FT : The Fed’s QE comeback could be dangerous

The Fed’s QE comeback could be dangerous
Will asset purchases restart before, or after, the Treasury market gets upended?

The Fed has already started down the path to resuming quantitative easing. The question is whether they do so before, or after, upending the highly-leverage hedge fund basis trade that has been supporting the Treasury market.

Back in 2018, quantitative tightening — the undoing of Fed asset purchases — was a simple affair. As bonds matured on the asset side of the Fed balance sheet, banks would draw down reserves on the liability side to buy bonds. The question then was how low reserves could go before they would become ‘scarce’ and the Fed would have to stop QT. In the end, the Fed went too far, causing strains in overnight markets. They reversed the ship in 2019 and resumed QE to maintain a ‘floor’ system for setting rates.

This time around, QT has been complicated by the presence of large amounts of money market fund cash sitting in the Fed’s Overnight Reverse Repurchase Facility, or ON RRP. In 2023, it was the ON RRP that declined alongside Fed assets, and bank reserves actually rose.

The assumption has been that ON RRP drainage was protecting bank reserves and that, only once these reserves started to fall would we have to worry about a rerun of 2018. The Fed also now has a backstop for the banks — the Standing Repo Facility — that can be drawn down in the event of unexpected liquidity squeezes.

But the ON RRP may have been playing an altogether riskier role in bond markets — financing the proliferation of the so-called hedge fund ‘basis trade’, whereby hedge funds borrow to buy Treasuries and sell Treasury futures to make a tiny return, leveraged up multiple times. This trade has caught the attention of regulators on both sides of the Atlantic. 

The problem is that the basis trade is financed in the private repo markets, and it is money market funds — drawing down their ON RRP cash — that are financing this trade. The box diagram below, from the New York Fed, shows how ON RRP money can end up financing hedge funds (“Non Bank Financial Institutions”) repos:

This has created the possibility of a worrying chain reaction — from the Fed’s balance sheet, via the money market funds and the private repo market, through the basis trade and on to the demand for Treasuries, at a time when the US government is coming to market with massive amounts of issuance.

Instead of scarce bank reserves creating liquidity problems and forcing the Fed to stop QT, it may well be the exhaustion of the ON RRP and the upending of the hedge fund basis trade that causes problems in 2024. The worrying difference now is that there is no Fed backstop for hedge funds and the high degree of leverage used in the trade could lead to liquidity problems proliferating even more quickly through the financial system.

It seems unlikely that the Fed is unaware of this issue. Indeed, it may be no coincidence that Fed messaging on QT is already shifting, with Dallas Fed President Lorie Logan already suggesting that QT should taper once the ON RRP runs dry. This may be too late to avert a severe bout of bond market volatility, though. 

Either way, the Fed is on course to end QT and restart QE in the coming months, against a backdrop of loose fiscal policy and a still-resilient economy, opening the door to a reappearance of inflationary pressures that the Fed may have little appetite (or ability) to restrain.

FT : Chinese shadow banking giant’s bankruptcy highlights uncertainty over econo

Chinese shadow banking giant’s bankruptcy highlights uncertainty over economy
Speed of Zhongzhi’s fall indicates government concern over prolonged slowdown in country’s vast property sector

Until last summer, there were few concrete links between a slowdown in China’s property sector and a domestic shadow banking industry that has for years supplied middle-class savers with high-interest products.

But that suddenly changed in July when longstanding wealth management group Zhongzhi ran into payment difficulties, making it the focal point of concerns about a potential spillover from a real estate cash crunch that has since worsened.

In the intervening six months, the conglomerate has unravelled. In November, it admitted it was severely insolvent and its management had “run wild” in the wake of its founder’s death. Recently, it declared bankruptcy.

While developer Evergrande was for years the subject of warnings over a default that eventually materialised and remains locked in negotiations with creditors, Zhongzhi’s issues emerged out of the blue and were rapidly addressed by authorities.

