Commercial Awareness Update - July 2019!

[S30]

Hi everyone!

Welcome to the first commercial news update for July.

Happy reading!

Commercial News Update: 3rd July 2019

Topics covered this week are:

1. The bid for British Steel and problems facing the Steel Industry (@bugsy malone)
2. US-China Trade Truce at the G-20 Summit (@Jaysen)
3. Rise in Gold Investment (@Sairah)

1. The bid for British Steel and problems facing the Steel Industry (by: @bugsy malone)

The Story:

On Sunday evening the deadline for bids to purchase British Steel past. The company collapsed in May after its owner, Greybull Capital, failed to secure a government loan of £75 million. If a buyer is not found then the company will be wound up. Although, an official announcement of the bids is yet to be released, newspapers have mentioned companies such as Liberty Steel, India’s JSW and China’s HeSteel group are interested in purchasing the entire company. Whilst others are interested in purchasing parts of the company. For example, Network Rail have confirmed an offer for the rail section (as most of the steel used on UK railways is made by British Steel (97%) and they buy around 100,000 tons per year). Although, Network Rail said “our overwhelming preference is that a purchaser for the entire business is found”.

Impact on Businesses and Law Firms:

For the long term future of British Steel, bidders’ investment intentions and what the government is going to do in terms of helping that investment (e.g. business rates) will be important. As the steel sector is massively capital intensive, companies have to make a lot of investment year in year out. The UK steel industry faces much higher costs than other European competitors such as France and Germany whose electricity prices are 50% less than the UK. Also, there is massive global over capacity. For example, in 2018 China made 100 million tons more steel than they needed, in turn we have seen an increase in exports, which could flood the UK market in the future.

Although, Brexit uncertainty has been spoken of as massive for the steel industry, this does not seem to be putting off foreign buyers as the products British Steel makes for rail and construction have seen growing demand.


2. US-China Trade Truce at the G-20 Summit (by: @Jaysen)

The Story:

Last Friday and Saturday, world leaders met to discuss pressing global economic and financial issues at the annual G20 summit.

The summit ended with the US postponing further tariffs on Chinese goods and lifting some restrictions on Huawei. In return, China agreed to buy more US agricultural products.

Impact on Businesses and Law Firms:

The markets are happy. Stock markets around the world rose sharply, with the S&P 500 closing at an all-time high. They had feared Donald Trump would keep to his word and impose tariffs on the $300bn in goods that aren’t already covered by existing US tariffs. With the ban lifted on Huawei, US tech stocks rallied; they can now get back to selling high-tech equipment to the company provided there’s no national security risk.

The trade truce is a positive sign, at least in the short term. The US-trade war has caused global organisations, such as the IMF and the World Bank, to cut global growth forecasts. It has caused investors to move to safe haven assets and likely exacerbated China’s slowdown. China’s growth has made it a crucial player in the world stage, which is why a fall in demand from China impacts everything from European shoe giants to Australian mining companies.

Is it worth it? Perhaps. You might argue it’s a necessary cost to tackle China’s lack of market access, discrimination against foreign companies and technology transfers. Alternatively, you might suspect Trump is trying to sabotage China’s attempts at competing on the global stage.

What we do know is Trump’s re-election campaign is underway. In the first Democratic primary debate, four of the 10 candidates identified China as the biggest threat facing the US. If Trump secures a weak deal, it will be used against him. In other words, the market should be wary of celebrating too quickly.

 

[S30]

3. Rise in Gold Investment (by: @Sairah)

The Story:

The price of gold has reached its highest in six years – climbing as high as $1,398.00 per ounce last Friday. Investors have turned to gold as a safe-haven asset (an asset which holds or increases its value during periods of market and economic uncertainty) amid increasing concerns about the health of the global economy. Recent developments such as the weaker US dollar and the fall of the ten-year US Treasury yield dropping below 2% for the first time since 2016 has contributed to the boost of gold prices. This is because, gold tends to rise in dollar terms when the US bond yields fall.

Impact on Businesses and Law Firms:

According to the World Gold Council, almost one fifth of central banks have signaled their intention to increase gold purchases over the next 12 months, as part of diversifying their reserve base. In May, China increased its gold purchases for the sixth-month running, taking its total reserves to 1,916 tonnes. Private banks and wealth managers have also started to shift a small percentage of their clients’ portfolios out of equities and into gold to protect investors from the uncertainties of the market. This is because, the price of gold offers a safety net to investors in times of crisis – as it moves in a opposite direction from other assets, such as stocks and bonds. It can also do well and serve as a hedge when inflation threatens.

