Dear reader,
The business model of social media platforms heavily relies on users who willingly upload content for free. Reddit takes it a step further by depending on unpaid moderators to manage its online forums. However, a coordinated protest by these moderators has led to a blackout on the site. While this is unlikely to be fatal, it highlights the challenges that social media companies face when trying to monetize their audience.
Reddit was launched in 2005, just a year after Facebook. Despite its popularity, Reddit has not been able to achieve the same level of profits and growth as Facebook. However, co-founder Steve Huffman has made efforts to improve the platform and attract more advertisers. Unfortunately, the $10 billion valuation that Reddit achieved in a 2021 funding round now seems overly optimistic, not because of the user backlash, but due to general low valuations in the tech industry. Nevertheless, Reddit has an opportunity to capitalize on the wealth of information that its users have already provided. As one Lex reader wisely stated, “The quality of user opinions on Reddit is valuable, and many people append ‘Reddit’ when searching on Google. This data is gold for training purposes.”
While Reddit’s potential listing this year is in the minority, the lack of exits also affects venture capital investments. Limited partners who have committed capital should not expect to be released from their commitments. In the meantime, regulatory authorities are closely monitoring M&A activities. Pharmaceutical companies have been actively pursuing acquisitions, with $85 billion spent on deals in the first five months of this year. However, the pace of consolidation is drawing unwanted attention. The FTC attempted to block Amgen’s $28.3 billion takeover of Horizon Therapeutics, creating barriers for pharma companies to replenish their drug pipelines.
The tech sector is facing similar challenges. Both the UK and US regulators are skeptical of Microsoft’s proposed $75 billion acquisition of Activision Blizzard. UK antitrust regulators are concerned that Microsoft could monopolize the cloud gaming market by leveraging Activision games like Call of Duty. However, cloud gaming has yet to gain widespread popularity, and the sector lacks exclusive titles. Achieving regulatory approval for the deal will be a lengthy process. Lex believes that both companies can thrive independently, even if Microsoft is subjected to a substantial reverse termination fee. The Nasdaq’s planned $10.5 billion purchase of compliance software company Adenza also awaits approval, but given the popularity and importance of the compliance sector, its potential rejection would not necessarily be a tragedy. However, Lex acknowledges that Nasdaq may have overpaid with a 31 times expected 2023 ebitda valuation.
The UK has shown commendable interest in renewable energy, particularly in energy storage. The estimated requirements for a net-zero electricity system amount to 24 gigawatts, eight times the current capacity. Shareholders of Glencore are urging CEO Gary Nagle to set more ambitious climate change goals, which is challenging considering that half of the company’s ebitda comes from coal. At its annual meeting, 30% of shareholders rejected Glencore’s progress report and demanded more transparency. Nagle’s plan to acquire Teck’s coking coal unit and spin off the expanded coal division could lead to its separation regardless of the purchase.
Interest rates in Europe have reached their highest level since 2001, with further increases expected in July. Higher interest rates can expose weaknesses in banks. Despite this, BBVA and Bank of Cyprus have reentered the market for Additional Tier 1 bonds, indicating their confidence. Former Bank of England governor Mark Carney has publicly stated that rates will remain high in the foreseeable future. However, Lex reminds readers that the BoE has a poor track record in forecasting and has failed to predict the persistence of rising prices due to its deference to government policy. Individuals are advised to use their own common sense when considering interest rate trends.
In recent news, major banks and investors have swiftly distanced themselves from Odey Asset Management following allegations of sexual misconduct against its founder, Crispin Odey. The allegations spanned a 20-year period, and the speed of disassociation reflects the seriousness of the claims. The aftermath serves as a stark reminder that the City of London can be a toxic working environment for some individuals. Odey has been ousted, and Odey Asset Management is being dismantled, as many investors and prime brokers no longer have an incentive to associate with the hedge fund.
Furthermore, we would like to congratulate Lex writer Andrew Whiffin for winning the CFA Society’s National Journalist of the Year award. His award-winning analysis on why the UK stock market is undervalued is worth revisiting. In other news, cyber-security expert Bruce Schneier reflects on his involvement in Edward Snowden’s NSA document leak ten years ago. Additionally, Tina Satter’s play about the arrest of linguist Reality Winner has been adapted into a film called “Reality,” using the actual transcript of her FBI interrogation.
We hope you have a wonderful weekend.
Elaine Moore
Deputy head of Lex
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