Congress Rejects Biden’s Defense Budget
The House and Senate add to his request, but it’s still not enough.
Congress has been working on next year’s defense budget, and for the second year in a row members of both parties have rejected President Biden’s proposal as insufficient. This is a welcome development, though Washington is only starting to address the threats the U.S. faces.
The Senate Armed Services Committee recently passed a national defense authorization for 2023 that would provide the Pentagon $817 billion, up from the roughly $773 billion the Biden Administration requested, about a $45 billion difference. The House amended its initial draft in committee to add $37 billion to President Biden’s request. These increases are aimed in part at mitigating inflation, which is crushing the Pentagon’s buying power, especially on fuel and housing.
Both chambers included a 4.6% pay increase for service members, consistent with the Biden request. This in normal times would be generous but not with inflation at 8.6%. The services need to offer competitive pay to weather “arguably the most challenging recruiting year since the inception of the all-volunteer force,” as Marine Lt. Gen. David Ottignon put it earlier this year to Congress.
Army end strength in both proposals falls to 473,000 from 485,000, as Team Biden requested, not because the land branch doesn’t want the manpower but because it is struggling to fill openings.
Also important: Bailing out some of the water the U.S. Navy has been taking on. The Biden budget asked to build eight ships but retire 24, putting the fleet on track to shrink to 280 ships in 2027 from about 300. The amendment that added $37 billion to the House bill, sponsored by Democrats Elaine Luria and Jared Golden, offers money for five additional ships, including another destroyer and frigate.
Meanwhile, the House and Senate precluded some ship retirements. That would at least put the Navy on a more stable course, but the U.S. needs a larger and more lethal sea service within the decade to counter China’s growing naval power.
A bright spot is that both chambers dedicated money for the sea-launched nuclear cruise missile, known as SLCM-N. The Biden Administration wants to kill that program as a bow to the arms-control lobby, despite the advice of military commanders who want to keep it. The missile was conceived to deter Vladimir Putin from using a tactical nuclear weapon in Europe, an especially salient goal as the Russian dictator has spent much of 2022 making nuclear threats against the North Atlantic Treaty Organization.
The House and Senate will have to iron out their differences, and the money will still have to be appropriated in a budget deal. The reality is that even the $45 billion plus-up won’t change the U.S. trajectory of managed military decline. Defense spending will stay at roughly 3% of the economy, down from between 5% and 6% in the 1980s when the U.S. was showing the Soviet Union it couldn’t win the Cold War.
But at least Congress has stepped in to prevent the Biden Administration from bleeding the U.S. military amid one of the most volatile world moments in 80 years.
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Appeared in the July 11, 2022, print edition.
EQT’s Boss Is Working Toward a Greener Planet Through Natural Gas
Toby Rice has emerged in the past year as the most visible and forceful advocate for the U.S. natural-gas industry. He has also led the industry’s efforts to reduce carbon and methane emissions while lowering EQT ’s drilling costs, improving its credit rating, and leading a consolidation in the prolific Marcellus gas-producing region of Pennsylvania.
“This industry is not just digging holes in the ground to make a profit,” Rice, 40, tells Barron’s. “We’re working to achieve a higher purpose, which is to provide energy security to the world while reducing the impact on the climate. The opportunity in front of us is tremendous.”
Rice’s efforts have raised the profile of EQT, the top producer of natural gas in the country. When Sen. Elizabeth Warren (D., Mass.) accused gas producers of “corporate greed” in late 2021, Rice wrote a letter pointing out that gas prices were below the 20-year average that year.
Rice’s crusade is to replace coal with natural gas in worldwide electricity production. He calls the coal-to-gas switch outside the U.S. “the largest green initiative on the planet,” given the prevalence of coal in international electricity generation. Gas has half the carbon emissions of coal.
The U.S., he argues, can play a critical role due to the country’s huge gas reserves. Rice wants to see a quadrupling in U.S. export capacity of liquefied natural gas by 2030 to help reduce overseas coal consumption. That means greater government support for new pipelines and LNG facilities. Rice also is moving to reduce EQT’s methane emissions by 65%, relative to 2018 levels by 2025.
