12 ★ FINANCIAL TIMES Friday 20 March 2020

COMPANIES

S

teve Jobswas known to be averse to doling out

Apple’s excess cash to shareholders. After seeing

the company teeter on the edge of bankruptcy,

he knew how vulnerable even the most success-

ful businesses could be if they missed a beat in

the fast-changing technology industry.

The resistance to playing by Wall Street’s normal rules

didn’t long survive him. Apple started paying a dividend

and buying back stock the year after Mr Jobs died, and

soon came under intense pressure from activists such as

Carl Icahn to disgorge much more of its cash.

Yet in the current crisis, the nearly $100bn that Apple

still has on hand more than fulfils its co-founder’s deep

sense of financial caution. At current rates, that would be

enough to fund its entire R&D and capital spending budg-

ets for nearly four years, even if sales dried up completely.

At a time of intense business dislocation, Big Tech’s scale

and financial resources are about to come into their own.

Add in Alphabet, Microsoft, Facebook and A mazon, and

the combined net cash reserves of the leading companies

now total just over $350bn.

The years since the last financial crisis have seen a boom

for the leading tech companies, followed by a political and

regulatory backlash against their spreading power. With

much of the corporate world now facing a time of deep

business uncertainty and financial insecurity, we could be

entering a new phase: Big Tech Unbound.

The tech companies will inevitably be dented by a col-

lapse in parts of the consumer economy. But the leading

digital platforms should fare better than most as face-to-

face commerce and communication comes to a sudden

end for a large slice of the world’s population.

That prospect is already being reflected in the stock

market. Of the big five, shares in all but Facebook have

held up better than the broader indices over the past

month. Amazon’s 14 per cent decline is only half the fall

seen in the S&P 500.

From a position of relative strength, big tech companies

are likely to tighten their grip on large areas of digital activ-

ity while accelerating their reach into new fields. In Silicon

Valley itself, a period of consolidation seems inevitable

after the years of easy money

for tech start-ups. The

region’s biggest companies

have always been viewed as

the buyers of last resort by

venture investors: If a prom-

ising new business failed to

take off, it could often be sold

off to a bigger concern, if

nothing else then for its tal-

ent and knowhow. That process is set to accelerate.

The vast funding rounds raised by the Valley’s most suc-

cessful “unicorns” may complicate this picture. Many said

they were taking advantage of the easy money to build

reserves in anticipation of just the kind of rainy day that

has now arrived. In the next few months, it will become

clear just how many have been true to their word, rather

than using the cash to pump up growth to artificial levels in

pursuit of an even higher valuation.

Beyond the tech industry itself, an extended crisis could

open up new opportunities for expansion. With business

suddenly drying up, tech companies that were once feared

may soon be welcomed as saviours.

The media and entertainment industries may be among

the first in line. With advertising likely to dry up and its

theme parks closed, shares in Walt Disney are down 40 per

cent, wiping out more than half a decade of stock apprecia-

tion. That’s twice the stock price fall seen by Apple, which

has long been seen as a possible suitor for Disney as it turns

its sights to the entertainment world.

Regulators have clearly signalled in recent years that

they are likely to block further M&A-led expansion. That

may even extend to the many smaller acquisitions that

have fallen outside the scope of antitrust consideration in

the past, to judge by the Federal Trade Commission’s scru-

tiny of the last decade of dealmaking.

But the climate has changed. Big Tech, accustomed to

being a punching-bag for politicians in Washington, is

coming to be seen as an important national asset. Whether

it is Google’s efforts to help people locate coronavirus tests,

Facebook’s offer of $100m in cash grants to smaller busi-

nesses or Amazon’s race to ramp up its warehouse and

delivery staff to fulfil essential ecommerce orders.

Governments struggling to keep economies afloat have

little choice but to rely more heavily on the digital plat-

forms. The time will come again to crack down on Big

Tech’s economic power — but it isn’t likely to be soon.

