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Corporate year in review

A round up of some of 2016’s most significant corporate events and news stories.

Smartphone sales


A bright start to the year for Samsung Electronicswent up in smoke, after it took the unprecedented decision to axe its Galaxy Note 7 line, following a spate of safety issues that saw the smartphone banned from aircraft, writes Nic Fildes.

The 2016 Galaxy Note iteration won substantial praise from the telecoms industry and was seen as a potential hit alongside the more mainstream Galaxy 7, which was also warmly welcomed. Samsung, the largest phonemaker in the world, headed into the summer having gained market share from a faltering Apple.

Yet by September, Samsung had moved to replace 2.5m Note 7s, amid reports that the handset was overheating and catching fire. It laid the blame on a battery supplier and was initially praised for acting quickly, with shares in the South Korean company hitting an all-time high. That confidence collapsed however, as the replacement models also started to catch fire, eventually triggering a full recall and the decision to kill the model.

Samsung shares went into a tailspin as analysts estimated that the cost of the recall could be $2.3bn, while Samsung would lose out on sales of up to $17bn. Samsung said its operating profit would decline Won3.5tn ($3bn) over the next six months, taking the total cost of the safety debacle to more than $5bn.

Samsung is expected to reveal what exactly went wrong with the Note 7 early in 2017 after running extensive tests on the phones to determine why they overheated so dramatically and, more pertinently, why it sent defective replacement models out into the market.

The end of the year proved just as frantic as it paid $8bn for automotive technology company Harman Industries and came under pressure from activist shareholders to return almost half of its $60bn cash pile to investors and reform its convoluted structure.

Banking on the US top five

© FT Graphic / Bloomberg

Europe’s investment banks have losing market share ever since the 2008 financial crisis, but 2016 was the year when they finally ceded all top five places in the global investment banking ranking to their US rivals, writes Laura Noonan.

Industry monitor Coalition reported in September that the five giants of Wall Street — JPMorgan, Citi, Goldman Sachs, Bank of America and Morgan Stanley — now lead the rankings for global investment bank fees, having edged out Deutsche Bank.

Deutsche Bank attributed its investment banking decline to a strategic revamp that has drained it of resources, in an attempt to improve its capital ratio and make its earnings more stable.

Indeed, similar strategic choices have inflicted similar wounds on the once-mighty investment banks of Credit Suisse, Barclays, UBS and Royal Bank of Scotland, which are now much smaller.

But US banks argue that the loss of market share for Deutsche — and other Europeans — is not just because they have cut back on investment banking, but also because they lost focus and the faith of their clients.

Their argument is that European banks have spent the past few years distracted by capital worries, which US banks dealt with much earlier in the crisis, and the resulting neglect of their core business cost them clients.

However, this suggests European banks may be on course for a rebound in 2017. Most are nearing the end of their strategic turnrounds, leaving them more time for their day jobs.

There are some encouraging signs. At the end of the year, Barclays joined JPMorgan in top place in the prestigious European Fixed Income Investors Study carried out annually by Greenwich Associates.

Still, the Europeans have much smaller investment banks now, and their contraction leaves the Americans free to claim that they are the only ones who can truly cover the globe for international companies. As such, any European rebound may prove limited.

A social media storm

2016 was the year the term ‘Big Social’ was coined, as social networks such as Facebook and Twitter came under scrutiny like their predecessors, Big Pharma and Big Tobacco, writes Hannah Kuchler.

The US presidential election crystallised one old fear about social networks, that they allow people to live in filter bubbles, and created a new fear, that fake news was spreading faster than real news, warping the understanding of a population that now relies on social media over traditional media for information.

Facebook, by far the largest social network with 1.8bn monthly active users, was first in the line of fire for the fake news phenomenon. Stories claiming the Pope endorsed Donald Trump and Hillary Clinton’s associates were involved in a pizza parlour paedophile ring went viral on the network, where almost half of all Americans consume news, according to the Pew Research Center. Facebook responded by saying it was working on ways to flag the fakes in the news feed.

Twitter was adopted by Mr Trump as his personal trumpet, bypassing the questioning media, while still gaining huge amounts of publicity for his late night Twitter rants. The messaging platform was also criticised for allowing hate speech from the ‘alt-right’, an online white nationalist movement, which it later cracked down on by suspending several accounts.

