ROLF BUCH, chief executive of Vonovia, Germany’s biggest residential-property company, says he has learned a lot since he tried and failed to buy Deutsche Wohnen (DW), the second-biggest, in 2015. Back then Mr Buch’s hostile bid was an attempt to prevent DW from combining with third-ranked LEG. Neither deal came to pass.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More
IN 2019 RICHARD LIU told couriers working for JD.com that the Chinese e-commerce giant would cancel their base pay after a 2.8bn yuan ($438m) loss the previous year, its 12th consecutive one in the red. Riders would make only a commission on deliveries. If the company did not cut back on spending, Mr Liu warned, it would go bust in two years.Far from collapsing, two years on JD Logistics, JD.com’s delivery division, is on a roll, fuelled by a boom in Chinese e-commerce. Its parent company’s revenues jumped by 39%, year on year, in the first quarter, to 203bn yuan. On May 26th Pinduoduo, an upstart rival that also offers customers delivery by JD Logistics couriers, reported quarterly sales of 22bn yuan, 239% higher than a year ago.The State Post Bureau expects logistics companies to deliver more than 100bn parcels this year, twice as many as in 2018 (see chart). Overall spending on logistics in China is projected to hit 16trn yuan this year and surpass 19trn yuan by 2025. That would make it the world’s largest market. The logistics business has also avoided the worst of the crackdown against Chinese big tech, which has seen the likes of Alibaba and Tencent (which owns a large stake in JD.com) taken to task by the Communist authorities over their growing power.Domestic and foreign investors have been pouring money into the sector, say lawyers working on deals in the industry. JD Logistics has attracted investments from big private-equity groups such as Sequoia China and Hillhouse Capital. The market buzz around the firm is as frenetic as the pace at which its 190,000 workers fulfil and ferry orders. On May 21st it raised $3.2bn in Hong Kong’s second-largest initial public offering this year. Its shares are scheduled to begin trading on May 28th. Its backers are betting that its Amazon-like approach of creating a fully integrated delivery network has more mileage than a similar offering from SF Express, a stodgier incumbent similar to FedEx, or a rival model championed by Alibaba, which has plumped for a distributed system.JD Logistics is the only large Chinese delivery service to grow out of an e-commerce parent. It became a separate entity from JD.com in 2017, in part so that it could take orders from other online retailers. It still delivers the bulk of JD.com’s packages but a large chunk of its revenues now come from orders outside the group. By owning much of its technology, lorries and warehouses, and directly employing staff, the firm has been able to ensure faster delivery times while monitoring quality. It operates China’s largest integrated logistics system, covering a good’s entire journey and including a fully autonomous fulfilment centre in Shanghai and some driverless vehicles. The system can also flip into reverse, sending customer feedback to product designers that, JD Logistics claims, helps produce better products and strengthen brands.Contrast that with Cainiao, in which Alibaba has a controlling stake. It does not own many of the logistics assets in its network. Instead it allows around 3,000 logistics companies employing some 3m couriers to plug into its platform. Its aim is to integrate and streamline the vast delivery resources that already exist across China, rather than build its own. The company has teamed up with most large logistics services—and taken investments from them as well. Alibaba, for its part, has bought minority stakes in several large operators as a means of exerting more influence over the industry. Cainiao is not publicly listed and does not disclose many operational details or, for that matter, how exactly it makes money.In terms of revenues, both JD Logistics and Cainiao trail SF Express. It is similar to JD Logistics in operating an in-house network. It still leads the market in “time-definite” delivery, a service that requires couriers to pick up and drop off parcels on a rapid, predetermined timetable. Like FedEx in America but unlike JD and Cainiao it did not emerge from the tech industry, so lacks its rivals’ technological chops.Which model emerges victorious will ultimately depend on which can best control costs, thinks Eric Lin of UBS, a bank. JD Logistics may be forced to lower prices further as it attempts to get more business outside of JD.com. Analysts predict it could lose a combined 12bn yuan over the next three years, and turn a profit only in 2024. SF Express is spending heavily to try to match JD’s and Cainiao’s technological prowess. Its share price has fallen by around half since it issued a profit warning in April; it is expected to record a net loss of at least 900m yuan in the first quarter. Jefferies, an investment bank, points to SF Express’s troubles as a clear sign of an ongoing price war.In the long run Cainiao’s asset-light model may enable it to keep spending in check. But for the time being it, too, is thought to be having trouble containing costs. Like its rivals it must fend off new specialist competitors offering cut-price services in areas like cold-chain and last-mile delivery. Average delivery prices in America have increased by about 5% annually in recent years, according to Bernstein, a broker. In China they have been falling at an average rate of 10% for the past decade. As China’s online shoppers get their goods ever quicker, investors in Chinese logistics may need to brace for longer waiting times before their returns finally arrive. More
