Quitting New York is making financial sense for many of the city’s super-rich.
Analysts say a growing number of New York’s financial elite believe that fleeing the city for other states with lower taxes and costs in order to protect their wealth is a total no-brainer — particularly since the 2019 UBS/PwC Billionaires Report found that the collective net worth of their peers globally has plunged heavily for the first time in years.
“The wealthy are migrating out of high-income-tax states such as New York to lower- or no-state-income-tax locations, more than ever,” according to Michele Lee Fine, president of Cornerstone Wealth Advisory and a financial adviser in Jericho, New York.
“Much of the tone and focus of the recent political agenda has been attacking the wealthy directly at the wallet,” she added. “Whether you’re a billionaire or millionaire, there is cause for concern.”
And while President Trump and tycoons such as legendary corporate raider Carl Icahn — both of whom are swapping New York for lower-cost Florida domiciles — are grabbing headlines, dozens of lesser-known, highly successful wealthy New Yorkers are also plotting escapes.
“The exodus continues from this tax-heavy city,” the New York-based CEO of a small high-tech transportation company, who declined to be named, told The Post. “Most of the uber-wealthy I know in New York now spend the majority of their time in Florida or Texas, where they are not obliterated by taxes.”
John O’Shea, executive chairman of the broker-dealer Global Alliance Securities, knows the feeling.
“You can make more money and keep more of it in South Carolina,” O’Shea said.
With a local property tax rate of 0.4%, it means O’Shea pays just over $4,000 annually to live in the lap of luxury — a small fraction of what the owner of a comparable home in many parts of New York would pay in property taxes. And with a maximum of only $10,000 in local property taxes now deductible against federal taxes, O’Shea is making out just fine.
That’s unlike many New York residents who live in some of the fanciest ZIP codes — some with annual property taxes starting at $40,000.
“The quality of life is also much better down here,” O’Shea told The Post. “I have a much larger property than what I would pay for something similar up in New York — and I also have lower costs for my business and in my home.”
At 100 Wall St., where O’Shea once ran a sprawling operation, at least three other firms also recently left the building for offices in the US sunshine states, according to people familiar with the moves. Management for the building didn’t respond to a request for comment.
T-Mobile, Sprint Head to Court to Defend Merger
States test antitrust oversight in unusual court challenge to wireless merger blessed by federal officials
An unusual merger trial starting Monday could have long-lasting effects on the consumer wireless market and beyond by potentially upending the federal government’s dominant role in deciding whether corporate rivals can join forces.
T-Mobile US Inc. TMUS 1.04% and Sprint Corp. S 2.22% , the country’s third- and fourth-largest carriers by cellphone subscribers, are defending their $26 billion plan to merge into a nationwide heavyweight rivaling Verizon Communications Inc. and AT&T Inc. T 0.03% The would-be merger partners must defeat a coalition of 13 states and the District of Columbia, all led by Democratic attorneys general, who are suing to block the deal.
The lawsuit has flipped the script for corporate merger reviews by standing in conflict with the views of the federal government. Federal antitrust and telecom officials, appointed by President Trump, approved the deal earlier this year, believing they addressed the merger’s shortcomings through concessions they required from T-Mobile and Sprint.
Legal experts say it is unprecedented for the states to reject such a settlement and sue to block a merger of this size and national scope without the support or involvement of federal authorities.
A victory for the carriers, which say the merger will allow them to offer better services, could arm other companies with new arguments for the benefits of consolidation. But a win for the coalition could give states newfound power in antitrust enforcement when they are also investigating U.S. tech giants.
If the states prevail, “companies will have to take them more seriously,” said New York University law professor Harry First. “They’ll have to have really serious discussions with states like California and New York.”
“If we have another four years of the Trump administration, we may see more of this,” Mr. First said. The Justice Department declined to comment.
Both sides will deliver opening arguments Monday before Judge Victor Marrero in federal court in New York. The bench trial is expected to last about three weeks with testimony from a colorful cast of executives, including longtime T-Mobile boss John Legere, Sprint Chairman Marcelo Claure and Dish Network Corp. Chairman Charlie Ergen. T-Mobile in November said Mr. Legere will step down as CEO next year, part of a long-planned transition that will hand the top job to operating chief Mike Sievert.
Lawyers for the states and companies agreed last week to scrap a potential last-minute meeting to discuss an out-of-court settlement, an acknowledgment that past negotiations haven’t borne fruit, according to court filings. The two sides could still reach a deal during the trial.
T-Mobile and Sprint announced their plan to join forces in April 2018. T-Mobile is controlled by Deutsche Telekom AG , and Sprint is controlled by Japan’s SoftBank Group Corp. Sprint abandoned an earlier effort to combine in 2014 amid opposition from antitrust officials in the Obama administration.
