Philippa Kaur

From meagre beginnings in the 1980s, Gautam Adani has emerged as India’s richest citizen. Now, in just a few days, the foundations of his sprawling empire have been shaken. On January 24th a small New York investment firm, Hindenburg Research, published a report calling the Adani Group “the largest con in corporate history”. In a series of statements, the group responded by saying that the report was “maliciously mischievous”, “unresearched” and intended to “sabotage” a secondary share offering of the group’s flagship listed company, Adani Enterprises. The group also said that Hindenburg had published its report “without making any attempt to contact us or verify the factual matrix”. “We are deeply disturbed by this intentional and reckless attempt by a foreign entity to mislead the investor community and the general public,” wrote the group’s top lawyer, Jatin Jalundhwala. These fierce denials have not averted a sell-off of shares in Mr Adani’s seven listed companies, first right after Hindenburg’s report was published, then again when markets reopened on January 27th after a public holiday. In two trading days the collective market value of the Adani Group’s listed firms fell by $47bn, or 22%. Mr Adani’s personal fortune declined from $122bn at the end of 2022 to $93bn, according to the Hurun Report, a research firm. The episode has also drawn the world’s attention to one of India’s corporate success stories—and a significant motor of the country’s recent economic growth.In targeting Mr Adani, Hindenburg could not have selected a bigger whale. After dropping out of school at the age of 16, the entrepreneur moved through a succession of jobs, trading first in diamonds, then in metals and cereals, before entering the infrastructure business. Today his firms run some of India’s biggest ports, warehouse 30% of its grain, operate a fifth of its power-transmission lines, accommodate a quarter of its commercial air traffic, and produce perhaps a fifth of its cement. An affiliated Singaporean joint venture vies to be India’s largest food company. The Adani Group has also invested in strategically located ports in Australia, Israel and Sri Lanka. In the last financial year the group’s listed companies had total revenues of $25bn, equivalent to 0.7% of Indian GDP, and a net profit of $1.8bn. Their combined annual capital spending of around $5bn accounts for 4% of the total for all non-financial public companies in India. And Mr Adani’s plans are grander still. Between 2023 and 2027 the group is forecast to spend more than $50bn on investments, including in clean energy and hydrogen.Mr Adani is widely regarded as a master operator, with a genius for navigating the complicated legal and political landscape of Indian capitalism. Some investors have, though, occasionally expressed concerns about his group’s governance and opaque finances. That is the focus of Hindenburg’s report. It describes a complex network of funds and shell companies, some based in Mauritius, which interact with 578 subsidiaries spread through the seven publicly listed firms. Last year, Hindenburg claims, these entities engaged in 6,025 related-party transactions.Byzantine corporate structures are common in India and other emerging markets. But the report contends that the Adani Group is “engaged in a brazen stock-manipulation and accounting-fraud scheme”. The point of the complexity, Hindenburg alleges, is to manipulate the listed firms’ share prices and to shift money onto their balance-sheets “to maintain the appearance of financial health and solvency” amid high debts and relatively few liquid assets. As a consequence, Hindenburg wrote, valuations for the companies were overstated by as much as 85% and financial holes were temporarily papered over, despite severe shortages of liquid assets in five of the public firms. The group’s “obvious accounting irregularities and sketchy dealings” were enabled by “virtually non-existent financial controls”. Hindenburg claimed that Adani Enterprises had 156 subsidiaries but its reports were audited and signed off by a tiny accounting firm employing a handful of people, including some in their early 20s. Such allegations, the Adani Group said, have been “tested and rejected by India’s highest courts”. On January 27th the group released a PowerPoint presentation rebutting Hindenburg’s claims. Specifically, it noted that the group’s indebtedness is decreasing, and the operating companies’ debt issuance had been classed as investment grade by various rating agencies. It added that multiple accounting firms had been used to provide audits. Mr Jalundhwala said that Hindenburg’s report had led to “unwanted anguish for Indian citizens” and adversely affected the company and its shareholders. “We are evaluating the relevant provisions under US and Indian laws for remedial and punitive action against Hindenburg Research,” Mr Jalundhwala wrote.Hindenburg responded on Twitter that it stood by its report and that it welcomed the prospect of legal action, especially in America. “We have a long list of documents we would demand in a legal discovery process,” the investment firm said.For the time being, the report has upended Adani Enterprises’ much-anticipated secondary share offering. This was intended to raise around $2.5bn in new capital, in part to reduce debt. The first stage of the offering, accounting for 30% of the capital-raising, took place on January 25th and was fully subscribed, raising $735m. Several prominent investors put in bids, including the Abu Dhabi Investment Authority, Life Insurance Company of India, and entities related to two American banks, Goldman Sachs and Morgan Stanley. Since then Adani Enterprises’ share price has fallen below the offer price. The bigger public portion of the offering, which began on January 27th and was meant to conclude on January 31st, has so far attracted almost no buyers. ■ More

