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The pesky obstacle to a $40bn takeover

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One big update: We are a week away from the FT Dealmakers Summit, a full-day virtual conference put on by FT Live and the Due Diligence team, on November 10. And we can now reveal our final keynote speaker for the event will be Bill Ackman of Pershing Square.

Read up on the full event agenda here, and use this link to register.

Bill Ackman © Bloomberg

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com.

Nvidia/Arm: a 50-50 shot?

Allen Wu, Arm China chief executive © FT montage

Since US chip company Nvidia first agreed to buy Arm Holdings from Japan’s SoftBank, longtime Arm boss Simon Segars knew it would be a bumpy ride.

The blockbuster deal will endure a “tough” process gaining clearance from Chinese antitrust regulators, he told the Financial Times last month, as China’s chipmakers urged Beijing to probe Nvidia’s proposed acquisition of the UK-based chip designer.

Their reasoning? One American company would control the essential technology used in many of the world’s smartphones and data centres — not an ideal ratio for its Chinese competitors in the middle of a tense trade war between Washington and Beijing.

Regulatory hurdles aside, both Segars and Nvidia’s founder Jensen Huang, who joked that he paid an “arm and a leg” for the UK chipmaker, and said it would eventually be “worth every penny” during Arm’s annual conference in October, remain confident.

Jensen Huang © Bloomberg

Huang, who envisions the deal as Nvidia’s path to becoming the dominant chip company of the artificial intelligence age, attempted to assuage concerns over his group’s ownership of Arm — which until now has been a neutral player in the chip industry, licensing its technology to all players — vowing to protect that business model.

Segars made similar promises to his customers, who, if the deal goes through, will become reliant on low-power chip designs suddenly owned by one of their rivals.

But antitrust issues and a bubbling trade war aren’t the last of the dealmakers’ worries — a power struggle unfolding at Arm’s Chinese subsidiary is threatening to throw an even bigger wrench in the proposed transaction, as the FT’s Ryan McMorrow, Qianer Liu and Henny Sender report.

Arm China, the UK chipmaker’s joint venture in the region with the private equity group Hopu, is experiencing somewhat of an identity crisis.

Arm China shareholding structure

Its chief executive Allen Wu remains at the helm, calling the shots and controlling almost 17 per cent ($7.5bn) of the business, despite being ousted by Arm China’s board in a 7-1 vote over four months ago, accused of “serious irregularities” and “conflicts of interest” relating to his Alphatecture investment fund.

Removing Wu will be a big obstacle in Nvidia’s acquisition of Arm — gaining the approval it needs from Chinese regulators will require data and co-operation from Arm China — and it’s not clear whether the joint venture can quell the chaos in its highest ranks.

One individual close to Arm China’s board said he rated the odds of success for the deal at “only 50-50”. Another told the FT that Arm and Nvidia had yet to make any filings with Chinese regulators because of difficulties in gaining control of Arm China.

Wu, who has installed his own security team to deny entry to representatives of Arm or Arm China’s board, and blocks emails from Arm headquarters to employees through a filtering system, seems unlikely to back down quietly.

Private equity serves up success in digital payments

Anyone who has closely followed the European payments sector for the past decade will have two observations when it comes to corporate finance. 

First, they will know that mergers and acquisitions activity has been bustling. 

Second, private equity groups Advent International and Bain Capital have been behind much of the activity, driving what one rival dealmaker described to DD as one of the most successful single-sector focused strategies in the history of the buyout business. 

The latest example of both trends came on Monday, as Italian payments group Nexi entered into exclusive talks to pay €7.2bn for Danish rival Nets. That deal comes just weeks after Nexi, which is backed by Advent and Bain, agreed to merge with Italian rival Sia

If both deals go through — the plan is for Nets and Nexi to close before the latter merges with Sia next year — it will create Europe’s largest payments company. And guess who will be the third-largest shareholders in the combined group? Advent and Bain. 

That’s because the duo also has a stake in Nets. They agreed to keep part of their investment in the company when they sold the business in 2017 to the private equity group Hellman & Friedman for $5.3bn. At the time, H&F outbid Permira in a shootout for the group.