Federal Communications Commission Chairman Ajit Pai threw his support behind the deal in May, backing the companies’ argument that their combined resources would fuel faster investment in fifth-generation, or 5G, cellular service. The FCC declined to comment.
But the Justice Department, which by law is tasked with reviewing a merger’s competitive effects, wasn’t immediately convinced, and pushed T-Mobile and Sprint to do more to address consolidation that would remove another national wireless carrier from the market.
A group of state antitrust enforcers led by New York and California took advantage of the lag to sue the companies in federal court. Their case makes a simple assertion: Putting together two wireless companies with a record of aggressive discounts would make cellphone plans more expensive than they would be if the two rivals were kept apart.
The Justice Department reached a settlement with the companies in July. The department’s antitrust division said it would approve the merger subject to commitments from the companies. They included arming satellite-TV provider Dish with the building blocks for a built-from-scratch cellphone network, which would preserve the market’s four-player structure.
Many state officials weren’t satisfied, arguing in a pretrial brief that the deal would create “a more staid market with prices higher than they would otherwise be—billions of dollars higher in the aggregate—and less innovation.”
The companies argued their complementary assets, including valuable radio spectrum licenses, would serve customers more efficiently. “Without the merger, Sprint and T-Mobile will continue to face competitive challenges and escalating costs,” the companies wrote, which would allow AT&T and Verizon to maintain their dominant positions.
AT&T and Verizon serve about 100 million domestic customers apiece. T-Mobile and Sprint would approach roughly the same number by combining.
T-Mobile’s shares have continued to climb as the company wins more customers. Sprint’s stock has slumped as subscribers depart and the deal’s outcome remains unresolved. Sprint traded at a roughly 30% discount to the value of the all-stock deal Friday.
“There’s definitely been investor fatigue with this one,” said Jennifer Fritzsche, a Wells Fargo Co. telecom analyst. “It’s gone on almost two years now.”
Adding to the drama, the tally of states on either side of the case has seesawed, amid growing tensions between the plaintiffs and the Justice Department. California and New York recruited allies from other states, only to see some defect.
Illinois, Oregon and Pennsylvania joined the states’ lawsuit. Colorado, Mississippi and Nevada switched sides after the companies offered them commitments to improve coverage and protect rates.
Texas Attorney General Ken Paxton, a Republican, added political gravity to the mostly Democratic state coalition by joining its lawsuit in August, only to switch sides by settling with the companies in November.
Investors Bail on Stock Market Rally, Fleeing Funds at Record Pace
In what may be the best year for stocks since 2013, investors have exited in droves
The S&P 500 is having its best run in six years, but individual investors are fleeing stock funds at the fastest pace in decades.
That is potentially a good sign for the long-running bull market.
Investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange-traded funds so far this year, the biggest withdrawals on record, according to data provider Refinitiv Lipper, which tracked the data going back to 1992.
Analysts say the trend highlights investors’ apprehension toward a stock market buffeted by the long-running U.S.-China trade war and lingering worries about a potential recession. Stock funds have bled money over seven consecutive quarters, dating to the second quarter of 2018—when trade tensions between the U.S. and China ratcheted higher.
The outflows are also a sign that investors aren’t chasing the stock market’s strong performance, either. This suggests major indexes like the S&P 500 still have plenty of room to run after a decadelong rally.
Investors have shifted hundreds of billions of dollars into bonds and money-market funds, areas considered to be harbors from volatility. A trade deal could pull some of that money back into stocks—many of which are trading at relatively reasonable valuations and offer dividends that top yields on U.S. Treasury bonds. For the week ended Dec. 4, for example, investors put nearly $5 billion back into U.S. stock funds—the biggest weekly inflows in three months—on trade optimism, to help somewhat stem the tide of withdrawals.
“There’s not a lot of faith in this market,” said Scott Wren, a senior global equity strategist at Wells Fargo Investment Institute. “There’s no chasing going on. Usually before you hit the top in a cycle, there’s a lot of chasing and fund flows are higher.”
Mutual funds account for most of the outflows. Roughly $220.8 billion has been pulled from stock-focused mutual funds this year, mostly actively managed strategies that have struggled over the past 10 years, according to Refinitiv. Meanwhile, $85.3 billion has flowed into equity ETFs, but those flows are at an eight-year low.
The outflows haven’t hindered the stock market’s run: The S&P 500 has risen 25% this year, on pace for its strongest gain since 2013. This is a reminder that individual investors are just one component of demand, and one that has grown less significant in recent years as corporate share buybacks have grown more important, analysts said. Fund flow figures also don’t account for investors’ individual stock purchases.
