☀️☕️ Breaking up News Corp?

Happy Wednesday (the 36th anniversary of Black Monday)

📝 Focus

• Breaking up News Corp?

📊 In the Markets

• Chips and Loopholes

📖 MoneyFitt Explains

🎓 Activist Investors

📝 Focus

Breaking up News Corp?

Activist investor🎓 Jeff Smith’s Starboard Value has taken a stake in Rupert Murdoch’s News Corp and is pushing for a breakup of the media conglomerate. It’s no coincidence that 92-year-old Murdoch retired as chairman of Fox Corp. and News Corp. in September 2023.

The main push is for a tax-free spin-off of News Corp's online property listings businesses, which could unlock more than $7 billion in value for shareholders. At a market value (share price X number of shares) of $12.1bn, that would be a huge gain. The breaking up of conglomerates with disparate business lines to unlock value is a common activist investor strategy.

Another is the elimination of different voting rights, which Starboard is also pushing for: News Corp has two classes of stock: Class A (NWSA) and Class B (NWS), where Class B shareholders (including, unsurprisingly, the Murdoch family) have 40X more voting power than Class A shareholders AND get 4X more in dividends.

..... ▷ A change in the dual share structure seems like a long shot, so if Starboard can push through the first part and get the shares shooting up, they may just let the second part go as a concession.

Shareholders are usually rather tolerant of such structures if share prices are going in the right direction.

Alphabet (GOOGL, GOOG), Meta, Ford, Nike and Berkshire Hathaway all have dual share voting structures. Of these companies, Alphabet, Meta and Nike have drawn the attention of famed activist investor Elliott Management in recent years. He’s left Warren Buffett alone, even though BRK.B shares have literally ZERO voting rights.

..... ▷ There is also an element of pushing against an open door for Starboard as News Corp has a history not only of building businesses but also of accumulating and selling off assets when there is money to be made.

In 2013, the company successfully split itself into high-growth film and television (21st Century Fox, which it bought in the 1980s as 20th Century Fox) and its legacy, low-growth print media (with influential titles now including the Sun, the Times, the Australian, the NY Post and the Wall Street Journal.)

..... ▷ Just five years later, Murdoch profitably sold off 21st Century Fox’s entertainment assets to Disney and its Sky European pay-TV business to Comcast.

The remaining bits, mainly Fox Broadcasting Company (Fox News, the Fox TV station network, Fox Sports etc.) went into the separately listed (and, of course, Murdoch-controlled) Fox Corporation and Murdoch even considered merging it back into News Corp.

(One example of building businesses: Fox News channel was created in 1996 and grew to become the most-watched news channel in the US.)

Disney Geek Section

In the 2019 acquisition of 21st Century Fox by The Walt Disney Company, Disney acquired the following assets:

- Twentieth Century Fox Film Corporation, Fox Searchlight Pictures, Fox 2000 Pictures, Fox Family and Fox Animation, Twentieth Century Fox Television, FX Productions and Fox21, National Geographic Partners, Fox Networks Group International, Star India, Tata Sky, Endemol Shine Group (50% stake), Hulu (60% stake), Sky plc (39.1% stake)

📊 In the Markets

European markets closed slightly lower on Tuesday after US retail sales came in higher than expected, reigniting fears that the Fed could keep interest rates higher for longer.

Don’t bet against the US consumer, even if, like now, they’ve run out of any excess cash they may have picked up.

More surprisingly, German economic sentiment improved by more than expected in October, with the ZEW index climbing up to -1.1 points from -11.4 points in September, still negative but far better than the -9.3 expected by Frankfurt’s Finest.

In Asia, most eyes are on China’s third-quarter economic growth data on Wednesday, with gross domestic product expected to hit 4.4%. The rest of the eyes are on Country Garden, where its 30-day grace period to make a $15 million coupon payment ended on Tuesday, potentially tipping its entire offshore debt into default.

Chinese search giant Baidu on Tuesday demonstrated Ernie 4.0, a “significantly improved” version of its generative artificial intelligence model with capabilities on par with those of OpenAI’s GPT-4 model. CEO Robin Li used Ernie to write a martial arts novel in real time and create advertising content.

In US trading, Nasdaq closed lower on semiconductor weakness (see below) while the S&P 500 remained about flat, while Treasury yields resumed their upward march, spiking to their highest level in 17 years. The global benchmark 10-year Treasury yield rose by 0.15 percentage points to 4.85%. (The rise in Treasury yields typically reduces the attractiveness of stocks, given higher income and effectively zero default risk in US government bonds.)

Bank of America rallied 2.3% on better earnings, though Goldman Sachs slipped on a slight miss (or because its CEO will stop his DJ-ing.) Shares in weapons maker Lockheed Martin were flat despite better-than-expected third-quarter results, and over the last year, they are pretty much unchanged despite the rise in geopolitical issues.

Chips and Loopholes

Basically, in an effort to close some loopholes and chipmaker workarounds since the original policies a year ago (which is why this all sounds rather familiar), Joe Biden’s Commerce Department is, in 30 days, halting shipments of specific advanced AI chips, including Nvidia products, to China.

This comes as part of tightened restrictions on various advanced chips and chipmaking tools for a broader range of countries, including Iran and Russia, while blacklisting Chinese chip designers Moore Threads and Birenefforts, with the end goal of curbing Beijing's access to cutting-edge technologies that could bolster its military capabilities.

Nvidia dropped 4.7% while AMD and Intel fell over 1% on both short-term sales worries and the prospect of Chinese chip firms developing home-grown alternatives, as seen recently with Huawei’s Mate 60 Pro, powered by the 7-nanometer Kirin 9000S chip.

..... ▷ The focus is on limiting computing power packed into a chip to prevent workarounds. These rules also affect chipmaking tools, including DUV lithography systems such as those from ASML.

The new measures also expand licensing requirements for exporting advanced chips to over 40 additional countries at risk of diversion to China, again closing a gaping loophole.

..... ▷ The target is military rather than economic, and the new rules exempt most consumer chips used in laptops, smartphones and gaming.

But the administration is also keen on safeguarding economic security by limiting China's progress in semiconductors, AI, and quantum computing.

..... ▷ The Biden administration's strategy to curb China's technological advances is twofold: imposing export curbs to prevent Beijing from strengthening its military with high-end US technology while also enticing non-Chinese chipmakers to invest in the United States.

As a result of the bipartisan "Chips and Science Act" of last year, which provides $52.7 billion for US semiconductor production, research and workforce development, companies worldwide are rushing to build or expand fabs in the US.