Following on from the G20 Summit, the US and China have agreed to restart trade talks, causing gold prices to decline as much as 2% on Monday. This has boosted investors’ confidence in opting for riskier assets such as stocks. But, the release of the US economic data report this week should help investors better assess how the US economy is performing. This includes whether the Federal Reserve will cut interest rates later this month. If the data shows signs of a weakening global economy – is it highly possible for gold to edge back up.

To navigate institutional investors from this uncertain situation, international law firms will need to step in, to provide advice with respect to issues such as investment into sovereign wealth funds to portfolio trading practices.

 

[Deleted member 970]

Thank you! Brilliant summary and so helpful!

 

[Jay-Lo]

Hello

How can I get the email updates instead?

Btw great read, very informative. Thanks Jaysen and team

 

[S30]

Thank you for the feedback - we are glad you like the articles!

@Jaysen will be best placed to answer your question about how to subscribe.

 

[Jaysen]

Hello

How can I get the email updates instead?

Btw great read, very informative. Thanks Jaysen and team

Here you go! https://thecorporatelawacademy.us17...ibe?u=46661f8fd74854dd3e16a20f9&id=a0132087cd

 

[Syafiqkay92]

Hi

Thanks for writing the story about business news and current affairs.

1. The bid for British Steel and problems facing the Steel Industry (by: @bugsy malone)

The Story:

On Sunday evening the deadline for bids to purchase British Steel past. The company collapsed in May after its owner, Greybull Capital, failed to secure a government loan of £75 million. If a buyer is not found then the company will be wound up. Although, an official announcement of the bids is yet to be released, newspapers have mentioned companies such as Liberty Steel, India’s JSW and China’s HeSteel group are interested in purchasing the entire company. Whilst others are interested in purchasing parts of the company. For example, Network Rail have confirmed an offer for the rail section (as most of the steel used on UK railways is made by British Steel (97%) and they buy around 100,000 tons per year). Although, Network Rail said “our overwhelming preference is that a purchaser for the entire business is found”.

Impact on Businesses and Law Firms:

For the long term future of British Steel, bidders’ investment intentions and what the government is going to do in terms of helping that investment (e.g. business rates) will be important. As the steel sector is massively capital intensive, companies have to make a lot of investment year in year out. The UK steel industry faces much higher costs than other European competitors such as France and Germany whose electricity prices are 50% less than the UK. Also, there is massive global over capacity. For example, in 2018 China made 100 million tons more steel than they needed, in turn we have seen an increase in exports, which could flood the UK market in the future.

Although, Brexit uncertainty has been spoken of as massive for the steel industry, this does not seem to be putting off foreign buyers as the products British Steel makes for rail and construction have seen growing demand.

I just thought I add something to this piece.

It seems to me that British Steel could be a target for private equity investment. I'm thinking distressed M&A. Greybull Capital, a private equity firm specialising in turnaround distressed companies, has attempted to improve the business but seems unable to do so. This means that British Steel might be an unattractive investment, even to private equity capital whose dry powder is increasing at an unprecedented level.

Despite initial interest from several buyers, British Steel did not receive any bids and that makes me wonder why. In practical terms, private equity firm tends to look at their cash flow projection. There are more factors that negatively affect their cash flow than benefits. This include factors such as increasing cost of energy, UK's commitment towards becoming carbon neutral by 2050, competition with steel supply from China and increasing cost of credit as a result of increase central bank interest rate.

One risk in particular is the decrease in steel prices affecting its revenue. This is due to Chinese companies over supplying the market with steel causing the price to fall. This could be an unintended impact of US-China trade war on the UK. As the tariff is affecting Chinese export of steel to the US, there is lower demand for their steel in the US, so they export that steel to the UK market instead.

As British Steel is the UK's second largest steel maker, if it does collapse, it means that 4000 jobs are at risk. This could also affect 20,000 jobs in the supply chain. This could have a strong impact on UK economic growth which increases the risk to UK inbound investors, making them less likely to invest in the UK.