Companies themselves have been the biggest buyers of stock through share repurchases in recent years. After taking into account any stock compensation passed on to employees, net corporate purchases of U.S. stocks are expected to total $480 billion this year, according to Goldman Sachs.
The heavy spending on share buybacks has helped the stock market hit fresh highs and avoid deeper pullbacks over the past two years, despite lackluster demand from households, pension funds and foreigners.
But analysts say companies can’t sustain the pace of those buybacks, leaving the market potentially vulnerable if other investors don’t pick up the slack. Corporate demand for equities is already down 20% from last year, Goldman said, as tepid earnings growth, along with trade and political uncertainty, have led companies to trim their spending. The slowdown is expected to stretch into next year, Goldman adds, knocking net corporate stock purchases down an additional 2% to $470 billion.
Individual investors also appear to be less bullish. The weekly investor sentiment survey by the American Association of Individual Investors shows the eight-week moving average of bullish investors at 36% of those surveyed for the week ended Dec. 5. That is up from a low of 27% in July, but below a peak of 50% in early 2018 as investors digested a U.S. corporate tax cut.
In the first quarter of 2018, roughly $68.6 billion flowed into U.S. stock funds, according to Refinitiv.
Analysts say the recent exodus from U.S. equity funds reflects investors’ wariness toward stocks at a time when the market is susceptible to sharp swings on trade-related headlines or weakening economic figures. Just last week, the stock market’s tranquility was punctured after President Trump signaled tensions with China could stretch well into next year. His comments sent the Dow Jones Industrial Average down 280 points, its worst day since early October.
Investors have sought to insulate themselves from those shocks. Wells Fargo’s Mr. Wren says clients of the bank’s wealth-management arm have been holding more of their assets in cash and bonds.
Brokerage firm TD Ameritrade Holding Corp. says its clients have mostly sold stocks over four of the past five months through October and bought fixed-income products. Apple, which is up 72% this year, counted as one of investors’ most sold stocks at the firm in October, along with Tesla Inc. and Netflix Inc.
That aligns with broader market moves. Investors have put roughly $277.2 billion into U.S. bond funds so far this year, the third biggest sum over the past decade, while $482.8 billion has flowed into money-market funds, an 11-year high, according to Refinitiv.
Those more conservative investment stances have also hampered investors’ returns relative to the S&P 500’s rise this year.
Ted Darling, a 56-year-old investor in Cape Elizabeth, Maine, said he hasn’t been bullish on stocks this year. He has moved more of his money into Treasury inflation-protected securities, bond funds like the Vanguard Total Bond Market ETF and other assets, such as gold and silver.
His view: Inflation will eventually move higher, while economic growth will further slow, crimping corporate profits.
His diversified portfolio has returned roughly 11% through November, and he acknowledged his positioning is conservative compared with financial advisers’ typical recommendations that investors split their assets 60%/40% across stocks and bonds.
“I forewent a lot of opportunities,” Mr. Darling said, referring to the fact that he hadn’t fully enjoyed the stock market’s run up this year. “But I’m being really cautious.”
Renault’s Stock May Outpace Peugeot in the Short Run
Consider the tale of two French car makers. Renault has been looking for a chief executive officer for two months. Its former chairman, Carlos Ghosn, has been under arrest in Tokyo for more than a year on embezzlement charges that he denies. And the group is still trying to sort out what its 20-year “alliance” with its Japanese partner Nissan (ticker: 7201.Japan) really means.
The other company, Peugeot (UG.France), is led by Renault’s energetic and respected former chief operating officer, Carlos Tavares. It has embarked on a widely-praised merger project with a big Italian-American rival, Fiat Chrysler Automobiles (FCAU)—after talks on a similar combination between Fiat and Renault (RNO.France) collapsed this year.
You’d expect the share prices of the two French auto groups to reflect their divergent fortunes. Renault is indeed down 22%, to about 42.33 euros ($46.90) this year, while Peugeot has gained 15%, to €21.46. The French stock exchange, as measured by the CAC 40 index, is up 23% over the same period.
Global car makers’ shares have also been hurt by the global trade slowdown, the U.S.-China dispute and the Trump administration’s threat to slap tariffs on European vehicles. But looking ahead, a case could be made that Renault is slowly overcoming its problems, while Peugeot might encounter a few.
Peugeot’s stock price is now down 17% since its planned merger with Fiat was announced in October. Some of this is due to the deal’s structure, which the two parties have tried to present as a merger of equals, even if it looks like an acquisition by Peugeot. When the plan was announced on Oct. 31, Peugeot’s stock-market capitalization stood at €23 billion, while Fiat’s was €18 billion.