Advent and Bain then increased their shareholding in Nets last year when they sold Germany’s Concardis to the Danish group in an all-share deal

The Nets bet appears to have worked out nicely for H&F as well, which sold one part of the company last year to Mastercard for $3.2bn and will end up with a 30 per cent stake in a Nexi-Nets-Sia hybrid. 

The question now is whether the three companies can be combined in an orderly fashion. 

One party that might not feel so great about all this dealmaking, however, may be advisory firm Lazard. Centerview Partners featured alongside HSBC as the advisers to Nexi. DD is told ex-Lazard man Matthieu Pigasse served as the key banker for Centerview. 

Dealmaking beats the odds. For now.

“Arb-ageddon”, it was called.

In the March market swoon driven by coronavirus fears, roughly 40 listed US companies were waiting to close their sales to either private equity groups or strategic rivals. 

Seemingly ironclad merger agreements were no match for plummeting stock prices as the coronavirus crisis began to take hold.

Merger arbitrage funds — which purchase and sell the stock of two merging companies simultaneously in an attempt to minimise risk — were staring at massive paper losses as even the safest deals were trading at double-digit discounts.

The arb spread for Apollo’s buyout of Tech Data had blown out to 45 per cent on March 18. Caesars Entertainment was trading 60 per cent below its implied buyout price from Eldorado Resorts

Fast forward almost eight months and things have gone about as well as possible for merger arbs who went long. 

Most deals did close on the original terms, including Tech Data/Apollo and Caesars/Eldorado. For those funds brave enough to go long in late March, the returns were juicy. Still, most merger arb funds are only up low single-digits in 2020, including the popular Merger Fund which is publicly traded.

Caesars Palace in Las Vegas © AP

As DD’s Sujeet Indap explores this week in his Inside Finance column, merger agreements largely stood up even as buyer’s remorse popped up à la LVMH and Tiffany

A few deals got recut (Forescout/Advent), a few were mutually cancelled (Hexcel/Woodward), but in large part buyers knew better than to try to re-trade even if they believed they were paying too much.

There’s one big showdown remaining: Simon Property Group goes to trial in Michigan this month, hoping to wiggle out of its agreement to buy fellow mall operator Taubman Centers

Lawyers are looking for a precedent for deal termination law. And, with Taubman trading at 40 per cent less than the deal price, arbs have one more fun play for the year.

Job moves 

  • Citigroup’s head of risk Brad Hu will step down after a series of run-ins with regulators. Meanwhile, head of US consumer operations Anand Selva has been promoted to global chief of Citi’s consumer bank, a position currently held by the bank’s soon-to-be chief executive Jane Fraser. More here.

  • Ted Fike and Justin Wilson have stepped down as partners at SoftBank’s Vision Fund to join Gores Group, the private equity company known to be a prolific Spac launcher, according to Axios.

  • The Carlyle Group has hired former HDFC Bank chief executive Aditya Puri, one of India’s top banking executives, as a senior adviser to the investment firm in Asia. More here.

Smart reads

The new face of Goldman Sachs Omer Ismail knows he doesn’t look like a typical Wall Street insider. But a life spent challenging onlookers’ perception may prove useful in his quest to win over Main Street as head of Goldman’s consumer banking division, Marcus. (BBG)

Smith vs Sheth Vista Equity Partners founder Robert Smith admitted to years of tax evasion on the public stage. The private equity group’s woes continue behind closed doors, as its president Brian Sheth negotiates his exit. (Business Insider)

Wall Street’s Biden backers Over 30 executives tied to big financial institutions are helping bankroll Joe Biden’s presidential campaign, with the big spenders hailing from Avenue Capital Group, Blackstone, Siris Capital, Moelis and Centerview Partners. (CNBC)

News round-up

Alibaba in talks to invest in online fashion retailer Farfetch (The Information)

Beijing interviews Jack Ma over $37bn Ant IPO (FT)

Former Wirecard CFO released on bail after three months in prison (FT) 

SoftBank share sales provide derivatives bonanza for banks (IFR)

Stonepeak to buy cable provider Astound from TPG in $8.1bn deal (FT)

PetSmart scraps debt deal after investor push back (FT) 

Lenders pull IPOs even as mortgage market thrives (FT)

US mall owner CBL files for bankruptcy (FT)

Nielsen to sell retail Arm to Advent in $2.7 billion deal (BBG)

Naspers $5bn share buyback plans signal unease with tech valuations 

Sainsbury’s considers sale of banking arm (FT) 



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Emerging Markets

Ukraine accuses Russia of blocking talks to ease military tensions

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Kyiv has accused Moscow of blocking attempts to begin talks aimed at calming military tensions sparked by the deployment of tens of thousands of Russian troops close to the Ukrainian border.