This news shows how the bigger issues such as US-China trade war, Brexit uncertainty, and rising interest rate environment could affect a company. This means that companies need to review their financing arrangement and this would require the help of law firms to negotiate a more favourable financing, so that their operation is more resilient towards macroeconomic factors.

I hope this makes sense and I am keen to hear if anyone has a different view about this that I can learn from.

Best wishes,
Syafiq.

 

[Angel]

Hi everyone!

Welcome to this week's commercial news update. Happy reading!

Commercial News Update: 10th July 2019

Topics covered this week are:

1. Private Equity Funds Targeting Real Estate @Sara Moon
2. Huawei’s 5G Network Concerns @Sairah
3. Deutsche Bank’s radical restructuring @Jaysen
4. Christine Lagarde's nomination as the next ECB president @Angel

1. Private Equity Funds Targeting Real Estate @Sara Moon

The Story

The global property market seems to be going downhill. In the UK, investments in London offices, affected by the Brexit uncertainty, fell by 37% in the first half of 2019 compared to the previous year. The increasing trend to shop online coupled with the devaluation of the sterling increased retailer costs. This made it difficult for landlords to rent out their high street properties. The atmosphere in the US is similar. The Financial Times reported that every one in six retail stores on the famous shopping street Fifth Avenue is empty- with Topshop being the most recent retail brand to close all of its US stores.

However, private equity industry is seeing opportunities in this seemingly slumping real estate market and has raised $8bn in the first quarter to invest in problematic retail estates. This is double the amount raised in the last two years aggregated. Private equity firms aim to gain juicy returns by investing in cheap properties through methods such as providing debt finance or interfering with the property management to increase the value of the property.

Impact on Businesses and Law Firms

Private equity funds raised are not yet being spent and firms are waiting for a property slump to realise in the near future. A recent report by LaSalle Investment Management stated that by 2021, “a cyclical inflection in many real estate markets is inevitable after a long run of global growth and real estate value appreciation”. Thus, private equity deals (‘PE deals’) are likely to be flooding the market in the coming years.

PE deals are lucrative sources of revenue for law firms not least because they tend to focus on generating profit in the long-run (10 years on average). This means that law firms engaged in the deals work with the same PE firm for a long time. Lawyers involved in PE deals advise on the sale and acquisition of companies, the negotiation of the deal, and the drafting of documents. Banking lawyers also advise on financing the deal.


2. Huawei’s 5G Network Concerns (@Sairah)

The Story

Last Saturday, it was revealed that four of UK’s major telecom operators – EE, O2, Three and Vodafone are using Huawei to build their 5G networks, despite the recent US sanctions that threatened Huawei’s global supply chain. The decision to use Huawei equipment in the “non-core” elements of their networks (e.g. antennas allowing wireless communication) is a concern for the operators. Although Theresa May approved Huawei’s bid to build 5G networks in April, the UK government has yet to confirm whether Huawei will be permitted to build the wireless infrastructure. It is estimated a partial to full restriction on Huawei could result in an 18-month to 24-month delay to the widespread availability of 5G in the UK. This would deter the UK from becoming a ‘world leader in 5G’ (a key-government target), costing the economy between £4.5 to £6.8 billion.

Impact on Businesses and Law Firms:

The involvement of Huawei in the UK’s 5G network industry has threatened relations between the UK and the US. In May, the Trump administration placed pressure on other countries to follow suit and prevent businesses from using Huawei equipment. In the UK, Trump has threatened to restrict intelligence-sharing between allies unless the government clamps down on the company[JS1] . However, Huawei has expressed preparations to take additional steps to provide the UK and other countries with assurances that the company is not involved in ‘spying claims for the Chinese government’. This will be done by signing “no-spy, no-backdoor” agreements. On Monday, China’s ambassador, Liu Xiaoming, also issued a guarantee that the UK will suffer economically if it refuses to allow Huawei to build the 5G mobile network. It could also impact trade and investment with other Chinese companies.

This issue is critically important for businesses such as BT Group and Vodafone, some of Huawei’s biggest clients. Vodafone has already switched on its 5G network in six of the seven cities in the UK. It will not be easy for companies that are already using Huawei equipment to switch to another equipment provider as Huawei’s equipment already forms the infrastructure for 4G networks of many major wireless carriers in Europe and other countries. Without Huawei, there would be a ‘huge’ gap in the market, one which Huawei’s competitors such as Nokia or Ericsson would not be able fulfil quickly.

