TheChek News Flow

CVS Board Conducts Strategic Review of Company

Among the possible options for the healthcare company is a breakup

CVS Health is conducting a strategic review of options for the company, including a possible breakup of the industry giant, according to people with knowledge of the matter.

The company’s board of directors has retained bankers to facilitate the review, which has been ongoing for weeks, the people said.

No decision by CVS is imminent, and it is possible there won’t be any major changes in the business as a result, they added.

The review includes different options, including various forms a potential breakup could take, some of the people said.

Reuters earlier reported that CVS had tapped bankers to explore options including breaking up the company.

“CVS’s management team and Board of Directors are continually exploring ways to create shareholder value. We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model,” a CVS spokesman said.

The review comes after CVS has struggled to realize the promise of its efforts to build a healthcare conglomerate spanning major sectors of the industry.

On Monday, hedge fund Glenview Capital Management met with CVS to discuss ways to improve operations, The Wall Street Journal reported. Glenview owns about 1% of CVS’s shares outstanding.

CVS, which began as a health and beauty product retailer, became a household name through its pharmacies. In recent years it has grown into a healthcare juggernaut, combining a pharmacy-benefit manager CVS Caremark, health insurer Aetna and healthcare clinics under its roof.

But the company has had to lower earnings forecasts several times since late last year, and shares have fallen about 20% this year to date. The S&P 500, meantime, is up nearly 21%.

At the heart of its recent struggles is the company’s Medicare business, the private version of the federal program offered by CVS’s Aetna subsidiary.

Aetna took a bold plunge this year, offering enticing perks to lure seniors to its products, and it enrolled hundreds of thousands of new members. They have run up higher medical costs than the company predicted, however, while federal regulatory policies have squeezed Medicare insurers.

CVS has said it is changing its approach and expects improved results in its Medicare business next year. It has also promised $2 billion in cost cuts, and Monday disclosed a round of layoffs affecting about 2,900 people.

But the strategic review is raising broader questions about the structure of today’s CVS. The company was built around the promise that its drugstores could be used to deliver care in a cheaper, more efficient way, bringing down costs for its insurance arm and improving the health of its members.

More recently, CVS has played down that idea, buying clinic operator Oak Street Health to be a primary-care vehicle. But that deal, which cost $10.6 billion, brought on board a money-losing asset that is also closely focused on the Medicare business at a time when it is facing major challenges.

SAP chief warns EU against over-regulating artificial intelligence

Christian Klein, head of bloc’s biggest software firm, warns against further curbs on AI models

The chief executive of SAP, Europe’s largest software firm, has cautioned EU policymakers against over-regulating artificial intelligence and widening the already large gap with the US in the transformative yet nascent sector.

“I’m totally against regulating the technology, it would harm the competitiveness of Europe a lot if I can better test my AI models here,” Christian Klein told the Financial Times during a visit to Silicon Valley.

“If we over-regulate using data for developing new AI in Europe, but [in the US] it is still OK, then you’re at a massive disadvantage.”

The SAP boss’s intervention comes as the enterprise software sector is being upended. Rivals such as Salesforce and Oracle are racing to infuse generative AI through their services via chatbots or agents that can understand and act on natural language queries and commands.

But tech companies have bridled at restrictions in the EU’s new Artificial Intelligence Act, which seeks to regulate the most powerful large language models, and the Digital Markets Act and data protection rules, which restricts what data can be used to train LLMs.

Meta and Apple have declined to launch some AI products from the region as a result.

Meanwhile, on Sunday, California governor Gavin Newsom vetoed a controversial bill designed to regulate the most powerful AI models built in the state, under heavy pressure from tech groups.

“I’m super close to all the discussions in Europe and as the biggest software company we have a certain voice in that,” said Klein. “I think the right discussion is happening in Europe right now: how can we regulate the impact on businesses, on end users? Don’t regulate the technology. Regulate the outcome.”

