The Wall Street Journal - 07.04.2020

B12| Tuesday, April 7, 2020 THE WALL STREET JOURNAL.

Getting Past a False Choice

Countries without lockdowns are in a state of economic free fall, too

Buffett Looks Smart

In Occidental Deal

Oil collapse could give Berkshire a chunk of

company for financing bidding war with Chevron

Warren Buffett wouldn’t stoop

to a borderline-legal financing

technique associated with penny-

stock financiers.

Yet, while it was never his inten-

tion,Berkshire Hathawaymight

wind up with a chunk of discounted

shares inOccidental Petroleumin

a pattern similar to death-spiral fi-

nancing. The technique involves a

company that is unable to raise

public equity directly and instead

issues debt privately to an outside

source; the debt becomes convert-

ible into stock for a fixed dollar

amount rather than a fixed number

of shares. The share price declines

in anticipation of dilution, giving

the financier much of the company.

Last year, Occidental found itself

in a bidding war with much-larger

Chevronfor Anadarko Petroleum.

To win and to avoid having its own

shareholders vote to approve it,

Occidental paid for much of the

$37 billion purchase with $10 bil-

lion in preferred stock bearing an

8% coupon issued to Berkshire.

While perpetual and not convert-

ible, dividends can be paid in com-

mon stock at a 10% discount.

A year ago, when Occidental’s

bidding war was heating up, its

market value was $50 billion. Now

its value is $12 billion, it has

slashed its dividend and capital ex-

penditures and its debt prices sig-

nal distress.

A logical but painful way of

staying afloat is to pay Mr. Buffett

in shares at next week’s dividend

declaration. Occidental can do so at

90% of the volume-weighted aver-

age price of Occidental’s shares for

10 days after the declaration. At to-

day’s price, paying the next four

quarterly dividends in discounted

stock would give Berkshire 7.3% of

the company.

Occidental also could ax its re-

maining common dividend and de-

fer quarterly payments on the pre-

ferred shares, but then it would

owe Berkshire dividends on the un-

paid amount that compound ad in-

finitum.

Even Mr. Buffett couldn’t see

this year’s coronavirus-induced oil-

price collapse, and if there were a

market price for his preferred stock

then it would trade below par

value. But he was smart enough to

throw Occidental a costly lifeline.

The ideal outcome for Berkshire

would be for Occidental to avoid a

true death spiral but remain on the

ropes long enough to give the con-

glomerate a chunk of a once-great

oil company at a bargain price.

—Spencer Jakab

Zoom Video Communications’

greatest strength is also its greatest

weakness: It is now a verb.

The coronavirus pandemic has

rapidly transformed the videocon-

ferencing upstart from popular cor-

porate tech vendor to a household

name. Everyone is Zooming now,

from yoga teachers to doctors to

bored teenagers. The latest sign

came in an April 1 blog post from

founder and Chief Executive Eric

Yuan, who wrote that peak daily

meeting participants have soared

from 10 million at the end of De-

cember to more than 200 million as

of March.

A 20-fold increase, in other

words. But it hasn’t all been good

news for the nine-year-old com-

pany, which is also now dealing

with an unprecedented level of

scrutiny. The past couple of weeks

have seen many media reports on

Zoom’s privacy policies and its abil-

ity to handle the surging load. New

York’s attorney general is also now

looking into the company’s privacy

practices. Meanwhile, Zoombomb-

ing, when bad actors crash Zoom

video chats to stream offensive ma-

terial like pornography, also has be-

come a common term.

Mr. Yuan’s blog post was in part

an apology for the company’s short-

comings. He told The Wall Street

Journal that he “really messed up”

as CEO, in terms of losing the trust

of some users. The news flow has

taken its toll on the company’s

highflying stock. Zoom’s shares slid

23% from their March 23 peak as of

Monday’s close.

The stock can certainly afford to

give back some gains. Zoom is still

up 81% since the first of the year—a

period during which the Dow has

shed more than one-quarter of its

value. Zoom’s market capitalization

is now more than one-third above

Workday’s, another growing cloud

software company with nearly six

times the annual revenue. Zoom re-

mains the most expensive cloud

stock by a wide margin, relative to

projected revenues. Granted, it is

also seeing a level of mainstream

adoption that any of its other cloud

peers would kill for.