Financially, some internet companies feared they were too small to be ‘Big Social’, with Twitter’s stock under pressure because of user growth problems that have dogged it for years and the once gigantic Yahoo signing a deal to be sold to Verizon for just $4.8bn. But while Twitter failed to find a buyer, after talks with Google and Salesforce, and Verizon pushed for an even lower price after Yahoo revealed a large data breach, LinkedIn was quids in with a $26bn sale to Microsoft.

Read more

Timothy Garton Ash: What to do when the ‘truth’ is found to be lies
Year in a word: Post-truth
Inside Business: Real consequences of posting fake news

Twitter — perched out on a limb

Driven to distraction by Brexit

Nissanshrugged off the uncertainty unleashed by the Brexit vote to make the most significant investment decision by a company since the EU referendum by pledging in October to build new car models in the UK, writes Peter Campbell.

The Japanese carmaker said its decision to assemble two models including the Qashqai at its north-east of England factory “follows the UK government’s commitment to ensure that the Sunderland plant remains competitive”.

The exact details of the assurances offered by the government to Nissan remain unclear, and ministers have faced repeated questions by MPs about whether the commitments are backed by any taxpayer money.

For the government, securing the Nissan investment was crucial, as other carmakers including Toyota and General Motors’ Vauxhall unit also have investment decisions to make during what are expected to be two years of negotiations on Britain’s exit from the EU.

Speaking in September before the Sunderland deal was struck, Nissan chief executive Carlos Ghosn said he could not delay the investment decision around the new Qashqai sport utility vehicle until after the UK’s exit, adding any changes in trading conditions — such as tariffs or other barriers — would have to be compensated for by the British government.

With Nissan and Renault sharing some manufacturing through their global alliance, the Japanese carmaker would have been able to move production of the Qashqai to Spain.

Losing the Qashqai — which accounts for half the vehicles made in Sunderland — could have rendered the factory uncompetitive.

The government’s assurances to Nissan have led to calls from other industries to receive assistance.

Philippe Houchois, analyst at Jefferies, said if tariffs were imposed on cars exported from the UK to the EU after Brexit, it seemed the UK was willing to compensate Nissan.

He added he could imagine other industries would ask for similar compensation if these sectors were also hit by tariffs.

Miners rebound

© FT Graphic / Bloomberg

A rare combination of rising prices, falling costs and management discipline helped the mining sector stage a remarkable comeback in 2016, writes Neil Hume.

Burdened with debt and under fierce attack from hedge funds, mining stocks tumbled at the start of the year as concerns about slowing growth in China — the world’s biggest consumer of raw materials — shook markets.

Since then, the sector has enjoyed a dramatic change in fortunes, triggered by a sharp surge in commodity prices and a growing realisation that 2017 could be a year of bumper payouts for shareholders.

“In under 12 months, fears of emergency cash calls and even bankruptcies have given way to one of the sharpest sector rallies in over 30 years,” says Macquarie analyst Alon Olsha.

From a 12-year low in January, the FTSE All-Share Mining index has almost doubled in value and will end the year as one of the best performing sectors in Europe. Anglo American and Glencore — two of its largest constituents — are up 280 per cent and nearly 200 per cent respectively year to date.

Usually when commodity prices are rising, miners crank up investment and dealmaking activity. 2016 has been different. Alarmed by the recent downturn, top mining executives have not sunk billions of dollars into new projects. Instead, they have continued to trim capital expenditure, cut costs and put profits above chasing market share.

This has allowed the benefits of higher commodity prices to flow straight to the bottom line, helping to reduce debt loads and put mining companies in a position to return cash to shareholders.

Glencore, the miner and commodity trader that axed payments in 2015, has already announced plans for a dividend of at least $1bn next year. Anglo American is expected to reinstate its dividend in 2017, while Rio Tinto could have enough surplus capital to launch a $2bn share buyback, if commodity prices hold.

Keeping the UK’s lights on

© Bloomberg

France’s EDF finally received the go-ahead in September from the UK government to build a contentious £18bn nuclear power station in south-west England, writes Michael Stothard.

The next-generation plant called Hinkley Point C in Somerset — due to start operations in 2025 and supply about 7 per cent of the UK’s electricity demand — is a crucial part of securing the country’s future energy needs as Britain phases out coal-based power generation.