IN 2019 RICHARD LIU told couriers working for JD.com that the Chinese e-commerce giant he founded would cancel their base pay after a 2.8bn yuan ($438m) loss the previous year, its 12th consecutive one in the red. Riders would make only a commission on deliveries. If the company did not cut back on spending, Mr Liu warned, it would go bust in two years.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More
“SORRY” IS NOT a word you hear often in business. Japanese miscreants may bow in shame. But in the West, even architects of some of the world’s most spectacular strategic blunders struggle to express remorse. It took Gerald Levin, boss of Time Warner, a decade to apologise for what he finally admitted was “the worst deal of the century”—the $165bn merger of the media giant with AOL, an internet firm, in 2001, during the dotcom crash. It was unravelled, ignominiously, eight years later.Who knows when—or indeed if—Randall Stephenson and his former lieutenant, John Stankey, will acknowledge how wrong they were to mastermind the $110bn acquisition of Time Warner by AT&T, which they completed in 2018. A mere three years later it, too, is being dismantled, with the media business spun out and merged with Discovery, another media firm. Mr Stankey, who took over from Mr Stephenson as the telecoms giant’s boss last year, has bowed not in shame, but to the inevitable. The combination created a company weighed down by huge debts, a high dividend and onerous investment demands. It was U-turn or bust.What to make of such strategic reversals? It is usual to see them all as an indictment of megalomaniacal empire-builders and money-grubbing bankers, at the expense of staff and long-suffering shareholders. And yet business, by its nature, is full of deathtraps. Risks must be taken. Wrong turns happen. Course corrections are inevitable. Not all about-turns merit the equivalent of hara-kiri in the C-suite. Here is a rough guide to when they should and should not be tolerated.Start with experimentation, the essence of business in a world of constant flux. Most mergers and acquisitions are small, incremental bets. The payoffs can be large. When they go wrong, they cost shareholders money and generate bad headlines, but are forgivable if done in a spirit of trial and error. Take Verizon, AT&T’s telecoms rival. The company, now valued at $235bn, spent less than $10bn on AOL and Yahoo, its fellow internet pioneer, in the mid 2010s, hardly breaking the bank as it sought to build a media division. Their sale, for $5bn plus 10% of shares in May, though embarrassing, marked a retreat, not a rout—certainly compared with the tens of billions of shareholder value that analysts believe AT&T torched on its media binge. Call it misadventure, not madness.Then there is speculation. Some firms make a living by buying and selling other companies, often using flimsy rationales to justify the purchases. U-turns are an occupational hazard. Headlining this group is SoftBank, a Japanese tech conglomerate, whose twists and turns can cause motion sickness. It has flipped Sprint, an American mobile operator, and is in the process of doing the same with Arm, a British chip designer. Masayoshi Son, its billionaire founder, once portrayed both as strategic acquisitions. Even Warren Buffett, the no-frills chairman of Berkshire Hathaway, a bigger, less techy conglomerate, occasionally pirouettes. Last year Berkshire dumped its holdings of airlines in America as the pandemic raged, just months after increasing its stakes. Airlines have rallied since. “I don’t consider it a great moment in Berkshire’s history,” Mr Buffett conceded recently, “but we have more net worth than any company on Earth.”Acquisitions are not the only danger zone. Sometimes a firm’s long-term strategy implodes, requiring a big rethink. GE, an industrial group, boasted that GE Capital, its financial arm, was a profit-making machine before discovering it was also a risky liability when the subprime crisis hit. Airbus, a European aerospace company, halted production of its A380 superjumbo after realising, 12 years into the programme, that airlines did not want it. Intel, no longer the world leader in chip-making, will rent out some of its production facilities to others, like a foundry. These fall into the category of course corrections, not full-scale flip-flops.The screeching handbrake turn is in a different league, though. AT&T is not the only stodgy firm to have tried—and spectacularly failed—to reinvent itself overnight. Others are Vivendi, born out of a French water-and-sewage company that 20 years ago, under its flamboyant boss J6M—Jean-Marie Messier Moi Même, Maître du Monde—sought to refashion itself as a global entertainment giant, becoming one of France’s biggest corporate casualties in the process. European lenders, as well as Japan’s Nomura, an investment bank, have lost fortunes trying to