Ukraine’s president Volodymyr Zelensky has not received a response to his request for a telephone call with Russia’s Vladimir Putin, his spokesperson said, amid concerns from the US and other European powers that an escalation in military deployments could result in full-blown conflict.

More than 14,000 people have been killed in eastern Ukraine since 2014 in fighting between Russian-backed separatists and Ukraine’s army for control of Donbas, a region in the east of the country bordering Russia. The fighting first erupted after Moscow’s annexation of Ukraine’s Crimea peninsula.

“The request has been forwarded from the office of the president of Ukraine to the office of Vladimir Putin to have a conversation, a telephone talk. And we have not received an answer yet,” Zelensky’s spokesperson Iuliia Mendel said on Monday.

“The office of the president of Ukraine hopes that it doesn’t mean that Vladimir Putin refuses to have a dialogue with Ukraine,” she said, adding that the request was made on March 26.

Separately, Ukraine’s foreign ministry said on Monday that Russia had refused to engage “in consultations aimed at reducing security tensions” and boycotted an OSCE meeting on Saturday where the troop build-up was scheduled to be discussed.

Volodymyr Zelensky
Ukraine president Volodymyr Zelensky (above) made a request for a telephone call with Russian counterpart Vladimir Putin on March 26 © Gints Ivuskans/AFP/Getty Images

Putin’s spokesperson responded by saying that he was not aware of any recent requests for talks from Zelensky.

“In recent days, I have not seen any requests. I am not aware that there have been any requests in recent days,” Dmitry Peskov told reporters.

“In terms of defusing tensions and preventing a potential war, Vladimir Putin always has something to say,” he added, when asked whether Putin had anything to say to his Ukrainian counterpart. “We hope that political wisdom will prevail in Kyiv, and the matter will not take a serious turn.”

Mendel said Russia had stationed more than 40,000 troops on the eastern border area and sent another 9,000 to Crimea, in addition to the 33,000 troops already there.

That build-up, supplemented by tanks and other armed vehicles, has led to accusations that Moscow plans some form of military intervention. The Kremlin said it is permitted to station its soldiers wherever it likes, and that they are no threat to any other country.

Both Ukraine and Russian-backed separatists in Donbas accused the other side of sporadic violations of a ceasefire agreement over the weekend.

Kyiv says 28 of its troops have been killed so far this year, more than half the number who died over the whole of 2020.

Russian officials have dramatically increased their belligerent rhetoric towards Ukraine in recent weeks. Putin has warned that the situation could provoke a repeat of the 1995 Srebrenica massacre in Bosnia, while his deputy chief of staff said any escalation by Kyiv would be “the beginning of the end” for the country and provoke from Russia “not a shot in the leg, but in the face”.

Ukraine has responded by calling on Nato to speed up its membership application, while US president Joe Biden has pledged his support to the country.

In addition to the US and European powers, concerns over the military build-up have drawn in regional power Turkey, which lies across the Black Sea from Crimea. The Nato member has deepened ties with Russia in recent years but opposes Russia’s annexation of the peninsula and in 2019 sold military drones to Kyiv.

Zelensky on Saturday held talks with Turkish president Recep Tayyip Erdogan in Istanbul, who called for dialogue and for a peaceful resolution
in line with Ukraine’s “territorial integrity”. Those talks came a day after a telephone call between Erdogan and Putin, in which the Russian leader accused Ukraine of “dangerous provocative actions”.

