Silicon Valley has unequivocally changed the landscape of the auto industry. In 2010, asking a stranger to give you a ride home was nobody’s favorite transportation option. Yet, in 2019, ride-hailing services like Uber and Lyft are a leading transportation choice. Even more disruption is inevitable as Google, Uber, Lyft, and others race to become the first driverless car operator.

This disruption has forced traditional car manufacturers to adapt to keep up with Uber and other innovators. Rivals Daimler (Mercedes-Benz) and BMW have agreed to a $1 billion joint venture. The companies believe the project will be a “global gamechanger” that “maximize[s] [their] chances in a growing market.” Daimler and BMW hope to fend off companies like Uber by focusing on five areas: “car-sharing, ride-hailing, parking, charging, and multimodal transport.”

Interestingly, Daimler and BMW are not alone. Collaboration among global automakers has increased as Google and Uber have pressed them to be on the forefront of auto technology like autonomous driving systems and electric vehicle platforms. For example, Ford and Volkswagen have not only agreed to build vehicles together, but also jointly “investigate” the development of next generation vehicles. General Motors, SoftBank, and Honda announced a similar joint effort.

Ultimately, cooperation among these rival car makers is an encouraging sign. After nearly 150 years of combustion engines, market forces are compelling car manufacturers to commit significant capital to innovation.

Rival Auto Makers BMW and Daimler Forced to Cooperate

CBRE, a worldwide leader in real estate services, launched a new business called Hana, eager to cut a piece of the coworking business pie. It aims to distinguish itself from companies like WeWork and its smaller peers like Knotel and Industrious by offering landlords an opportunity to maintain relationships with their tenants.

Coworking companies, such as WeWork, make their money through rental arbitrage by purchasing or renting commercial spaces from property owners, transforming them, by adding features such as cafés, communal spaces, and offices, then renting the space to clients at higher prices on a short-term basis. Their target markets typically include startups, work-at-home professionals, independent contractors, and remote freelancers seeking to avoid working in isolation. Landlords take companies like WeWork as tenants because they attract startup culture, facilitate short term leasing with multiple tenants, and can add to property value by making traditional 9-to-5 office buildings more vibrant.

However, coworking company profits stem also from larger company clientele, generating disconnect between landlords and the companies they usually court. CBRE’s Hana takes advantage of this disconnect through partnerships with landlords that enable them to maintain their relationship with tenants. Therefore, owners wanting to share in the profits of the flexible office market can partner with Hana, effectively cutting out intermediary companies like WeWork. Under this alternative model, owners will co-invest with Hana in building the workspaces; Hana will manage them for a fee; and they both would share in the profits.

Indeed, the transition from arms-length leases to partnerships in the coworking sphere is not entirely new. WeWork and Industrious have begun using co-management agreements, a staple in the hotel industry, where landlords might pay for renovations and then split the profits equally. Still, however, lenders feel more comfortable issuing debt on a property with a long term lease, a reason why management agreements have not gotten much grip in the U.S., according to Granit Gjonbalaj, WeWork’s real estate development officer. It is exactly this mismatch of long term commitments supported by short-term rentals that gives WeWork a going concern issue, the same exposure that pushed IWG’s Regus into bankruptcy in 2003. It’s possible that some landlords have refused to rent to WeWork because of concerns about its long-term viability.

CBRE’s Hana is betting that its partnership business model coupled with its deep relationships derived from its commercial real estate services, investment management services, and development services will give it a competitive edge in obtaining landlord business. While lenders still might prefer a long-term lease before issuing debt on a property, this may change as underwriting standards begin to better understand coworking income streams.

