Monday 29/10/18

1. In MACROECONOMIC NEWS, Merkel gets mullered and Brazil takes a right turn
2. In TECH NEWS, IBM buys Red Hat, Facebook and Google come under focus for more tax payments and Epic Games earns a chunky valuation
3. In INDIVIDUAL COMPANY NEWS, Tesla gets probed by the FBI but praised by Baillie Gifford
4. In OTHER NEWS, I bring you some baby/celeb lookalikes and scary toilets. For more details, read on…

So Merkel’s nightmare continues and Brazil gets a new extreme-right president…

Angela Merkel’s CDU humbled in German regional vote (Financial Times, Guy Chazan) piles on the pressure for Germany’s creaking grand coalition as Chancellor Merkel’s Christian Democrats suffered a chastening blow-back in elections in the Hesse region yesterday. The Social Democrats also lost big time in the election as voters swung to the greens and the Alternative for Germany anti-immigration party (aka the AfD, which now has representation in all 16 regional parliaments). Having said that, the CDU still won, albeit by a much reduced margin. * SO WHAT? * This puts further pressure on what has 

proved to be a very fragile coalition that has been dogged by infighting, mainly centring around immigration policy. However, because Merkel’s CDU did not actually lose the election, she survives to fight another day. She will stand again as chairwoman of the CDU at a party conference in December.

Extreme rightwinger takes power in Brazil (The Guardian, Tom Phillips and Dom Phillips) heralds a new dawn in Brazil as it says goodbye to a largely socialist era and hello to far-right, pro-gun, pro-torture populist Jair Bolsonaro who made pre-election pledges to wage a war on corruption, crime and a perceived communist threat. * SO WHAT? * This promises to be quite a departure from the approach of the Workers’ party – in power from 2003 until 2016 – which has been seen to be very much to blame for years of economic recession and corruption. This really is quite a regime shift and so I suspect there will be a lot of surprises to come when he gets his feet under the table. 

In tech news, IBM makes a big acquisition, Facebook and Google face further tax scrutiny and Epic Games looks at a rather epic valuation…

In IBM to acquire Red Hat for about $33billion (Wall Street Journal, Jay Greene and Robert McMillan) we see that IBM has embarked on what is its biggest ever acquisition in an effort to boost its cloud computing power – seen as being essential to sparking the giant back into life. Both Amazon and Microsoft have leap-frogged it in recent years in that department but IBM chief exec Ginni Rometty believes that the market is now moving towards having multiple cloud providers, which should present decent business opportunities. Red Hat is a leading provider of open-source software and services which helps to knit together different software platforms and is a major provider of an enhanced version of the Linux operating system to corporations, called Red Hat Enterprise Linux. *  SO WHAT? * Rometty had to do something drastic as her bid to turn the company around by cutting slower-growth areas and focusing much more on more cutting-edge tech like AI and cloud computing has so far just led to six years of falling revenues. IBM’s proposed price of $190 per share in a cash-and-shares offer represents a MASSIVE 63% premium to Red Hat’s closing price on Friday, but the theory is that the marriage of Red Hat’s freewheeling style and IBM’s selling power will make for a powerful combination. The acquisition has been approved by both boards and is expected to close in the second half of 2019.

Facebook, Google may face billions in new taxes across Asia, Latin America (Wall Street Journal, Timothy W. Martin and Sam Schechner) highlights the efforts of a number of countries that are looking to implement new taxes on tech behemoths such as Alphabet and Facebook in order to get a slice of the online pie. The European Union has proposed to tax such companies based on revenues rather than profit – and now South Korea, India and at least seven other Asian-Pacific countries along with Mexico, Chile and other LatAm countries are looking at doing something similar.

These taxes are effectively a levy on the digital services sold by these companies and are designed to catch services that are sold from one country to another and could add billions to their respective tax bills. * SO WHAT? * Unsurprisingly, interested parties (Google, Facebook et al.) and the countries who depend heavily on their presence (e.g. Ireland) are opposed to this move but those getting increasingly p!ssed off with watching billions of tax dollars/pound/euros walking out of the door are keen to keep the pressure on. Currently, US tech companies often report low profits, leading to small income tax bills in overseas companies where they SELL their digital services because customers in those countries are actually BUYING from a unit that is often based in a low-tax country (e.g. Ireland). The EU is proposing a tax on the digital REVENUE of very large companies from customers within the eurozone in addition to the conventional tax paid on PROFITS after expenses. The US is, funnily enough, not in favour and calls it a “unilateral and unfair” tax aimed at US tech companies.

Interestingly, Creator of Fortnite, most popular video game in the world, is valued at $15bn (The Guardian, Rupert Neate) shows how the company behind Fortnite, Epic Games, has just been valued at almost $15bn after receiving a $1.2bn cash injection from KKR, the private equity firm. Epic counts the likes of China’s Tencent Holdings and Walt Disney amongst its early investors and has seen its value skyrocket from $660m when Tencent took a 48% stake in 2012 to $4.5bn in May and now $15bn! Epic’s impact has been so huge that two rival makers Activision Blizzard (responsible for the Call of Duty franchise) and Take-Two Interactive (which makes Grand Theft Auto) have lost billions on their own valuations because of the impact of Fortnite. * SO WHAT? * That the company has been incredibly successful thus far is not in doubt, but there have been so many one-hit wonders in the world of gaming that you can’t help but think that this is ripe for being the latest example. Examples such as Tomb Raider back in the day and then more recently Candy Crush, Angry Birds, Farmville etc. etc. have all attracted huge investment and attention, but the problem has always been that the companies have been unable to follow up such a hit with another one of the same magnitude. There is no doubt that there’s more upside to come yet, but I suspect that the potential crash when gamers move onto The Next Big Thing will be huge.

Tesla continues to be under scrutiny but Baillie Gifford reiterates its loyalty…

Tesla faces deepening criminal probe over whether it misstated production figures (Wall Street Journal, Dana Cimilluca, Susan Pulliam and Aruna Viswanatha) is worth keeping in mind as the FBI’s criminal investigation into whether Tesla misstated production data on its Model 3 cars from as early as 2017 remains ongoing. The

company’s share price surged following its earlier-than-expected earnings release last week, but the stock is still off its highs. * SO WHAT? * The ramifications of a negative result in this investigation could be huge, so it is likely that it will cap any major upside until it is resolved as investors might have to temper their enthusiasm. Mind you, Tesla backer set to put more cash behind Musk (The Times, Simon Duke) shows that there is at least one major investor willing to back the embattled company – Scotland’s Baillie Gifford, which is the company’s second largest shareholder with an 8% holding. Ah well, there’s nothing like talking your own book ;0)

And finally, in other news…

I thought I’d leave you today with something hilarious I saw on my Facebook feed yesterday – 10+ babies who look just like famous celebrities (Sharebaby, D.G. Sciortino https://tinyurl.com/y8cefrpm) – it’s not new, but it is amusing. Then there was this: There’s a viral Facebook page that just posts pictures of scary toilets (msn.com, Jacob Shamsian https://tinyurl.com/y9lg6wfo). Who knew that people could get so creative?!?