a partner at seed stage venture fund Homebrew, has written about Silicon Valley’s desire for “software margins”—high gross and net profits due to fixed development costs and ability to scale, often found in tech companies whose main product is a “platform.” The tradeoff of pursuing those margins is that engineering efforts are often focused on growth and revenue, rather than operational issues like safety standards.
“There are a host of innovative and valuable startups—Airbnb included—which touch the physical world in ways that traditional software companies never had to deal with,” Walk tells Fortune. “The complexity of trust and safety when dealing with housing or transportation is far greater than staffing a call center to just deal with enterprise software bugs, and accordingly we should assume it might cost more too.”
In other words: This might just be the beginning of a new economic reality for Airbnb, as the company sacrifices software margins while addressing the expenses of protecting the people using its platform.
“If you go public, if your liability goes up significantly in any sort of fraction of regulation, I have to believe some portion of higher expense has been due to stories of fraud taking place on their network,” says Roger McNamee, a founding partner of venture capital firm Elevation Partners. McNamee was an early investor in Facebook but has since become a critic of companies typically described under the label of “Big Tech.”
“One of the problems with disrupting an offline business is that some of the costs of those businesses are actually really important,” McNamee says. There’s a reason hotels cost the amount they do, he continues: They have to pay for security, infrastructure, housecleaning—things Airbnb often leaves to hosts—and comply to “regulatory framework that was designed 100 years ago.”
Big expenses before going public
According to the Journal, Airbnb is spending $100 million a year on upgrading the technology of its platform. That’s likely related at least in part to safety as well. The newspaper’s report says general and administrative expenses such as HR, accounting, legal, and maintaining Airbnb’s offices doubled year-over-year to $175 million in the third quarter. In October, tech site The Information reported that Airbnb doubled its losses in the first quarter of 2019, largely because of a big marketing push—a common tactic companies use to convince investors of their value ahead of an initial public offering. The company sunk $367 million into sales and marketing in that quarter, a 58% jump from the same period a year earlier.
If you take a step back from specific costs, the fundamental concern is that increased expenses could make the company look less valuable to investors. Airbnb is about to seek the validation of the public markets at a time when investors are already skeptical of in-the-red tech companies. Fellow unicorns like Uber, Lyft, and Slack underwhelmed following their public debuts—not to mention the WeWork debacle.
“Investors will be concerned if [Airbnb’s] losing money,” says Kathleen Smith, a principal at IPO research firm Renaissance Capital. “It’s been seen as one of the more unique private companies, but losses will cause more scrutiny. It will be sold on expected profitability.”
But some point out the initial reason that Airbnb earned the “Silicon Valley darling” tag in the first place. Unlike those companies just mentioned above, Airbnb already achieved profitability, even if it has slipped off of that pedestal. The company has also said it has $3 billion in cash on its balance sheet.
“I think it’s different when you say, ‘We’ve got a business that works. We’ve proven that in this market, with this product we can be profitable,'” says Seth Borko, a senior research analyst at Skift, a travel media and research firm.
“Now you take some cash and say, ‘We’re going to juice our marketing spend, our safety, and negate bad press,'” Borko adds. “It doesn’t concern me as much as [it would with] a company as that has never been profitable.”
More must-read stories from Fortune:
—The strange tale of Jeff Bezos’s $16,840 parking ticket bill
—Post-Brexit U.K.’s surveillance practices could spell problems for business
—Governments deploy surveillance tech to track coronavirus victims
—How marketers are increasingly using A.I. to persuade you to buy
—Predicting the biggest tech headlines of 2020
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.


fortune--2020-02-13--Business’s coronavirus conundrum: What’s the best alternative to a handshake?