[email protected]

INSIDE BUSINESS

TECHNOLOGY

Richard

Waters

Troubled times see

Silicon Valley earn its

place as national asset

Regulators had

looked likely to

block expansion.

But the climate

has changed

O L A F STO R B E C K— F R A N K F U RT

Two former London bankers were
found guilty of tax evasion in the first
German trial to rule on the legality of a
controversial set of share trades that
authorities claim robbed them of bil-
lions of euros of revenues.

Martin Shields, a former London-based
employee ofHypoVereinsbank, was
found guilty of tax evasion by a court in
Bonn late on Wednesday. His former
colleague Nicholas Diable was convicted
of aiding and abetting tax evasion in a
trial that started in September last year
but was expedited as the coronavirus
outbreak spreads across Germany.
The two men received suspended jail
sentences after co-operating with prose-
cutors. Mr Shields, who was given a sus-

pended sentence of 22 months, was also

ordered to pay back €14m he made

from the trades.

The trial of the two men examined

one set of so-called cum-ex transac-

tions, which exploited a design flaw

in Germany’s tax code that allowed

clients to trick authorities into refund-

ing dividend tax that had never

been paid. There are now several other

investigations into other such transac-

tions spanning multiple banks and law

firms.

The German government has put the

total losses to the taxpayer from the

scandal at as much as €5.5bn, although

some academics estimate it could be

twice that amount.

The judges in Bonn concluded that Mr

Shields and Mr Diable helped to orches-

trate a set of transactions that were

intended to trick German authorities

into refunding a tax on a dividend that

was never actually paid.

The public criminal prosecutors on

Wednesday called the cum-ex schemes

“organised crime” at the taxpayer’s

expense.

In his closing remarks, Mr Shields told

the court that “I clearly see that I have

made mistakes. I regret these deeply”.

He had already promised to repay the

personal gains he made with cum-ex

and made a first payment of €3m in Feb-

ruary.

As part of the ruling by the judges,

Hamburg-based private bank MM War-

burg, which had a role in the transac-

tions, was ordered to pay €176.6m to

German tax authorities.

Financials

Bankers convicted of share trade tax evasion

R I C H A R D M I L N E

N O R D I C A N D B A LT I C C O R R E S P O N D E N T

Swedbankhas been fined a record

SKr4bn ($400m) for serious deficien-

cies in its anti-money laundering con-

trols and for withholding documents

from Swedish and Estonian regulators.

Separate investigations by Sweden and

Estonia’s financial regulators found that

Swedbank, whose overseas operations

make it the largest bank in the Baltics,

had weak processes, routines and con-

trol systems while it failed to give its

subsidiaries in Estonia, Latvia and

Lithuania adequate resources to combat

money laundering.

“Our investigation shows that the

Swedish management did not efficiently

address the risk of money laundering in

the Baltics,” said Erik Thedeen, direc-

tor-general of Sweden’s Financial

Supervisory Authority. “It is also deeply

concerning that the bank on a number

of occasions withheld information from

FI that would have revealed the serious-

ness and scope of the problems.”

The record fine and stern words raise

the pressure on Sweden’s oldest bank

and increase the prospects of large fines

from the US, where it is also under

investigation. Swedbank this month

said that an internal probe — due to

report its full findings next week — dis-

covered that it had potentially broken

US sanctions through 586 transactions

totalling $4.8m.

As fears about the strength of some

European banks reverberate in markets

as a result of the coronavirus crisis, the

regulators stressed that the record fine

would not jeopardise Swedbank’s cur-

rent business and that it was well capi-

talised. Swedbank’s net profit last year

was SKr20bn.

Estonia’s regulator issued a precept

forcing Swedbank to take a number of

measures, including changing its organ-

isational structure as well as its prac-

tices for understanding the risks posed

by its customers and how it reports sus-

picious transactions to police.

