Soft landing suspicion creeps in

Investors gather around a campfire to recount how Paul Volcker tamed inflation with his bare hands and exchange tales of former housing core services. Email us your financial ghost story: robert.armstrong@ft.com and ethan.wu@ft.com.

the market is a little unsure of itself

Inflation forecasters we follow sound uncertain about today’s January CPI numbers. Their work is especially hard this month. methodology Changes, higher prices at the beginning of the year, lower car volatility, higher airfare volatility. The consensus calls for inflation to reaccelerate. Core inflation rose by 0.4% m/m. This brings the six-month annualized core inflation rate closer to 5%.

Markets are also uncertain.big and fast Changes in interest rate expectationsIn February, the story went something like this. The futures market has priced in his peak rate of 4.9%, ending the year at 4.4% after several rate cuts.Now the job market is booming and some scary Fezpeakthe new peak is 5.2% and the year-end rate is 4.9%.

Until recently, the winners of 2023 have been last year’s dunce: the easy ones, including high-growth ones, Bitcoin, the Ark Innovation ETF (Arkk), profitless tech, and heavily shorted stocks like Carvana. All things prosperous with money. However, this is being reversed as doubts about soft landings grow. Goldman Sachs’ Unprofitable Tech Index, for example, is down 11% from its Feb. 2 peak. The recent rise in interest rate volatility (bottom dark blue line) corresponds to the end of the year-to-date growth outperformance (light blue).

A snapshot of an interactive graphic is shown. This may be due to being offline or having JavaScript disabled in your browser.

We can see that suspicions of a soft landing are spreading to European stocks, where cyclical value stocks dominate.as we pointed out yesterdayEuropean stocks’ multi-month streak of U.S. stocks’ outperformance was broken in mid-January (bottom light blue) and even before the recent euro weakness:

A snapshot of an interactive graphic is shown. This may be due to being offline or having JavaScript disabled in your browser.

This looks like a consolidation, says Bernstein strategist Matthew Palazzolo. However, Palazzolo added that heightened fears of a soft landing in the US are likely behind “more cyclical profit-taking in Europe that will impact the economic improvement.”

So, as the economy continues to surprise, markets are uneasy about a soft landing. No one knows for sure what will happen next.

Such fear makes sense. But remember, a soft landing does not mean interest rates will return to zero. It will probably only happen in a deep recession. Even with interest rates of 2%, it’s still a tough world for the most speculative stocks. On the other hand, if you’re a large, profitable tech company, that’s fine. If today’s CPI report shows a soft landing, it makes sense to own Alphabet, but not Arkk. (Ethan Wu)

FIS/World Pay

In principle, I have great confidence in capitalism and markets. Then I read something like this:

US-based financial technology group FIS has announced that it will spin off Worldpay, the payments business it acquired just four years ago for $43 billion, after failing to merge the two companies. The company, formally known as Fidelity National Information Services, acquired Worldpay in 2019, creating he one of the largest providers of underlying financial infrastructure for the banking payments sector.

In 2019, the management and board of FIS, which sells technology to help banks process payments, invested $43 billion (mostly equity) to acquire Worldpay, which sells technology to help merchants process payments. I thought it would be a good idea to pay for This represents a 13% premium over Worldpay’s market value, which had already risen due to merger speculation in the payments space.who paid for the insurance justified We expect $700 million in annual revenue and cost synergies. The company estimates the present value of these synergies at $11 billion.

Yesterday, the company announced it had acquired a $17.6 billion write-down of goodwill related to the acquisition. This is a bit strange because according to FIS all of the targeted synergies have been achieved and more. As of early 2022, the company will have report Achieved $500 million in operating expense savings and $750 million in revenue synergies. FIS also said it achieved $400 million in non-operating cost synergies. I think this means lower funding costs. He beat the original synergy target of at least $550 million. So the present value of synergies is probably well over $11 billion.

Something seems to have changed as FIS is willing to scrap the deal and lose the significant revenue and cost synergies involved. what is that?