Stockpickers are finally earning their fees once again.
After more than a decade of chronic underperformance, actively managed stock mutual funds and exchange-traded funds have been beating their passive peers at a steadily rising rate during the stock market’s selloff this year.
Just over half of U.S. stock funds outperformed the average passive portfolio for the year through May, compared with 45% in 2021. While that figure might not quite sound boast-worthy, the average is dragged down by ongoing struggles among active growth fund managers—less than 30% of whom have managed to beat their passive counterparts’ average returns, according to Refinitiv Lipper.
The bright spots have been in the value and core stock segments, where a significant majority of active portfolios have been outperforming across small-, mid-, and large-capitalization stocks. Eighty percent of active large-cap value funds—and 62% of active mid-cap core funds—beat the average return for comparable passive funds through May, according to Refinitiv Lipper. Those rates are more than double their three-year averages.
Of course, in a very bad market, almost all stock funds are down for the year, but active funds in many stock categories have significantly stemmed losses. For example, the average annual return through May for active large-cap value funds was minus 4% compared with minus 7.3% for comparable passive funds, and active small-cap core funds returned minus 10.9% compared with minus 13.1% for passive peers, according to Refinitiv Lipper.
“While there are tons of ways to cut and slice the data—versus stated benchmarks, the S&P 500 indexSPX –0.08% , or passive funds—no matter how you look at it, it’s rare to see active equity managers outperforming six out of nine Morningstar style categories versus their long-term averages,” says Scott Krauthamer, chief operating officer of AllianceBernstein ’s global business development organization.
If there were ever a time for active managers to demonstrate their value, this year has been it. As the bull market came to a tumultuous end early in 2022, major dislocations in pricing between sectors and individual stocks created an optimal environment for savvy stockpickers to suss out winners from losers.
“Active shines when you have changing market leadership,” says Antonio Picca, manager of the Vanguard U.S. Momentum FactorVFMO +0.03% ETF (ticker: VFMO), a top-decile performer among mid-cap growth funds with a minus 19.8% return compared with a minus 28.5% category average through July 5. “We’ve been able to navigate the transition between Covid stay-at-home tech-heavy trends to reopening cyclical trends, and more recently to an outperformance of energy and defensive.”
Nevertheless, it’s too soon for managers to wash down years of humble pie with Champagne, analysts say.
Since the number of low-cost passive funds exploded in the 1990s and beyond, challenging traditional active managers to prove themselves worthy of their higher fees, reams of research have pointed to the same conclusion: Over long periods, active managers have a hard time sustaining outperformance. They either die off or are unable to keep up outperformance through different market cycles.
“The fact that managers would do a bit better in conditions that are absolutely awful doesn’t really matter much over the long-term horizon,” says Ben Johnson, director of global ETF research at Morningstar.
Johnson found that over a 10-year period through 2021, just 8.2% of active large-cap growth funds and 14.2% of active large-cap value funds have survived and beaten their passive counterparts. The best long-term outperformance among all active U.S. stock funds is by small-cap growth portfolios, with 44% of funds beating passive funds.
Nevertheless, this year’s best performers have been posting some impressive numbers. The small-cap blend portfolio Boston Trust Walden Small Cap (BOSOX) posted a minus 14.98% after fees through June, compared with minus 22.09% for its benchmark index, Morningstar U.S. Small Cap Extended. Among the top five mid-cap value performers in that period is Nuance Mid Cap ValueNMAVX –0.54% (NMAVX), with a minus 7.02% return versus minus 12.08% for its benchmark, Morningstar U.S. Mid Cap Broad Value. The top performer in the large blend group, Virtus KAR Equity IncomePDIAX –0.20% (PDIAX), posted a minus 4.31% return compared with minus 21.25% for its Morningstar U.S. Large-Mid index.
A New Era
Proponents of active management posit that this could be a new era for stronger active portfolio performance. The past dozen years of steadily rising stock indexes have been enormously challenging for stockpickers, with the bull market being led by a handful of tech names. Any manager who, in an effort to differentiate a portfolio or to try to beat the market, didn’t own Amazon.com (AMZN), Facebook parent Meta Platforms META –0.76% (META), Apple (AAPL), and Google parent Alphabet (GOOGL) was almost sure to lag behind the market.