 

[Angel]

3. Deutsche Bank’s radical restructuring @Jaysen

The Story

Last Sunday, Deutsche Bank announced a radical turnaround plan that would see it cut 18,000 jobs by 2022, exit its global equities business and move billions of toxic assets to a separate unit -- a so-called ‘bad bank’.

Impact on Businesses and Law Firms

Is it too little too late? The German lender failed to clean up its balance sheet properly after the financial crisis. It has since been plagued by regulatory investigations, fines and stiff competition. It’s no wonder that its recent attempt to merge with rival lender Commerzbank failed.

It’s not only Deutsche Bank either. Other European banks failed to aggressively reform after the crash. They’ve also suffered from negative interest rates, slow growth and fragmentation within the Eurozone, which have stifled their profitability. While these banks have stumbled, US rivals like Goldman Sachs and Morgan Stanley have increased their market share in Europe.

Deutsche Bank will now go back to its roots, focusing on European companies and retail-banking customers. The plan is to reduce costs while leaving enough money to fund the restructuring, so it doesn’t have to raise more capital. Its ‘bad bank’ will take in the assets the bank no longer wants, which can then be sold or wound down.

Lawyers play an important role in the restructuring process. Take the job cuts, for example. Lawyers must advise Deutsche Bank on making staff redundancies across multiple jurisdictions. And this can be delicate; how will they be consulted? Will they be offered financial compensation? How can they avoid potential claims for unfair dismissal?

Germany will also be an interesting case study. The country has strict employment laws that are supported by powerful unions. Yet in Frankfurt, legislation was recently introduced to make it easier to fire high-earning bank officials as Germany sought to benefit from the fallout of Brexit. Deutsche Bank could be the first major test case.

4. Christine Largarde's nomination as the next ECB president @Angel

The Story

Last Tuesday, Christine Lagarde was nominated to be the new European Central Bank (“ECB”) president. The ECB in the Eurozone is analogous to the role of the Federal Reserve in the US. It sets monetary policy and supervises the banking and financial activities for the 19 countries that adopt the common European currency (Euro) – aka, the Eurozone. Therefore, it plays a crucial role in maintaining the stability of prices and inflation within the Eurozone.

Impact on Businesses and Law Firms

Financial markets across Europe rallied upon news of her nomination. The response from business leaders and central banks on Lagarde’s ECB nomination have been positive. Investors take the view that Lagarde will retain current ECB President Mario Draghi’s policies that support economic growth. Put simply, this is achieved by adopting expansionary monetary policy - the process in which a central authority (in the case, the ECB) influences the economy of its province (the Eurozone) by controlling the money supply or the interest rates in the zone (in this case, to keep interest rates low to stimulate the economy).

Commercial lawyers, especially those who specialise in capital markets, will need to stay up-to-date with the nomination. The role of capital market lawyers includes helping clients raise funds in the financial markets. In doing so, they work closely with bankers to advise on the legal and regulatory aspect of a transaction. In the likely event that Lagarde is appointed as the new ECB president, capital markets lawyers would need to be prepared for changes in policies, a shift in investors’ confidence (for better or for worse), and alterations to regulations that must be complied with.

 

[Bugsy Malone]

Welcome to this week’s commercial write up everyone. The topics covered are:

1. Virgin Galactic going public (by Sara Moon)
2. US opposition to Libra (by Moni)
3. France’s digital tax (by Jaysen)
4. British Airways fined a record £183 million under new GDPR (by Flora)
5. Ford and Volkswagen’s Billion Pound Alliance (by Sairah)

1. Virgin Galactic going public (by @Sara Moon)

The Story:

Virgin Galactic announced last week that it will go public through the New York Stock Exchange. Virgin Galactic is a space tourism company within the famous Virgin Group and was founded in 2004 by Sir Richard Branson. Its aim is to provide commercial space flights to the public, possibly as early as the second half of this year. This initial public offering (IPO) is part of a merger agreement between Virgin Galactic and an investment company Social Capital Hedosophia (SCH). IPO is a term used to describe a private company offering its shares to the public for the first time, allowing any investors to buy its shares. If Virgin Galactic gets listed, it will be the first publicly-traded commercial spaceflight company.