The speed of its fall is indicative of government concern over the prolonged slowdown in China’s vast real estate industry and adds to uncertainty over the country’s economic and financial trajectory.

“All in all, Zhongzhi’s bankruptcy filing points to the rippling effect of real estate and some failures in the shadow banking sector,” wrote Alicia García-Herrero, chief Asia-Pacific economist at Natixis, in a note on Thursday.

“Although trust companies have reduced their exposure to real estate, the uncharted waters of wealth management products by non-bank entities can pose more credit risks.”

How does Zhongzhi fit in China’s financial system?
Zhongzhi was founded in 1989 by Xie Zhikun, who worked in timber and real estate. The company evolved into a sprawling conglomerate that included five asset management businesses, four wealth managers and a stake in Zhongrong, a trust company — part of an industry that funnels retail and corporate savings into investments.

Its complex structure in part reflects the development of China’s financial system, which has evolved dramatically since liberalisation in the 1990s. Informal or loosely regulated investment products, often seen as a means of channelling money into property and in some cases sold directly by developers’ wealth management arms, have been widely sold to investors in China. One Zhongzhi product seen by the Financial Times offered a return of 8 per cent.

By international standards, little information was publicly available about Zhongzhi until its bankruptcy. According to its website, its assets total Rmb1tn ($140bn). However, in an open letter to investors last year, it said it had assets of just Rmb200bn, compared with obligations of Rmb460bn.

The bankruptcy filing said the company was 76 per cent owned by Zhonghai Shengfeng (Beijing) Capital Management, an investment company that as of 2019 was owned by Xie, who died in 2021. The remaining 16 and 8 per cent is owned by individuals Liu Yiliang and Xie Rutong, respectively Xie’s business partner and daughter.

What went wrong?
The first sign of trouble came in the summer of 2023, amid widespread speculation on Chinese social media over the company’s health and missed payments at Zhongrong.

It is unclear exactly how much Zhongrong has invested in the property sector, but the trust industry in general has come under pressure from regulators to reduce its exposure to real estate.

In late July, companies listed on the Shanghai stock exchange said Zhongrong — which is not mentioned in the bankruptcy filing — had failed to make investment payments. Retail investors in Zhongzhi’s wealth management arms gathered at its headquarters in August, prompting a large police presence. The protests quickly dissipated.

The bankruptcy filing cited Zhongzhi’s involvement in court cases brought over the summer by Shanghai Pudong Development Bank and Shandong Energy, both related to unpaid funds or debts. These cases are ongoing. The filing stated there was an “obvious lack of repayment ability” at Zhongzhi, given the difference between its assets and liabilities.

In a letter from the business to investors made public in November, the company cited the death of Xie as one reason for the company’s problems. In the same letter, it said management “ran wild” as authorities launched an investigation into “suspected illegal crimes”.

Why is this bankruptcy different?
The most significant aspect of Zhongzhi’s bankruptcy filing is the speed with which the court accepted the application and with which authorities in general have moved. This follows President Xi Jinping’s call in November for “fast discovery and speedy resolution” of financial risks.

It contrasts with the situation at Evergrande, the world’s most indebted property developer. Its default in 2021 sparked an ongoing liquidity crunch across China’s real estate sector. HNA, a conglomerate that borrowed heavily overseas, was also embroiled in years of delays before a bankruptcy plan was approved by creditors in late 2021.

Zhongzhi, based on the bankruptcy filings, is much smaller than Evergrande or its peer Country Garden, which reignited real estate concerns in recent months after it similarly missed payments on international debt. It is domestically-focused and its bankruptcy is unlikely to trigger the kind of legal and restructuring processes arising from offshore liabilities.

Some observers also suggested the speed of the resolution implied the situation was “not as sensitive” as with more high-profile banking institutions.

