Quarterly capitalism has become a four-letter word. From BlackRock boss Larry Fink to American Democratic presidential contender Hillary Clinton, critics of the overweening desire to hit the numbers every three months, common among both investors and managers of publicly traded companies, see a fundamental flaw in today’s system. But words are cheap. For the system to change, significant players have to make the first move. That may happen in the year ahead.

Corporate executives have long railed against the treadmill of reporting their guts out every three months. They say it’s a waste of time, costs money, and is a distraction from the more important tasks of setting strategy and running a business. They moan that it creates unnecessary and unhelpful swings in stock prices and debt funding costs and, most damaging of all, hinders longer-term planning.

Defenders of the practice do not say they need news flow to trade, or that trading is fun and profitable. They talk about transparency. Stock-market investors who have regular glimpses into corporate finances are better placed to judge the progress of strategy, assess the efficacy of management and gauge product cycles. The ultimate investors – widows, retirees, teachers and billionaires – gain from the knowledge.

This logic has led to mandatory quarterly reports for companies with securities regulated by the U.S. Securities and Exchange Commission. For the last three decades, the instinct to tell more, and more frequently, has gone global.

Germany’s Deutsche Boerse requires companies to provide detailed statements every quarter. Even where such regularity of reporting is no longer required – as in the United Kingdom since 2014 – it is still the convention.

But the trend may be reversing. This past summer, UK insurer Legal & General’s $1 trillion investment-management arm nudged the debate forward when it wrote a letter to the top 350 companies on the London Stock Exchange urging them to consider dropping quarterly reporting.

“Reducing the time spent on reporting that adds little to the business,” Legal & General Investment Management Chief Executive Mark Zinkula wrote, “can lead to more articulation of business strategies, market dynamics and innovation drivers, which are linked to key metrics that drive business performance and long-term shareholder value.”

While lots of stewards of other people’s money agree in principle, in practice many still worry that any company that only gives its investors a look into the sausage factory every six months will be stigmatized in the markets. Classically, this would manifest itself as a valuation discount to peers. It’s worth noting that Legal & General itself still provides interim management statements every quarter.

The world’s largest public fund managers and insurers could help change habits by firmly stepping off the quarterly treadmill, at least where the law currently allows. After all, shareholders set the theoretical transparency discount by deciding what shares to purchase and at what price. Ultimately, these human beings determine valuations.

If the custodians of trillions of dollars of assets decide what’s good for the goose (ending quarterly reporting by the parent) is also good for the gander (the portfolio managers they employ) then other companies in other industries can follow suit. Ten of the largest listed investment managers – including BlackRock, Allianz, State Street and Bank of New York – oversee some $10 trillion of wealth.

There will be resistance. Not every investor buys the argument that quarterly reporting is a bad thing. It may help avoid problems earlier, before they fester – giving shareholders time to get out or press CEOs to fix matters more rapidly. And businesses in technology, retailing, consumer goods and media probably move too swiftly for six-month updates to be sufficient.

The quarterly-financial-industrial complex won’t like a big shift, either. Stock exchanges like Deutsche Boerse and Nasdaq benefit from companies reporting twice as often in a given year, as it bolsters trading volumes and fills their faster-growing “market data” business pipelines.

More frequent corporate dispatches are arguably better for the news and information business, too, including Breakingviews parent Thomson Reuters. It even benefits Warren Buffett, who has often lamented short-termism in the investing world. Berkshire Hathaway owns Business Wire, which would see its volume of earnings reports cut if the world moved to report twice a year.

It will take a brave and big investment manager to get beyond these entrenched interests and sustained effort will be needed to modify rules requiring disclosure four times a year. But if the signals from fund managers with the most at stake are genuine, expect their corporate parents to lead the way in the not so distant future.

