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Aug 29, 2016

DealBook Morning News on August 29, 2016: Silicon Valley Heeds Warnings of Apocalypse

The New York Times 
 By Amie Tsang

“Here we sit, a year after we were supposed to die,” — Chris O’Neill, chief executive of Evernote.
This was supposed to be the year of the great reckoning for Silicon Valley start-ups, but some are still waiting for the crash.
And while they wait, some companies, like Evernote, have gotten back on their feet. Last year Evernote was a poster child for the collapse of Silicon Valley, but after cutting back on staff and eliminating some employee perks, it has stabilized. “It was hard for employees to readjust expectations,” Mr. O’Neill said. “They had only known a world where another fund-raise was just around the corner.”
The biggest start-ups still attract investors, venture capital funds are still raising money and engineers can still command a high salary. That’s not to say some companies haven’t fallen by the wayside, but many of those who heeded the warnings have managed to stick it out.
It seems, if nothing else, that the doomsayers have at least pushed start-ups to shift from boasting about how fast they are growing to talking about financial responsibility.
The 124-Year-Old Start-Up
General Electric has been making a return to its heavy-industry roots while also trying its hand at becoming a start-up of sorts. In 2011 it opened a software center in San Ramon, Calif., with the aim to build an industrial operating system — a Windows or Android for factories.
Jeffrey R. Immelt, the chief executive, wants to be a “top 10 software company” by 2020. And he seems to have no Plan B.
The response? “They’re not software people,” was one of the skeptical comments.
G.E. has access to data from sensors in its machines that it uses to make software that helps predict whether a machine needs repairs. But by entering the software business, G.E. is also opening itself up to competition from a greater variety of companies.
And the stakes are high. For a consumer, a misfiring algorithm might mean a bad suggestion for what book to buy or what film to see. But if an algorithm prompts an airline to take a jet engine off the wing, it’s a $100,000 mistake.
The Case for an Interest Rate Increase
The Federal Reserve looks like it will probably raise rates in the coming months. “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” said Janet L. Yellen, the Fed’s chairwoman, said after last week’s annual policy conference at Jackson Hole.
Although the Fed is likely to consider a move at the next meeting, in September, many expect action to come in December, after the presidential election.
Some officials remain nervous about fragile growth, and there are questions about how the Fed could combat downturns in the future. If interest rates are not raised as much as during other periods of growth, they cannot be cut as much during downturns. Officials also remain skeptical about using negative rates.
“Central banks still have arrows in their quiver [although] they may not be as effective as they were before the crisis,” Randall Kroszner, a former Fed governor, told The Financial Times. But, he pointed out, “central banks can’t simply create growth.”
Still, perhaps they will take the advice they received from Christopher A. Sims, a Nobel laureate in economic science. What is that? Stop. You’re making things worse.
Mr. Sims argues that central banks need to say publicly that more government spending is required to stimulate economies. “So long as the legislature thinks it has no role in this problem, nothing is going to get done,” he said.”
Coming Up
The Commerce Department reports data on spending in July, which is expected to have dipped slightly.
Deals
Hedge Funds Said to Vie for SunEdison’s TerraForm Power
By REUTERS
The hedge fund manager D.E. Shaw is considering a bid for SunEdison’s controlling stake in TerraForm Power, the bankrupt renewable energy producer’s most valuable asset, according to people familiar with the matter. The hedge fund Appaloosa Management and the asset manager Brookfield Asset Management have also announced plans to bid for shares.
 
Banks
Santander UK Said to Spend Nearly $1.3 Billion a Year Covering Flagship Current Account
By THE FINANCIAL TIMES
Santander’s 123 account pays on average 2.3 percent on a total of 50 billion pounds, or about $66 billion, according to people familiar with the product. The bank has to spend nearly £1 billion, or about $1.3 billion, a year covering the cost of this, an example of how low interest rates are eroding bank margins.
Chinese Banks Starved of Data as Mobile Payments Rise
By THE FINANCIAL TIMES
The shift from swiping cards to scanning QR codes with mobile wallet apps knocked $20 billion from banks’ fee income in 2015, according to Kapronasia, a Shanghai-based fintech consultancy.
RushCard Gets New Features
By THE WALL STREET JOURNAL
RushCard, the prepaid debit card, will introduce a new mobile phone application that lets customers temporarily put their accounts on hold if they misplace their cards.
 
Hedge Funds
Activist Funds Set Their Sights On Micro-caps
By THE FINANCIAL TIMES
Since the start of the year, 61 micro-cap companies, those with a market capitalization of $50 million to $250 million, have found themselves on the receiving end of attention from activist funds.
Carlyle Said to Consider Withdrawing from Hedge Fund Activities
By THE FINANCIAL TIMES
One of the hedge funds majority owned by Carlyle, Emerging Sovereign Group, told investors this month that Carlyle was selling its stake back to ESG’s partners. Assets in another Carlyle hedge fund, Claren Road, have fallen to less than $1 billion, from $8.5 billion two years ago.
 
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I.P.O.s
I.P.O. Market Is Poised for Rebound
By THE WALL STREET JOURNAL
Companies in a variety of industries plan to go public after the Labor Day holiday, but the window for offerings is expected to shut about six weeks later because of the political uncertainty surrounding the presidential election.
 
Legal and Regulatory
Angela Browne-Kemmerling was just short of finishing her nursing degree at ITT Technical Institute in Hilliard, Ohio, when she left the program. She is now $40,000 in debt.
Crackdown on For-Profit Colleges May Free Students and Trap Taxpayers
By PATRICIA COHEN
The goal of relieving students saddled with onerous debt and a subpar education can be at odds with reducing the cost to taxpayers who are likely to be stuck with the bill.
 
Business
A train yard near a power plant in Cleveland, Va., on Wednesday.
Coal Country Is Wary of Hillary Clinton’s Pledge to Help
By CORAL DAVENPORT
Mrs. Clinton is promising $30 billion to create a new economy by retraining miners and investing in technology, but locals have heard promises before.
Boxes of sweet potatoes being checked for quality at the packing plant for Vick Family Farms in Wilson, N.C. Sales have increased since the family started using an ultrafast internet system to run the plant.
Broadband Law Could Force Rural Residents Off Information Superhighway
By CECILIA KANG
A federal court ruling may halt the spread of municipal high-speed internet providers, which often serve households and businesses where commercial cable and telecom firms have been unwilling to go.
Advertising
Ken Marino, an American actor who starred in the NBC sitcom “Marry Me,” appears in an advertising campaign for the Dutch airline KLM.
To Bolster KLM’s Identity, a ‘Charmingly Clueless Approach’ to Humor
By ELIZABETH OLSON
The Dutch airline is working on a lighthearted social media video campaign in hopes of making it more recognizable to American travelers.