Impact on Businesses and Law Firms:

Normal people like us buying tickets for a space tour was nothing more than a fiction until a few years ago. Now, it seems like the space industry is growing rapidly to provide services to the public in general. A new space race seems to have begun among private space travel companies like Virgin Galactic, SpaceX and Blue Origin. This means that we are likely to see an increase in business expansion strategies like mergers and acquisitions and IPOs from these companies. There are many other businesses in the space industry, ranging from spacecraft hardware manufacturing to launching services, and we should be expecting active business activities from these companies as space technology develops.

The space sector is a growing area that could bring new sources of revenue to law firms. Some law firms like Hogan Lovells and Bird & Bird already have departments solely dedicated to the space activities sector. We can expect more law firms developing a space practice in the coming years.


2. US Opposition to Libra (by @Moni)

The Story

Over the past several days, Facebook has come up against significant opposition from Washington to its proposed cryptocurrency Libra. President Trump unleashed a twitter storm on “Bitcoin and other cryptocurrencies” which he said are “highly volatile” and can "facilitate unlawful behaviour." In particular, he criticized Libra, saying that it will have little standing and that Facebook would become subject to US and international banking regulations. It was the first time President Trump had articulated his views on cryptocurrencies and came amidst significant political opposition to Libra in the US.

Before President Trump tweeted, the chair of the US Fed, Jerome Powell, said that Libra “raises many serious concerns regarding privacy, money laundering, consumer protection, and financial stability” which he felt needed to be addressed before Libra would be allowed to launch.

However, the opposition to Libra did not end there as on Monday; Congressional House Democrats released draft legislation called the “Keep Big Tech out of Finance Act” which would fine large tech companies that primarily offer an online platform service $1million a day for operating digital assets. The draft legislation was released ahead of David Marcus, Facebook blockchain lead’s testimony in front of the House Financial Services Committee and the Senate Banking Committee.

Impact on Businesses and Law Firms

Before the announcement of Libra in June, Facebook and the other members of the Libra association conducted an "initial consultative phase" with regulators and central banks and affirmed their commitment to a "collaborative process with regulators, central banks and lawmakers." Despite Facebook's openness to collaboration, US lawmakers and regulators appear to have united in opposition against Libra. Facebook did not respond directly to Trump’s tweets but did say that the Libra association would not interact with consumers or operate as a bank and that Libra is meant to be a complement to the existing financial system.

Despite these statements, there are significant legal barriers to the implementation of Libra, including the fact that Libra would be viewed as a commodity and subject to capital gains taxes under current US tax laws. David's Marcus' testimony will be telling as to whether or not Libra is viable in the existing regulatory environment, and international regulators and other cryptocurrency providers will be watching closely as this could be a turning point in the US regulatory conversation around cryptocurrencies.

When asked about the possibility of Facebook opening it up to other jurisdictions if they were to be banned by US regulators, Facebook executives noted that while they would want to operate in markets where they are allowed to, they would also like to operate in as many markets as possible. However, they did express concern that a ban by US regulators would probably also concern other regulatory regimes.

 

[Bugsy Malone]

3. France’s Digital Tax (by @Jaysen)

The Story

Last Thursday, French lawmakers approved a digital services tax, which will apply a 3% tax on large digital companies in France.

The tax will affect about 30 companies, including US tech giants Google, Amazon and Facebook, which generate over €750m in annual global revenues including at least €25m in France.

Ahead of its passage, the US announced a Section 301 investigation to determine whether the tax proposal unfairly targets US companies. The last time the US initiated such an investigation was just before it imposed tariffs on Chinese goods.

Impact on Businesses and Law Firms

Many EU states believe the existing rules governing corporate tax are outdated. Tech giants like Google, Facebook and Amazon have taken advantage of the fact that the tax rules were originally designed to govern physical assets, and for years they’ve shifted around profits to pay little tax where they operate.

However, the EU has been unable to unanimously agree on a new digital tax, leading to countries like France, Spain and the UK to propose their own tax measures. These states believe the tax system should reflect the fact that digital companies generate value from their users’ data (such as through targeted advertising) and not just where their products are created and designed.

Under the Section 301 investigation, the US has between 12 to 18 months to come to an agreement with France over how US tech companies are taxed, otherwise the president can decide to impose tariffs. France has already stated the digital tax will be withdrawn if there is international agreement over how to tax companies in the new digital age.