Additional reporting by Ayla Jean Yackley in Ankara



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Technology will save emerging markets from sluggish growth

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The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Emerging economies struggled to grow through the 2010s and pessimism shrouds them now. People wonder how they will pay debts rung up during the pandemic and how they can grow rapidly as they did in the past — by exporting their way to prosperity — in an era of deglobalisation.

The freshest of many answers to this riddle is the fast-spreading digital revolution. Emerging nations are adopting cutting-edge technology at a lower and lower cost, which is allowing them to fuel domestic demand and overcome traditional obstacles to growth. Over the past decade, the number of smartphone owners has skyrocketed from 150m to 4bn worldwide. More than half the world’s population now carry the power of a supercomputer in their pockets.

The world’s largest emerging market has already demonstrated the transformative effects of digital technology. As China’s old rustbelt industries slowed sharply over the past decade, and ran up debts that threatened to explode in crisis only a few years ago, the booming tech sector saved the economy.

Now, often by adopting rather than innovating, China’s emerging market peers are getting a push from the same digital engines. Since 2014, more than 10,000 tech firms have been launched in emerging markets — nearly half of them outside China. From Bangladesh to Egypt, it is easy to find entrepreneurs who worked for Google, Facebook or other US giants before coming home to start their own companies.

As well as the so-called Amazon of China, there are Amazons of Russia, Poland, Latin America and south-east Asia. Local firms dominate the market for search in Russia, ride-hailing in Indonesia and digital payments in Kenya. 

By one key metric, the digital revolution is already as advanced in emerging economies as developed ones. Among the top 30 nations by revenue from digital services as a share of gross domestic product, 16 are in the emerging world. Indonesia, for example, is further advanced by this measure than France or Canada. And since 2017, digital revenue has been growing in emerging countries at an average annual pace of 26 per cent, compared with 11 per cent in the developed ones.

How can it be that poorer nations are adopting common digital technologies faster than the rich? One explanation is habit and its absence. In societies saturated with bricks-and-mortar stores and services, customers are often comfortable with and slow to abandon the providers they have. In countries where people have difficulty even finding a bank or a doctor, they will jump at the first digital option that comes along. 

Outsiders have a hard time grasping the impact digital services can have on underserved populations. Nations lacking in schools, hospitals and banks can quickly if not completely redress these gaps by establishing online services. Though only 5 per cent of Kenyans carry credit cards, more than 70 per cent have access to digital banking. 

The “digital divide” is narrowing in many places. Most of the big countries where internet bandwidth and mobile broadband subscriptions are growing fastest are in the emerging world. Last decade, the number of internet users doubled in the G20 nations, but the biggest gains came in emerging nations such as Brazil and India.

The digital impact on productivity, the key to sustained economic growth, is visible on the ground. Many governments are moving services online to make them more transparent and less vulnerable to corruption, perhaps the most feared obstacle to doing business in the emerging world.

Since 2010, the cost of starting a business has held steady in developed countries while falling sharply in emerging countries, from 66 per cent to just 27 per cent of the average annual income. Entrepreneurs can now launch businesses affordably, organising much of what they need on a smartphone. Lagos and Nairobi are rising as local fintech hubs, where leading executives vow to raise Africa’s “digital GDP” by widening access to internet financing.

It’s early days, too. As economist Carlota Perez has shown, tech revolutions last a long time. Innovations like the car and the steam engine were still transforming economies half a century later. Now, the fading era of globalisation will limit the number of emerging economies that can prosper on exports alone, but the era of rapid digitisation has only just begun. This offers many developing economies a revolutionary new path to catching up with the living standards of the developed world. 



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China’s wolf warriors refuse to back down

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Late last month the EU, acting in concert with the US, UK and Canada, imposed sanctions on four obscure Chinese officials for alleged human rights violations in Xinjiang, where hundreds of thousands of Muslims have been systematically detained over recent years.

China retaliated immediately, imposing counter-sanctions on 10 European individuals, including five EU parliamentarians from five different political parties.

In doing so President Xi Jinping’s administration threatened a contentious trade deal provisionally agreed on last year between the EU and China, despite US opposition. The sanctioned parliamentarians’ parties are now reluctant to start reviewing the deal unless Xi’s counter-sanctions are lifted.

