Old School Tech Giant Adapts For The Future

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What's going on here?

Cisco Systems, the tech giant that traditionally made hardware like your old school modem, announced on Monday that it agreed to buy a cloud-based software company for almost $2 billion!

What does this mean?

Cisco is buying BroadSoft, which sells communication and workplace collaboration tools (think: video conferencing). BroadSoft’s clients include huge telecom companies, like Verizon and AT&T, who then sell the services on to their business customers.

The acquisition is part of Cisco’s shifting focus from hardware (like modems and routers) to cloud-based software, which is typically sold as a subscription. The idea is that this will create recurring revenue for Cisco and offset declining demand for hardware.

Why should I care?

The bigger picture: Cisco’s traditional networking equipment business is under threat.


When it comes to virtual “software-defined networking”, Cisco’s rivals like VMWare have been making strides. Meanwhile, companies outside the networking industry, like Facebook, have created their own networking technology and they are giving away the designs and software for free. In short, Cisco’s leadership as a network provider is under threat, which is partly why it’s evolving into new products.

For the stock: Cisco has announced seven other acquisitions this year!


Monday’s acquisition is part of a slew of purchases Cisco has made this year in an attempt to accelerate its shift from hardware to software. These include the $3.7 billion acquisition of AppDynamics, a business monitoring software provider and Perspica, a company that uses machine-learning to analyze data.

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Second Try For This Startup’s IPO

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What's going on here?

HelloFresh, the German meal-kit delivery group backed by Rocket Internet, said it is targeting a valuation of up to €1.5 billion (about $1.76 billion) when its shares become available to the public this week in an IPO. The share price of American competitor Blue Apron has halved since its recent IPO, so it will be interesting to see how HelloFresh fares.

What does this mean?

HelloFresh puts recipes and their ingredients into boxed kits and delivers these to customers to cook at home. The company is active in ten countries and has shown strong revenue growth (it doubled in 2016), although it remains a loss-making company. It’s looking to raise between €243 ($286) million to €311 ($366) million to invest in expanding its business further. The company had planned an IPO in 2015 but canceled it amid concerns over the valuation it could achieve. Now, it’s trying again.

Why should I care?

For the stock: HelloFresh seemingly thinks it’s in a better place to IPO this time around.


With stock prices hovering around record highs on both sides of the Atlantic, momentum is strong at the moment. Rocket Internet, which owns a majority of HelloFresh, is hoping to repeat the success of one of its other companies, Delivery Hero, which completed an IPO earlier this year.

The bigger picture: Meal-kit delivery is a competitive space.


HelloFresh’s largest market is the US, and it says it will use the proceeds from its IPO to become the “clear number 1” meal-kit delivery provider in America. But the US is a tough market, as evidenced by Blue Apron’s poor stock price performance. There are various competitors and, potentially, a new huge competitor: following its acquisition of high-end grocery chain Whole Foods, Amazon filed a trademark application for prepared food kits in July.

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GE’s Cutting Back

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What's going on here?

On Friday, General Electric (GE), America’s largest manufacturing group, reported profits significantly below Wall Street’s expectations. Ouch.

What does this mean?

The poor results were driven primarily by weak performances in GE’s power as well as oil and gas businesses (the CEO essentially blamed poor management for the power businesses woes). The company also slashed its profits forecast for the rest of the year.

This was GE’s first earnings report since the new CEO took over in August, and he called the results “unacceptable”. He announced plans to sell off parts of GE worth about $20 billion to make the company more focused, as well as cutting an additional $1 billion in spending. While details were scarce on where the cuts would be made, the CEO made it clear that “everything is on the table”. A presentation is scheduled for November 13th where GE’s new CEO will outline his plans for the future of the company.

Why should I care?

For the stock: GE is under pressure to pay out less cash to its shareholders (i.e. lower its  dividend) to free up cash.


