The Lex Newsletter: Reddit and the API apocalypse 

Dear reader, 

Social media’s business model is built on the backs of users willing to upload their content for free. Reddit goes one stage further, relying on unpaid moderators to manage its online forums. A co-ordinated protest by those moderators has created a blackout on the site. It’s unlikely to be fatal but it illustrates the difficulties social media companies can face when trying to monetise their audience. 

Reddit was created in 2005, one year after Facebook. But its popularity has never translated into Facebook-like profits or growth. Still, co-founder Steve Huffman has managed to clean the place up over the past few years, drawing in more advertisers as a result.

Even so, the $10bn valuation Reddit achieved in a 2021 funding round now looks overly optimistic. That’s not because Reddit is locked in a fight with users but because valuations across tech are down.

If only Reddit could find a way to make more of the information that users have already uploaded. As one Lex reader put it: “The quality of the user opinions is so good a lot of searches on google append reddit and a site to search. For training purposes this data is gold.” 

Low on the Horizon 

If Reddit does list this year, it will be in the minority. Lack of exits mean venture capital investments are on hold too. Although limited partners who committed capital should not expect to be released from those commitments.

While low valuations ward off IPOs, interventionist regulators are eyeing M&A moves. Cash-rich pharma giants spent $85bn on deals in the first five months of the year. The pace of consolidation is attracting unwelcome attention. The FTC attempted to block Amgen’s $28.3bn takeover of Horizon Therapeutics. Barriers to M&A are going to make it harder for pharma companies to replenish drug pipelines. 

The tech sector faces the same issue. Neither the UK nor US supports Microsoft’s attempted $75bn acquisition of Activision Blizzard. UK antitrust regulators are worried Microsoft could use Activision games such as Call of Duty to corner the market in cloud gaming. But cloud gaming has yet to take off. Turning every device into a gaming device could increase the audience, but the sector lacks exclusive titles. Closing the deal will be time-consuming. Lex thinks both companies can do well enough without the other, even if Microsoft is charged a hefty reverse termination fee.

Will Nasdaq’s $10.5bn purchase of compliance software company Adenza meet with approval? Would it be a tragedy if not? Compliance is a popular sector. But at 31 times expected 2023 ebitda before cost savings, Nasdaq has paid too much.

Flagging energy levels 

UK interest in renewable energy is admirably high. Storage is an important component. One estimate puts the requirements for a net zero electricity system at 24 gigawatts — eight times existing capacity. 

Glencore shareholders want boss Gary Nagle to set more ambitious climate change goals — tough when coal makes up half of the company’s ebitda. At its annual meeting, 30 per cent rejected its progress report and asked for more detail. Nagle’s plan to buy Teck’s coking coal unit and then spin off the expanded coal division in two years could lead to the division being spun out regardless of a purchase. 

Credible credit forecasts 

This week, interest rates in Europe reached their highest level since 2001. Another rise is expected in July. Higher rates can expose bank weakness. Still, BBVA and Bank of Cyprus have jumped back into the market for Additional Tier 1 bonds (aka Cocos or AT1s).

In the UK, former Bank of England governor Mark Carney went on TV to declare that rates would stay high for the foreseeable future. Lex would like to point out how bad the BoE is at forecasting. It has failed to predict the persistence of rising prices, thanks to its deference to government policy. Those able to use their own common sense are advised to do so.

Finally, the speed with which big banks and investors have cut ties with Odey Asset Management is at odds with the 20-year timeframe over which Crispin Odey’s alleged sexual misconduct took place. The FT’s reporting has been a sharp reminder that the City of London can be a deeply unpleasant place to work for some.

Odey has now been ousted and Odey Asset Management is being dismantled. We did not expect it to survive intact. The nature of the allegations left investors and prime brokers with little incentive to deal with the hedge fund he founded, even after his departure.

Other stuff I liked this week

This week we’re celebrating Lex writer Andrew Whiffin, winner of the CFA Society’s National Journalist of the Year award. Revisit the in-depth analysis that bagged him his prize: Why is the UK stock market so cheap? 

Ten years on, cyber-security expert Bruce Schneier looks back at his role in Edward Snowden’s NSA document leak.

Speaking of whistleblowers, Tina Satter’s play about the arrest of a 25-year-old linguist called Reality Winner is now a film called Reality. The eerie script uses the FBI’s own transcript of her interrogation.

Enjoy your weekend,

Elaine Moore
Deputy head of Lex