To maintain the appearance of a balanced transaction, Fiat is to pay €5.5 billion to its own shareholders before the deal is final. And Peugeot will divest its stake in a French car parts maker. In effect, Peugeot is to transfer some €3 billion-plus of value to Fiat’s shareholders.
In the days after the announcement, markets quickly adjusted the companies’ market value. But owing to the global environment and rising uncertainty, their stock prices have fallen so much that the merger terms might need to be revised. Their combined market capitalization is down €1.7 billion since the announcement. That isn’t supposed to happen for a deal expected to generate some €3.7 billion worth of synergies annually. “It is projected that 80% of the synergies would be achieved after four years,” Peugeot’s Tavares and Fiat Chrysler Chairman John Elkann said in a joint statement when the deal was disclosed.
Renault, on the other hand, may be about to turn the page of its annus horribilis. The rumored favorite for the company’s top job is Luca de Meo, the CEO of Seat. Choosing an Italian who runs the Spanish subsidiary of a German company— Volkswagen (VOW:Germany)—would send the right signals for a group that has often seemed much too French for its own good: France’s government still holds a 15% stake in Renault, with double voting rights.
Also, the apparent intention of both Nissan and Renault Chairman Jean-Dominique Senard to make the alliance work for both shareholders and customers indicates a healthy desire to move beyond the consequences of the Ghosn affair. In a statement this month, Senard said that a full merger of the companies, which Ghosn had pushed for, was “probably not the right way to think about” the alliance.
Considering how far its stock has already fallen, Renault may be the French auto maker with upside.
Ericsson to pay US more than $1bn over foreign bribery
Telecoms group admits years of corruption in Djibouti, China, Vietnam, Indonesia and Kuwait
Ericsson has agreed to pay more than $1bn to settle US criminal and civil investigations into foreign corruption involving high-level executives that spanned almost two decades.
The Swedish telecommunications group admitted to a long-running scheme to use agents and consultants to bribe government officials in Djibouti, China, Vietnam, Indonesia and Kuwait.
The settlement announced on Friday draws a line under investigations by the US Department of Justice and Securities and Exchange Commission, and was in line with the company’s previously disclosed provisions.
“Ericsson’s corrupt conduct involved high-level executives and spanned 17 years and at least five countries, all in a misguided effort to increase profits,” said Brian Benczkowski, head of the criminal division of the justice department, in a statement.
Mr Benczkowski had signalled the deal in a speech earlier this week, where he said the justice department had recovered $1.6bn in corporate resolutions of foreign bribery cases in 2019, beating the previous record of $1.3bn set in 2016 under the Obama administration.
As part of the settlement, Ericsson struck a three-year deferred prosecution agreement and a subsidiary pleaded guilty to conspiracy to violate the US Foreign Corrupt Practices Act.
The conduct admitted by the company between 2000 and 2016 ranged from cash bribes disguised as sham contracts to in-kind bribes for government officials and “off-the-books slush funds” used to make payments to customers who would ordinarily not pass its due diligence processes.
In Djibouti, from 2010 to 2014, an Ericsson subsidiary paid $2.1m in bribes to top government officials to win a contract with the country’s state-owned telecoms company, according to the company’s admissions.
Over 17 years in China, subsidiaries funded tens of millions of dollars of gifts, travel and entertainment for officials, while in Vietnam and Indonesia the bribery involved millions of dollars to consulting companies to form slush funds, the company admitted.
The admitted conduct in Kuwait involved an Ericsson subsidiary that won a $182m contract after an employee received inside information on the tender; it paid the source’s consulting company $450,000.
Steve Peikin, co-director of the SEC’s enforcement division, said Ericsson had “engaged in an egregious bribery scheme for years, spanning multiple continents, by surreptitiously using slush funds and funnelling money through sham intermediaries”.
The settlement involved a $520m criminal penalty due to the justice department and the return of $540m in ill-gotten gains, payable to the SEC, as well as the imposition of an outside monitor for three years. The SEC’s case included alleged bribery in Saudi Arabia.
Though Ericsson had co-operated with the investigations, the justice department said the company had failed to voluntarily disclose the conduct, provide all materials in a timely manner, and did not take “adequate disciplinary measures” with some employees involved in the scheme.
Börje Ekholm, Ericsson’s chief executive, said in a statement he was “upset by these past failings”, adding that the company had “not always met our standards in doing business the right way”.
“We have worked tirelessly to implement a robust compliance programme. This work will never stop,” he said.
Hedge funds lag stocks and bonds again
Industry on course for its best year since 2013, but investors remain sceptical
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Hedge funds are on course for their best year since 2013 but will still come in with weaker returns than both equities and bonds, figures from an industry research group show.
