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Best of Lex: failure and futurology

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Dear readers,

For an hour or so this week, a number of the world’s most popular websites showed a disconcerting error message. The blackout turned out to be the fault of a little-known San Francisco company called Fastly. It was a useful reminder of how concentrated power has become in internet infrastructure.

Fastly’s share price is up this week despite the public embarrassment. Lex attributes that to investor acknowledgment of the company’s importance. It also prompted us to canvas for other examples of shareholders rewarding ostensible failures.

There have been share price rises in the wake of multibillion-dollar fines, meme stocks rewarded for incompetence and pay-offs to poor-performing executives. One person pointed out that odd publicity can have an amplifying effect too. Look at South Korean semiconductor manufacturer DI Corp, run by the father of pop star Psy. DI Corp got an 800 per cent share price bump after the success of Psy’s song “Gangnam Style”. As Lex’s colleague put it, weird PR can still be good PR.

Short-term notoriety does not, however, mean long-term gains. US biotech giant Biogen this week made global headlines with a new drug that promises to halt the progress of Alzheimer’s. Shares jumped along with patient hopes. But the company’s decision to charge $56,000 per patient a year could backfire. Biogen may claim it is fair compensation for the cost of development but Lex thinks that it could finally prompt US government action on drug prices.

See also British American Tobacco’s buoyant message this week that sales of cigarette alternatives are doing so well the company can raise its annual sales growth forecast to 5 per cent. The problem is that BAT still relies on smokers for most of its sales and they keep quitting. By 2050 there may be none left in the US. As one reader said: “It’s not often one has to value a company where there is a pretty clear path to it having no customers . . . even over a 30+ year timeframe.”

What has a better chance of performing well over 30 years? Cryptocurrency positions itself as the future. In the US, however, regulation is still stuck in a grey area. Step in custody banks — big, stodgy and well placed to make institutional investors feel secure. Crypto services add some sparkle to the sector but Lex cautions that fees will not add much to the bottom line.

City-centre office groups, however, are unlikely to survive intact. Hybrid working is already popular, even if US bank bosses rail against it. London office space availability is at a two-decade high. Even flexible space providers such as IWG are in a tight spot. The company warns ebitda will drop this year. Without a mass return to offices, there is no reason to expect shares to recover.

UK insurer Aviva is unlikely to even make it to next year in the same shape. Activist investor Cevian’s 5 per cent stake has put difficult financial targets in front of the slow-moving company.

On a larger scale, all big companies face years of changing tax bills. The corporate tax deal struck between G7 countries seeks to impose a global minimum corporation tax. UK chancellor Rishi Sunak wants banks in the City of London to be granted an exemption — a suggestion that does not carry much weight, says Lex. The new regime might cost companies an extra $84bn. If additional rules include companies that do not meet the current criteria, such as Amazon, the total will rise. The hype is justified, says Lex. Now the wrangling begins.

Enjoy your weekend, however you spend it.

Elaine Moore
Deputy Head of Lex

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