The dividend GE pays out to shareholders is about 4% per year (compared to the current value of its stock price), which is quite high, both by historical standards and compared to its peers. Now, there is speculation that GE may have to cut this dividend in order to free up some flexibility in how it spends its money.

The bigger picture: Conglomerates are slimming down, and GE also may have to succumb to this trend.


There has a been a trend in recent years of large conglomerates slimming down their operations by selling off disparate parts of their business. Hewlett-Packard is a prime example, as is DowDuPont’s plan to split into three separate businesses. Pfizer and Unilever are other big companies that are currently considering smaller “spin-offs” of parts of their businesses. GE, with its announcement of $20 billion worth of divestments, looks like it’s next in line to slim down.

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BMW Raided By EU Investigators

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What's going on here?

BMW acknowledged on Friday that its headquarters were raided by European Union (EU) officials as part of an investigation into illegal collusion among German carmakers.

What does this mean?

The EU’s competition watchdog said it would investigate collusion among German carmakers back in July, after a German news magazine reported that BMW, Daimler, Volkswagen and Audi had conspired to fix prices in certain technologies for decades. This included allegations like they had agreed on how much they would pay suppliers for certain components, which would have meant that the carmakers didn’t have to spend as much money competing with each other. The raid on BMW’s headquarters last week appears to be part of this investigation.

Why should I care?

For markets: Collusion would imply other culprits, but only BMW was raided…


While Daimler says it has not set aside funds for a possible fine (suggesting it is confident it won’t be fined) and there is no indication that the offices of Volkswagen or Audi have been raided, the raid on BMW suggests it may not have been cooperating with the EU investigation while its competitors were. Once news of the investigation broke this summer, each of the car companies had an incentive to speak out first to get a more lenient punishment – and BMW may have been too slow. (This episode is similar to a concept called “prisoner’s dilemma” in economics: read more)

The bigger picture: The German car industry is losing its shine.


The German car industry has been hit with big fines in recent years. Most recently, Volkswagen’s diesel emission scandal cost the company tens of billions of euros. This is the latest blow to an industry trying to improve its image. However, the investigation may take years to complete and concerns could be overblown – for example, the EU’s Competition Commissioner said in September that officials were checking whether “completely legal cooperation” is being confused with an illegal cartel.

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Tezzies In Freefall

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What's going on here?

Tezos, a blockchain technology company, raised $232 million earlier this year in what was the biggest Initial Coin Offering (ICO) at the time (tweet this). Reports on Wednesday of management infighting are now threatening the deal, spooking investors and raising concerns about cryptocurrencies.

What does this mean?

An ICO is an event where a business issues a new cryptocurrency to fund its operations and invites investors to buy it (analogous, in some ways, to an IPO), although the investors typically do not get an ownership stake in the company (instead they get tokens that can, in theory, be used as currency in the future).

In the case of Tezos, the founders set up a separate, independent company designed to act as a guardian of the funds raised. But the founders, essentially, allege that the head of this independent company is not disbursing the funds to foster product development and that he is acting in his own interest. The battle has resulted in a delay of the launch of Tezos’ technology – until the launch, investors will not receive their tokens (“tezzies”).

Why should I care?

For markets: Tezzies fell as much as 75% in a matter of hours following the news!


Tezos raised money in July, but investors may not be able to trade the tokens until next year (they can trade them informally on exchanges where they trade future promises to buy or sell tokens). Based on those transactions, tezzies have lost a lot of value. Investor contributions to Tezos are technically considered a “non-refundable donation” to the foundation – which means investors have a lot to be nervous about!

For you personally: ICOs are risky business.


ICOs have raked in $3 billion this year despite the lack of transparency in their operations and little protection offered to investors. With so much money going into cryptocurrencies, regulators have started to take note (e.g. the US regulator cautioned against their use). This week’s events are a reminder for the ordinary investor of just how risky such investments can be.

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Unilever’s Sales Disappoint

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What's going on here?