What happens next?
The failure of Zhongzhi has highlighted the extent of uncertainty over the health of China’s financial system at a time when the government is cracking down on the flow of information and parts of its once-booming property sector are paralysed by inactivity.

Analysts have largely said they see limited spillover from the case of Zhongzhi. At a UBS conference in Shanghai this week, Tao Wang, chief China economist at the Swiss bank, said she “did not see the impact on the financial system per se as significant”.

Reinforcing this idea, Zerlina Zeng, head of east Asia corporates at CreditSights, said its savers were largely ultra-high net worth individuals and as such less likely to protest than the middle-class holders of banks’ wealth management products.

Zhongzhi’s investments were mainly unlisted stocks and bonds, she said, adding that its failure was unlikely to move public markets, which had already priced in any broader impact.

However, China’s shadow financing industry, which based on available data now plays a less significant role than before the Covid-19 pandemic, is by its nature highly opaque.

Zeng added that many of Zhongzhi’s products were “sold via off-balance-sheet channels”, meaning they “won’t be necessarily booked in the court filings” and that “these assets won’t be part of the winding-up procedure”. This could mean that Zhongzhi’s failure will take longer to resolve.

“The actual systemic impact of Zhongzhi’s bankruptcy would be limited since its crisis has been brewing for years, and its risk exposures are not cross-held by other financial institutions,” said Larry Hu, economist at Macquarie. “But the fallout could continue to hurt investor and market sentiment.”

Business Of Fashion : This Italian Influencer Flew Too Close to the Digital Sun

This Italian Influencer Flew Too Close to the Digital Sun
Chiara Ferragni’s legal troubles and tainted image are a sign the pendulum is swinging from influencer-led marketing back to traditional media.
Chiara Ferragni outside Alberta Ferretti during Milan Fashion Week Autumn/Winter 2020. (Getty)

A year before the pandemic, Brunello Cucinelli, the “quiet luxury” baron who lives in a hilltop town in Umbria, told me he believed that soon, “privacy will be the new luxury.” Living under lockdown seemed to put pay to that prediction, as many people found being forced to isolate anything but luxurious. But Cucinelli’s argument came back to me as a business crisis entirely of her own making hit another star of the Italian luxury firmament, the uber-influencer Chiara Ferragni.

Ferragni is the populist anti-hero of Cucinelli’s philosophy. She has harvested 30 million followers on Meta Platforms Inc.’s Instagram and made herself a multimillionaire by entirely eschewing privacy.

For more than a decade, she has incessantly photographed herself in various stages of dress and undress — along with her husband, her mother, her sisters and, more recently, her two small children. From the humble beginnings of taking selfies outside Milan runway shows to which she wasn’t invited, she now has contracts with the same consumer brands that once barred her. She runs her own clothing line and digital marketing agency, and sits on the board of the leather goods group Tod’s SpA. And there’s the Amazon Prime series about her, adding to the meta absurdity of it all. She describes herself this way on her marketing agency’s website: “Chiara Ferragni is one of the most influential figures in the Italian fashion, media and business worlds and every day she uses her influence to make the world a better place.”

Predictably, the hubris has come back to bite. In the past month, Ferragni has been fined €1 million ($1.1 million) for having falsely claimed on her social media accounts that proceeds of the sale of a pandoro Christmas cake branded with her name would help a Turin hospital for sick children. It didn’t. A donation had been made upfront prior to the promotion, but the sales had no impact on the size of the gift. The company behind the Christmas cake promotion, Balocco, was also fined for unfair commercial practice. Ferragni for her part allegedly received €1 million for the promotion.

Besides the fine, Milan’s prosecutors office this week has started investigating Ferragni for serious fraud. A slew of consumer associations have opened cases against her, Coca-Cola has shelved an ad campaign she was due to front, and Safilo, the world’s No. 2 eyewear group, has dumped her. Even Prime Minister Giorgia Meloni took a swipe at Ferragni, saying the people who made pandoro had more value than those who promoted it.