“The banking group made choices

that allowed it to service higher risk cli-

ents without proper anti-money laun-

dering systems and controls and with-

out knowing to the fullest extent the

money laundering risks posed from

servicing these clients,” said Kilvar Kes-

sler, chairman of Estonia’s regulator.

Banks

Swedbank fined $400m over control failings

O RT E N C A A L I A J, R O B I N W I G G L E S WO RT H
A N D H E N N Y S E N D E R

US hedge fundMillennium Manage-
menthas closed several of its “pods” run
by teams of traders in response to losses
related to violent market swings.
Closures of the trading pods at the
$40bn multi-strategy firm—which has
about 150 to 200 of them—have
reached double digits, according to two
sources familiar with the situation.
Millennium gained 0.75 per cent in
the first two months of the year before
declining 2.67 per cent this month
through to March 12, people briefed on
the numbers said.

But there has been a wide disparity in

performance between different hedge

fund strategies at Millennium.

The large moves in markets have

wreaked havoc on strategies such as rel-

ative value — eking out profits from

small price differences in similar securi-

ties — fixed income, and quantitative

trading.

Millennium had close to 40 per cent

of its strategy allocation in relative-

value fundamental equity, 19 per cent in

quant and arbitrage, and 22 per cent in

fixed income as of mid-2019, according

to an investor document seen by the

Financial Times.

Millennium was founded more than

30 years ago byIzzy Englander. It is

known as one of the best-performing

funds and has only had one down year,

when it lost 3 per cent in 2008, accord-

ing to an investor presentation.

Over the past three weeks the S&P

500 has tumbled into a bear market —

defined as a 20 per cent drop from its

recent peak.

The US stock market sold off again

on Wednesday, and is 30 per cent below

its peak.

Bond markets have also been hurt by

the turmoil unleashed by the virus out-

break.

Even the US Treasury market, usually

seen as a haven for investors, has

become less liquid than normal. Widen-

ing gaps between nearly identical gov-

ernment bonds, as well as Treasury

bonds and Treasury futures, have hit

relative-value funds that use leverage to

arbitrage and try to profit from the price

differences.

Millennium’s problems have

extended to Asia, where relative-

value trades have also been wrong-

footed, and lay-offs are expected

imminently.

“That is the disadvantage of being

in transparent markets,” said one per-

son familiar with the group in Asia.

“Public market securities are the first

to suffer. In the private market there is

no transparency and nobody knows

what the right mark is. Liquidity has

vaporised.”

New York-based Millennium is struc-

tured as an empire of trading teams and

strategies. It has expanded aggressively

in recent years.

Mr Englander is renowned for an “eat-

what-you-kill” approach to managers,

traders and analysts.

A spokesperson for Millennium

declined to comment.

Additional reporting by Miles Kruppa in

San Francisco, Laura Noonan in New York

and Joe Rennison in London

Financials

Sharp swings catch out Millennium

Trading pod closures

at US hedge fund reach

double digits after losses

C L A I R E B U S H E Y— C H I C AG O
J O E R E N N I S O N— LO N D O N

Boeinghas asked the US government
for $60bn for aerospace manufacturers,
a liquidity injection that would bolster
the group and its supply chain if
airlines defer deliveries, but could l oad
it with debt.
The aricraft maker’s stock has fallen
70 per cent over the past month, with
virus fallout heaping uncertainty on a
company that is already dealing with
the costs of the grounding of its 737 Max
following plane crashes off Indonesia
and in Ethiopia.
Even before the pandemic, a flight
needed to recertify the 737 Max had
been pushed back until April, putting
a goal to return the grounded plane
to service by the middle of the year
under pressure.