Mr. Yuan described the recent

surge in traffic as “mostly con-

sumer use cases,” which suggests

many are using the free version of

the service. The company is also

scrambling to beef up its networks

and security, suggesting that costs

are going up. Mr. Yuan said Zoom

has enacted a “feature freeze” to fo-

cus on addressing current issues,

though he did tell the Journal the

company plans to bring end-to-end

encryption to its service.

The competition also isn’t sitting

still. RingCentral, an enterprise

communications company that part-

ners with Zoom to resell its service,

announced a competing videocon-

ferencing offering on Thursday.

But no competitors can match

Zoom’s visibility at the moment.

And even its basic paid plan of $15

a month is a manageable expense

for most households and small busi-

nesses. Mr. Yuan seems to under-

stand that the company’s runaway

success also brings with it a mas-

sive obligation. If the history of

technology is any guide, Zoom will

stay in the vernacular long after the

pandemic has ebbed and life re-

turns to normal. But it needs to

make Zoombombing a distant mem-

ory. —Dan Gallagher

Marketvalue

Source: FactSet

$50

15

20

25

30

35

40

45

billion

Jan. Feb. March April

ZoomVideo

Workday

As the U.S. Federal Reserve and

its European peers have pumped li-

quidity through the Western finan-

cial system in recent weeks, Beijing

has been notably restrained. Re-

cently, however, there have been

hints of a change in tone.

On Friday, the People’s Bank of

China cut the amount of cash banks

must hold in reserve for the second

time in less than a month, releasing

an estimated 400 billion yuan

($56.4 billion) for lending. That fol-

lows a Financial Times report in

late March that China’s central bank

is considering cutting benchmark

deposit rates, which it hasn’t done

since 2015. A few days earlier, PBOC

Vice Gov. Chen Yulu had noted that

there was room for credit growth to

run slightly higher than growth in

nominal gross domestic product.

The central bank’s long-stated goal

has been for credit and nominal

GDP to move fundamentally in line.

Keeping China’s monetary am-

munition in reserve made a lot of

sense when it looked like the epi-

demic would be primarily confined

to Asia—and relatively fleeting.

China’s economy was accelerating

at the end of 2019 before the coro-

navirus hit. Sharply cutting rates to

combat a one- or two-month threat

would have risked reinflating hous-

ing and food-price bubbles as the

economy bounced back.

But now Covid-19 has moved

abroad with a vengeance. Chinese

job losses as exports fall could reach

four million to six million, estimates

analyst Ernan Cui at consulting firm

Gavekal Dragonomics—worse than

the hit in 2008 and 2009. And that

is on top of the already severe dam-

age from the coronavirus lockdowns:

Surveyed urban unemployment

jumped nearly a full percentage

point to 6.2% in February.

Making matters worse, Chinese

households are considerably more

indebted than they were in 2008,

meaning widespread financial trou-

bles for the unemployed could

quickly spread to banks. Household

debt, which was just 56% of dispos-

able income in 2009, was 124% in

2019, according to the Institute for

Advanced Research at the Shanghai

University of Finance and Economics.

The hit to domestic consumption

also looks likely to persist longer

than initially hoped, as fears about

a secondary outbreak persist. After

a tentative attempt to reopen, Bei-

jing has ordered movie theaters

closed again. And in contrast to the

improving picture in manufacturing,

March purchasing managers’ in-

dexes for services were notably

weak. Images of popular tourist ar-

eas like Huangshan packed with

people over the Qingming holiday

weekend may not be representative

of the country as a whole. Recent

survey data shows that consumers

remain wary.

Add in a weak housing market

and cooling inflation, and the case

for more aggressive monetary easing

starts to look compelling. Goldman

Sachs thinks growth in total finance

outstanding could jump to 11.1% in

March, from 10.7% in February.

Stretched balance sheets for banks

and households still make a 2009- or

2015-size lending ramp-up unlikely.

But as the coronavirus crisis starts

looking more like 2009, it will be in-

creasingly difficult for China’s mone-

tary policy makers to keep sitting on

their hands. Lower rates are coming.