become racier by buying Wall Street firms. Still, none compares to AT&T and Time Warner for the number of U-turns running through their combined corporate history.There are three danger signs to watch out for. First, be alert when deals are billed as transformative. Looking through the fine print of AT&T’s purchase of Time Warner, the main justification, to track customers to sell advertising, was flimsy; it did not warrant the cost. Yet shareholders blithely gave it their blessing. Second, it was no small experiment: the whole company was put on the line. Third, it produced big opportunity costs. The acquisition of Time Warner and DirecTV, a satellite-TV company, in 2015, turned AT&T into America’s biggest non-financial corporate borrower. That constrained it when it needed to spend on 5G mobile spectrum and the Hollywood streaming wars. Even with the Discovery deal and its first dividend cut in decades, it is not out of the woods.U-turn, you pay the priceThe moral of the story is that when deals go wrong, the quicker they are unravelled the better. But when they are so big that they jeopardise the future of the firm, accountability is vital, too. Mr Stephenson pocketed $90m at AT&T since 2018, when the TimeWarner deal was completed. Mr Stankey has earned $60m. Mr Stephenson has already left. Mr Stankey should go, too, if nothing else to serve as a deterrent against future acts of M&A madness. There may be no apologies in business. But failure on such a grand scale should at least carry a price tag. More
“THE STONE age did not end for lack of stone, and the oil age will end long before the world runs out of petroleum.” That battle cry has long animated critics of Big Oil, who dream of a phase-out of hydrocarbons in favour of cleaner fuels and technologies. Their bête noire is ExxonMobil, long the richest and mightiest of Western oil supermajors—and the most unrepentant in its defence of crude. Lee Raymond, a formidable former boss of the Texan titan, once told your correspondent to get out of his office after being challenged over his flagrant denial of climate science. How the times have changed. Darren Woods, who currently does Mr Raymond’s old job, does not deny that climate change is real. And he is about to confront the stiffest challenge posed to the firm’s management in living memory. At his company’s shareholder meeting on May 26th a coalition of activist investors led by Engine No.1, a small hedge fund, will try to put four green-tinged directors on the board to promote a lower-carbon strategy of the sort espoused by European supermajors such as BP, Royal Dutch Shell and Total. Proxy advisers, who counsel shareholders on such votes, have backed some of Engine No.1’s demands. Unlike earlier foiled attempts to contest ExxonMobil’s carbon-addiction, this one is not a foregone conclusion. The voting could be a close-run thing, with a mixed outcome. Huge institutional investors must square their climate-friendly rhetoric with the desire for healthy returns, which have outperformed those at the European rivals as the oil price has rebounded from its pandemic-induced collapse (see chart). But even if the dissidents do not win outright, there are reasons to think that Mr Woods is unlikely to emerge from the proxy battle as brashly self-confident as he and his predecessors have from previous dust-ups. The activists have enlisted powerful allies. CalPERS and CalSTRS, pension funds representing, respectively, California’s public employees and its teachers, have between them over $700bn in assets under management. Two giant funds representing New York’s state and city employees, with another $300bn or so in assets, have joined them in supporting Engine No.1’s effort. Together they hold less than 1% of ExxonMobil’s shares. But as large asset managers, their actions send a strong signal to the broader market. “The links between climate change, business and financial investments are undeniable,” says Aeisha Mastagni of CalSTRS. She argues that the election of the four activist directors will “prepare the oil giant for the global energy transition”. Institutional Shareholder Services (ISS) and Glass Lewis, the proxy-advisory duopoly, recommend the election of three and two of Engine No.1’s directors, respectively. But even one dissident director could make a big difference, says Charles Elson, a corporate-governance expert at the University of Delaware who has served as a courteous rebel on various boards. In a report published on May 14th ISS declared that the hedge fund “made a compelling case that additional board change is needed to provide shareholders with sufficient confidence” in ExxonMobil’s prospects.Outside pressure for the oil business to embrace the transition to a low-carbon future is growing intense. On May 18th the International Energy Agency (IEA), an international forecaster not known for alarmism, warned that investments in all new fossil-fuel projects must stop now if the global energy sector is to achieve carbon neutrality by 2050. President Joe Biden wants America’s power sector to stop adding greenhouse gases to the atmosphere 15 years earlier than that. So far it has been Europe’s oil giants that were pushed harder to go greener—by activists, consumers, regulators and some investors. Last year BP vowed to slash the carbon intensity of the