In response to the opening of the fraud probe, Ferragni said she had full confidence in the judiciary with whom she was collaborating with their investigations. “I’m serene because I have always acted in good faith,” she said. Ferragni hasn’t posted on her Instagram since Dec. 18, when she made a defensive mea culpa and lashed out at the fine. It’s her longest online silence since she started out.

Though Ferragni’s fall can be seen as an isolated blow to the estimated $250 billion influencer industry, it could also be a broader warning of shifting winds. Italy also has a reputation for having been at the vanguard of telegraphing a change in the zeitgeist for tech and fashion. The Italian regulator AGCM, which fined Ferragni, issued a record fine against Apple Inc. and Amazon in 2021 for alleged competition violations. The fine has since been rolled back by a higher court, but it still coincided with the beginnings of a turn in public and regulatory opinion against the tech giants’ dominance.

Stefania Saviolo, professor at Milan’s Bocconi University and expert on the fashion industry, recently told me signs indicate the age of the fashion influencer has peaked. Rising inequality has meant influencers’ picture-perfect lifestyles are starting to grate. It’s also becoming clearer to consumers that influencers aren’t just random individuals who did well for themselves but savvy marketers and businesspeople.

I spent a couple of hours with Ferragni five years ago, when she had half the number of followers she has now but was diligent in maintaining her image. She repeatedly replied to questions about her motivation for opening up her entire life to the camera with the inane non sequitur, “sharing is caring.” When the photographer arrived, Ferragni was transformed and animated as if life only had value if it were captured in pictures. Which, for Ferragni’s business model, was, of course, true.

But the pandoro debacle — and Ferragni’s response that the punishment was excessive considering she was only trying to help people — has disfigured her manicured image. As the mask slipped, she hired the prestige Milanese law firm Gianni Origoni and a suite of spin doctors who usually work for scandal-hit Italian blue chips to resolve a very traditional corporate-image crisis.

The media head of one of Italy’s largest luxury brands tells me the pendulum is swinging elsewhere too. Traditional media is coming back into vogue for the fashion brands. That means less money being sprayed around startup media brands and influencers. And there’s another threat on the horizon: artificial intelligence. Virtual and AI influencers, with names such as Noonoouri, Ayayi and Kuki, have already been used by brands including LVMH’s Louis Vuitton and Hennes & Mauritz AB.

Maybe Ferragni is starting to see the value of a bit more privacy for herself — even the sanctuary of an Umbrian hilltop.

FT : Hedge funds take on private equity in battle for distressed companies

Hedge funds take on private equity in battle for distressed companies
Buyout firms’ stranglehold over who can buy portfolio groups’ loans under threat as many lenders retrench

Hedge funds are challenging private equity firms over restrictions that dictate who can lend to or buy the debt of buyout-backed companies, weighing legal action to capitalise on a surge in corporate distress.

Private equity portfolio companies can be particularly exposed to interest rate rises because of buyout firms’ reliance on debt to buy businesses. The firms draw up “whitelists” of approved lenders to stop potentially troublesome credit investors from using a position in the companies’ debt to steer the business’s strategy.

Although whitelists have been a feature of the buyout market for the past decade, the system is increasingly being tested as higher interest rates cause lenders to retrench, leaving companies searching for new sources of finance.

Law firm Pallas, which counts some of the hedge fund industry’s best-known names among its clients, told the Financial Times that it was exploring a legal challenge to the practice.

“The use of whitelists, which prevent financial institutions who are not listed from acquiring the debt, damages market liquidity and often results in a sponsor-friendly restructuring instead of one that is in the best interests of the company,” said Natasha Harrison, managing partner at Pallas.

Many large private equity firms use whitelists. The system not only helps them to prevent combative investors from buying the debt of their portfolio companies if they get into difficulty, but also to cement relationships with friendly lenders.