Published November 2015

(Image:REUTERS/Lisi Niesner )



More than just a nice desk in the Oval Office awaits the next U.S. president. Whoever wins the campaign will probably contend with an economic recession, no matter what the Federal Reserve does with interest rates. The great downturn ended six years ago, longer than it traditionally takes for another slowdown to hit. Given the sluggish recovery, another peak could be years off. But unless modern records are shattered, today’s White House contenders will need to brace for a crisis.

Since the Great Depression, the average period between the end of one American recession and the start of another has been about five years. By that metric, the economy is currently operating on borrowed time. It has been more than a year longer than that average since the slowdown that accompanied the global financial crisis ended in June 2009.

Of course, this time around it might just take a little more time than usual to rebound. The United States enjoyed 10 recession-free years from early 1991 through early 2001. That’s the longest uninterrupted period of prosperity in 150 years of record-keeping. That means unless this is another historically unprecedented moment, another recession will arrive by June

True, most economists don’t see an imminent slowdown. They expect the Fed to eventually begin to raise interest rates in response to the economy’s strength and its ability to weather tighter monetary policy. As Goldman Sachs explained in a research note, the unusually slow recovery implies a longer-than-usual cycle. The bank does not forecast a recession for 2016, the last full year that Barack Obama will occupy the White House.

If correct, that makes any slowdown a problem for, take your pick: President Donald Trump, Carly Fiorina, Bernie Sanders, Hillary Clinton, etc. If it starts early enough in the 45th president’s first term, the commander in chief might be able to place the blame at Obama’s doorstep. But every time since World War Two that an American president faced a recession that began after his first year, he failed to win re-election.

Presidents don’t deserve all the blame for the unavoidable cycles of developed economies. That doesn’t stop voters from thinking otherwise. Moreover, if the next boss happens to be Jeb Bush, a recession on his watch would mark the fourth in a row to have begun under a member of his immediate family. He and his rivals need to brace for the inevitable.

Published September 2015

(Image: REUTERS/Larry Downing)



Walt Disney is about to awaken the financial power of the Force. The media conglomerate appeared to have fallen for a hokey religion when it paid $4 billion for Star Wars maker Lucasfilm in 2012. Now, as it prepares to unleash the first of six new movies in the space saga, it may be on track to more than triple its money.

Advance ticket sales for “The Force Awakens” smashed records even before its Dec. 18 opening. That gives the movie a good shot at displacing “Avatar” as the top-grossing movie of all time. The 2009 hit pulled in $2.8 billion in global box-office revenue, according to Rentrack data.

As with “Avatar” before it, debuting in December avoids the glut of wannabe-blockbuster movies that usually come out in early summer. So no Jedi mind trick should be required to persuade moviegoers to shun other flicks in favor of the continuing adventures of Luke Skywalker, Han Solo and Princess (now General) Leia Organa – along with new characters.

Assume the film directed by J.J. Abrams rings up a more conservative $2 billion in worldwide ticket sales – a Breakingviews estimate that takes the average box-office receipts of the top 10 movies released around Christmastime. Factor in production and marketing costs as well as theater revenue splits, and pre-tax profit would be about $700 million.

Meanwhile, revenue from licensing and the oodles of toys, action figures, books, clothing and other items that will carry the Star Wars mark could hit $500 million over the next year, according to Macquarie’s Force-enhanced gaze into the future. Apply Disney’s consumer-product operating margin of 40 percent, and that adds another $200 million of operating earnings. Home entertainment and video streaming may yield another $300 million.

Tally it up and Disney could squirrel away $1.2 billion before tax in the next 12 months – and that doesn’t factor in any revenue from amusement parks, TV spinoffs and the like. It’s unlikely to do as well on the five movies to follow – past Star Wars sequels brought in, on average, 25 percent less. On that basis, and after handing over 30 percent to the Republic of Uncle Sam, the company run by Bob Iger could earn an average of $669 million in each of the next six years.

On Disney’s current stock market multiple of around 20 times 2016 earnings, Lucasfilm would be worth $13.3 billion. That may be insignificant next to the power of the Force, but it’s a payoff even Jabba the Hutt would be happy with.

