The Economist - USA (2021-10-09)

The Economist October 9th 2021 Business 65

tough the chip business hasbecome,not­
withstanding the favourableclimate.
GloFo  is  a  product  of  consolidation,
caused  by  the  industry’s  unforgivingeco­
nomics  that  demand  ever­tinier silicon
furrows  and  hence  ever­costlierfabrica­
tion plants (or “fabs”). The mostadvanced
of these now cost more than$20bnapiece.
After  a  spin­off  in  2009  fromamd, which
designs processors for personalcomputers
and servers in data centres, GloFolaterac­
quired  Chartered  Semiconductor,another
foundry,  and  the  chip­manufacturing
business  of  ibm,  a  purveyor ofassorted
information­technology wares.
With  billions  from  Mubadala Invest­
ment  Company,  a  sovereign­wealthfund
from the United Arab Emirates,whichcur­
rently  owns  all  of  GloFo,  thefirmtriedto
keep up with rivals in the racetoforgecut­
ting­edge  electronic  circuitry. In 2018 it
gave  up  and  started  cateringtothelower
end of the market. These aresemiconduc­
tors  which  go  into  productssuchascars
and  machine  tools,  and  thereforedonot
need  the  highest­performingprocessors,
rather  than  data  centres  orsmartphones.
This niche is still a $54bn market,accord­
ing to Gartner, another market­researcher.
Today GloFo operates a handfuloffabs
across  the  world,  employs  around15,000
people and has a market shareof7%inthe
chip­manufacturing  business.Mostofits
customers,  which  include amd, Broad­
com, another American chipdesigner,and
nxp,  a  Dutch  one,  are  “singlesourced”.
That means their chips cannotbemadeby
other foundries, such as SamsungofSouth
Korea  and  in  particular  TaiwanSemicon­
ductor  Manufacturing  Company (tsmc),
the  world’s  mightiest  chip  manufacturer,
which controls more than halfthemarket.
The difference in size goesa longwayto
explaining  why  tsmcis  hugelyprofitable
whereas  GloFo  struggles  to  generatecash.
In the first six months of thisyeartheTai­
wanese  giant  boasted  salesof$26bnand
profits  of  $9.8bn.  Although GloFo’s rev­
enues rose to $3bn in the sameperiod,up
by  nearly  13%  on  a  year  ago,anditsac­
counting  losses  have  beennarrowing,it
still lost $300m between JanuaryandJune.
Investing  in  GloFo  will  thereforebea
wager  that  the  company  canridethecur­
rent  tailwinds  in  its  industry andstart
making serious money. But itmayalsobea
bet that another firm snaps upGloFoforit­
self.  In  July  it  emerged  that Intel, the
world’s  largest  chipmaker by revenues,
was in takeover talks with thefirm.These
did  not  go  anywhere  becausetheparties
could  not  agree  on  a  price.OnceGloFois
listed  it  should  be  clearer  howmuchitis
worth.  Negotiations  could restart. Then
again,  with  GloFo’s  numbersnowpublic,
Intel may have a hard time convincingits
shareholders that it needs topaythe$25bn
that GloFo is expected to fetch.n

Germanpropertydevelopers

Berlinwalls

andwindows

R

olfbuchhasnotimetorestonhislau­

rels.OnOctober4ththechiefexecutive

ofVonovia,Germany’sbiggestresidential­

propertyfirm,managedaftera longordeal

to seal the creation ofEurope’s biggest

such company through a merger with

DeutscheWohnen(dw), itsmainrival.But

dwcomeswitha newheadache.Ina non­

bindingreferendumlastmonthBerliners

backeda proposalobligingallprivatefirms

thatownmorethan3,000flatstosellthem

tothecity,whichcouldrentthemoutmore

cheaply.dwownsmorethan110,000flats

inBerlin.Vonoviahasanother43,000.A

quarterofthecombinedfirm’sproperties

areintheGermancapital(seechart).