“Certain firms have reputations for being more litigious, being more activist and a lot of private equity don’t want to deal with those kinds of investors,” said Randy Raisman, managing director at Marathon Asset Management, which is on many whitelists.

But companies need to refinance more than $1tn of debt in the coming four years, according to figures from rating agency Moody’s, at a time when interest rate rises have made borrowing more expensive.

Some whitelisted lenders have been reluctant to lend more to troubled companies when their investment is already under pressure. Without existing lenders putting in new cash, portfolio companies need their private equity sponsors to permit them to take money from new sources.

“The problem becomes that you need new money and the sponsor does not want to give up [some or all of their ownership in the company] and the company is paralysed for a longer period,” a hedge fund executive said.

Last year KKR-backed cancer treatment provider GenesisCare was unable to borrow the money it needed from existing lenders, chief executive David Young told a US court, in part because of a restrictive whitelist. It was ultimately able to raise $200mn after the whitelist was expanded, according to Young.

Investors at another KKR-backed company, Unilever’s former spreads business Upfield, were unable to sell their debt to willing buyers in 2022 because of KKR’s whitelist, according to one creditor. KKR expanded the list in 2023 because Upfield needed to extend the maturities on its debt and the company managed to push out the repayment date for billions of dollars of loans.

KKR declined to comment.

As many private credit groups rely on buyout shops for business — the bulk of their lending is often to finance private equity deals — they may have an incentive to avoid rocking the boat even if a company’s strategy is failing.

“How are you going to negotiate with a sponsor during a debt restructuring knowing that you will go to the naughty list if you don’t roll over and play dead,” said Allan Schweitzer, portfolio manager at credit hedge fund Beach Point.

Some industry figures suggest that the system should be modified. One compromise would be to make it easier for lenders who are not on the whitelist to get involved earlier in the refinancing process, for example if there were a credit downgrade or a drop in the company’s earnings.

“There could be a middle road where PE firms still keep the whitelists in place but there are more triggers that allow for opening the whitelists than there are now,” said Eric Larsson, portfolio manager for Alcentra’s special situations funds.

>>> US After Hours Summary: DCGO +6% on guidance, short seller report rejection;

After Hours Summary: DCGO +6% on guidance, short seller report rejection; KBH -2.9% slipping following earnings; C -2.1% down on Q4 pretax results
After Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: DCGO +6% (also rejects short seller report), ITGR +0.9% (also acquires Pulse Technologies), AGI +0.8% (guidance), GMED +0.5%
Companies trading higher in after hours in reaction to news: TTGT +10.6% (strategic combination with Informa Tech's digital businesses), BBIO +5.2% (positive results), CHPT +1.3% (reduces workforce), RCEL +1.1% (distribution agreement with Stedical Scientific), CMC +1.1% (increase repurchase plan), DHT +1% (business update), DRS +0.8% (awarded over $3.0 bln in contracts), IVZ +0.7% (prelim AUM), OXY +0.3% (Warren Buffet increases passive stake; provides summary of Q4 earnings considerations), HCI +0.1% (to redeem remaining balance of notes), BLK +0.1% (spot bitcoin ETF declared effective)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: RELL -11.8%, KBH -2.9%, ORC -0.2% (guidance)
Companies trading lower in after hours in reaction to news: C -2.1% (provides certain Q4 pretax results), LAAC -1.4% (prelim 2023 operational results), HRZN -0.4% (Q4 portfolio update), HBAN -0.2% (COO retiring), U -0.1% (confirms ironSource founders departure), HL -0.1% (2023 production)