Published December 2015

(Image: REUTERS/Carlo Allegri)



Bank capital hawks are about to bump up against the realities of politics. Basel-based standard setters are due to finalise capital adequacy reforms that banks call Basel IV over the next 12 months. The catch is that these tweaks to the pre-existing Basel III framework conflict with European policymakers’ growth plans.

Basel IV is needed to harmonise assessments of credit, trading and legal risks. European banks’ measurements of their risk-weighted assets – a key determinant of their capital requirements – are suspect, insofar as they sometimes produce low results and differ by jurisdiction. U.S. peers, by contrast, typically carry fuller risk-weightings on their balance sheets: they lend less to corporations and offload lower-risk mortgages to government-sponsored enterprises.

The full implementation of Basel IV may take several years. But the key question is whether European lenders, once it does kick in, will need to maintain their key common equity Tier 1 ratios at the current level of about 12 percent of RWAs.

graphic-Bank rule zealots will be forced to back down

(Source: Barclays research, Reuters Breakingviews. REUTERS/Dominic Elliott)

Bank of England Governor Mark Carney’s answer to that question, for the UK at least, is no. Though he backs greater harmonisation in measuring asset riskiness, Carney argues that the UK regulator already forces banks to hold capital in anticipation of RWA reforms. So UK banks will only need to exceed a 9.5 percent common equity Tier 1 ratio under Basel IV and they won’t need new capital.

Euro zone politicians and regulators could follow Carney’s lead. European Central Bank President Mario Draghi is keen to jumpstart Europe’s securitisation market, but Basel IV could raise the relevant capital requirements by 2.2 times, according to an ISDA-led lobbying group. European politicians care more about improving the euro area’s anemic growth rate, which the International Monetary Fund puts at just 1.7 percent in 2016.

Brussels will want a slight uptick in lending to continue. So Basel IV will be in its sights, given Barclays analysts reckon it could knock 2.2 percentage points off lenders’ common equity Tier 1 ratios. European financial services commissioner Jonathan Hill has already commissioned a review of the net effect on economic growth of various post-crisis rule changes. Its conclusion may be that Basel IV should either result in lower capital requirements, or be substantially watered down.

Published December 2015

(Image: REUTERS/Toby Melville)



Power suppliers have long enjoyed a natural monopoly. But the arrival of budget batteries coupled with cheaper solar power will allow a growing number of consumers to pull the plug on old-fashioned electricity networks in 2016 and beyond.

Solar panel prices have already plummeted, and batteries look set to follow in the near future as manufacturers hone new technologies and ramp up production. Tesla says it can slash the cost of its own batteries by more than a third with a bigger, better factory. That’s plausible: costs dropped by 14 percent on average every year between 2007 and 2014. Broker CLSA reckons they will tumble by a further 70 percent over the next five years.

The prospect of being able to generate, store and manage their own power may prompt some customers to leave the grid. In parts of developing economies where electricity has yet to arrive, power networks may not be needed. More than a fifth of India’s population does not have access to electricity. Rather than waiting for infrastructure to expand, Prime Minister Narendra Modi’s government is offering a 30 percent subsidy to encourage homeowners to use solar to become self-sufficient.

Energy companies’ initial responses to this potentially existential crisis have ranged from denial to defensiveness. Doing nothing is not a great option, but actively resisting the shift is worse. In Australia, industry lobbyists initially tried to fight special subsidies for renewable energy and raise fees for homes with solar panels. Though such bullying tactics will burn solar homeowners in the short term, it only encourages them to seek ways to harvest and hoard their own energy.

Some power companies have decided to embrace change. Australian utilities AGL Energy and Origin Energy now sell solar panel and battery sets to their own customers. Though there’s a risk the move will dim demand for conventional electricity, the bet is that clients will stay connected to the grid in order to sell their extra volts back to the utilities. In that case, the grid will survive as an exchange where energy is traded between large and small producers and consumers.