Active managers tend to have more of a value and quality bias, “so a year like this is a tailwind for them,” says Scott Opsal, director of research and equities at the Leuthold Group. “Unprofitable stocks are down 60%, and profitable stocks are down 18%. If you’re an active manager who doesn’t like money-losing companies, that’s a big plus right now.”
The environment could get better for active managers if interest rates continue to rise and the cost of capital goes up, further exposing weaker companies, says Brian Katz, lead investment strategist at the Katz Group, an advisory in Melville, N.Y. “When capital is cheap, it allows companies that should not be in existence anymore to continue to exist. When that cost rises, they fail.”
Meanwhile, stock-price gyrations are creating opportunities for managers to find the kind of market mispricing they have only dreamed of in recent years.
“I’ve never seen such a wide disparity between consumer discretionary and energy,” says Krauthamer, adding that those sectors’ performance usually varies by a few percentage points, but through May this year, there was an 88-point difference. “Consumer discretionary was down 12%, and energy was up 76%. This doesn’t mean short energy and go long consumer—it says when the disparity is so wide, maybe there are some dislocations that don’t make a whole lot of sense.”
The jury is out on whether active managers will meet the moment to their full potential. Active large-cap funds have so far been slow to react to changing times.
“Despite an inflection in Fed policy, inflation, political control, peacetime to wartime, and a host of other major shifts, active funds have largely maintained directional biases versus 2019,” notes Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, in a June report.
She found that the turnover rate for active large-cap funds over the past 12 months was lower than in the much steadier environment of 2019, and portfolios continue to have an entrenched growth and technology bias.
Many managers with success so far this year were willing to pivot and ease up on traditional growth names in favor of defensive and cyclical sectors such as consumer staples, healthcare, energy, and financials. These funds typically have high “active share,” which is a measure of how much a portfolio’s holdings differ from a benchmark.
“We are adaptable and pragmatic with where opportunity is, rather than being dogmatic about buying growth at any price,” says Rajiv Jain, manager of GQG Partners US Select Quality Equity (GQEIX), which was the top-performing large growth fund this year through June 17, with a minus 5.29% return, versus minus 30.86% for its category.
The fund’s current exposure might seem to peg Jain as a value investor, with deep underweights in technology, communication services, and consumer cyclicals, and big allocations to energy and utilities. But he argues that his portfolio continues to have a growth strategy.
“We define growth as where the growth is going to be. Is Netflix [NFLX] really a growth business right now? Our view is energy is one of the new growth areas. And you’ll be better off owning utilities than companies like PayPal Holdings [PYPL],” he says.
But active share isn’t a reliable indicator of outperformance. Most of the top-performing large-cap growth mutual funds have active-share scores of more than 70%—but so do the bottom-performing portfolios in the category.
GQG Partners US Select Quality Equity has an active share of 87.3%, but Baillie Gifford US Discovery (BGUIX) has a 98.9% active share and is one of the category’s worst performers, down 39.9%.
“A high active share doesn’t say you are a good manager; it says you are a high-conviction manager,” Krauthamer says. “You can have high conviction and be wrong. You have to couple active share with the persistency of alpha and look at whether a manager’s ability to provide alpha is a repeatable fundamental process.”
By far the biggest indicator of a fund’s chance for long-term outperformance is fees. The higher the fee, the more value a manager has to add to offset them. That’s a tall order most don’t deliver on. Low-cost active funds beat passive funds at a significantly higher rate.
Consider the percentage of actively managed large-cap blend funds whose performance outpaced average passive returns over the 10 years through 2021: just 9.5%, according to Morningstar.
While that’s a dismal record, the rate is worse—1.3%—when considering only the highest-cost funds. It improves to 19.2% for the lowest-cost group.