Unlike in the dispute with China, there is an incentive for the US to stay at the table this time. The US will want to avoid a situation where more countries begin introducing their own taxation rules, which could lead to a complex series of taxes imposed on digital companies.


4. British Airways fined a record £183 million under new GDPR (by Flora)

The story:

Last week British Airways (BA) was fined £183 million for its breach of security systems last September. The personal details of 500,000 BA customers were collected.

This is by far the largest data breach fine and the first to be recorded under the new General Data Protection Regulation (GDPR). The GDPR increased the maximum penalty for data breaches to 4% of a company’s turnover. BA’s penalty amounts to 1.5% of its worldwide turnover in 2017.

The impact on business and law firms:

The significant fine shows companies must invest in the services they use, as regulators are not afraid to use their new powers to impose severe financial punishments. This will be a huge wake up call to owners of websites that collect personal and credit card data, not only in the UK but also in the EU.

Investment in cyber security will now have a more tangible impact on companies’ bottom line results. Investors will be looking at companies’ customer security more seriously before investing as receiving the maximum GDPR fine could risk insolvency.

Litigation is likely to follow this fine as BA has suggested it will be appealing. Law firm SPG Law has also threatened a £500 million class-action lawsuit for non-material damage under the Data Protection Act 2018 (the UK’s implementation of GDPR). This could set precedent for future GDPR fines. Law firms will need to pay close attention as this story develops in order to help clients navigate through these new rules.


5. Ford and Volkswagen’s Billion Pound Alliance (by @Sairah)

The Story:

Last Friday, two of the world’s biggest car makers, Volkswagen and Ford announced the expansion of their global alliance, to include autonomous and electric vehicles. The alliance will enable both companies to share investments in vehicle architectures in an attempt to reduce costs on new technologies. As part of the deal, Volkswagen will invest $2.6 billion ($1 billion in cash and $1.6 billion in assets) into Argo AI, an autonomous tech startup backed by Ford. Meanwhile, Ford will gain access to Volkswagen’s electric-vehicle MEB platform, a car production system which Volkswagen has invested around $7 billion in since 2016. Ford plans to use the platform to design and build at least one high-volume vehicle in Europe starting in 2023. Ford also aims to deliver more than 600,000 European vehicles using the MEB platform over the course of six years.

Despite both car companies sharing the considerable research and development costs associated with commercialising the technologies. Ford and Volkswagen announced they will “remain independent and fiercely competitive” in the car market. This means the alliance will not entail cross-ownership, the two car makers will have separate autonomous-vehicle businesses under the deal, but both will use Argo’s software.

Impact on Businesses and Law Firms:

Many car companies are racing to build on Tesla’s success, which was the first high-profile car maker to commercialise electric and self-driving vehicles on the roads. Self-driving cars have the potential to eliminate emissions and avoid accidents caused by human error. But, a shift towards these technologies could be detrimental for established traditional automakers like Ford and Volkswagen. This is because they will need to invest billions in the coming years or risk becoming irrelevant. Also, they face new competitors like Uber with access to larger financial resources and deep-pocketed tech companies such as Apple, who last month purchased the self-driving tech startup, Drive.ai.

In the past month investors have viewed Volkswagen and Ford’s plans as negative, with ‘no merit’, as they were hoping for more dramatic action. This is because auto investors fear threats from rich high-technology companies threatening to catch market share, as consumers start to avoid traditional car ownerships and instead embrace new methods of transportation like car sharing, electric and autonomous cars. At the same time, car sales are starting to fall in all of the largest markets, such as China and the UK, pinching the automakers financially. With this in mind investors are more willing to back Silicon Valley companies like Apple or Google.

 

[Jaysen]

Hi everyone!

Welcome to this week's commercial news update. Happy reading!

Commercial News Update: 24th July 2019

Topics covered this week are:

1. Second-Quarter Reports of US Investment Banks (by @Sara Moon)
2. Netflix and the Streaming Wars (by @Jaysen)

1. Second-quarter reports of US investment banks (by @Sara Moon)

The Story

Last week, US investment banks reported their second-quarter performance. The six largest US banks (Morgan Stanley, Citigroup, J.P. Morgan, Wells Fargo, Goldman Sachs and Bank of America) all exceeded analysts’ profit expectations. Goldman Sachs reported higher-than expected-income from advisory work on mergers and initial public offerings (IPO), despite a sharp drop in revenue in investment banking. JPMorgan suffered in both M&A business and investment banking but managed to top expectations thanks to tax benefits gained through the resolution of tax audits and better performance in consumer banking. Consumer business also brought higher profits at Citigroup, Wells Fargo and Bank of America. Morgan Stanley experienced better-than-expected results in wealth and investment management.