Others would be wise to heed their example and take action. Battery power is about to deliver an electric shock to the old system. Utilities will have to see the sunny side if they are to survive.

Published December 2015

(Image: REUTERS/ Amir Cohen)



Newly launched headsets from Facebook, HTC, Sony and others will help turn the immersive artificial environments of virtual reality into what could soon become a $10-billion-a-year commercial reality.

For decades the dream of VR has remained unfulfilled. Nintendo’s 1995 “Virtual Boy” console, for example, was an infamous flop, complete with red-and-black wireframe graphics. Later equipment often made users nauseated, as eyes and body received conflicting information.

But advances in processing power now make for far smoother, more compelling experiences in VR and augmented reality, its less intense cousin. Tech giants and venture capitalists reckon the duo may become the next big computing platform after mobile. Investors have poured some $4 billion into AR and VR firms since 2010, PitchBook says.

This should start bearing fruit in the first half of 2016, as HTC’s Vive, Facebook’s Oculus Rift, and Sony’s PS VR headsets go on sale. Samsung’s low-end Gear VR is already out, while Microsoft is working on the HoloLens visor. Developers like Japan’s Bandai Namco, Capcom and Square Enix are preparing games in genres from horror to romance.

As usual, early adopters will be gamers and gadget enthusiasts. Wider adoption will require vaulting a couple of hurdles: that no one looks good wearing a clunky VR headset poses a marketing challenge; and the hardware needs apps with broader appeal. But that should come. There are many potential uses: students could attend distant lectures; fans could sit front row at sold-out concerts; architects could walk the halls of unbuilt buildings; and so on.

The initial financial impact will be modest, but this could ramp up quickly. Nomura analysts estimate sales of home-based VR kits will be sub-$2 billion in 2016, largely in hardware. By 2020 that could be $10.4 billion, with 45 percent in software.

Major beneficiaries will include programming houses and hardware specialists like Nvidia, the graphics chipmaker. Among the bigger players, success in VR would be a big boost for HTC, whose handset business is ailing, and help cement Sony’s dominance in console gaming. It would also vindicate Facebook boss Mark Zuckerberg’s bold, $2 billion bet on Oculus. The tech industry could be about to change reality again.

Published December 2015

(Image: REUTERS/Benoit Tessier)



The runaway mergers and acquisitions train is barreling into its third year. Global merger volume in 2015 shattered the $4.1 trillion annual record set in 2007. As measured against worldwide GDP, the rate nearly doubled to more than 6 percent in just two years. To understand why this level of activity could stay on track for a while longer, look at North America’s railroad mega-deal.

Canadian Pacific in mid-November disclosed a $28 billion offer to buy U.S. peer Norfolk Southern. The Calgary-based railway operator is grappling with low growth. Its revenue is projected to increase by just 2.4 percent in 2015 compared with almost 8 percent for each of the last two years. It’s not alone: S&P 500 Index constituents suffered a collective third-quarter sales drop of 3.9 percent, according to FactSet. That stark reality will be a motivating force for mergers.

graphic-Rail megadeal holds ticket to runaway MA train

(Source: Thomson Reuters, IMF GDP figures. REUTERS/Jeffrey Goldfarb, Rob Cox)

The shareholder roster at Canadian Pacific offers more insight. Its biggest investor was hedge fund billionaire Bill Ackman’s Pershing Square. He originally unveiled a stake in late 2011 when the company’s stock was trading at about $60. It more than tripled in three years before sinking back to around $130. Activist investors like Ackman have doubled their funds to some $130 billion in two years and piled into nearly every industry. Their pushiness will drive plenty more deals like Canadian Pacific’s.