MrBuch’sdealwithdwalmostdidnot

happen,whichwouldhaveprobablysent

the56­year­oldRhinelanderintoprema­

tureretirement.Aftertryingandfailingto

buydwin 2015 witha hostilebid,MrBuch

launched anothertakeover offerinMay,

thistimewiththeagreementofMichael

Zahn,thechiefexecutiveofdw. That€18bn

($22bn)all­cashdealcollapsedinJulyafter

failingtowintheapprovalofatleasthalfof

dw’s shareholders.

MrBuchdidnotgiveup.Heincreased

his offerslightly. More unusually, dw’s

boardagreedtoissueprimaryshareswith­

outpre­emptionrightsandsellthemdi­

rectlytoVonoviaifMrBuchneededmore

helptogethisdealdone.Theprospectofa

deliberate dilution of existing share­

holdersbydw, whichdoesnotneedaddi­

tionalcapital,didnotgodownwellwith

Davidson Kempner, an American hedge

fundthatowns3.2%ofdw, aswellasa

chunkofVonovia.Itsaidinastatement

that it “raises serious corporate gover­

nanceconcerns”.

Union Investment, a German asset

manager,andDeka,a Germanbank,which

alsoownstakesindw, agreewithDavid­

sonKempner.Theydonotbuydw’s justifi­

cationthatitisbettertobetakenoverbya

bigrivalthantohaveitasthebiggestnon­

controlling shareholder. They speculate

thatdw’sbossescouldhavebeenluredby

lucrativegoldenhandshakesorthepros­

pectofhighersalariesafterthemergerand

somaynothaveactedinthebestinterest

ofshareholders.MrZahnwillbecomedep­

utyceoofthemergedgiantandPhilipp

Grosse,dw’s chieffinancialofficer,willbe­

comeitscfo. Theepisodehasraisedred

flagsamongGermaninvestors.“Weneed

toreviseourrulesonthedutyofneutrality

ofthebosses oftargetcompanies,”says

MarcTüngleroftheGermanassociation

fortheprotectionofshareholders.

dwdismissesanysuggestionsofim­

propriety.Itrespondedina statementthat

it was“commonpractice”forexecutivesof

a target company to join the enlarged

group.Moreover,theplannedcapitalin­

creasetogetthedealoverthefinishingline

wasinline withGerman securities law.

Andintheevent,it nevercametopass.

Eventhefiercestcriticsofthedealcon­

cedethatit isalmostcertainlyirreversible.

Butif themergerwasa pain,theexpropria­

tionvotemayprovetobea migraine.The

newlyelectedmayorofBerlin,Franziska

Giffey, cannot ignore the burghers’ de­

mands.Thesereflecta growingfrustration

withpropertyspeculationandrocketing

rents.Afterreunificationin 1990 housing

costsinBerlinwerelowerthaninotherbig

Germancities.Wavesofimmigrantsand

youngGermansluredbycut­priceflats,a

hip artscene andathrivingjobmarket

havehelpedpushrentsupmorethantwo­

foldinthepasttenyearsinreal terms.

Incomeshavenotkeptup.

If,aslookslikely,themayordraftsthe

lawandBerlinlawmakerspassit,affected

propertyfirmswouldsuetooverturnit.

Thedevelopersarelikelytoprevailinthe

federal Constitutional Court, which in

AprildeclaredBerlin’searlierexperiment

withrent controlunlawful.Butthecase

coulddragonfora yearormore.

Expropriationisnota solutionforBer­

lin’shousingproblems.Instead,MrBuch

says,constructionmaybepartofone. Ifit

werenotforBerlin’slabyrinthinebureauc­

racy,Vonoviaalonecouldhavebuilt7,000

newflatsinBerlininthepastfewyears.Ms

Giffeyshouldfocusonspeedingupbuild­

ingpermitsandreformingarcanebuilding

codes.Thecityneedsfewerpitchforksand

moreshovels. n

B ERLIN

MoretroubleforVonoviaand

DeutscheWohnen

Capital gains

Deutsche Wohnen and Vonovia,

share of combined portfolio, by region

September 2021, % of total value

Source:UBS *1% of total national portfolio

Austria

Sweden

Kiel

Hannover

Hamburg

Rhineland

Rhine-Main

Southern Ruhr

Leipzig/Dresden

Rest of Germany*

Berlin

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