The Lex Newsletter: chaotic drift at Credit Suisse — and in world affairs

Dear reader,

Lex coined the phrase “chaotic drift” this week to describe the malaise at Credit Suisse. For years, successive crises have spun the business hither and thither. The latest upset, prosaically, is poor performance by the investment banking division. This is set to trigger a group-wide loss for the second quarter.

Previous disasters have included embroilment with defunct hedge fund Archegos, tie-ins with financial disaster artist Lex Greensill and a spying scandal during the incumbency of Tidjane Thiam.

The limits of foresight in business and politics were an underlying theme of Lex this week. Please let me know what you think of our coverage at lexfeedback@ft.com.

Raft of problems

We have seen chaotic drift before at Barclays, Deutsche Bank and Rolls-Royce, to name just three businesses. The symptoms are serial disasters generated by leadership failures and an entitled workforce. Each might, in isolation, be deemed exceptional. This is how corporate PRs try to explain them. Shrewd investors instead perceive a pattern generated by a damaged culture and ineffectual management.

It is time for chief executive Thomas Gottstein to show he has Credit Suisse by the scruff of the neck. The weakness of the lender is reflected in dwindling capital and in investor hopes of a takeover by US financial services group State Street.

Apple under Tim Cook is the antithesis of Credit Suisse under Gottstein. The devices giant is a ship, not a raft. Cook has steered it to a valuation of $2.4tn. He has beaten lower-cost rivals, supply shortages, market saturation and controversy over data privacy and anti-competitive behaviour.

Apple’s latest project for altering our reality is a move into buy-now-pay-later lending.

Sometimes when tech companies flirt with financial services, they disappoint with underwhelming ventures dependent for fulfilment on big banks. That is our excuse for initially assuming Goldman Sachs would be the ultimate lender behind Apple Pay Later.

Instead, the role of the investment bank will be limited to managing access to Mastercard’s payment network. Apple will take the credit risk itself, which it is well-capitalised for, given that it has $193bn in cash and marketable securities.

Apple has fallen far less in the tech rout than other members of the Faang grouping.

Perhaps, laggard Netflix should be expelled from that hallowed club? Lex reckons the streaming service is locked into hefty content spending that it cannot reduce without suffering an exodus of subscribers.

Of course, the most important question is what acronym disruptive US giants should go by if Faang is now irrelevant. Adjust for name changes, remove Netflix, add Tesla and we get to Amata (Apple, Meta, Alphabet, Tesla, Amazon). That is Latin for “the beloved”, apparently.

Deal showreel

“Amata” may sound like “amateur”, but it is a description that would not apply — except perhaps to the bid for Twitter by Tesla boss Elon Musk. He eschewed full due diligence and launched his $44bn takeover as tech stocks started to crater. He now appears to be trying to wriggle out of it by claiming inadequate disclosure of fake accounts will imperil debt financing. Lex warned Wall Street banks and lawyers that lending legitimacy to the wheeze would be a bad look.

M&A of a more proficient kind was demonstrated this week in three inbound UK bids:

• Reliance Industries, the business of Indian tycoon Mukesh Ambani, agreed to buy most UK operations of Walgreens Boots Alliance for a reputed £6bn. Indian retailing is fiercely competitive. But Reliance and bidding partner Apollo are well-positioned to expand Boots there.

• Energy Capital became the latest US buyout fund to snatch an asset from the depressed UK market, with a £1.4bn offer for waste manager Biffa. At a premium of 37 per cent, the acquirer would still be able to keep net debt to ebitda below six times and produce annualised five-year returns of 20 per cent (just).

• Inclusive Capital, another US private equity group, enlisted Countryside’s largest shareholder in its push to buy the UK housebuilder for £1.5bn. Countryside, which builds for local governments and private landlords, is in a mess. In-Cap probably need not bid much higher.

Lex also approved of Canadian pension fund CDPQ paying $5bn for a 22 per cent stake in the Dubai port Jebel Ali. This has defensive pricing power.

It is unprecedented for the column to cheer four out of five deals reviewed in one week. We have launched an internal investigation into this failure of journalists’ negative cognitive bias and will publish our heavily redacted findings in due course.

Supply awry

Dislocated supply chains remain an uninterruptible source of gloom. Spiralling food and energy costs are discouraging consumers from buying new garments. US retailer Target is rammed with unsold inventory. That is a risk for Japan’s Uniqlo, which is ill-advisedly raising prices for its clothes.

Four factors are driving up world food prices: a Russian blockade of Ukrainian cereals shipments; military disruption to farming; steeper input prices for ammonia fertiliser; and the chilling effect of western sanctions on potash fertiliser exports from Russia and Belarus.

Lex concluded that severe food insecurity would spiral upwards, particularly in poor nations. This is chaotic drift writ large. It is bad for humanity — and investment.

Its antithesis is the market in scientific innovation that has developed between biotechs and Big Pharma.

BioNTech led the vaccines pushback against coronavirus in partnership with Pfizer of the US. The German start-up has now reported promising early-stage results in deploying the same mRNA technology against pancreatic cancer. Beating this disease is a holy grail for cancer researchers. Stage-three sufferers survive only six to 11 months on average.

Fresh investment is flooding into mRNA cancer treatments. Experts deploying capital to improve the lot of humankind? It can happen.

Enjoy your weekend,

Jonathan Guthrie
Head of Lex