The handshake supposedly began as far back as 5 B.C., as a gesture to prove to a stranger that you were unarmed and meant no harm. But in the time of the coronavirus outbreak, that sign of good faith can no longer be trusted.
“Singapore Airshow 2020 has adopted a ‘no-contact’ policy and encourages attendees to practice alternative business greetings, instead of the conventional handshake throughout the event,” said Leck Chet Lam, managing director of Experia Events, which organizes the Singapore Airshow—Asia’s largest aerospace and defense expo, convening this week.
The “no-contact” policy follows official guidance from the Singapore government on how to avoid spreading the novel coronavirus, now known as Covid-19, which has so far infected 43 people in the city state. A handshake can transfer the virus from person to person, though that doesn’t necessarily mean either person is infected. The biggest concern is that when the virus lives on a person’s hand, it can more easily contact the eyes or mouth, where infection ultimately takes place
Alternative greetings suggested by the airshow in a video include waving, bowing, or clasping your hands at chest height in the Chinese style—as opposed to the “prayer-hands” style of the Thai wai. Although, presumably, either would suffice.
For the welfare of all attendees, please adopt alternative greetings. Let's all play our own part to stay safe! #SGAirshow2020 pic.twitter.com/kLpjIROizl — Singapore Airshow (@SGAirshow) February 10, 2020
While the handshake is by no means a universal greeting—even the way a handshake is conducted can vary from culture to culture, or person to person—the gesture has become a staple of the international business community. And inking deals and shaking hands is what the Singapore Airshow is all about.
The handshake has fallen victim to previous public health crises. In 2014, some African countries struck by Ebola reportedly turned their backs on handshakes and hugs. Even the U.S. ambassador to the United Nations at the time eschewed a handshake in favor of a bizarre elbow rub when meeting a World Health Organization official in Liberia. Earlier the same year, a group of U.S. doctors proposed banning handshakes from all health care and, a month later, scientists in Wales advocated for fist bumps over handshakes as a more hygienic greeting.
“If both parties feel like at this moment it’s safer to protect their self and not shake hands then foregoing a handshake won’t be cause for offense,” says Cheris Chan, an associate professor of sociology at the University of Hong Kong. “But if there’s a business delegation from the U.S. coming to Asia, for example, and they’re not aware of the situation, they might feel a little unwelcome.”
Sometimes precautions taken during health scares can have long term effects on society. In Hong Kong, which suffered 299 deaths due to SARS in 2003, paranoia over public hygiene remained high even before the current coronavirus outbreak. Signs next to doors on public buildings, such as malls, inform users that the door handle is sterilized every two hours. Meanwhile on public buses, infographics inform riders on best practices for coughing and sneezing.
“After SARS there was no problem shaking hands, however, and social interactions in general returned to normal shortly after the crisis passed,” Chan says. So, no need to wave goodbye to the handshake just yet but, if you plan to do business in Asia soon, it might be best to brush up on alternatives.
More must-read stories from Fortune:
—Why China is still so susceptible to disease outbreaks
—Coronavirus risks universities’ reliance on Chinese students
—Stock scammers are using coronavirus to dupe investors, SEC warns
—A new coronavirus red flag on the horizon—a stronger dollar
—WATCH: Coronavirus outbreak has disrupted global economy
Subscribe to Fortune’s Brainstorm Health for daily updates on biopharma and health care.


fortune--2020-02-13--Jeff Bezos’s new $165 million Beverly Hills mansion breaks Los Angeles area record

Jeff Bezos is on a shopping spree befitting the world’s richest man.
The Amazon.com Inc. founder agreed to pay $165 million for a Beverly Hills mansion on nine acres, according to a person with knowledge of the matter, setting a record for a Los Angeles-area home.
The property designed for Hollywood film titan Jack Warner in the 1930s was described by Architectural Digest in 1992 as the “archetypal studio mogul’s estate,” built in Georgian style with expansive terraces and its own nine-hole golf course.
It’s emerging just days after regulatory filings showed Bezos cashed out $4.1 billion of Amazon shares and comes amid reports that he’s also entered the art market. Reportedly, he set a record for artist Ed Ruscha at a Christie’s auction with a $52.5 million purchase of “Hurting the Word Radio #2” in November and also bought “Vignette 19” by Kerry James Marshall for $18.5 million.
Read more: After era of restraint, Bezos starts 2020 with record stock sale
The purchase of the Warner estate, described by the person on condition they not be named, was reported earlier Wednesday by the Wall Street Journal. The property has belonged to David Geffen since 1990, when he paid $47.5 million. Bezos was seen socializing on the entertainment mogul’s mega-yacht last summer, visible in an Instagram post with girlfriend Lauren Sanchez and Goldman Sachs Group Inc.’s former chief, Lloyd Blankfein.
It’s something of a style makeover for Bezos, 56, whose once-low-key personal life has been a source of frequent headlines since he and MacKenzie Bezos divorced in 2019. He’s been walking red carpets with Sanchez and has even been drawn into geopolitical controversies over allegations that the crown prince of Saudi Arabia was involved in hacking his phone.
Bezos had been shopping for an estate for months, according to agents who were contacted during the search. In a January interview, realtor Josh Flagg said he’d get a call “at least once a month from different agents asking if I have something.”
The purchase adds to a string of mega-deals for high-end residential properties since the start of 2019. Citadel founder Ken Griffin plunked down record $238 million for a New York penthouse at 220 Central Park South. Lachlan Murdoch, the son of media mogul Rupert Murdoch, paid a then-California record of about $150 million for a Bel-Air estate that had been featured about a half century ago on “The Beverly Hillbillies” TV show. Hedge fund billionaire Steven Schonfeld and his wife Brooke closed on a mega-mansion in Palm Beach, Florida, for $111 million.
Bezos’s real-estate empire already features homes on both U.S. coasts, such as a Washington, D.C., mansion where he recently hosted a party for capital elite including Jared Kushner and Ivanka Trump. He also owns 170,000 hectares (420,000 acres) of desert scrub in Texas.
Regardless, he can afford it. Even after his marital split, he’s worth $131.9 billion, according to the Bloomberg Billionaires Index.
More must-read stories from Fortune:
—Why China is still so susceptible to disease outbreaks
—The rich own stocks, the middle class own homes. How betting it all on real estate is a wealth gap problem
—14,000 recalled baby carriers could drop infants on ground
—Stock scammers are using the coronavirus outbreak to dupe investors, SEC warns
—WATCH: Why CEOs are pessimistic about 2020 business outlook
Subscribe to Fortune’s Bull Sheet for no-nonsense finance news and analysis daily.