The German company is investing €2bn a year in AI, a tiny fraction of the $100bn Big Tech titans have spent so far this year. But Klein said SAP is not trying to compete with the US hyperscalers and has no need for vast data centres or frontier AI model research.

“While others are screening the whole internet with their large language models, ask them about some facts about your company on business data, the results will not be that good,” he said. 

His modest budget is being used to develop its “Joule” chatbot, which Klein said can perform a variety of tasks from writing code to acting as an internal consultant to identify supply chain and business process inefficiencies and suggest improvements.

SAP also wants to attract more US engineering talent by opening labs near universities such as UCLA, Berkeley and Stanford. It has also directly invested in generative AI start-ups Anthropic and Cohere.

The AI pivot is the latest reinvention of the 51-year-old company.

Over the past decade, it repositioned itself from a mainframe-based, per-head licensing service to one that sells customers subscriptions to its interconnected cloud-based apps for overseeing everything from accounting, supply chains and HR.

Only about a third of its 400,000 customers have transitioned to the cloud so far, but Klein said there is a long waiting list and those who do spend more with SAP and have an 80 per cent recurring revenue rate.

In July, SAP reported that second-quarter revenue rose 10 per cent to €8.29bn, largely driven by increased cloud sales.

The company’s relatively slow move to the cloud led to a depressed share price for years. But during Klein’s five-year tenure as co-CEO and then sole CEO, SAP’s share price has almost doubled to an all-time high.

Its market capitalisation of €242.4bn makes it Europe’s fourth-largest listed company and bigger than Salesforce, but it still trails its long-standing US rival Oracle, which is almost twice its size.

“For a long time, part of the bull case for SAP has been increased buy-in from US investors, and we now have the right set-up for this to materialise,” said Barclays analyst Sven Merkt. “SAP no longer lags behind US peers in terms of growth.”

Despite his stock market success, Klein is wrangling a morale problem at home. A recent survey of German staff showed that 51 per cent were willing to leave for a rival and only 38 per cent said they had “full trust” in the executive board.

In January, Klein announced that 8,000 of its 110,000 workforce would be affected by an AI-focused restructuring programme, increasing that figure to 10,000 in July. Just 15 per cent of those surveyed said that the overhaul had improved their working conditions.

“If we would not make our bet on AI and apply it internally, SAP would not be competitive any more,” Klein said.

Ofcom ‘absolutely prepared’ to impose heavy sanctions on platforms that do not comply, Melanie Dawes says

Britain’s media regulator will take “strong action” against tech companies that break new rules on content moderation, even if it has limited powers to stop the spread of lies online, the agency’s head has told the Financial Times.

Ofcom chief executive Melanie Dawes said the UK’s Online Safety Act, which will largely come into force next year, directly addressed much of the internet activity that caused violence across Britain in August.

“We have got some pretty strong powers here,” she said in her first interview since the far-right unrest, adding that Ofcom would be fully prepared to enforce the legislation quickly.

“There will be some [websites] who we need to take strong action against and we’re gearing up for that now so that we can be really fast,” she said.

Asked what this may mean for Elon Musk’s X platform, Dawes said Ofcom would “make sure that X follows the rules that have been set down in the act . . . and that action needs to take place next year”.

The UK’s online safety regime, the first of its kind globally, will require websites to set and enforce clear content moderation policies, and to quickly remove illegal content.

Ofcom can levy fines on websites that violate the Online Safety Act or shut them down in extreme cases. “We will absolutely be prepared to use them,” Dawes said of the new powers.

X has been blamed for enabling the spread of misinformation in the UK this summer that stoked tensions during what was the worst unrest in England for more than a decade.

During the riots in August, UK government officials complained that X had resisted requests to remove what they viewed as harmful content.

Musk has accused Prime Minister Sir Keir Starmer’s Labour government of censorship and recently falsely claimed it was “releasing convicted paedophiles in order to imprison people for social media posts”, a reference to a policy of releasing some offenders early to ease prison overcrowding.