Unilever, which owns brands like Axe, Dove and Magnum ice cream, reported on Thursday that it had disappointing sales in its latest quarter – sending the stock down 5%! It’s the latest sign that big consumer goods companies are struggling.

What does this mean?

Unilever blamed factors beyond its control: like poor weather in Europe hurting its ice cream business (which includes Ben & Jerry’s) and hurricanes hurting sales in its biggest American markets, Texas and Florida. But these aren’t enough to explain why Unilever’s sales came in below expectations in all geographies and why fewer of Unilever’s products grew their market share compared to previous years. Deeper concerns are emerging like growing competition from niche, local brands in various markets.

Why should I care?

For the stock: Unilever will need to adapt to the shifting competitive landscape to improve its outlook.


Unilever is trying to be more agile. For instance, it has put its struggling margarine and spreads business up for sale, and it is giving local teams more freedom to spot trends and innovate. But it is still facing headwinds, including from healthy ice cream Halo Top, which was able to grab market share from Unilever as customers become more health conscious. So the jury is still out on whether Unilever can drive the change that’s needed for it to succeed.

The bigger picture: Sharks are circling the waters…


Activist investors try to spot companies they think could be run more efficiently, and buy stakes in them with the intention of making changes that boost their share prices. This has been happening in Unilever’s space where activist investors have been pressuring consumer goods companies to raise profitability (for example, one high-profile activist has bought a stake in Nestle, which also reported disappointing results on Thursday). Unilever itself was briefly targeted earlier this year by a competitor, Kraft Heinz, which considered trying to take over Unilever and make its operations more efficient (read more here).

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UK Feels The Wage Squeeze

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What's going on here?

Data released on Wednesday showed that for the sixth month in a row, everyday prices in Britain have been increasing faster than paychecks, meaning that the real value of people’s wages is still declining…

What does this mean?

During the three months to the end of August, wages increased by 2.1% compared to the prior three-month period. This was higher than economists had expected, but when compared with the 3% inflation recorded in the UK last month, it means that the purchasing power of everyday people is still shrinking.

The real culprit here is inflation: following the Brexit vote, the value of the pound declined. This means that it costs more for the UK to import stuff from abroad – and Britain imports a lot. The relatively high inflation that Britain is now experiencing sets it apart somewhat from other developed economies, where workers are experiencing similar low wage growth (by historical standards), but aren’t seeing the value of their paychecks decline.

Why should I care?

The bigger picture: So…why aren’t people asking for bigger paychecks?


There are various theories, but one is likely that this decade’s low productivity growth means that workers haven’t substantially increased the value they add to a company’s earnings, so there is less of an incentive for companies to pay them more. Another potential reason is that there may be more underemployment than the statistics indicate (e.g. contract workers that would rather be working more frequently) – and so there isn’t much upward pressure on wages.

For you personally: Buyer beware…you’re earning less these days!


August marks the sixth month in a row that wages have grown slower than inflation, i.e. the sixth consecutive month that the money you take home was worth less than it was the month before. So you might want to prepare to rein in that spending ahead of the holidays!

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Health Insurers Could Lose A Lot Of Customers

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What's going on here?

Stocks of US health insurers have had a rollercoaster past few days as political decisions in Washington alter the market for healthcare insurance.

What does this mean?

Under the Affordable Care Act (ACA), commonly known as “Obamacare”, lower income customers are offered a discount on their health insurance, for which the US government gives insurers a subsidy. The Trump administration’s decision to end this subsidy (but keep the discount for customers) means insurers face a black hole in their revenue. The solution may be to raise costs for other customers, but that would, likely, mean fewer customers would take up the insurance (or that they may seek out plans that provide more limited coverage).

There is a proposal in the US Senate to continue the subsidies for at least two years, but it is far from clear that it will be passed into law.

Why should I care?

For markets: Politics is creating uncertainty for traditional health insurers, but it might create a bump for cheaper, more flexible plans.