Active stock mutual fund fees have been coming down steadily—from about 0.93% to 0.64% on an asset-weighted basis since the beginning of the bull market in 2009, compared with the current average 0.09% for index mutual funds, 0.16% for passive ETFs, and 0.46% for actively managed ETFs, according to Morningstar Direct.
But active mutual funds haven’t been able to stem a yearslong trend of outflows, as investors have sought cheaper and higher-performing options.
Passive Aggressive
Assets in passive U.S. stock mutual funds exceeded assets in actively managed counterparts in August 2019 for the first time and have continued to firm up their dominance since then. Through this year’s first quarter, a net $128.1 billion drained out of actively managed funds excluding money-market funds, while passive funds took in a net $199.4 billion, according to Lipper.
The biggest outflows were from active large-cap growth funds—$28.9 billion—while passive large-cap growth funds took in a net $7.4 billion, according to Lipper.
Increasingly, investors are turning toward the growing universe of ETFs for active management. These funds represent less than 15% of the overall $10 trillion ETF market, but their low costs and simplicity have appeal, and they have continued to plump up with fresh assets this year. Even in the large-cap growth category, active ETFs had net inflows of $131.4 billion through May, according to Lipper.
When it comes to portfolio construction, many advisors say the passive-versus-active debate is too simplistic. A “for or against” argument misses the important point—which is that each can have a vital role in a portfolio, Katz says.
He uses passive strategies in the U.S. large-cap segment and active strategies where they have a better record of proving their fees are worthwhile. “We try to find those segments of the equity markets that are least efficient and allocate to active managers there, and, in segments that are more efficient, we keep costs down by allocating to passive managers,” Katz says.
Small-cap and emerging market stock managers have higher outperformance rates than U.S. large- and mid-cap managers because there are more undiscovered companies in those markets that savvy stockpickers can bet on.
Over the three years through 2021, some 65.8% of active U.S. small-cap growth funds beat their passive peers, as did 73.7% of European stock funds and 61.3% of diversified emerging market funds, according to Morningstar.
Investors who want to add a tilt to their broad U.S. stock fund exposure can do so through more-concentrated active portfolios, Katz says.
Picking Active Funds
When going with active funds, do so with eyes wide open: Many active portfolios will have a significantly wider dispersion of returns than comparable passive funds. According to Bank of America, 56% of U.S. active large-cap stock managers outpaced the Russell 1000 in this year’s second quarter. But while active large-cap funds have been some of the best performers, they’ve been the worst, too. Their returns for the year through July 6 ranged from 4% to minus 62%.
The recent poster child for risks associated with concentrated active portfolios is the ARK Innovation ETF (ARKK), which caught investors’ fancy—and $1 billion of their assets—in 2020 when its big bets on a handful of tech stocks put it in at the very top of its category, with a 152.8% return compared with its benchmark index’s 34.9%. A year later, it hit the very bottom, with a 23.4% loss compared with the benchmark’s 18.8% gain.
“If you’re paying for active, you should have something that performs different than your low-cost index funds, but different isn’t always better—it is often worse,” says Todd Rosenbluth, head of research at VettaFi. “The data are pretty consistent that you’re better off replicating a benchmark than trying to beat it. But investors don’t want average returns; they want better-than-average returns.”
So far this year, they have a better chance of getting what they want. But analysts caution investors that paying too much attention to short-term performance can lead to picking poorly managed funds that simply had a lucky surge, while overlooking sold long-term performers that may be having a temporary setback.
Consider BNY Mellon Income Stock (MPISX). Its deep-value tilt caused the fund to rank toward the bottom of its category in 2017 and 2020. But patient and discerning investors who stuck with the fund over the long term have been soundly rewarded. The portfolio has outperformed its Morningstar U.S. Large Mid Broad Value index benchmark and its category average in trailing one-, three-, five-, 10-, and 15-year periods through June 30.
“Short-term performance is random. Long-term performance is not,” says Leuthold’s Opsal, who adds that the best indicator of long-term outperformance isn’t superstrong returns. “To get in the top peer group in the shorter term, managers have to take big risks, and then it’s almost as sure as rain that they will then end up in the bottom decile, too.”