The OSA criminalises the act of sending a message known to be false with the intention of causing “non-trivial psychological or physical harm”. Several people were prosecuted for this offence after the riots.

But the act has been criticised in the wake of the riots for lacking powers to deal with “legal but harmful” content, a category omitted from the legislation when it was passed last year over free speech concerns.

Dawes, a former senior civil servant who has led Ofcom since 2020, accepted that the regulator could not “require” social media platforms to have policies on disinformation when they set content moderation rules.

She also said Musk’s posts were not a matter for Ofcom, noting it was up to parliament to decide whether there should be a law against spreading falsehoods. Dawes cautioned about the need to protect freedom of speech.

“It isn’t entirely straightforward to know how you create rules here that deal with harmful disinformation while also allowing people to have their voice [and] maybe make mistakes,” she said.

Some lawyers and MPs remain sceptical about Ofcom’s ability to take the fight to some of the richest and most powerful companies in the world, given it has struggled to date to hold GB News — a lossmaking rightwing broadcaster — to account for breaking its impartiality rules 12 times.

Dawes said Ofcom was “moving to sanctions” against GB News, in a signal that the broadcaster, which is co-owned by hedge fund boss Paul Marshall, could be facing a fine this year.

GB News was found in May to have failed to preserve due impartiality in a live TV debate with former Conservative prime minister Rishi Sunak — a breach that Ofcom said was “serious and repeated”. 

Dawes defended the speed of Ofcom’s decision-making, saying: “I don’t think anyone wants a regulator that shoots from the hip, particularly when there are questions of freedom of expression.”

She noted that the regulator had not opened up any investigations into GB News in the past few months, adding that she was “glad that they have been making some improvements”.

Dawes is tipped as a candidate for the role of head of the UK’s civil service after the resignation of cabinet secretary Simon Case on Monday. In the interview Dawes said, “I’m very happy in my current role and have a lot more still to do at Ofcom.”

SpaceX’s Falcon 9 rocket is grounded again after the vehicle’s second stage did not come down in the expected area of the ocean, following an otherwise successful mission that delivered a Dragon capsule and its crew to orbit.

“We will resume launching once we better understand root cause,” the company said in a statement posted to X.

The Crew-9 mission, which carried NASA astronaut Nick Hague and Russian cosmonaut Aleksandr Gorbunov to orbit, launched on Saturday. (Two seats were left empty to ensure the two Boeing Starliner astronauts could return on the capsule in February.) Hague and Gorbunov arrived safely at the International Space Station early Sunday evening.

While the most important part of the mission was carried out without a hitch, the issue that occurred during the second stage’s deorbit burn marks the third time in three months that the Falcon 9 has experienced an anomaly. The deorbit burn is a precisely targeted firing of the stage’s single Merlin Vacuum engine to ensure any debris from reentry lands in a specific zone in the ocean.

The other two issues appeared in July and August. In the first instance on July 11, a liquid oxygen leak sprung up in the insulation surrounding the second stage’s engine during a routine Starlink launch, which led to the loss of the 20 satellites on board. Later, on August 28, the booster came down hot in its attempt to land on a SpaceX landing drone ship and was destroyed on impact.

These have not grounded the Falcon 9 for long; after the issue with the liquid oxygen leak in July, SpaceX resumed flying the rocket after just two weeks. SpaceX said it had identified the cause of the leak — a cracked line connected to the pressure sensor — and took a number of steps to ensure the issue didn’t recur. The landing anomaly in August led to no pause in missions at all as the U.S. Federal Aviation Administration allowed the company to continue with launches while the investigation was underway.

This most recent issue could delay some critical upcoming missions, notably the European Space Agency’s Hera mission to study asteroids on October 7 and NASA’s Europa clipper mission to the Jupiter moon of the same name on October 10. Both missions have tight launch windows that close by the end of the month. A Falcon 9 mission scheduled to launch 20 internet satellites for Eutelsat OneWeb scheduled for last night was also delayed.