fortune--2020-02-13--Why coronavirus cases in one Chinese province surged 45% overnight

Coronavirus cases in the Chinese province at the center of the outbreak surged by 45% to nearly 50,000, after authorities added a new group of patients diagnosed by a different method, raising questions over the true scale of a crisis that appeared in recent days to be coming under control.
The change will raise the number of those infected globally by a third to almost 60,000, dashing hope that the epidemic was showing signs of easing.
In a statement on Thursday morning, the Hubei national health commission said it would now start including cases confirmed by “clinical diagnosis,” which refers to using CT imaging scans to diagnose patients, alongside those confirmed by the previous method of nucleic acid testing kits.
Previously, many patients with pneumonia-like symptoms found via CT scans could not be diagnosed as positive without an additional nucleic acid test.
The abrupt spike reversed the declining growth trend of previous days. U.S. stock futures retreated along with the offshore yuan, and the yen gained.
“The capacity to do the laboratory testing is limited in some way, and we have heard anecdotally that they’ve had to use CT scans to diagnose probable or suspected cases without testing.” said Raina MacIntyre, professor of global biosecurity at the University of New South Wales. “So I think it’s a more complete way of counting the cases.”
The change in method will renew concern over the adequacy and reliability of the tests currently used to identify stricken patients globally, and raise questions over the true scale of the outbreak that has now affected over 40,000 and killed over 1,000 people. The spike in number — and the implication that thousands of cases had previously not been disclosed by Hubei province — will likely intensify public anger against the government’s handling of the crisis.
Faulty Tests
The traditional nucleic acid test identifies the virus in a patient’s body through its specific genetic sequence, but reports of a severe lack of test kits and the unreliability of test results have circulated since the start of the crisis.
In Hubei province’s Wuhan city, where the outbreak originated, people with symptoms like fever and coughing wait for hours in line to get tested. But those who test negative were usually turned away from hospital, although tests were known to throw up false negatives.
“A patient may be found as negative for the first or second test, and then found to be positive the third time,” said Jonathan Yu, a doctor at a university hospital in Wuhan, in an interview last month. “It is like fishing in a pond: You did not catch a fish once, but that does not mean the pond does not have fish.”
The issue has cropped up outside China as well. On Wednesday, the U.S. Centers for Disease Control and Prevention said that test kits shipped to labs across the country and around the world last week have had problems detecting the virus.
Public Anger
In an update to its treatment guidelines on Feb. 5, China’s National Health Commission added the category of “clinically diagnosed cases” in recognition of a shortage of nucleic acid tests. But Hubei province did not include this category in its case count until Thursday, a week later.
A spokesman at the National Health Commission said it’s unknown why Hubei only started reporting the clinically diagnosed case number today, even though doctors should have started diagnosing patients using CT scan images shortly after the update was released on Feb. 5.
In its Thursday statement, Hubei said that the reason for the counting change is to ensure patients receive standard treatment early on. It is unclear if the 13,332 cases it added in the “clinically diagnosed” category were just from a single day of CT scans, or a longer time period.
In total, Hubei added 14,840 new cases on Thursday, of which 13,332 are from the new category of clinical diagnosis using CT scans. The death toll in the province rose by 242, of which 135 cases are from the new method of diagnosis, it said.
Both local and central government officials have been accused of delaying news of the new virus in the early days of the epidemic and eight local doctors who tried to ring the alarm were reprimanded by local authorities, only to be later vindicated by the country’s Supreme Court.
Earlier this week, Hubei province removed two top provincial health commission officials, Liu Yingzi and Zhang Jin, from their posts.
More must-read stories from Fortune:
—Why China is still so susceptible to disease outbreaks
—Coronavirus risks universities’ reliance on Chinese students
—Stock scammers are using coronavirus to dupe investors, SEC warns
—A new coronavirus red flag on the horizon—a stronger dollar
—WATCH: Coronavirus outbreak has disrupted global economy
Subscribe to Fortune’s Brainstorm Health for daily updates on biopharma and health care.