Impact on Businesses and Law Firms

The performance of US banks contrasts with the situation of European banks. Due to Brexit, M&A deals and investment banking revenues in the UK tumbled by 66% and 36% respectively compared to a year ago. Similarly, M&A deals fell by 34% across Europe, the Middle East and Africa. This resulted in big European banks like Barclays, HSBC and UBS slipping down the world league tables, their places newly replaced by US banks.

However, with the Federal Reserve expected to cut interest rate later this month, US investment banks might experience a fall in net interest income in the next quarter. The cut will be a particularly strong headwind to JPMorgan, which heavily relies on its customer deposits and loan business for its profits. Investor concerns led to JPMorgan’s stocks fall last Tuesday.

Banks and lawyers work closely together. While investment banks advise companies on M&As or IPOs by focusing on financial matters, law firms focus on legal issues, such as preparing necessary documents to structure a deal or addressing tax issues.

Banking lawyers advise investment banks on the various business they undertake. Their work can range from those of a transactional nature, such as negotiating contracts relating to underwriting to advising on contentious issues, such as litigation threats, bankruptcy-related issues or fraud (along with, perhaps, the litigation team).

2. Netflix and the Streaming Wars (by @Jaysen)

The Story

Netflix found itself in trouble last Wednesday as it reported its first drop in US subscribers in almost a decade. The internet giant had 130,000 fewer domestic subscribers in the second quarter of 2019, while its international subscriber growth also fell short of expectations.

In response, Netflix’s shares fell 11% on Thursday morning, its largest one-day percentage loss since June 2016.

Impact on Businesses and Law firms

You might be thinking: One quarter of missed results, what’s the big deal?

First, Netflix has been burning through enormous amounts of cash for many years. By issuing high yield debt (essentially high-risk bonds) and longer-term loans, it has been able to fund licensing agreements and original content.

Second, this news comes at a time when new rivals are pulling back their content as they enter the race. Comcast’s NBCUniversal is taking back The Office; while Warner Media, formed after the 2018 AT&T acquisition of Time Warner, is pulling Friends, the second most-watched Netflix show in 2019 by time spent.

Lenders and investors have so far been willing to overlook Netflix’s minimal profit because it promised fast subscriber growth and greater margins when it raised prices. However, with subscriber growth missing expectations and new rivals entering the market, there are doubts over Netflix’s ability to sustain its debt-heavy business model.

In addition to competition at home, Netflix must also navigate new regulations and competitors in international markets. For example, in the UK, ITV and the BBC recently announced their own streaming service after working together to produce BritBox. Their last joint venture attempt, Project Kangaroo, was rejected by the Competition Commission a decade ago. But this time, the media regulator Ofcom welcomed the move, with CMS and Hogan Lovells advising on the landmark deal.

With regulators trying to get to grips with overseeing competition in the digital age, it’s an interesting time to be a competition lawyer.

 

[Sara Moon]

Commercial News Update: 31st July 2019

Welcome to this week’s commercial write up everyone. I can't believe it's the last day of July already! The topics covered this week are:

1. SoftBank’s Vision Fund II @Jaysen
2.ECB laying the groundwork for a potential stimulus @Moni
3. WeWork’s earlier than expected September IPO @Lewis James


1. SoftBank’s Vision Fund II @Jaysen

The Story:

SoftBank just announced the launch of its second mega fund, Vision Fund II. It comes two years after the Japanese company launched the world’s biggest tech fund, disrupting the venture capital industry as it pumped billions into fast-growing companies like Uber, WeWork and Flipkart.

Impact on Businesses and Law Firms:

It was Linklaters that was offered the job on the first fund after a specialist from the firm successfully pitched to the CEO in Tokyo. Fund lawyers from London, Tokyo and New York were then involved in drafting the fund documentation.