Do an image search for the word “business” or “manager”, and what comes back? Nothing that remotely resembles business or managers. It isn’t just that the people are attractive. It is what they are doing. Many stock photos feature well-dressed types sitting around a table. One of them is holding forth and everyone else is laughing madly, like cult members hearing that the Rapture has been brought forward a week. Listen to this story. Enjoy more audio and podcasts on More

IT IS HARD not to be in awe of Amazon. It is one of history’s greatest companies. Jeff Bezos nurtured the firm from the humble online bookshop he founded in 1994 into a tech juggernaut, selling everything from corn syrup to cloud computing, a future trillion-dollar industry that Amazon more or less invented (see chart 1). Today it is the world’s fifth-most-valuable company, third-largest revenue generator and second-biggest private employer. Its warehouses, data centres, shops and offices cover an area almost the size of Manhattan. Consumers, competitors and politicians have been left to wonder if Amazon would take over the world. Or whether it would stop there—it is investing heavily in Kuiper, a satellite-broadband venture.Listen to this story. Enjoy more audio and podcasts on More

FOR BOSSES and boards, dealing with the odd activist shareholder is par for the course. Contending with a swarm of such gadflies is unusual. Last October Starboard Value, an activist hedge fund, took a “significant” stake in Salesforce, a maker of customer-management software, arguing that the firm had failed to convert its leading market position into juicy margins and needed to cut costs. On January 4th Salesforce duly announced it would lay off 8,000 staff, or 10% of its workforce. That was not enough to swat off the attacks. On January 22nd it emerged that Elliott Management, a fearsome member of the gadfly genus, had also taken a multibillion-dollar stake in the company. The next day another, Inclusive Capital, was reported to have been buying Salesforce shares.So far the hedge funds have said little publicly about their demands. Deeper cost-cutting is almost certainly among them. Salesforce’s sales and marketing costs chew up 42% of its revenues, compared with 28% and 19% for SAP and Oracle, two big rivals, respectively (see chart 1). The activists could also push for a spin-off of one of Salesforce’s pricey recent acquisitions, such as MuleSoft, a business-software firm, Tableau, a data-visualisation tool, or Slack, a workplace-messaging app.Salesforce is not the only tech firm suffering such vexation. Last July Elliott was revealed to hold around 9% of Pinterest, a digital pinboard; by December it had wriggled its way onto the board. In October Altimeter, an activist fund with a holding in Meta, called on the social-media empire to reduce headcount and scale back its metaverse investments. In November TCI, another such outfit, demanded that Alphabet lay off staff, lower highish salaries and cut back on bets unrelated to its core search business, such as autonomous driving.All this buzz comes after a quiet few years. Between 2018 and 2021 the number of activist campaigns fell steadily worldwide. In 2022, as stockmarkets plunged, activists sprang back to life, launching 36% more attacks than the year before, according to Lazard, an investment bank. Silicon Valley, which went on an uncontrolled expansion binge amid the pandemic tech boom, presents a particularly juicy target. As Altimeter noted in a public letter to Meta, “It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people.” Investors have also soured on tech stocks, whose promise of profits in the distant future look less attractive today as interest rates rise. The tech-heavy NASDAQ index has fallen by 30% since its highs in late 2021, twice as much as the S&P 500 index of big American firms. That has allowed activists to swoop in at discounted prices, notes Gregory Rice of BCG, a consultancy. In 2022, 21% of activist campaigns globally took aim at tech, up from 14% in 2018-21 (see chart 2). In America, last year’s figure was 27%.Dual-class share structures like those of Meta and Alphabet, which let founders keep majority voting rights, offer the targets some protection. Still, even founder-controlled firms have to keep shareholders happy. Meta’s share price took a drubbing after it rebuffed Altimeter’s call to ease off its metaverse plans. Two weeks later the company announced it would fire 11,000 staff, or 13% of its workforce, and trim up to $2bn, or some 5%, from its capital spending in 2023. On January 20th Alphabet, too, said it would sack 6% of its employees. Contrary to their reputation for short-term opportunism, activist investors can help boost long-term returns. One study of 2,000 activist campaigns concluded that target firms on average outperformed their rivals after five years on both share-price and operating measures. Microsoft and Apple, tech’s two giants, have both had constructive exchanges with activists in the past. In 2013 Apple was nudged by Carl Icahn, a veteran gadfly, into returning some of its mounting cash pile to shareholders. Microsoft’s revival in the past decade was helped along by the appointment of another activist, Mason Morfit, to the board at the start of Satya Nadella’s tenure as CEO in 2014. Whether or not other tech giants follow Apple’s and Microsoft’s conciliatory example, they may be realising that the activists aren’t going away. After Alphabet announced its lay-offs, TCI sent it another letter arguing they were too modest. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Not a day goes by in India without news of the exploits of its wealthiest tycoon, Gautam Adani. In September his fortune was estimated at $140bn, double what it was the year before, largely thanks to the huge gains of the seven publicly listed companies he controls. That encouraged new acquisitions, including an Israeli port, an Indian TV-news network and the country’s second-largest cement producer.Listen to this story. Enjoy more audio and podcasts on More

Many who have met Satya Nadella like him. For those who haven’t, a skim through his autobiography endorses the view that the boss of Microsoft is an intelligent, decent sort of person. He is unassuming, with a passion for cricket. He is a listener, who encourages employees to share their personal as well as professional dreams. He writes about Buddhism, but not in a new-agey way. His son was born with cerebral palsy, so Mr Nadella seeks to understand suffering. At times, there is something gleefully Tigger-like about him, when he can barely contain his excitement about Microsoft’s new technologies. He describes one such “eureka moment” the first time he put on one of the firm’s HoloLens mixed-reality headsets and, thanks to a live feed from NASA’s Mars rover, visualised himself walking on the red planet. It was, he wrote, a glimpse into the future. “The experience was so inspiring, so moving, that one member of my leadership team cried.”Once again Mr Nadella is giddy with “this-is-the-future” euphoria. On January 23rd Microsoft announced its third investment, estimated at $10bn, in OpenAI, the company behind ChatGPT. The advanced artificial-intelligence (AI) tool lets users ask questions and get human-like, often funny responses. In the past few months it has grabbed headlines and become part of the zeitgeist. In no time, the wizardry of the technology, however error-prone, has led to its portrayal as a potential Kodak moment for Alphabet-owned Google, a boon to cancer research, the end of coding as you know it, and a nail in the coffin of the exam essay. In other words, it’s the tech hype cycle on steroids. At the risk of sounding churlish, it is worth noting that seven years after Mr Nadella’s HoloLens epiphany, the whole mixed-reality buzz at Microsoft has gone deathly quiet. HoloLens was reportedly affected by the firm’s 10,000 recent lay-offs. That said, ChatGPT is already so accessible and intuitive to use that it is hard to imagine it will be a flash in the pan. It is not difficult to see how Microsoft, with its strength in cloud computing and business software, could use OpenAI’s underlying GPT models to rejuvenate a whole range of products. And Mr Nadella, for all his mindfulness, burns with an ambition to restore the company to the pinnacle of tech innovation that it vacated with the onset of social media and the smartphone. Could this be his moment? Microsoft’s share price suggests not. It has barely advanced since November 29th, the day before OpenAI publicly launched ChatGPT (save for a brief rally after Microsoft reported quarterly earnings results on January 24th that were a bit better than expected). Given the risks of an economic slowdown, which is cooling demand for Microsoft’s software and cloud services, investors have too many short-term concerns to pay much heed to Mr Nadella’s promises of AI-flavoured jam tomorrow. Yet they shouldn’t underestimate his missionary zeal. He led Bing, Microsoft’s search engine, when Google was on a tear. He led its cloud provider, now called Azure, when it was an also-ran to Amazon Web Services, owned by the e-commerce giant. He has long nurtured a passion to leapfrog his west-coast rivals. That makes him impatient with AI research for its own sake. He wants it embedded in products that wow customers. Hence Bing, with a mere 7% of search queries in America, will shortly incorporate ChatGPT to wrestle share away from Google. GitHub, Microsoft’s coding tool, is using OpenAI technology in its Co-pilot product, aimed at accelerating the work rate of software developers. Microsoft is likely to overhaul products like Office and Windows with GPT technology, so that chatbots can take the drudge out of creating PowerPoints and Excel spreadsheets. As for the cloud, Microsoft benefits because OpenAI has built and trained its GPT models on Azure, and it can offer state-of-the-art chatbot services to Azure’s customers. The more they are used, the better they get. Microsoft will not have the field to itself, nor will it be a winner-takes-all market. Among