Opsal’s research shows that the most talented managers—those with consistent outperformance—are usually in the 20th or 30th percentile when markets are in their favor, and around the 60th or 70th percentiles in bad years. “Over time, these funds’ returns will compound and gravitate to the top quartile.”
That’s certainly worth the wait.
Philanthropist and high society fixture Lily Safra has died in Geneva, Switzerland, at age 87.
Philanthropist and high society fixture Lily Safra has died in Geneva, Switzerland, at age 87.
Her death was revealed on Saturday by the Edmond J. Safra Foundation in a brief statement. Media reports indicate the cause as pancreatic cancer.
“For more than 20 years, Mrs. Safra faithfully sustained the philanthropic legacy of her beloved husband Edmond, providing support to hundreds of organizations across the globe,” said the organization, where Safra was chairwoman at the time of her death.
Born Lily Watkins in 1934 in Porto Alegre, Brazil, to Czech-British engineer Wolf Watkins and Annita Noudelman, she grew up in South America and was first married to businessman Mario Cohen. They had three children and divorced in the early 1960s.
A second marriage to Alfredo “Freddy” Monteverde ended with his death in 1969, after a struggle with mental health. Her third union was short-lived and ended in divorce.
Safra became a fixture of New York society after her fourth and final marriage in 1976 to banker Edmond J. Safra, to whom she stayed married until his 1999 death in a mysterious and controversial arson fire in Monaco that attracted significant media coverage because of his wealth. One of Safra’s nurses was convicted of starting the fire. Safra left half his fortune to charities while Lily Safra reportedly inherited $800 million.
In the decades that followed, she was known as “one of the leading philanthropists in the world with an enduring devotion to her late husband” and for “only [doing] splendid evenings,” wrote society columnist Aileen Mehle, best known under her pen name “Suzy.”
Her life-long connection to culture and couture also saw her regularly mentioned in the fashion world. A 2003 dinner she hosted in her New York home saw the likes of former British Prime Minister Margaret Thatcher; New York’s then-Mayor Michael Bloomberg; Evelyn and Leonard Lauder, and Carolina and Reinaldo Herrera among her guests.
At the 2004 Sidaction AIDS benefit dinner, she was spotted in conversation with Karl Lagerfeld and Lady Amanda Harlech.
Through several organizations she cofounded, Safra supported a large number of causes, with a particular focus on furthering education and research on brain diseases, especially Parkinson’s, which had affected her husband in the latter part of his life.
In 2012, she put her jewelry collection, with a sizeable section devoted to the jeweler JAR and a 32-carat ruby ring by Chaumet, up for auction at Christie’s Geneva.
The “Jewels for Hope” sale netted nearly $38 million, with proceeds distributed to some 32 charities including the Elton John AIDS Foundation, the Paris Opera, the Paris Ballet, the Royal Opera House London and Henry Street Settlement in New York.
After the 2019 fire that devastated the Cathédrale Notre-Dame de Paris, Safra pledged 10 million euros for its restoration.
According to a biography published by the Edmond J. Safra Foundation, Safra received a number of awards, among which honorary doctorates from prominent higher education institutions like the Hebrew University of Jerusalem and Imperial College London; honorary fellowships from King’s College London and the Courtauld Institute of Art, and France’s Legion d’Honneur.
She also served as trustee of New York’s Museum of Jewish Heritage and board member of the Michael J. Fox Foundation for Parkinson’s Research and the Foundation for the National Institutes of Health.
Safra is survived by her children, grandchildren, and great-grandchildren. A funeral service will be held on Monday in Geneva.
Morgan Stanley: Soaring Dollar Will Crush Earnings Growth And Snuff The Rally In Stocks
By Michael Wilson, Morgan Stanley chief US equity strategist
One of the more popular views over the past decade has been the eventual demise of the US dollar. After all, with the Fed printing so many dollars since the global financial crisis and then doubling down after the Covid pandemic hit two years ago, this idea has merit. Indeed, the meteoric rise in cryptocurrencies was essentially a bet on the entire fiat currency world coming unglued. However, after the GFC, these printed dollars never made it into the real economy as they were simply used to patch up broken balance sheets from the housing bust. Therefore, M2 growth never got “out of hand”, exceeding 10% on a year-on-year basis only briefly in 2009 when QE first began and then again in 2012 when QE3 was started to help to offset the sovereign debt crisis. In fact, during the entire period after the Fed first embarked on QE in November 2008 through the end of the cycle in March 2020, M2 growth averaged just 6% – right in line with the long-term trend of M2 and nominal GDP growth. As a result, the US dollar maintained its reserve currency status and rose almost 40% during that decade.