Shares in health insurers and hospital operators fell last week after the announcement of the end of the subsidy. However, a bipartisan proposal announced on Tuesday to extend the subsidies sent those stocks back up. Meanwhile, online health insurance broker eHealth expects a boost as customers look for different options.

For you personally: The burden may actually fall on middle income customers.


Lower income Americans who are eligible for the discount would still get it – it’s just that the federal government won’t pay insurers for it (it’s worth noting, that some are concerned that insurance providers will pull out of some markets altogether, leaving even fewer options for insurance). To make up for the shortfall, health insurers are expected to raise prices for middle income Americans. Individuals with an income over $48,000 or families of four with an income over $98,000 don’t qualify for the discount, and it is their premiums that are expected to rise.

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Tick-Tock, Says The ECB

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What's going on here?

On Wednesday, Mario Draghi, the head of the European Central Bank, hinted that governments should take advantage of the supportive environment created by low interest rates, while it lasts, to reform their economies. It’s a lesson many countries may want to heed as interest rates start to tick back up…

What does this mean?

Draghi has said before that the eurozone’s economic recovery after the 2008 financial crisis would have proceeded much faster if European economies had more flexible regulations. For example, if countries passed laws allowing for easier worker dismissal or more freedom to set wages, it would have helped stimulate investments and job creation, helping to put Europe’s economies back on track.


He’s now underlining again that some countries in Europe need to push through those reforms as rising interest rates will put more pressure on businesses’ profitability, and economically efficient reforms for businesses will be especially needed!

Why should I care?

For you personally: Employees still need security.

However, Draghi also noted that there was a growing feeling that reforms were biased against everyday people (e.g. making it easier to fire workers). For that reason, he says, reforms should still guarantee workers’ basic rights, including the right to bargain for wages, and encourage inclusive growth for everyone in the economy.


For the markets: Draghi is giving a not-so-subtle hint that interest rates will go up.

Draghi is telling governments, “act now, before it’s too late”. The clear signal is that, assuming nothing dramatic changes in terms of the European or global economy, the ECB is going to allow interest rates to go up. And, the global market reacted: bonds sold off and bank stocks went up (click here and here for background on both) on both sides of the Atlantic (remember, policies from big central banks like the ECB tend to a have a global effect).

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Two Aircraft Makers Fly High

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What's going on here?

Bombardier, the Canadian aircraft maker, has agreed to sell just over half its stake in its “C Series” jet business to French competitor Airbus, in a deal that potentially saves thousands of jobs worldwide – and a big fat penalty.

What does this mean?

A few weeks ago, the US government said it would slap a big penalty tax on Bombardier’s C Series, after Boeing, a major American competitor, complained that Bombardier had received unfair government support from the Canadian and British governments. At the time, this threat called into question a major order for the jet by Delta Air Lines in the US.

Now, Bombardier says the deal with Airbus will allow it to bypass the penalty and continue with the sale to Delta (although Boeing disagrees). Airbus will pay nothing upfront to acquire its stake in the partnership and instead will contribute by using its sales network and marketing capabilities to help sell the jet.

Why should I care?

For markets: Bombardier’s stock skyrocketed over 15% on Tuesday!


There hasn’t been a new order for the C Series in 18 months and the US penalty made new orders even less likely. Bombardier’s recent financial woes may have hurt demand for the plane as potential clients were unsure that production of the C Series would survive – so it’s a boost to have it backed by Airbus, a much bigger company.

The bigger picture: The deal should secure jobs in several countries, like the UK and Canada, while creating more in the US.


Airbus will assemble some of the jets in a factory in the US, an action the companies say will help avoid any penalty (which only applies to imports). This means thousands of jobs associated with the C Series are expected to be saved in countries where some of the jet’s other parts are made and assembled. Of course, the deal is not yet complete, and there could be legal challenges to it if it is seen as purely a way to skirt laws.

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