other cloud providers, Alphabet, for one, has foundational models that are more powerful than GPT. For now, though, its ability to compete is constrained. Alphabet, loathed by critics of surveillance capitalism, bears a big reputational risk if human-like AI amplifies the biases and privacy concerns of current consumer technology. It is under regulatory fire: a lawsuit filed on January 24th by America’s Department of Justice and eight states calls for the break-up of Google’s ad-tech business. Moreover, the cost of the average Google search is exceedingly cheap; adding ChatGPT-like searches, heavy on computing power, would raise it. As for Microsoft’s business-software competitors, such as beleaguered Salesforce, they are trying to cut costs and cannot hope to match Microsoft’s advanced AI investments, says Mark Moerdler of Bernstein, an investment firm.First innings In short, Microsoft has a valuable head start and Mr Nadella is loth to squander it. The big question, however, is not who will win. In these early days that would be like asking, at the dawn of the 19th century, who will come out top from the Industrial Revolution. It is more a matter of how well-equipped is any company to handle the potential implications of introducing technology that will do work previously done by humans, but with neither the ability nor the moral compass to check the reliability of its work. The risks of propagating errors or, worse, misinformation, are serious. So is the danger of societal backlash if knowledge workers feel their jobs are threatened—though if the technology succeeds, over the long term it is likely to be a boon to job creation.Microsoft’s initial approach to the potential pitfalls is shrewd. Investing in OpenAI puts ChatGPT at arm’s length if something goes wrong. But eventually, with GPT infused in all of its products, it will bear a big responsibility for the outcome. In that case, the attention will focus on Microsoft’s own moral compass—and Mr Nadella’s human decency will be put to the test. ■ More

Chief executives of the world’s biggest firms left Davos on January 20th after a week of jaw-jawing in highish spirits. The mood at the annual gabfest was, if not upbeat, then at least no longer sombre. Behind closed doors, CEOs conceded that, although the war in Ukraine remains a humanitarian tragedy, the risks to the world economy look for now to be contained. Central banks have got serious about inflation. If a recession in America and Europe strikes, it should be manageable. The Chinese delegation sent the clearest signal in years that China is not just reopening after its harsh “zero-covid” regime but also reintegrating with the world. Globalisation may not be in the rudest of health, but news of its demise appeared, to the snow-swept bosses, exaggerated.Back on earth, things look dicier. “Earnings season is going to be the confessional event,” says Jim Tierney of AllianceBernstein, an investment firm, referring to the month or so when most companies report their quarterly results. The profits of America’s banking giants, which kicked things off in the past week or so, had fallen by 20% year on year. Investment bankers received a particularly severe drubbing, as dealmaking collapsed amid economic uncertainty. In early January Goldman Sachs gave around 3,200 of its workers the boot. Profit estimates for large American firms are plunging more precipitously than a black ski run. In the last three months of 2022 analysts revised their fourth-quarter earnings forecasts for the S&P 500 index down by 6.5%, twice as much as the typical downward revision. Wall Street’s collective wisdom about the past quarter now points to a year-on-year decline in profits, the first since the depths of the pandemic in 2020 (see chart 1).For many companies, costs are rising faster than sales. Businesses are finding that it is harder to resist wage rises than to persuade customers to bear rising costs. This will compress margins at a rate that has yet to be fully digested by analysts, who collectively still predict profits to grow in 2023. If the American economy does slide into a recession, as many economists expect, profits will almost certainly slide further still. Since the second world war earnings per share have fallen by an average of 13% around periods of economic contraction, calculates Goldman Sachs. The first thing to which firms will be confessing is the weariness of consumers. In firms’ conference calls with analysts at the end of last year, many spoke of weak demand, as shoppers reined in spending on discretionary items. Procter & Gamble, whose products range from nappies and detergents to dental floss, has reported falling sales volumes across its businesses in the fourth quarter. It managed to meet earnings expectations only because it increased prices by 10%—and plans further rises in February.Yet the chorus of bosses advertising such “pricing power”, last year’s favourite boast, will be quieter this earnings season. Although households are still spending excess savings built up during the pandemic, they are increasingly fishing for bargains. American consumers skimped on everything from restaurants to electronics in December, causing retail sales to decline by 1.1% on a seasonally adjusted basis, compared with the previous month. Constellation Brands, which makes and distributes