For EDF, the deal is a chance to show that its European Pressurized Reactor technology — seen by critics as too expensive and overly engineered — can be built on time and to budget. Other projects involving the EPR design have suffered big cost overruns and significant delays.

For the Chinese, which are financing one-third of Hinkley, it is a chance to get a foothold in the European nuclear industry.

Hinkley encountered fierce opposition. Some within EDF warned the balance sheet of the French utility is too stretched and that any construction delays at Hinkley could destroy the company. The chief financial officer of EDF resigned over these concerns.

Shareholders and credit rating agencies also warned about the risks to EDF from Hinkley. Shares in the company have fallen 30 per cent over the past year, hit also by a drop in power prices in France and technical problems at other EDF nuclear plants.

In the UK, critics questioned the guaranteed electricity price for Hinkley’s electricity that was agreed with the British government.

There were also last-minute security concerns by new British prime minister Theresa May about Chinese involvement in such a sensitive project. But she ultimately approved Hinkley in September, albeit under revised terms.

Under the final deal, EDF was barred from selling its stake in Hinkley during construction, and the UK government said it would take a “golden share” in future nuclear plants.

Read more
Hinkley Point: Is the UK getting a good deal?
Inside Business: Hinkley is the peak of subsidy cultureJonathan Ford: The twisted tale of Britain’s great energy gamble
Sarah Gordon: Hinkley ‘golden share’ will not solve UK infrastructure problems
Lex: EDF — a sporting chance

The end of BHS

Former BHS owner Sir Philip Green © Bloomberg

Sir Philip Green has said he made “an honest mistake” when he sold BHS, a department store chain that employed 11,000 people, to a consortium led by a former bankrupt. MPs sifting through the wreckage have pronounced him “the unacceptable face of capitalism”, writes Mark Vandevelde.

The demise of BHS in April was Britain’s biggest high street failure since Woolworths toppled over in 2008. It was also one of the most contentious, denting the retirement incomes of thousands of former workers, shouldering an official rescue fund with what it says could be a £300m bill and inflaming a debate over how to make capitalism work for ordinary people as well as the super rich.

Dominic Chappell had never run a retailer, or any company approaching the size of BHS, when he bought the chain for £1 last year. He was introduced to the deal after reportedly working as a driver for another prospective buyer whom Sir Philip had rejected after receiving information that the billionaire considered to be disqualifying.

Mr Chappell has acknowledged receiving £4.1m in salary, bonuses, fees and loans during his chaotic 13-month spell at BHS. But the brunt of public resentment has fallen on Sir Philip, who made his first billion by buying BHS and was knighted a decade ago for services to the retail sector.

“Envy and jealousy, my doctor told me, are two incurable diseases,” said the Topshop-owner at a parliamentary hearing in June, before spending the summer aboard his new 3,000 tonne superyacht, the Lionheart. “ I have done nothing wrong.”

Nonetheless, Sir Philip is facing a campaign by MPs to strip him of his knighthood and the prospect of legal action by the Pension Regulator, which is trying to reclaim the cost of bailing out BHS pensioners.

Labour MP Dennis Skinner has even compared Sir Philip with disgraced media baron Robert Maxwell. “He had the money and he had the yachts. He had the workers and he robbed them of their pensions,” he told parliament in October. “It is almost a parallel.”

Spending spree


When Nikesh Arora, the expected heir to one of Japan’s most successful technology groups, abruptly resigned in June after less than two years at SoftBank, its founder Masayoshi Son blamed his own greed, writes Kana Inagaki.

The 59-year-old billionaire said he was not ready to hand over the company he founded to the former Google executive as promised, cryptically saying that he had to “work on a few more crazy ideas”.

Investors did not need to wait long to find out what the eccentric CEO was up to next. A month later, and just weeks after the UK voted to leave the EU, SoftBank agreed to take over British chip designer Arm Holdings for $32bn. Differences in opinion over the Arm acquisition, it now appears, was what helped kill the Son-Arora bromance, in addition to a clash over succession plans.

SoftBank’s crazy spending spree did not end there. After the summer had passed, Mr Son was off to Riyadh to meet Prince Mohammed bin Salman, Saudi Arabia’s powerful deputy crown prince, to launch a $100bn technology fund.