>>> US Close Dow +0.45% S&P+0.57% Nasdaq +0,57%Russell

Closing Stock Market Summary
The three major indices closed near their highs of the day. The S&P 500 logged a 0.6% gain and turned positive for the year; the Dow Jones Industrial Average saw a 0.5% gain; and Nasdaq Composite registered a 0.8% gain.
Mega cap stocks boosted index level gains. The Vanguard Mega Cap Growth ETF (MGK) gained 1.2%. Apple (AAPL 186.19, +1.05, +0.6%) had been down as much as 0.7%, but managed to close with a gain despite another analyst downgrade from Redburn Atlantic, which cut its view to Neutral from Buy.
Meta Platforms (META 370.47, +13.04, +3.7%) and NVIDIA (NVDA 543.50, +12.10, +2.3%) were among the top standouts in the mega cap space, helping to offset modest weakness in Tesla (TSLA 233.94, -1.02, -0.4%).
The aforementioned stocks boosted their respective S&P 500 sectors, which closed with the largest gains among the 11 sectors. The health care sector (+0.4%) was another winner, along with the industrial sector (+0.5%). Meanwhile, the energy sector (-1.0%) saw the largest decline by a decent margin, sliding alongside oil prices. WTI crude oil futures fell 1.0% to $71.41/bbl.
There was a general lack of conviction from either buyers or sellers today. Declining issues had a slim lead over advancing issues at the Nasdaq while advancers led decliners by a 5-to-4 margin. The equal-weighted S&P 500 logged only a 0.2% gain today.
The muted price action under the surface was due to a wait-and-see mindset ahead of the results from today's $37 billion 10-yr note auction, an afternoon speech from New York Fed President Williams (FOMC voter) on the economic outlook, Thursday's release of the December Consumer Price Index, and earnings reports out of the banking industry before Friday's open.
The 10-yr note reopening was met with decent demand, but the market was more responsive to the remarks from Mr. Williams, who said in a speech that he thinks the Fed will need to maintain a restrictive policy stance for some time.
The major indices all pulled back from session highs, which had the S&P 500 within six points of its all-time closing high (4,796.56), in response to Mr. Williams' comments.
Treasuries settled little changed from yesterday. The 2-yr note yield fell two basis points to 4.36% and the 10-yr note yield rose one basis point to 4.03%.
  • S&P 500: +0.3%
  • Dow Jones Industrial Average: UNCH
  • Nasdaq Composite: -0.3%
  • S&P Midcap 400: -1.6%
  • Russell 2000: -2.8%
Reviewing today's economic data:
  • Weekly MBA Mortgage Applications Index 9.9%; Prior -9.4%
  • November Wholesale Inventori); Prior was revised to -0.3% from -0.4%
Thursday's economic calendar features:
  • 8:30 ET: December Consumer Price Ind consensus 0.2%; prior 0.1%) and Core Consumer Price In consensus 0.2%; prior 0.3%); Weekly initial jobless claims ( codex 209,000; prior 202,000) and continuing claims (prior 1.855 million)
  • 10:30 ET: Weekly EIA Natural Gas Inventories (prior -14 bcf)
  • 14:00 ET: Treasury Budget (prior -$314.0 billion)

WSJ : SEC Approves Bitcoin ETFs for Everyday Investors

SEC Approves Bitcoin ETFs for Everyday Investors
The exchange-traded funds will allow investors to buy bitcoin as easily as stocks or mutual funds

A ruling Wednesday clears the way for the first U.S. exchange-traded funds that hold bitcoin to be sold to the public.

The decision by the Securities and Exchange Commission will allow mainstream investors to buy and sell bitcoin as easily as stocks and mutual funds. Expectations of U.S. regulatory approval for such funds drove the price of bitcoin to the highest level in about two years. The digital currency fell to just below $46,000 late Wednesday, up from $17,000 in January 2023.

Until now, everyday investors who wanted to buy and sell digital currencies have had to either trade on crypto exchanges and incur hefty transaction fees or purchase products that track bitcoin in less direct ways. At least half a dozen bitcoin-futures ETFs are already on the market. Those funds use futures contracts to provide exposure to bitcoin price moves, though they have been criticized for often straying from bitcoin’s price.