Beijing should err on the side of acceptance rather than denial and make major efforts to avoid the mistakes of Japan

China’s seemingly outsize policy stimulus last week took many of us by surprise. The nation’s financial authorities apparently came to the rescue with their own version of a “big bazooka”. At least that was the initial verdict of an explosive rally in the Chinese equity market. With the Chinese Communist party’s Politburo sending a message of more to come, is the country’s long economic nightmare now over?

If it were only that easy. China is at risk of falling into a Japanese-like quagmire characterised by stagnation and deflation as a result of the bursting of a major debt-fuelled asset bubble. The comparison is far from perfect. China still has untapped sources of future growth — namely, household consumption, urbanisation and insufficient capital endowment of its large workforce. China also benefits from understanding the lessons of Japan  as underscored by a famous warning on the issue by an unnamed “authoritative person” on the front page of People’s Daily back in May 2016.

Being forewarned, however, is not the same as being pre-emptive. The jury is still out on whether China has succumbed to the Japanese disease. But Chinese policymakers should err on the side of acceptance rather than denial of the need for action. China has experienced its most severe whiff of deflation since the 1980s, as well as a growth shock on a par with that in Japan. China’s GDP growth rate is decelerating by six percentage points from the 10 per cent surge from 1980 to 2010 to the IMF’s projected increase of around 4 per cent over the next five years, virtually the same as that which hit Japan when its economic growth went from 7.25 per cent from 1946-90 to just 0.8 per cent from 1991 to 2023.

Japan not only provided a template of what to avoid but the “Abenomics” framework of the late prime minister Shinzo Abe offered a prescription for how to get out of the quagmire. It was broken down into three “arrows”, as Abe dubbed them — monetary, fiscal, and structural. The theory was simple: powerful fiscal and monetary stimuli were necessary to provide Japan with escape velocity while structural reforms were vital for an enduring recovery. In the end, Japan lacked the political will for the heavy lifting of structural change. Could the same fate await China?

Beijing’s latest stimulus appears to be an impressive first arrow. Large interest rate cuts — coupled with major liquidity injections into hard-pressed local governments and a beleaguered equity market — are especially significant. However, despite the seemingly extraordinary 25 per cent in the surge CSI 300 Index following China’s policy pronouncements, the market remains fully 31 per cent below its February 2021 high. The Japanese experience provides an important perspective, as the Nikkei 225 Index bounced four times by an average of 34 per cent on its way to a 66 per cent cumulative drop from December 1989 to September 1998.

China’s fiscal arrow is iffier. In the Politburo statement, actions were framed more by broad promises than specifics. For example, a pledge to support the property market was couched mainly in terms of cuts in mortgage rates and downpayment requirements for second homes. There was no detail on absorbing the overhang of unsold homes. Like Japan in the 1990s, Beijing remains wary of deploying a fiscal bazooka as it did in 2009-10, given mounting public-sector indebtedness. That’s understandable, with the Chinese government’s debt-to-GDP ratio at 85 per cent in early 2024, nearly three times what it was back then (33 per cent in 2009-10).

As it was for Japan, structural reform is the most problematic arrow for China. It faces three major structural challenges: demographic, productivity and chronic under consumption. The Communist party’s recent Third Plenum took steps to address some issues, but this was mainly a small rise in China’s incredibly low retirement age.

Meanwhile, actions in support of the private sector are more rhetorical than substantiative in rolling back regulatory and political constraints that have been in place since mid-2001. Nor has Beijing faced up to China’s most daunting impediment to structural rebalancing — social safety reforms (ie retirement and healthcare) needed to reduce excessive fear-driven saving and boost discretionary household consumption.

With the markets roaring their early approval of China’s bold policy actions, it is tempting to say that the worst is over for the country’s beleaguered economy. At best, that conclusion is premature. At worst, it is a false dawn. At a minimum, be wary of cracking out the champagne in response to Beijing’s latest moves.