Further consider the nature of the rail bid. It involves a Canadian company stalking an American one. Cross-border transactions tend to pick up as merger momentum gathers steam. About 44 percent of deal volume in 2007 included a buyer and seller from different countries, according to Thomson Reuters data. In 2015, it was about a third, suggesting there may be capacity for more.

Similarly, Canadian Pacific’s offer was unsolicited. Such aggressive approaches, including ones eventually withdrawn, accounted for 15 percent of M&A in 2007 compared with about 14 percent in 2015. Lofty valuations could make targets more demanding and eager suitors increasingly frustrated.

Finally, the rail tie-up is messy. That tends to be a hallmark of deals near the end of an M&A boom. Merger partners become harder to find, testing competition limits or leading to mission drift. Norfolk Southern rejected its rival’s overtures on Dec. 4 in part because it suspected the combination wouldn’t be approved by regulators. Don’t expect that to stop many other buyers just like Canadian Pacific from trying.

Published December 2015

(Image: REUTERS/Lucas Jackson)



The following is a fictional memo from the office of the chief executive of a big American bank to employees sent on the occasion of the British referendum on European Union membership:

Dear colleagues,

You are by now aware of the British electorate’s vote last night to leave the European Union. While we had hoped for a different outcome given our considerable investments in the United Kingdom, we have been preparing for this possibility for the past two years. Fortunately, we are in a position to act quickly.

Thanks to the work done by our “Brexit Task Force,” which we formed in late 2015, we have architected a cross-platform contingency plan that will see many of the functions now performed by the London-based broker-dealer migrate to regional EU centers. While this transition will not be simple, and there will be some employee dislocation, we expect clients will not notice a significant difference.

In the past 12 months, the company has invested $50 million in scenario planning related to the referendum. As part of that process, we have effectively routed nearly 85 percent of the bank’s retail and commercial lending activities through our Dublin-based banking subsidiary.

Our facilities management team has procured options on additional office space in preparation. Front-office customers will be served from our Client Performance Hubs in Frankfurt and Madrid. Support and administrative functionality will gravitate towards our Center of Compliance Excellence in Gdynia.

Overall, we expect to migrate less than 20 percent of our current operational workforce in the UK, numbering about 5,600 people in total, over the coming two years.

Many of you have asked why we did not campaign harder for Britain to stay in the EU given the investments we have made in the City of London over the past few decades. The short answer is that we felt the optics of a large Wall Street bank visibly trying to sway opinion would backfire. The financial services industry is still rebuilding public trust after the 2008 crisis.

We had hoped that Prime Minister David Cameron’s efforts to renegotiate the terms of Britain’s membership in the EU would bear fruit. Unfortunately, the numerous attacks perpetrated in many European cities in recent months by supporters of the so-called Islamic State have weakened the domestic political positions of German Chancellor Angela Merkel and other counterparties critical to the reform process.

I appreciate your patience as we work towards a new, dynamic operating structure for the bank in Europe. The Brexit Task Force will be toiling diligently to identify which positions in London may be transferred to the continent on a going-forward basis, and to plan for the effect of lifting the financial transactions tax, and the cap on banking bonuses for UK-based employees.

In the meantime, I urge you to continue your dedication to serving our customers and to upholding the value principles of the bank. Britain’s participation in the EU may draw to a close, but business continues as normal.


Bank CEO

Published December 2015

(Image: REUTERS/Toby Melville)



China will “friend” Facebook again in 2016. Chinese censors blocked access to the $300 billion social network barely a year after it launched there in June 2008. Yet founder Mark Zuckerberg is going to great lengths to leap the Great Firewall. Rivals have shown that foreign groups can play by local rules.

Even though China’s 668 million web users can’t access Facebook, the Silicon Valley company says the People’s Republic is one of its largest advertising markets as Chinese businesses eyeing overseas markets target Facebook’s 1 billion daily active users. That’s significant as ads brought in more than 95 percent of the company’s $4.5 billion in revenue in the three months to September.

