Best of Lex: cash, cars and conglomerates

Dear readers,

Records set this century are crumbling. The S&P 500 chalked up its longest streak of record highs since 1997 this week. US inflation has risen to its highest levels in three decades.

Yet sometimes it is necessary to look further back in the history books for precedents. Oxford university has secured its largest donation for at least 500 years. Linacre College, named after a Renaissance physician, is to be called Thao College after selling its naming rights to a Vietnamese budget airline tycoon for £155m. 

That tops the sum given to the university by US billionaire Stephen Schwarzman in 2019 by £5m. The US and Asia lead the way for naming rights in education. But Britain is rapidly catching up.

The sale of naming rights can cause controversy. The rebranding of Linacre, a graduate college with a strong environmental ethos, did not go down well with the Oxford Climate Justice campaign. Environmental campaigners have other causes for dismay. The COP26 climate summit is unlikely to do enough to limit temperature rises and “keep 1.5 alive”.

A commitment to phase out fossil-fuel vehicles by 2040 did not win the support of four of the world’s five largest carmakers, nor governments in Washington or Beijing. Even so, hydrocarbon-fuelled vehicles clearly do not have a bright future.

That leaves FTSE 100 chemicals group Johnson Matthey painfully exposed. It has tried to reduce its dependence on sales of catalytic converters by pushing into electric batteries. This week it became clear the plan had failed, downgrading the group from plodder to omnishambles. The London market bears as much blame as bosses. Powerful UK income funds demand dividends over capital expenditure.

Wall Street’s embrace of venture capital risk provides a striking counterpoint. The market value of electric truckmaker Rivian leapt to $93bn on Wednesday, its first day of trading. That looks incredibly high for any newly listed company, even more so for one that generated just $1m of revenue in its most recent quarter.

Elon Musk deserves some of the credit, said Lex. Tesla has shown that the improbable can happen: a start-up automaker can produce vehicles at scale. The chief executive’s sale of nearly $5bn of his shares this week hit the headlines. But Lex reckoned it was only prudent of him to take advantage of a lofty valuation. Its enterprise value to forward ebitda multiple hovers near 100 times. Moreover, he needed to sell shares before his options expired to pay potentially $15bn in state and federal taxes. That may provide a small victory for those alarmed by America’s wealth polarisation.

PayPal, a company Musk co-founded, also came under the spotlight after it lowered its full-year earnings outlook. Lex thought it should hold its nerve, sticking to its core products, rather than rush to tack on new services. The abandonment of talks to acquire social media company Pinterest for $45bn made sense. There are good reasons why no US company has replicated the success of China’s WeChat in building an all-in-one app.

Nor is WeChat as shiny as it used to be. Owner Tencent missed third-quarter sales expectations this week amid growing competition from ByteDance, owner of short video platform TikTok. That is a bigger threat than crackdowns by Beijing.

Chinese regulatory risk remains high, though. Just ask SoftBank. Its shares have fallen 40 per cent over six months, dragged down by the declining value of its Chinese tech holdings such as Alibaba and Didi. SoftBank still lacks a sense of direction, says Lex, though buybacks will boost the share price.

Regulation is also an ever more important issue for US tech groups. CME, the Chicago-based futures exchange is selling Google a $1bn stake. No one expects Google to buy CME outright. But the search giant’s obvious interest in securities trading should make regulators wary.

As the tech goliaths expand into new lines of business, they are morphing into conglomerates, albeit a 21st-century version held together by a common focus on technology. That should give added interest to the fate of General Electric, once the US’s apex industrial conglomerate. After years of scandal and stumbles, this week it announced its formal break-up into three groups.

The spun-out healthcare and energy businesses should do better without the stigma of GE’s problems. On Friday came more announcements of break-ups, from Toshiba in Japan and Johnson & Johnson in the US.

Another conglomerate coming under pressure is the Swiss luxury business Richemont. US activist Third Point has reportedly bought shares and is seeking improvements. News of talks to cede control of lossmaking online retailer Yoox Net-a-Porter, which emerged on Friday, might please the activist. Even so, founder and chair Johann Rupert is not obliged to respond quickly to chivvying from minorities. A dual-share structure gives him control despite his economic interest of just 9 per cent.

Time is a luxury that Richemont, like its customers, can afford. Try to enjoy some of it too and have a pleasant weekend.

Vanessa Houlder
Lex writer