In December, a month after the US election, a smiling Mr Son boasted to reporters in New York that he had made a $50bn pledge to invest in US start-ups, in a meeting with president-elect Donald Trump. The move quickly spurred market speculation that Mr Son would revive talks for a merger between SoftBank-owned Sprint and rival T-Mobile USA.

So far investors have not punished Mr Son for his bold bets. Shares have risen nearly 30 per cent this year and the group is now worth $73bn. But analysts say Mr Son will need to follow through on his promise to restore the company’s balance sheet, which is burdened by interest-bearing debt totalling ¥14tn ($118bn). For now, though, investors are willing to wait and see where his big, crazy ideas will take the company.

Driven to cut its losses

Few businesses have made as many big pivots as Uber in 2016, writes Leslie Hook.

At the beginning of the year, the ride-hailing company was pouring money into its lossmaking China business as quickly as it could, while chief executive Travis Kalanick spent one in five days there.

That headlong rush into developing markets — China was the biggest, but India, Southeast Asia and South America were also chewing through cash — drove Uber to losses of $1.3bn in the first half. That is believed to be a record sum for a private company in Silicon Valley, but Uber’s investors did not blink. Saudi Arabia’s sovereign wealth fund invested $3.5bn in June, and then a few weeks later, Uber raised a line of credit of more than $1bn. Both of these valued the company at more than $60bn.

A key pivot point arrived at the beginning of August, when Uber cut its losses in China, selling its business to rival Didi Chuxing in exchange for taking a stake in the Chinese company and receiving a $1bn investment from Didi. The deal also saw the rivals take seats on each other’s boards.

Uber focused on a different area in the second half: expanding its research into self-driving vehicles. The company made its largest ever acquisition in August, buying Otto, a start-up working on technology for self-driving trucks. In September, Uber started carrying passengers in its pilot self-driving taxi fleet in Pittsburgh, and then expanded these tests to San Francisco.

These new efforts are part of the reason Uber’s deep losses have continued. The company lost $800m in the third quarter, and had net revenues of $1.7bn. Earlier in the year, Uber said it was profitable in all its developed markets, but intense competition from rivals such as Lyft has forced it to keep subsidising rides. A possible public offering is still years away, it says. Just as well, with these figures.

Read more

Lex: Feel the burn
FT View: Taxman has grounds to test Uber’s business model

Feed the world

Werner Baumann had been chief executive of Bayer for just two weeks when he launched an ambitious takeover bid for US seedmaker Monsanto in May, writes Arash Massoudi.

Formerly Bayer’s finance director and a lifer at the company, Mr Baumann saw an opportunity via the deal to transform the German aspirin-to-crop chemicals conglomerate into the market leader of the agribusiness industry, while also making Bayer too large for any rival to easily swallow.

Following four months of back and forth with Monsanto’s board and its shareholders, the 54-year-old succeeded in clinching a $66bn takeover agreement in September after raising Bayer’s initial offer by only about 5 per cent.

The deal, one of the largest in 2016, was aided by three factors. Monsanto, which unlike Bayer is fully exposed to the agriculture sector, had been weakened by a downturn in commodity prices that put pressure on farmers’ budgets.

Second, Monsanto’s chairman and chief executive Hugh Grant had unsuccessfully spent much of the previous five years trying to buy Swiss crop chemicals group Syngenta. Those failed attempts ultimately put Syngenta in play for other prospective suitors. By February, ChemChina, an ambitious Chinese state-owned enterprise, had agreed a friendly $44bn takeover.

Third, Monsanto’s main US rivals, Dow Chemical and DuPont, had agreed to a $130bn merger in December 2015 that would spin out their respective agribusiness units into a standalone company after the deal completes. The situation left Monsanto with limited options to escape Bayer’s clutches.

Now, the trio of deals may lead to more than 60 per cent of the agribusiness industry being controlled by just three companies — Bayer, ChemChina and the Dow Chemical and DuPont unit. However, that is only if the transactions are approved by regulators — they could insist on major divestitures, or even block one or more of the deals.

Read more

Lex: Bayer / Monsanto: holy crop
Michael Skapinker: Huge, dangerous bets

Via FT