The industry returned 8.6 per cent in the year to November 30, according to HFR.
Hedge funds that bet on stocks rising or falling were up 11.4 per cent, one of the biggest increases of any hedge fund strategy, but investors would have fared far better in the US S&P 500, which was up 27.6 per cent over the same period.
Even the US bond market, measured by a Bloomberg Barclays index, returned 10.4 per cent in the first 11 months of the year.
The hedge fund industry also posted weaker returns than stocks and bonds in 2018, according to HFR.
While the latest figures, released late on Friday, show the industry slightly ahead of its annual performance in 2017 and on track for its best result since the 9.1 per cent return in 2013, it seems unlikely to resolve investors’ discontent.
Redemptions have totalled $129.6bn over the past four years, marking the worst wave of investor outflows since the height of the financial crisis a decade ago.
Closures are also set to outpace new launches for the fifth consecutive year, led with veteran money manager Louis Bacon’s Moore Capital and Stone Milliner among those shuttering funds. The number of hedge funds has been shrinking steadily since it peaked in 2014.
In closing his funds to outside investors, Mr Bacon cited “disappointing results” in recent years and “intense competition for trading talent coupled with client pressure on fees”.
The strongest performers so far this year have been equity hedge funds that specialise in technology and healthcare. Shareholder activist hedge funds were also showing double-digit returns at the end of November, up 13 per cent, led by a resurgent Bill Ackman. Pershing Square Holdings, his publicly traded fund, is up more than 50 per cent, set for his first positive result in five years.
The only hedge funds tracked by HFR that were not up for the year were Multi-Strategy funds, whose index dropped 1.5 per cent. Distressed and restructuring funds were up 2.5 per cent, while macro strategies increased 5.8 per cent.
Kenneth Heinz, president of HFR, said that hedge fund managers’ were “positioning for interest rate volatility and other potential geopolitical and macroeconomic catalysts for volatility, including Brexit scenarios, ongoing trade negotiations, impeachment proceeding, and the US election”.
He said: “Tactical exposure to opportunities created by these catalysts and trends is likely to define performance in early 2020.”
Solus suffers after bad bets on failing companies
Hedge fund hit by heavy redemptions as assets sink for second year in a row
Solus Alternative Asset Management, one of the best known hedge funds specialising in distressed investments, has suffered heavy redemptions and poor performance after making a raft of ill-fated bets on companies including satellite operator Intelsat and power utility Pacific Gas & Electric.
The firm’s flagship fund is down as much as 9 per cent so far this year, depending on the share class, according to people familiar with estimates sent to investors in the past week. That is on top of a 15 per cent drop in 2018.
The New York-based firm, which is part-owned by private equity powerhouse Blackstone, has shed $1.5bn in assets since November 2018, cutting the total managed to $4.3bn.
Solus is a casualty of the string of corporate collapses that have tripped up US distressed investment funds, which look to profit from buying the stocks and bonds of struggling companies.
The hedge fund was a shareholder in both PG&E and Intelsat, both popular hedge fund trades. The Californian utility went bankrupt after wildfires caused by its power lines and its stock is now widely expected to be wiped out in a restructuring. The heavily indebted satellite firm’s shares fell as much as 75 per cent last month after a US regulator rejected its plans to raise money by selling off its airwaves.
Solus declined to comment.
Several investors said the disastrous performance across many US distressed specialist hedge funds has stoked fears that prominent firms could “gate” their funds, meaning investors are blocked from withdrawing their money in the normal timeframe.
The unravelling of PG&E contributed heavily to BlueMountain’s decision in October to shutter its $2.5bn flagship credit fund after it haemorrhaged half its assets in three years.
Bonds issued by one Intelsat entity also cratered last month, with $1bn of debt maturing in 2023 now trading at less than half of face value, down from 85 cents on the dollar at the start of November. The high yields these bonds offered made them a popular trade for hedge funds betting that US regulators would wave through the company’s spectrum plans.
“All the consensus trades have blown up,” said one rival distressed fund manager. “PG&E was the first domino — then Intelsat hit.”
Filings show that Solus more than doubled the size of its position in PG&E’s shares in the second quarter of 2019 before dumping the stock entirely by September 30. The San Francisco-based utility’s market value halved in the third quarter of this year.
Solus has emerged as one of the most high-profile distressed investment firms after its skirmish with Toys R Us employees last year and a legal battle with another Blackstone-owned hedge fund, GSO Capital Partners.