Now Zuckerberg is eager to connect his social network to the world’s largest internet population. The 31-year old CEO hosted a meeting with China’s internet policy chief in 2014 and met with visiting President Xi Jinping in October. The hoodie-clad founder is also learning to speak Mandarin.

None of this will necessarily sway Chinese bureaucrats. Yet there are signs that relations with U.S. tech groups are thawing, provided the latter bend to local rules. Jobs networking site LinkedIn, for instance, censors certain content on its Chinese site, while note-taking app Evernote has disabled a note-sharing feature on its Chinese service. Both store local data in China as well. These strategies are paying off: LinkedIn already had around 4 million mainland users when it formally launched its Chinese service in February 2014. Now it has 10 million.

What might a Chinese Facebook look like? Posts deemed too sensitive from accounts in China would be blocked in the country, while censors could also filter content from abroad. If this proved too complicated, Facebook could even opt to launch a separate service, such as an event planning app, to test the waters.

Finding a local partner would help to seal the deal. Google, which retreated from the People’s Republic five years ago over censorship concerns, will introduce a Chinese app store in 2016, Reuters reported on Nov. 20. A partnership with local smartphone maker Huawei, which makes Google’s handsets, should give it a boost. Facebook could persuade another domestic manufacturer like Xiaomi to pre-install its app on Chinese phones.

Re-entry would only be the beginning as Facebook would face a fierce fight with local networks like Tencent’s ubiquitous WeChat. Zuckerberg will need all the Chinese friends he can get.

Published December 2015

(Image: REUTERS/Ted S. Warren/Pool)

Revellers in unicorn costumes from the Grande Rio samba school participate in the second night of the annual Carnival parade in Rio de Janeiro's Sambadrome February 21, 2012. REUTERS/Nacho Doce



A capital squeeze may stimulate an orgy among unicorns. Plentiful money has detached valuations on many hot private tech firms from reality. There are 144 of these private companies worth $1 billion or more, according to CB Insights. Curiously, about a third are valued at $1 billion on the dot. As capital becomes more expensive in 2016, selling to rivals or mating with other unicorns will become appealing.

Few of these young companies are cash-flow positive, so most will need capital infusions to survive. That spigot is slowly dwindling. Fidelity Investments recently marked down the value of its Snapchat and Zenefits holdings, and BlackRock slashed the value of its Dropbox stake. If massive asset managers pull back, private firms will be dependent on tinier venture capital outfits, which may be more demanding in their terms.

Even hardened angel investors are becoming skeptical. Marc Benioff, Salesforce.com’s founder, says he will no longer invest in unicorns because they have “manipulated private markets to obtain these values.”

Going public is an option. American technology firms’ proceeds from initial stock sales so far this year are $6.1 billion – a fifth the amount they raised last year, according to Thomson Reuters data. Global trends are similar. Claims that remaining private allow founders to retain a long-term focus look suspect. Super-powered voting stock allows insiders to treat public companies as their fiefdoms. But the stretched private valuations make it harder for unicorns to go public. Insiders do not want the ignominy of a so-called down round. Floating at a reduced price also creates the impression something has gone wrong. That can make it difficult to lure customers and talented engineers.

M&A may be a better option. Two of China’s private taxi apps, Didi and Kuaidi, combined in February to gain scale against Uber, and the combined valuation ballooned. Didi Kuaidi recently invested $100 million in U.S. based Lyft. Lyft could seek shelter from Uber by selling itself to Didi Kuaidi or partner Hertz.

Other unicorns that have run into trouble could also find comfort in the arms of bigger, more mature rivals. Benefits manager Zenefits might make a nice target for Workday or ADP. It’s easy to see how cloud-storage firm Dropbox might drop nicely into the portfolio of Microsoft.

Insiders may not wish to sell at public market valuations. Tacking on a change of control premium would help narrow this gap. And a lack of cash flow and scarcer private capital may eventually force their hands.

Published December 2015

(Image: REUTERS/Nacho Doce)