fortune--2020-02-13--How virtual reality could help women during childbirth

This is the web version of Brainstorm Health Daily, Fortune’s daily newsletter on the top health care news. To get it delivered daily to your in-box, sign up here.
Hope you’ve had a good Wednesday, readers.
I’ve been thinking a lot about the intersection of virtual reality and its intersection with health care. And it’s not just reasonable to maintain a healthy level of skepticism about using the technology in medicine, it’s necessary.
The current hype and hope about digital health rarely delivers practical solutions or results. At least, right now. It could take years, if not decades, for the technology to prove itself.
But that’s not to say that we should ignore early-stage advances—especially when it comes to traditionally under-explored areas like maternal health. And a new study presented at the annual meeting of the Society for Maternal-Fetal Medicine in Grapevine, Texas demonstrates exactly why.
The research, focused on women in labor, involved a half-hour test that displayed certain relaxing sequences via a VR headset. The experiment involved women who hadn’t been given pain drugs and were going into labor for the first time.
According to Reuters, the study participants who wore the VR headsets over a 30-minute period had an average 0.52 point drop on the self-reported pain scale (which goes from 1 to 10) compared with the control group that experienced a nearly identical rise in pain.
This was a small group of just 40 participants in labor. But this kind of research helps explain why health care firms are so invested in the digital health space, including technologies which are still far from proven on a large scale. The hype and hope may take years to pan out but it’s going to be worth the wait. And the fact that maternal health in America needs significant improvements underscores that need. It’s good to see the researchers giving that underserved area the attention it deserves.
Read on for the day’s news.
Sy Mukherjee
sayak.mukherjee@fortune.com
@the_sy_guy
DIGITAL HEALTH
Robotic surgery and the future of health care. Ryan Madder, a cardiology chief at Michigan's Spectrum Health, has a piece up at Fortune detailing the promise of robotic surgery in remote regions where access to health care can be hard to come by. What I found most fascinating about Madder's piece is his explication of the "hub-and-spoke" model of medicine. Here's what he had to say: "Hub-and-spoke models currently exist for the treatment of heart attacks and strokes, but existing models necessitate patients presenting at a spoke location before being transferred to the hub to undergo a procedure. The tele-robotic hub-and-spoke model could dramatically increase the volume of patients one physician could treat." (Fortune)
INDICATIONS
A massive shakeup at Sanofi. French drug giant Sanofi is shaking up its executive staff as it transforms its drug pipeline. Under CEO Paul Hudson, the company is ousting its chief medical officer/digital officer, as well as three other major executives. What does that mean for Sanofi's digital health ambitions? According to Hudson, the company isn't retrenching from the use of A.I. and other health tech to help its drug development ambitions. (FiercePharma)
Coronavirus gets a name. Call it COVID-19. The World Health Organization (WHO) finally has a name for the coronavirus strain, 2019-nCoV, that has been wreaking havoc across Asian and international health and economic systems. To be clear, COVID-19 is the term for the disease caused by the underlying virus. The virus itself will be referred to as coronavirus 2. ((Science)
THE BIG PICTURE
Contagion and the epidemic of fear. In case you haven't had enough coronavirus content... The screenwriter of Steven Soderbergh's Contagion did a Q&A with Fortune about the ways the film relates to the current outbreak. The main takeaway? "What is... important and accurate is the societal response and the spread of fear and the knock-on effects of that. That is proving to be accurate," he says. Yes, we've seen this movie before. (Fortune)
REQUIRED READING
White House proposes huge A.I. spending increase amidst budget cuts, by Jonathan Vanian
Fortune poll: Many Americans are uneasy about the T-Mobile Sprint merger, by Lance Lambert
The importance of caffeine, by Alan Murray
Sign up for other Fortune newsletters.


fortune--2020-02-13--Tesla raises capital two weeks after Elon Musk said it wasn’t needed