However, as we pointed out back in April 2020, the stimulus provided during Covid was very different. At the time, we suggested that the coordinated fiscal and monetary policy was unprecedented and akin to “helicopter” money as described by Milton Friedman in his seminal paper back in 1969 and referenced by Ben Bernanke in 2002 as a tool the Fed could always use to avoid a deflationary trap. In other words, the seeds of today’s inflation were sown in those early months right after the pandemic with the first dose of helicopter money. That first drop was arguably necessary to prevent a deflationary bust. But, handing out free money is very popular with the people, so there were two more doses – one by each party – administered in January and March 2021 after we had an effective vaccine to help to reopen much of the economy. The result is that M2 growth exploded and since February 2020 has averaged 17%, or 3x the long-term trend – a truly unprecedented outcome that left us with much more inflation than was desired. Consequently, the US dollar fell sharply from March 2020 to March 2021 but, once M2 growth peaked, so did the dollar’s decline. Now, with the Fed reversing course so quickly and the checks having stopped long ago, M2 growth has fallen all the way back to its long-term trend of just 6%. Given the projected path for rate hikes and quantitative tightening, M2 growth is likely to fall even further and the dollar is unlikely to show any signs of demise until the Fed pivots, which seems unlikely any time soon, especially after Friday's strong jobs report.
So why does this matter so much for stocks? Based on the extreme rally so far this year, the DXY is now up 16% year on year. This is about as extreme as it gets historically speaking and, unfortunately, it typically coincides with major financial stress in markets, a recession, or both.
Ultimately, the Fed wants a meaningful economic slowdown to curtail inflation and a stronger dollar is part of that cocktail. From the standpoint of stocks, the stronger dollar is going to be a massive headwind to earnings for many large multinationals. This could not be coming at a worse time as companies are already struggling with margin pressure from cost inflation, higher/unwanted inventories, and slower demand.
The simple math on S&P 500 earnings from currency is that for every percentage point increase on a year-on-year basis it’s approximately a 0.5x hit to EPS growth. At today’s 16% year-on-year level, that translates into an 8% headwind for S&P 500 EPS growth, all else equal.
Of course, things can change quickly, but it doesn’t seem likely until M2 growth stops slowing, which will require a Fed pivot. The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons, which starts next week. Therefore, the recent rally in stocks is likely to fizzle out before too long.
Buyers challenge UK government’s decision to block Truphone deal
Transaction to sell Abramovich-owned telecoms group under scrutiny on national security grounds
The prospective buyers of UK telecoms group Truphone, which is owned by Roman Abramovich and Russian associates, are challenging the British government’s decision to block the deal while it conducts a national security probe.
Hakan Koç, a German businessman who founded the used-car company Auto1, and his business associate Pyrros Koussios, a former telecoms executive and private equity investor, made an offer to buy the company for £1 in May, after sanctions imposed on Russian billionaire Abramovich threw the future of the group into doubt.
On Thursday, a day before Koç and Koussios were hoping to close the transaction, the purchase was “called in” under the UK’s new National Security and Investment Act, which gives the government the power to block or unwind deals it believes pose a risk to national security, according to people briefed on the situation.
The Department for Business, Energy and Industrial Strategy also issued an interim order to halt the deal while it makes its investigation, the people said.
Lawyers for the prospective buyers wrote to the government’s Investment Security Unit on Friday saying that the interim order increased the likelihood of Truphone entering insolvency, which could lead to hundreds of job losses, according to people with knowledge of the details.
They also said that delaying the deal meant Truphone would remain under the ownership of sanctioned individuals.