Solus sued GSO and US homebuilder Hovnanian over an alleged “fraudulent scheme” that would allow GSO to cash in on credit derivatives tied to the company. Solus stood to lose millions of dollars, having bet that Hovnanian would not default on its debt. GSO backed away from the scheme after US regulators voiced concerns about the so-called “manufactured default” it had planned.
Shares in two of Solus’s other equity investments, US coalminer Contura Energy and offshore drilling services firm Hornbeck, have fallen around 90 per cent over the past year.
Renewed difficulties at energy and natural resources-related companies this year have caused pain for many prominent US hedge funds, which placed big bets that these businesses would recover. Among the disasters, the stock and bond prices of oilfield services firm Weatherford and shale-gas specialist Chesapeake have collapsed this year.
Jean-Dominique Senard’s fight to rescue the Renault-Nissan alliance
The boardroom changes have removed executives within the companies who seemed to work against the partnership
In the bar at Yokohama’s swish InterContinental Hotel in late October, Renault chairman Jean-Dominique Senard was drinking with the future leadership team of Nissan when he received a call from a French government official.
Fiat-Chrysler, the Italian-American carmaker that months earlier had walked out on Renault, was to merge with its French arch-rival PSA.
The implication for those around the table was obvious — Renault and Nissan would have to set aside their substantial differences and make the alliance work.
“We cannot survive if we don’t move quickly now to do real sharing,” says Mr Senard, who plans to unveil several combined projects in the new year designed to demonstrate that, finally, the alliance can function.
A year on from the arrest of Carlos Ghosn, who held the companies together, the alliance, which includes Mitsubishi Motors, is fighting for its place in a car industry beset by falling sales, the global trade war, and burdensome investments into electric vehicles.
While PSA and FCA are merging to pool resources, and Ford and Volkswagen have created their own alliance to combine some investments, the oldest auto alliance risks being left behind.
Apart from jointly procuring components, the true cost savings achieved by the alliance have been slight, while many of the achievements held up during the Ghosn years have been revealed to be more smoke and mirrors.
Left without FCA as a potential partner, Renault’s focus has been forced back to its Japanese bedfellow of two decades’ standing.
The two companies had been corralled into co-operation for more than a decade by Mr Ghosn, the totemic leader who set them on a convergence course. Yet his stunning arrest last November on charges of financial misconduct broke open the nationalist fissures that had been inching wider under his tenure. He denies all the charges.
In January, Mr Senard was parachuted into Renault by the company’s largest shareholder, the French state.
His age — he is 66 — prevented him, under Renault rules, from being named chief executive, so he took the title of chairman, with specific orders to restore peace to the riven enterprises.
It looked like a doomed task. By the middle of the year, Renault and Nissan’s chief executives Thierry Bolloré and Hiroto Saikawa, who had co-operated with each other while Mr Ghosn was in charge, were not on speaking terms and refusing to return phone calls, according to people on both sides of the alliance.
Board decisions, once taken, were never implemented, undermined by systemic disregard for the parties across the table and the bedlam that followed Mr Ghosn’s arrest. Paralysis set in.
To Mr Senard, who earlier in his career pushed through a painful restructuring of aluminium group Pechiney and closed factories at Michelin while chief executive of the tyremaker, the extent of the turmoil was breathtaking.
“I had my doubts it would survive,” he admits in an interview in Paris. “Sometimes I say to myself alone in my office, good gracious, this is really tough.”
When asked directly if there was a moment over the past year he thought the whole edifice would come crashing down, Mr Senard smiles: “If I answer now, no, I never had that, you would not believe me and you would be right.”
The depths of dysfunction became apparent ahead of one board meeting, when the two sides refused to bring sensitive benchmarking data — details of comparisons about profits and costs with rivals. An exasperated Mr Senard said he would not attend unless the documents were shared. He also became embroiled in the infighting, threatening Mr Saikawa in June over Nissan’s refusal to appoint Mr Bolloré to several key board committees.
Until Mr Senard was appointed chairman in January, Mr Saikawa said his efforts to connect with Renault were hobbled by suspicions that people inside Nissan had been behind Mr Ghosn’s downfall, something the Japanese company firmly denies: “In the beginning, it was a huge burden that we couldn’t hold any regular communication.”
Both companies realised that change at the top was needed. But Mr Bolloré, having lived in Mr Ghosn’s shadow for so many years, was not about to go quietly. He sought to build power structures of his own within the company, using behaviour that echoed some of the more domineering instincts of his former mentor, according to people within Renault.
Mr Senard tried to convince him to leave quietly, without success. His eventual ousting, in October, was greeted with widespread relief outside his circle. Mr Bolloré declined to comment for this article.