Corona beer for drinkers in America, said on January 5th that it plans slower price increases this year. Many retailers are discounting goods to clear inventories. The prices of Tesla’s cars are lower globally by as much as 20%.As demand falters, firms are owning up to excessive costs—their second confession. Technology companies, which saw appetite for their products slow last year from earlier pandemic-induced highs, are doing so with special zeal. Apple’s boss, Tim Cook, is taking a 40% pay cut this year. Twitter is auctioning off its neon-bird wall art. Less symbolically, on January 18th Microsoft announced plans to lay off 10,000 people. Two days later Alphabet, Google’s corporate parent, said it would sack 12,000. These cuts do not entirely reverse tech’s pandemic hiring binge, but a Silicon Valley venture capitalist thinks it will provide “air cover” for more tech firms to trim their payrolls and shore up their cashflows. Companies’ third confession concerns the fate of any profits that will be made. This earnings season is also a time for firms to lay out their spending plans for the year ahead. In aggregate, large American businesses tend to split their outgoings evenly between shareholder payouts (through dividends and share buy-backs) and investments (research and development, capital expenditure, and mergers and acquisitions). In the era of cheap money, before central banks started raising interest rates to quash inflation, the payouts were often financed with debt. Now that money is expensive, such borrowing is likely to subside. As for dealmaking, plenty of acquirers are still sorting out the mess created by transactions struck at peak prices during the pandemic merger boom. Write-downs acknowledging the fall in value for some of these are more likely than announcements of replenished war chests and a desire to strike more deals. That leaves investments. The 21st century’s mega-trends—decarbonisation, digitisation and decoupling between China and the West—argue in favour of mammoth spending on climate-friendly technology, robots and software, and non-Chinese factories. One European industrial boss contends that, as a result, capital spending should withstand the impending downturn better than usual. Maybe. For the time being, though, most companies remain cautious. After American firms’ capital expenditure ticked up in the third quarter of 2022, one tracker of corporate spending plans, compiled by Goldman Sachs, points to continued growth but at a considerably slower pace. Many companies are likely to defer significant spending decisions until the economic uncertainty lifts. Ericsson, a Swedish maker of telecoms gear, warned that its American customers are increasingly holding off on new network investments. Dell shipped nearly 40% fewer PCs, which it sells chiefly to corporate customers, in the fourth quarter, compared with the year before, according to IDC, a research firm. Logitech, which makes keyboards, webcams and other desktop-related hardware, now expects revenues to fall by as much as 15% in the fiscal year to March, down from its previous estimate of no more than 8%. Makers of software, such as Microsoft, and chips, such as Intel, could also be affected by crimped digitisation budgets.Like all earnings seasons, this one will spring positive surprises. A few have already sprung. United Airlines increased its prices without putting off holidaymakers and business travellers. Netflix smashed expectations by adding 7.7m new subscribers in the fourth quarter, partly thanks to a new, cheaper, ad-interrupted service. The beleaguered streaming service, which has lost roughly half its market value since its peak in autumn 2021, has issued bullish profit forecasts for 2023. On January 19th Reed Hastings stepped down as Netflix’s co-CEO, possibly because he believes the worst is over for the company he founded 25 years ago. Such perkiness will, however, be the exception rather than the rule this year. In aggregate, positive earnings surprises have been getting less positive in recent quarters (see chart 2). Having reached an all-time high as a percentage of GDP last year, post-tax corporate profits look overdue for a correction. And they may have further to fall. High debt and low taxes, which propelled corporate profitability for decades, are no longer the tailwinds they were, as interest rates rise and the appetite for deficit-funded tax cuts diminishes. Real corporate life takes place at less rarefied levels than the Swiss Alps. ■ More

China’s clampdown on its best and brightest tech companies came quickly in late 2020. Two years later authorities in Beijing are swerving rapidly back towards more predictable policymaking. On January 16th DiDi Global, a ride-hailing firm, said it would soon be allowed to resume taking on new customers after an 18-month pause during which regulators banned it from growing. A week earlier Ant Group, China’s payments and fintech giant, revealed that Jack Ma, the country’s most prominent entrepreneur, no longer held controlling rights in the company which he co-founded. Mr Ma’s ceding of control was rumoured to be one of the final steps toward political approval of the company. Shortly afterwards a senior Chinese technocrat said the tech crackdown was drawing to a close.Listen to this story. Enjoy more audio and podcasts on More