Here is an excerpt from the 2019 press release announcement transaction:

The combination will enhance FIS acquisition and payment services, significantly expand Worldpay’s points of sale, accelerate entry into new regions and significantly expand FIS’s capabilities. . .

FIS Chairman, President and Chief Executive Officer Gary Norcross said: “When completed later this year, our two strong organizations will join forces to offer a combination of client-driven scale, global presence and the broadest range of global financial solutions in the industry.”

yesterday’s press release While the spin-off announcement talked about a “strategic and operational focus,” the main issue is the capital structure. Her current FIS CEO, Stephanie Ferris, said in a conference call with investors yesterday:

The pace of payment disruption is accelerating rapidly, requiring increased investments for growth and alternative capital allocation strategies for merchant businesses. . .

Separated. . allow FIS and Worldpay to implement different capital allocation strategies. FIS will be better positioned to balance the return of capital to shareholders with organic investments and complementary M&A. The company remains committed to investment grade ratings, a conservative capital structure and dividend increases. . .

The separation from FIS will allow Worldpay to pursue a more growth-oriented strategy. . . more consistent M&A and a return to a capital structure that does not require an investment grade rating. . .

. . . FIS and Worldpay are expected to maintain a close commercial partnership to provide critical functionality. . . Realized many cost synergies [Worldpay] I think we know what they are. We try to have as many commercial relationships as possible and not have a lot of non-synergies. increase.

In 2019, the payments industry was changing so quickly that it needed scale. In 2023, the payments industry is changing rapidly, requiring agility. In 2019, synergies will generate billions of dollars in value. In 2023, losing synergy is “pretty manageable.” what is going on here?

It’s not just synergies that are lost. There are also sunk costs.Transaction Banker Paid $93 million, but compared to the $2.7 billion in “acquisition, integration, and other” costs recorded by the FIS from 2020 to 2022, this is a small potato. At least $1.3 billion of that is Worldpay’s integration costs, and could be more depending on how it’s allocated. Such as retirement benefits and data center consolidation costs. From the FIS investor’s perspective, all that money is gone.

Ferris’ comments on commercial partnerships and other forms of efficiency suggest that the two companies could maintain some of their synergies. However, this does not improve the tough situation. Because if that were true, it would have been possible to achieve a lot of cost savings and higher returns. without trading in the first placePut another way, tens of billions of synergies are either lost in spin-offs, or synergy values ​​are exaggerated from the start. It cannot be both.

Even if synergies are lost, the spin-off will undoubtedly create billions in net shareholder value compared to the combined company’s current position. Perhaps this is why activist investors his DE Shaw and Jana Partners got involved with FIS. But that means the original deal was a grand mistake.

Industries change. Perhaps because the merchant payments space is so competitive right now, Worldpay will have to invest much more than he expected in 2019 by the FIS. Investors are now paying more to Worldpay and value investors are paying more to FIS. But again, note that the rapidly changing competitive landscape was the key justification for this deal in the first place. In 2019, fast-growing rivals Square and Stripe have been around for a decade before him.

The lesson for investors here is old. M&A is very risky. This is a company that has made huge deals, promised great synergies, and invested a lot of money and management time to achieve them. bottom Accomplished them and canceled the deal after a few years anyway. This only makes sense if the synergies achieved by FIS are so value-destroying that they are not worth maintaining, or if those synergies are not worth much.

Boards and management have strong incentives to make deals. Target’s leader buys stock at a premium and buys out contracts. The buyer’s management gets to run a bigger company, which means more money and more power. They also have the joy of doing something transformative instead of just watching a good company do it. Bankers and lawyers who are advisors on either side receive huge commissions only if the deal goes through. Whatever the intention, everyone involved has plenty of reasons to overstate the benefits of her M&A and downplay the risks.

FIS has a new CEO, a new CFO and a new independent chair since the transaction closed. This represents the degree of accountability. Ultimately, however, FIS investors paid the price. It was their money.

one good read

“consultants and outsourcers. “