Mr Saikawa’s departure was no less cathartic at Nissan. On the day he resigned following disclosures of improperly paid compensation, staff circulated WhatsApp pictures of champagne bottles.
From the factory floor to the boardrooms, the leadership changes cleared air that had been poisoned by months of hostility. “When I came out of the last board meeting, I said to myself, gee, this is another world,” says Mr Senard.
Nissan’s new chief executive Makoto Uchida began last week, while Renault is at the closing stages of appointing a new chief.
The frontrunner is believed to be Luca de Meo, who leads VW’s Spanish Seat brand, a role that makes him no stranger to negotiating national identities within a single business.
The boardroom turnover marks the end of the bloodletting at the businesses to rid them of executives — and nationalist forces — who seemed to work actively against the partnership.
“If you wanted to kill the alliance, you would not have done anything else,” says Mr Senard, his diplomatic mask slipping in a rare flash of anger, leaning forward with his index finger raised to mark the moment. “I know exactly who was behind that. These people are no longer in the company.” He adds: “For the alliance, the future is bright. I would not have said that two months ago.”
Yet real change will take far longer. “It runs deep down into the organisation, layers and layers and layers deep,” says one former high-ranking Nissan director. “Getting rid of a couple of people will not change the organisation”.
The new year may bring answers, with a badly needed business reset planned for January. New joint projects will be launched, pooling development into areas such as electric vehicles and self-driving technology.
Each new venture will be headed by one person from one of the carmakers, who reports into the alliance board, with staff seconded on to the team from either side. The aim is to avoid the mirage of co-operation that existed under Mr Ghosn.
Gone too will be the prior obsession with becoming the largest carmaker in the world, which drove a sales strategy that undermined profitability at the two companies, and obscured the lack of co-operation under the surface.
“This number one worldview, it was true factually when you do the numbers,” says Mr Senard. “But it was totally artificial when you dig into the subject.”
But investors who have heard claims of cost savings before will need convincing that the new projects are bearing fruit — and profits. “The areas of co-operation look so flimsy,” says Philippe Houchois, an auto analyst at Jefferies. “It would really help investors if they were able to quantify this co-operation.”
Yet among executives who witnessed the infighting during Mr Ghosn’s apparently golden years, a deep scepticism remains about the ability of the companies to play nicely together.
The chaotic year at Renault and Nissan
NOVEMBER 2018
Renault and Nissan chairman Carlos Ghosn is arrested in Tokyo, later charged with financial misconduct
JANUARY 2019
Jean-Dominique Senard is appointed as chairman of Renault, with the aim of restoring the alliance
MAY 2019
Renault and Fiat Chrysler are revealed to be in merger discussions
JUNE 2019
FCA walks away from talks after just 10 days, blaming the French state
SEPTEMBER 2019
Hiroto Saikawa resigns as chief executive of Nissan following revelations of incorrect pay
OCTOBER 2019
The Renault board votes to remove chief executive Thierry Bolloré
OCTOBER 2019
PSA and FCA announce plans to merge to create world’s fourth largest carmaker
“I don’t think you’ll find a single person in either business not being paid by the alliance that was supportive of the alliance,” says one former director. “I think ultimately it dissolves.”
Mr Saikawa disputes the claim, telling the Financial Times: “The alliance is already part of the DNA for the new management team and the younger leaders in their thirties and forties, who joined the company after the Renault partnership had already been established.”
Still, the new structure also lacks a single leader for the businesses — with alliance decisions taken by the three chief executives in a four-person board chaired by Mr Senard. While this was done to avoid a repetition of the imperial style of Mr Ghosn, it risks hampering decision-making on thorny issues such as combining manufacturing operations or cutting weaker engineering elements.
“To make the alliance work, the decisions that have to be taken are really tough decisions,” says one former senior executive. “What you’re missing is the guy who is in command. [Changing chief executives] is a positive factor, but you need the driver but the driver is not there.”
The real fear inside both companies, particularly within Nissan, was always the prospect of a full merger.
Renault owns 43 per cent of Nissan as well as having power to name certain directors, while the Japanese group owns a 15 per cent non-voting stake in its French partner despite contributing more in terms of profits and revenue. Nissan also holds a stake in Mitsubishi.
The French state, which company insiders say still views Renault more as a state asset than an investment, does not wish to see its holding diluted, while Nissan executives are worried about any deal that reinforces French control over the combined group.
Mr Ghosn claims that a plot to overthrow him was launched within Nissan in order to prevent such a merger.
With a year’s hindsight, Mr Senard says that a merger “probably isn’t the ultimate step”, at least in the medium term. “It was seen in Japan as a real threat to its independence and to its pride,” he says.