Investors were also increasingly con-
cerned that the market was oversup-
plied with wide-bodies such as Boeing’s
787 Dreamliner.
Then the virus struck in force, with
customers slashing capacity as passen-
gers cancelled bookings and govern-
ments imposed travel curbs.
“Three black swans in one month,”
said analyst Peter Arment at Baird. Cov-
id-19 meant government loans were
“likely needed to bridge payments to
the supply chain and aid the lack of
inflows from reduced deliveries”.
S&P Global Ratings forecasts that the
group will see free cash outflows of more
than $11bn in 2020, against a previous
expectation of a $2bn inflow.
As US airlines have called on Congress
and the White House for a bailout, their
supplier has done the same.
Boeing’s $60bn request would include
some loans directly from US taxpayers
and others from private institutions
backed by the government, a company
spokesman said. He did not immedi-
ately comment on whether the group
was also asking for grants that did not
need to be repaid.
Boeing has said that an unspecified
portion of the $60bn would flow to its
supply chain.

The commercial aerospace industry

employs 536,000 workers in the US,

according to the Bureau of Labor Statis-

tics. Some smaller suppliers will fold if

work evaporates, and Donald Trump

has said that “we have to help Boeing”.

Any package would swell Boeing’s

large debt pile further.

The group has just under $35bn in

debt, a figure that is likely to rise to

almost $40bn by the end of the first

quarter. It drew down a $13.8bn loan

this month.

The best-case scenario for Boeing was

if airlines deferred deliveries until the

second half and government funds were

used as a way of managing liquidity, said

Christopher Denicolo, an analyst at S&P

Global Ratings.

Even then, if lawmakers award Boe-

ing the full amount, the group will have

$100bn in debt to pay off.

“In the short term, the concern is

liquidity, and then after, it’s what is the

leverage on the company, and can they

pay that over time,” said Mr Denicolo.

“It’s a massive amount of debt. It’s a big

company, but it’s not that big.”

Boeing’s bonds have sold off sharply

this month as investors reassess the

company’s creditworthiness. A $750m

bond maturing in 2030 had fallen from

a high of 106 cents on the dollar earlier

this month to 84 cents on the dollar by

Wednesday, pushing the implied yield

for the debt from 2.2 per cent to above 5

per cent.

Bonds maturing this year have been

hit, with a $350m bond maturing in

October dropping 4 cents to 93 cents on

the dollar on Wednesday, pushing its

yield above 12 per cent. S&P has cut its

rating for this two notches, to BBB.

Any Congress-approved aid package

might come with strings attached.

There is a push among Senate Demo-

crats to leverage an airline bailout to

impose restrictions on executive pay

and stock buybacks.

Michael Stumo, whose daughter was

killed in the second of the two crashes of

the Max, said on Twitter that any

funds should come with increased regu-

latory scrutiny.

“Public bailout needs to provide pub-

lic benefit,” he wrote.

A bailout could have ramifications

for investors. Mr Arment pointed to the

2009 bailout of the car industry via

the Troubled Asset Relief Program.

While the federal government owned

60 per cent ofGeneral Motors, it capped

executive compensation and prohibited

a dividend.

“We see many of these loan handcuffs

on the table,” Mr Arment said. “If

50 per cent of the $60bn in funding goes

to Boeing directly, that’s essentially half

its current market cap, which could

come with some dilution to existing

equity holders.”

Aerospace & defence.State loans

Boeing begs for $60bn to salvage sector

Liquidity injection would

prop up the business and

suppliers but swell debt pile

Customers have slashed

capacity as passengers

cancel bookings and travel

restrictions are imposed

The large

moves have

wreaked

havoc on

strategies

such as

relative

value and

fixed

income

Boeing’s stock in meltdown

Share price ()

Source: Refinitiv













 Mar



Jan

$40bn

Projected debt at

Boeing at the end

of the first quarter

$11bn

Forecast for the

group’s free cash

outflows this year

Virus fallout has heaped uncertainty on a group that is already dealing with the costs of the grounding of its 737 Max— Jason Redmond/AFP/Getty

MARCH 20 2020 Section:Companies Time: 19/3/2020 - 18: 30 User: cathy.pryor Page Name: CONEWS1, Part,Page,Edition: USA, 12, 1