All 11 applications filed by asset managers including BlackRock BLK -0.27%decrease; red down pointing triangle, Fidelity Investments, ARK Investment Management, Invesco, WisdomTree WT 0.86%increase; green up pointing triangle, Bitwise Asset Management, Valkyrie and Grayscale Investments have been greenlighted to list. The new funds, known as spot-bitcoin ETFs because they buy and sell the digital currency itself, are expected to begin trading on Thursday.

Crypto assets were mixed after the SEC’s decision. Ether, the second largest digital currency rose nearly 10%. Coinbase Global COIN -0.46%decrease; red down pointing triangle, the largest publicly traded crypto exchange whose stock price tends to move in tandem with bitcoin, fell 1.4% in after-hours trading. Coinbase is listed as the custodian on at least eight spot bitcoin ETF applications.

The SEC previously rejected applications for so-called spot bitcoin ETFs on the grounds that the underlying market is vulnerable to fraud and market manipulation. SEC Chair Gary Gensler has said more regulation and investor protection is needed before a swath of investors get access to the crypto market.

Gensler acknowledged the latest ETF applications were similar to ones the SEC had denied in the past. But he said a court ruling last year in favor of crypto asset manager Grayscale had compelled the change.

SHARE YOUR THOUGHTS
Would you invest in spot bitcoin ETFs? Why or why not? Join the conversation below.

“Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares,” he said.

He added the SEC “did not approve or endorse bitcoin.”

“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said.

The argument that the bitcoin market is rife with fraud and easily manipulated got a boost Tuesday when the SEC’s official X account was hac

FT : Artificial intelligence frenzy underpins $14bn Juniper deal

Artificial intelligence frenzy underpins $14bn Juniper deal
HPE points to intensive AI applications using Juniper’s products to justify its acquisition

Twenty-five years on from the dotcom internet bubble, the tech sector is entering an artificial intelligence frenzy.

Juniper Networks has lived long enough to prosper from both. On Tuesday, Hewlett Packard Enterprise announced that it would acquire Juniper for $14bn, representing a juicy 32 per cent premium to the latter’s previous trading price. HPE hopes that Juniper’s switches and routers will fit nicely into its existing hardware and software offering for corporate computing systems. 

In particular, HPE points to data centres running intensive AI applications, which Juniper products can help to manage. HPE says the combination is worth $450mn of annual cost synergies, or nearly a tenth of Juniper’s revenue.

The all-cash buyout is transformative for HPE, whose enterprise value is $30bn. Its shareholders, however, are worried about the fit and new leverage. It shed $2bn in market cap when the news was announced.

For Juniper, this marks the conclusion of a wild ride as a public company. The takeout price represents an annualised appreciation from its 1999 initial public offering of about 8 per cent, excluding the small dividend it has paid in the past decade.

That index fund-like return belies the stock’s extreme moves, however. At its peak in 2000, market capitalisation reached $76bn. This was a year in which revenues hit $700mn. By 2002, the equity value had fallen to less than $2bn.

Juniper was among a group of telecom equipment manufacturers that were expected to be major winners of the internet buildout. Cisco Systems, the star of the lot, reached a market cap of $550bn. Today, a much more diversified Cisco is down to $200bn. Some companies, such as Alcatel-Lucent and Brocade, were eventually acquired. Others, like Nortel Networks and Global Crossing, went bust. 

Many of the rest, including the likes of Juniper, Ciena, Corning and JDS Uniphase, have continued to plug along in mostly obscurity as public companies with multibillion-dollar market caps. Juniper’s current operating profit margin of 17 per cent substantially exceeds that of HPE, itself a survivor of multiple tech cycles.   

Excitement around AI has boosted the likes of chipmaker Nvidia, which now trades at 22 times its 2024 expected revenue. OpenAI, which has barely been commercialised yet, is reported to have reached a private market valuation of $86bn.

Whether those figures are grounded in eventual profits remains to be seen. Juniper shows that even if the grandest expectations are not met, a useful business may exist underneath.