But even amid the height of the chaos over the summer, talks were still being held behind the scenes about the future shape of the alliance. Over the summer, Mr Senard, Mr Saikawa and Pierre Fleuriot and Masakazu Toyoda, the most senior non-executive directors at Renault and Nissan, discussed ways to level their capital structure.
At the time, Nissan officials were seeking voting rights to be attached to their stake in Renault, while it wanted the French company’s stake in Nissan to be effectively below one-third so that Renault would not have veto power over acquisitions and other strategic decisions, according to people close to the Japanese company.
A merger was discussed as recently as February by Mr Senard and Mr Saikawa, though Mr Senard told the FT that a combined entity is now “out of my mind”. He stresses that the merger was just one of a range of options on the table — including breaking up the whole thing.
Talks over changing the ownership structure, however, continued, with Mr Senard and Mr Toyoda communicating amid the havoc via their lawyers.
A deal that sees the two companies reorder their respective stakes may follow a successful launch of new combined projects. “The first thing is to deliver,” says Mr Senard. “My obsession now is to show some change in 2020.”
Both companies urgently need to get their stagnating financial performance under control. Nissan’s cash flows are roughly neutral and could go negative if its performance deteriorates further.
With the company widely expected to reduce its annual dividends on a collapse in profits, that would put further pressure on Renault, which analysts say faces a cash crunch in the near future.
“We model virtually no dividend from Nissan to Renault,” says Mr Houchois at Jefferies. “Without it, they are absolutely naked, everyone can see how vulnerable they are now.”
Last month, Nissan warned its annual net profit is expected to fall 66 per cent from a year earlier as sales fell in all of its core markets including the US.
“People may think Nissan hit a bottom in the last quarter, but that’s probably too optimistic,” said one Hong Kong-based investor.
The need for survival is infused with new urgency. “Both sides appear to believe that they are too small to survive alone and, without obvious alternative partners, they need to find a way to coexist and co-operate,” says Max Warburton, an auto analyst at Bernstein who believes the groups will eventually go their separate ways.
Neither Mr Senard, or Mr Uchida, have yet outlined how the alliance will deliver that recovery in earnings, yet the bets the Renault chairman is taking on the future are twofold.
He thinks a recovery in earnings is the necessary proof to make sure the alliance can survive in the near term. Just as importantly, he believes he has to give both sides room to breathe. “This alliance can only work if we close ranks and work in common sense, but keep the feeling that Renault is a French company, and Nissan a proud Japanese one.”
Jeff Bezos warns US military it risks losing tech supremacy
Amazon chief suggests China’s attempt to gain an edge represents a new kind of danger
Jeff Bezos has warned American military leaders that the US risks losing its superiority in technologies that have been key to its national security.
Speaking at the Reagan National Defense Forum, an annual gathering of US military leaders and defence contractors, the Amazon chief executive officer suggested that China’s attempt to steal an edge in important technologies represented a new type of threat to US military supremacy, which has been based for decades on a clear technological superiority.
“Do you really want to plan for a future where you have to fight with someone who is as good as you are?” he asked the annual gathering at the Reagan Presidential Library. “This is not a sporting competition. You don’t want to fight fair.”
The Amazon boss singled out space as one area where US leadership was in doubt. “We’ve had an advantage in space — I’m very nervous that it’s changing rapidly,” he said. Mr Bezos has been pouring around $1bn year of his Amazon fortune into Blue Origin, his personal space company, which has set its sights on eventually selling launch services to the US Department of Defense.
Commenting on the US space sector, he said: “They’re facing adversaries who are good at innovating. If you’re facing adversaries who are good at innovating, you have to do it more.”
Mr Bezos’ appearance before top US military leaders came two weeks after he sued the Pentagon for failing to award a contract to Amazon Web Services, his company’s cloud computing arm, worth up to $10bn.
The contract, to operate a single data platform to support all US military operations, went instead to Microsoft after an eleventh-hour intervention by President Donald Trump — a decision that Amazon claims was the result of bias. Mr Bezos is also the owner of the Washington Post, which has been fiercely critical of the president.
The Amazon boss did not comment on the Jedi contract. But he struck a strong position in support of the US military, arguing that making the country’s top private sector technology available to the Pentagon was essential to the preservation of freedom and democracy. That was in contrast to some other tech companies, most notably Google, which have steered away from some types of military work after complaints from workers.
“My view is, if Big Tech is going to turn their back on national defence, this country is in trouble,” Mr Bezos said. Referring to the protests from some tech workers, he added: “I understand people are emotional. But there is truth in the world. We’re the good guys.”
Satya Nadella, chief executive of Microsoft, has taken a similar stance, even though he has faced protests from some employees over his company’s work for the US government on national security.