The business currently faces severe challenges to its cash flow and will lose customers and commercial viability if new capital is not invested soon, the lawyers noted in their letter.
Earlier this year Truphone appointed FRP to find a buyer for the company, which has received more than £300mn in investment from Abramovich and his two Russian business partners Alexander Abramov and Alexander Frolov. The company, which allows customers using its digital SIM cards to avoid roaming charges, was valued at £410mn in 2020 and has recorded 15 consecutive years of losses.
People close to the deal believe the government’s decision, which was first reported by Sky News, is linked to a contract Truphone has with British telecoms group BT that allows users to access their digital SIM card remotely. This process requires access to BT data.
The new owners are willing to avoid activities related to contracts with BT that have given rise to national security concerns until cleared by the government, according to one person with knowledge of their position.
The person added that the government could go ahead with its national security probe without blocking the deal.
The decision to delay the Truphone deal comes at a time of increased scrutiny of foreign involvement with UK telecoms assets. In May, the government called in French telecoms group Altice’s majority stake in BT, which increased from 12 to 18 per cent late last year.
The national security act gives the business secretary the power to call in any transaction they “reasonably suspect gives rise to or may give rise to a risk to national security”, according to a business department document.
If deemed “necessary and proportionate”, they can then “impose certain conditions, block or unwind it completely”.
According to its first interim report on the new powers, between January and March this year the UK government was notified about 222 transactions that may have an impact on national security, of which 17 were called in.
The business department said in a statement: “The Government routinely monitors acquisitions across the economy in case of national security concerns.”
Twitter hires Wachtell legal firm to sue Elon Musk for ending $44bn acquisition
Social media company prepares to file suit at Delaware Court of Chancery, vowing to hold billionaire to original deal terms
Twitter has hired elite law firm Wachtell, Lipton, Rosen & Katz as it readies for a legal battle against Elon Musk, who has moved to terminate his $44bn acquisition of the social media company, according to two people familiar with the situation.
The San Francisco company is preparing to file its lawsuit with the Delaware Court of Chancery against Musk early this week, one of the people said.
Musk said on Friday that he planned to walk away from his deal to buy Twitter, citing three breaches of the merger agreement by the social media platform.
In response, Twitter vowed to hold the mercurial billionaire to his original deal terms and price of $54.20 per share, in what could develop into a messy legal fight that would dictate the future of the company.*
In addition to drafting merger agreements, Wachtell Lipton has perhaps the leading litigation practice in Delaware, where the majority of US public companies are incorporated. It defends companies in breach of fiduciary duty lawsuits and broken merger agreements in the state.
Both Twitter and Musk will also probably hire local counsel in Delaware to work alongside the lawyers whom they retain from other states.
The firm had initially defended Musk in a shareholder lawsuit brought in Delaware by Tesla shareholders who alleged that Musk had improperly bailed out SolarCity, another piece of the Musk empire, when Tesla acquired the clean energy company in 2017.
Earlier this year, Musk was cleared by a Delaware judge of any wrongdoing in that case. He was represented by the law firm Cravath, Swaine & Moore in the 2021 trial.
Twitter declined to comment on Wachtell’s appointment, which was first reported by Bloomberg. Wachtell did not immediately respond to a request for comment.
In a regulatory filing on Friday, Musk’s team argued that Twitter had failed to provide enough information to prove that the number of fake and spam accounts on its platform stands at less than 5 per cent, as it has long estimated.
The filing alleged that the true number may in fact be “wildly higher”, suggesting the company had made false statements in its regulatory filings. It also accused Twitter of failing to comply with its obligation to “conduct its business in the ordinary course”, by firing several senior employees after the agreement had been made.
Twitter, which denies Musk’s claims, has an incentive to push the deal through or extract a larger break-fee from Musk than the $1bn already agreed. Its share price has declined by more than 30 per cent since the Tesla chief made his offer and no other buyers have emerged.
The company is likely to argue that Musk’s concerns simply mask buyer’s remorse over a pricey and highly leveraged deal, amid a broader rout in tech stocks.
Additional reporting by Alexandra Scaggs in New York