The nature of investors in that fund made for an interesting yet challenging job. SoftBank’s first fund was supported by substantial checks from Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Company. Linklaters’ lawyers would have been responsible for negotiating the terms on which the investors contribute their money. They would also help to reconcile the different interests and any conflicts between investors. Due to the size of their investments, terms appear to have been negotiated to allow the UAE and Saudi Arabian sovereign wealth funds (funds owned by the state) retain a say over certain deals, including veto rights on deals over a certain size.

Linklaters’ lawyers also helped to structure the fund, which is notable because of its size and because of its reliance on leverage. This is because the Vision Fund, unlike most funds, raises its capital through a combination of preferred debt and equity. Preferred debt promises a regular payment and more security if things go wrong, but it also means investors receive less of the upside.

With the influx of new capital, the fund’s portfolio companies can also do more deals. This means plenty of legal work to go around, such as the 16 law firms currently involved in the upcoming Sprint/T-Mobile merger.


2. ECB laying the groundwork for a potential stimulus @Moni

The Story:

At its most recent meeting on Thursday, the ECB announced that it expects interest rates to remain "at their present or lower levels" through the first half of 2020. The announcement is a change to previous statements and suggests that a rate cut, to provide more stimulus to a region that has been experiencing weak economic growth and low inflation. Following the announcement, ECB President Mario Draghi reassured investors that the risk of recession in the region is very low. However, data released last week shows that German manufacturing output fell to its lowest level in seven years in July, which suggests that a slowdown in trade has significantly affected German exports. The ECB also suggested there could be additional or alternative measures taken to stimulate the eurozone economy including "a tiered system for reserve remuneration", and a potential reintroduction of quantitative easing. Draghi also suggested that some members may have doubts on specific aspects of the stimulus package; however, the concerns appear to be regarding the nuances of the package and not necessarily on the need for a package.

Impact on Businesses and Law Firms:

Markets have been somewhat prepared for a potential stimulus package since June when Draghi announced that the ECB would use all necessary measures to boost the economy if there were no apparent signs of improvement. However, stock markets have risen this week as more concrete signs of a stimulus package are on the horizon. Optimism around the stimulus is heightened by the fact that many expect the US Federal Reserve to cut its key interest rates this week, and simultaneous stimuli from key central banks will likely give a substantial boost to global growth. A stimulus package would be positive news for most businesses as it suggests lower future costs of funding and lower costs of investments. Lower interest rates also can boost consumer spending, which in turn, boosts business. The stimulus is also positive news for law firms as higher-performing businesses tend to invest more and participate in more deals which bring in business for city law firms.


3. WeWork’s earlier than expected September IPO @Lewis James

The Story:

The technology start-up providing shared workspaces is planning to go public in September, the Wall Street Journal reports. WeWork is meeting with Wall Street banks to help advise upon their IPO, after confidentially filing with US securities regulators last year. Meanwhile, WeWork is also trying to raise up to $6 billion through an asset-backed loan to ease the pressure on their IPO.

There is controversy surrounding WeWork, with many investors feeling apprehensive. The IPO is happening sooner than expected, especially in light of WeWork’s recent financial report. The report illustrated how WeWork is reflecting the pattern of other tech companies, being both growth-intensive while making persistent losses. It almost hit $2 billion in net losses just last year alone.

Impact on Businesses and Law Firms:

Debate surrounds the CEO Adam Neumann, who recently raised $700 million through share sales and debt backed by his ownership stake. This ‘cashing out’, coupled with Neumann’s ‘self-dealing’ (leasing his own properties back to WeWork) and unpredictable management style has caused claims that WeWork’s IPO “doesn’t pass the smell test”. There does remain optimism in Neumann, especially with backing from Masayoshi Son’s SoftBank and T Rowe Price, but many investors remain unconvinced.

WeWork’s IPO raises some interesting legal questions for firms when advising clients. For example, Neumann’s ‘self-dealing’ and scandals like WeWork banning meat for employees may be something firms would like to distance clients from.

Nevertheless, the start-up was recently valued at $47 billion; as such, it is certainly going to be one of the main IPO’s this year. Indeed, WeWork is now the largest tenant in New York and is growing fast in London. It will be interesting to see whether WeWork manages to successfully disrupt a traditional industry, but a current environment of underwhelming disruptor IPO’s with Uber and Lyft potentially casts doubt upon this prospect.