—Nathaniel Taplin

The Case of the Missing Chinese Stimulus

Japan’s economy has slowed down even though it has taken a less aggressive approach than other nations.

KIMIMASA MAYAMA/EPA/SHUTTERSTOCK

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

As many Western nations begin

their second month under some

form of lockdown, many are pub-

licly debating the bleak, utilitarian

question of whether such strict

measures cause more economic

damage than their public-health

benefits merit.

But it is clear from international

business surveys released over the

past week that this is something of

a false choice: Even major countries

without significant lockdowns are

experiencing their worst economic

conditions since the 2008-09 finan-

cial crisis.

Until the past week or so, which

came after the survey ended, Japan

was the large, advanced economy

least affected by the coronavirus

outbreak. Even so, its services sec-

tor, less exposed to overseas de-

mand than manufacturers, was

hammered in March. Japan’s ser-

vice sector purchasing managers in-

dex recorded a sharper slowdown

than even during the 2011 earth-

quake and tsunami.

Schools are closed in Japan, but

there are no travel restrictions in

place. The government has called

on people to work from home and

not visit bars and nightclubs, but

not compelled adherence with

threats of fines or imprisonment as

in some other jurisdictions.

But even without a strict lock-

down, the disruption to economic

activity is hard to overstate: Major

events have been canceled, con-

sumption delayed and existing busi-

ness plans severely disrupted even

by voluntary efforts to avoid con-

tracting the virus.

Singapore, where the public

health response to the coronavirus

was initially hailed as a model, has

been hit hard, too. The country’s

overall PMI reading fell to 33.3 in

March, the lowest in its eight-year

history.

Singapore, Japan and the U.S. are

very different economies and

started off in very different posi-

tions. Japanese consumption is less

robust and gets hit hard by eco-

nomic shocks. Singapore’s export-fo-

cused economy means it is far more

affected by conditions overseas.

That a variety of economies with

a variety of outbreaks and a variety

of policies to counteract them are

all experiencing sharp downturns

casts some doubt on the argument

that the economic cost of severe

shutdowns outweighs the public-

health benefits.

Not locking down may have neg-

ative economic consequences, too.

A paper published by Federal Re-

serve and Massachusetts Institute

of Technology economists at the

end of March illustrates that during

the 1918 flu pandemic in the U.S.,

cities with stricter lockdowns

seemed to emerge with less-severe

economic consequences.

That is in part because lockdowns

solve coordination problems: The al-

ternative to an enforced lockdown

could be millions of people indepen-

dently trying to prevent themselves

becoming infected by restricting

their social contact and economic

activity for far longer periods.

It is clear that no major economy

is working in anything like an ordi-

nary manner now, regardless of its

structure or the size of the local

outbreak. The debate about when

and how to lift the strictest lock-

down measures will continue, but

the idea that the trade-off is be-

tween that and economic normalcy

has very little foundation.

—Mike Bird

Share-priceperformance

Source: FactSet

20

–100

–80

–60

–40

–20

0

%

May 2019 ’20

OccidentalPetroleum

BerkshireHathaway

OVERHEARD

Need help making your mort-

gage payments? Here’s a solution:

Buy a car.

That is the pitch from one

dealership. Pick up any new Ford,

Lincoln or Mazda this month and

the Maryland dealership will cover

$1,500 of your mortgage or rent

payments for two months.

“To some people it sounds

crazy,” said Alex Perdikis, the

owner of Koons of Silver Spring.

“But, hey, we are in crazy times.”

For many consumers, this

means adding an auto loan to

other debts, threatening to push

people further into the red when

many are losing their jobs. But

that is a problem for down the

road, especially with some

auto lenders allowing buyers to

defer early payments on new

car purchases.

Auto dealers and service de-

partments have mostly remained

open, even as the spread of the

new coronavirus is forcing much

of America to stay home. After

all, health-care workers need to

get their cars fixed or replaced to

get to work.

Business is down at Koons of

Silver Spring, as it is pretty much

everywhere else, Mr. Perdikis

said. He and his team came up

with the idea to cover mortgage

payments last week and rolled it

out Friday. More than half of

new car buyers since then have

taken the deal.

Zoom’s Runaway Success

Carries a Heavy Burden

GARY CAMERON/REUTERS