products it sells by 50% in the next 30 years. This month Shell won shareholder approval for its plan to create a carbon-neutral business, including emissions from the fuel burned by end-users, by mid-century.The activists would like to push ExxonMobil down a similar path. In response to their badgering, earlier this year it already unveiled plans for a new “low carbon solutions” division, which will develop technologies to capture carbon and store it underground. It has also pledged to cut the carbon intensity of its own exploration and production operations by 15-20% by 2025. Not good enough, Engine No.1 and its backers retort. They point to ExxonMobil’s plans to spend only about $3bn in total over the next five years on its low-carbon effort, compared with around $20bn a year on dirtier traditional investments. Unlike Shell, the company has promised only to reduce emissions from its own operations, not the vastly greater ones produced when its products are used by consumers. The big reason such arguments are no longer falling on deaf ears is ExxonMobil’s once mighty reputation for being tightly run has slipped. Historically prudent capital spending has been replaced by indiscipline. The company has torched billions in shareholder value in the past few years. The most eye-popping chart in Engine No.1’s 80-page manifesto shows its return on capital languishing at or well below its weighted-average cost of capital since 2015. ExxonMobil has splashed out nearly $100bn on capital expenditure in total over the past five years even as world oil prices swooned. Chevron, its biggest American rival that is similarly bullish on oil, spent less than $70bn in that period. ExxonMobil’s net debt has nearly doubled since 2015 to over $60bn. Its mistimed and overpriced acquisition of XTO Energy, a gas firm, led it last November to write off $17bn-20bn—and S&P Global, a rating agency, to entitle a scathing analysis of the incident “How not to do M&A”. “Additional board refreshment is necessary due to the long-term financial underperformance at ExxonMobil,” concludes Anne Samson of CalPERS.Last summer, as ExxonMobil’s share price headed to a two-decade low and the company was knocked out of the Dow Jones Industrial Average after nearly a century in the blue-chip index, Ms Samson’s argument would have sounded incontrovertible. To many it remains compelling. But many investors in energy firms appear to be getting cold feet about a green shift. Thanks to dearer oil ExxonMobil has clawed back $110bn in market capitalisation since October, handily besting the European giants whose promised wind and solar projects are years away from profitability and could meanwhile eat into their dividends. This puts huge asset managers such as BlackRock, the world’s biggest, in a bind. Its boss, Larry Fink, who rarely misses a chance to talk up the importance of curbing global warming, also has a fiduciary duty to guarantee optimal returns to investors in his firm’s funds.Crude prices are, of course, cyclical by nature. They will fall again at some point, unlike the carbon dioxide relentlessly accumulating in the air as more oil is burned. Mainstream investors now view climate risk as “a core component of long-term value”, insists Timothy Youmans of eos, which offers stewardship services to owners of $1.5trn in assets and supports Engine No.1. This week’s shareholder battle will not be the last one Mr Woods and his successors will face. ■ More
IN THE EARLY days of Amazon, its founder, Jeff Bezos, insisted there was some advertising the e-commerce giant wouldn’t touch, such as guns. That extended to James Bond’s Walther PPK. When producers of “Skyfall”, a Bond film released in 2012, sought to run an ad on the site, Amazon at first informed them that it violated the company’s weapons policy. “The studio was like ‘screw you!’” an Amazon executive later recalled. “Who is James Bond in silhouette without a gun? Literally, he’s just a random dude.”Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More
ON MAY 19TH Target reported that digital sales rose by 50% in its latest quarter, year on year. That is a blistering pace—but not nearly as blistering as earlier in the pandemic. Walmart, Home Depot and other retailers have also recorded slowing e-commerce growth. But as shoppers emerge from self-isolation they are in a splurging mood. Target’s overall quarterly revenue of $24bn beat forecasts. Clothes in particular are flying off the racks, and not just sweatpants; the firm’s apparel sales jumped by over 60%.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More
F OR YEARS McDonald’s has been a prime target of the battles of labour-rights campaigners over miserly pay. The day before its annual general meeting on May 20th Fight for $15, an advocacy group, organised a strike of McDonald’s workers in 15 cities across America. The strike went ahead despite the firm’s vow a week earlier to raise wages. The company said that its 36,500 in-house employees will get a rise of 10% on average, that entry-level wages for new hires would go from $11 to $17 an hour and that average wages for all staff paid by the hour would reach $15 by 2024. It added that it wants to hire 10,000 people for the 650 restaurants it owns outright over the next three months.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More