Before Beijing imposed sanctions on the EU MPs, it was expected that the European parliament would eventually ratify Xi’s geopolitical coup, which had strong backing from France’s Emmanuel Macron and Angela Merkel, the German chancellor.

But when Merkel and Xi spoke on Wednesday, China’s official account of the call did not mention the trade deal or Xinjiang.

“We had seven years of negotiations for the deal,” said Joerg Wuttke, head of the European Chamber of Commerce in China. “Now it looks like it will take another seven years.”

The Xinjiang sanctions exchange is just the latest diplomatic dispute that Xi’s pugnacious “wolf warrior” foreign ministry officials are embroiled in. Chinese diplomats are sparring with countries and organisations that Beijing enjoyed relatively good relations with during Donald Trump’s one-term presidency. But they are expressing no regrets.

Chinese vessels anchored at Whitsun Reef off the Philippines’ Palawan Island © Philippine Communications Operat/AFP

Yang Jiechi, China’s top diplomat, set the tone for Beijing’s clashes with a long lecture to his US counterpart on March 18 in Alaska, where he told Antony Blinken that no country would ever again “speak to China from a position of strength”.

Victor Gao, a former Chinese diplomat who worked for Yang, said his former boss’s diatribe was “groundbreaking”. “Chinese leaders believe they have momentum and time is on their side,” he added. “Nothing can stop their rise.”

Chinese state media contrasted Yang’s comments with paintings of foreign colonial powers lording it over late Qing dynasty officials, who were repeatedly humbled in a series of conflicts with European, Japanese and American enemies.

The country’s “century of humiliation”, according to the Chinese Communist party, ended only after its revolutionary victory in 1949.

“China today is not the China of 1840,” Xu Guixiang, a senior party official in Xinjiang, said last week. “The days of Chinese people being bullied by the west have passed. We are not an easy target any more . . . We will fight tooth for tooth until the end.”

Many Chinese officials viewed Trump’s years in office as an unprecedented “strategic opportunity” to build bridges with Washington’s frustrated allies. But analysts said that, like Trump, those officials also believed that the Chinese Communist party could benefit domestically from diplomatic confrontations.

“Heated nationalism is good for strengthening the legitimacy and authority of the central government and [Xi],” said Yun Sun, a Chinese foreign policy expert at the Stimson Center in Washington.

“It all comes back to [Xi’s] mentality and the course he has charted,” she added, especially as the CCP prepares to celebrate the centennial of its founding in July. “The party needs to demonstrate its strength and achievements. A soft approach is not going to work.”

Last week Beijing challenged comments by Tedros Adhanom Ghebreyesus, the World Health Organization director-general who had previously been criticised for his reluctance to confront Beijing. Tedros said that Chinese officials had withheld information from WHO experts investigating the origins of coronavirus.

“After coming under pressure from the Europeans, Canadians and Americans, Tedros didn’t want to give China a pass because that would have provoked a crisis with the west,” said a diplomat involved in the WHO’s deliberations.

“Meanwhile the Chinese had to stick to their rhetoric that ‘[Covid] is a bigger problem, we had it and we dealt with it, but now we have to look elsewhere [for its origin]. They have bats in Myanmar and Laos, too’,” the diplomat added.

“It also has to be seen in the context of what had just happened in Alaska where they said don’t lecture us and don’t talk down to us.”

Chinese diplomats have recently clashed with Manila, too, over an alleged incursion of Chinese fishing vessels in Philippine territorial waters, as well as Tokyo over Japan’s concerns about the Xi administration’s policies in Xinjiang and Hong Kong.

Wang Yi, China’s foreign minister, warned his Japanese counterpart on Monday not to join US efforts targeting China.

“A certain superpower’s will does not represent the international community,” Wang said. “As a neighbour Japan needs to show at least a modicum of respect towards China’s internal affairs.”

Steve Tsang, director of the Soas China Institute in London, sees no end to such disputes. “Xi has said multiple times that Chinese officials and diplomats must unsheathe swords to defend the dignity of China,” he said. “The wolf warriors are just acting on Xi’s call to arms.”

Additional reporting by Xinning Liu in Beijing



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