Trump to transfer $ 3.8 billion from military to fund his border wall

Tesla CEO Elon Musk was definitive during the company’s January 30 earnings call. Despite its current heat of expansion, “it doesn’t make sense to raise money because we expect to generate cash despite this growth level,” he said.
Then came today’s news that Tesla would sell another $2 billion in stock—with the common option for the underwriters to purchase another 15%, or $300 million. The cash raised will be used to “strengthen its balance sheet, as well as for general corporate purposes,” a company press release stated.
Shares jumped 4.8% over yesterday, reaching $804—the second highest value the stock has ever seen, the record being $887.06 earlier this month. At that price, even $2.3 billion (including the underwriters’ option) in value would be about 2.9 million shares, or a 1.6% addition to the outstanding 181 million shares, minimizing dilution for other shareholders.
Musk said he planned to buy up to $10 million in shares during this offering. Board member, strong Tesla supporter, and Oracle co-founder and executive chair Larry Ellison said he would purchase $1 million. (The Wall Street Journal reported today that the Security and Exchange Commission is taking another look at Tesla’s financing and accounting practices, though reportedly the interest predates the round’s announcement. Tesla did not respond to Fortune’s request for comment.)
A surprise? Not really. Musk u-turns are hardly new.
“[W]e’d like to see more consistency between the company’s actions and the words of CEO Elon Musk,” David Whiston, an industrials strategist for Morningstar, wrote in a note to clients today. “This is at least the second time Musk has said on an earnings call that raising capital is not happening and then shortly thereafter Tesla raises capital.”
The reversal may be Musk’s contrarian nature, according to Mauro Guillen, a professor of international management at the Wharton School of the University of Pennsylvania. “Musk loves to confuse journalists,” he said. Or it may be a strategic concern of being a chief executive. “The average CEO most of the time doesn’t want the market to anticipate their next move.”
Whatever the reason, the move is a smart one, according to experts.
Even with some heavy volatility, Tesla’s fast driving shares have left the company with the world’s second largest market capitalization of any auto manufacturer, behind Toyota. It’s quite the change from less than a year ago when a plunge in share price saw many investors and analysts jump ship. The current strength of the stock makes raising capital through issuing more stock cheaper than additional debt.
As of Dec. 31, 2019, Tesla had total unpaid debt of $12.5 billion, according to the company’s most recent 10-K filing. Of that, almost $1.4 billion, in the form of 1.25% notes, comes due in 2021. Another $978 million at 2.375% is due in 2022. Then, in 2024, another $1.84 billion at 2%, followed by $1.8 billion at 5.3% in 2025.
Interest payments run hundreds of millions of dollars a year and a number of the notes are convertible, which means the holders might require “cash and/or shares,” according to the 10-K.
Tesla “could probably refinance if they wanted to and on better terms,” said Joseph Osha, senior analyst and managing director in equity research at JMP Securities. (The firm currently has an interest in Tesla shares and looks to perform investment banking services for the company in the near future, according to the firm’s disclosure statement.)
But why refinance when issuing new equity is a possibility?
“It’s not surprising when a company does a re-offering when the stock price is high,” said Reena Aggarwal, a professor of finance and director of the Center for Financial Markets and Policy at Georgetown University. “They raise debts when interest rates are low. When market conditions are right, it makes sense for companies to raise capital.”
Although some of the money raised will go to strengthening the balance sheet—otherwise known as paying off debt—other amounts will likely fund further growth.
“The reason you go out and raise money now is you can potentially accelerate this rate of capital investment,” Osha said. “It’s not to pay down debt [only] and not because they’re running out of money. It’s to accelerate the rate at which they are adding capacity.”
Capacity at this point is critical. For years, Tesla has had to maximize revenue and profits from production that couldn’t keep up with consumer demand. And so, the company had to pick and choose where to sell.
For example, Tesla has strongly favored Norway as a European sales destination because of the tax incentives provided to people there. “It turns out it’s much cheaper to buy an electric car than internal combustion,” said Matthias Schmidt, a German automotive analyst. “Normally it’s around 40% of the market [in that country].” Tesla also focused heavily on the Netherlands in the fourth quarter of 2019 because of an impending tax change that drove demand. Now, with a new tax break, the U.K. will be the likely target for sales—because of an improvement in tax treatment.
But, ultimately, Tesla needs to satisfy markets with factories on each continent in which it does business. The U.S. factory can’t produce as many units as the company could sell.
“This is a cult guy and a cult product and a bull market, and he should sell shares,” said Jason Ader, founder and CEO of SpringOwl Asset Management and an owner of Tesla shares. “But the bulls better not kid themselves. If we were ever in a market like 2008 and 2009, there are a lot of stocks that would be repriced [downward]. Tesla is close to the top.”
For the time being, Tesla is going to grab the money while it can.