CBRE Takes on WeWork

Markets reached their highest peak this week since November of last as President Trump postponed a planned tariff hike against Chinese imports, a signal to some that a trade-deal between the two economic powers is close at hand. The President himself announced his optimism regarding the prospects of reaching a deal, though warned that an agreement may still not be possible. Many credit the long trade-spat between the two countries with slowing global economic growth since its inception, and some fear that its effect on U.S. GDP or inflation could expedite or worsen a possible near-recession. Contributing to this market rally has been the Federal Reserve’s recently dovish stance on interest rates and the weakening of the U.S. dollar to certain emerging market currencies, the latter of which is positive sign for global trade prospects; a higher relative dollar value makes debt in those countries, which is held in U.S. dollars, more expensive to service.

Still, whether a deal happens and whether that deal accomplishes the goals set out by the Trump administration is another matter. The purpose of any such deal, according to the administration, is to provide more rigid protections against intellectual property theft and curb technology transfers that threaten U.S. national security interests and industrial, technological leadership.  However, with recent signs that China is pushing for market growth, rather than deleverage to reduce the risk of its current debt position, the extent to which China will concede to any such regulations that run contrary to the goals of its Made in China 2025 initiative may be dubious. If they do, will that trade-deal framework be sufficiently rigid or realistically enforceable enough to be practically effective?

Moreover, questions emerge concerning the President’s intent underlying this delay announcement, especially coming off of President Trump’s inability to secure funding for a National Border Wall and Emergency Declaration. Is the President posturing – using the inevitable market boost that accompanies the announcement to boost support?  Whatever the case, how trade-talks proceed in the coming months could have a profound effect on global markets and international trade-regimes in the near-future.

Stocks Rally Following Tariff Delay, but a Trade Deal is No Sure Thing

Last week Microsoft employees published an open letter calling on the company to cancel its $480 million HoloLens contract with the U.S. Army. The employees claim that Microsoft is failing to inform engineers “on the intent of the software they are building” and demand greater transparency. In the letter, Microsoft employees call on the company to cease working on “any and all weapons technologies,” to create a public “acceptable use policy,” and to create an “independent, external ethics review board” to enforce compliance with such a policy.

Chief Legal Officer Brad Smith previously defended Microsoft’s work with the military in an October blog post, stating that “the people who defend our country need and deserve our support” and that withdrawing from the weapons technology market would reduce Microsoft’s ability to shape how technology is used.

The Microsoft protest follows the trend of tech employees speaking out against contracts with the U.S. government. Last year, Google announced it would not renew a contract with the military after thousands of employees protested the company’s involvement in a Pentagon program that used artificial intelligence as weaponry. A few weeks later, employees from Google, Salesforce, Amazon, and Microsoft demanded that their companies end contracts with Immigration and Customs Enforcement (ICE) and other government agencies in response to evidence of family separation at the border.

As employee activism becomes the norm in Silicon Valley, tech companies are grappling with how to respond. On one hand, yielding to the open letter’s demands could lead to a slippery slope where Microsoft is overly beholden to its employees’ political views. On the other hand, more transparency from Microsoft might attract and retain top tech talent, especially as views of the industry turn negative and the public is more cognizant of the “double-edged sword” of technology. Microsoft’s response to the letter will set an important precedent for how far the company is willing to be pushed by its employees.

“We did not sign up to develop weapons” – Microsoft Workers Protest Army Contract

The retail apocalypse saga seems to be continuing as some of America’s biggest and most historic retailers file for bankruptcy and close up shops. On February 18th, long-time discount shoe retailer, Payless ShoeSource, filed for Chapter 11 Bankruptcy, less than two years after it filed for its first one.

The reasons for Payless’s downturn are many, including a computer malfunction during a critical 2018 back-to-school sale period, general inventory overstock, and more. However, per usual, many are quick – perhaps too quick – to conclude that Payless’s story, like other retail failure stories, is due simply to the boom in e-commerce giants like Amazon that has replaced traditional shopping in brick and mortar retail stores.

But this e-commerce narrative seems to be far from a complete explanation. TJX, operator of TJ Maxx and Marshalls is absolutely booming – it hopes to open up more than 1,000 additional stores throughout the US and Canada. Nordstrom and Home Depot also showed robust earnings in 2018, thanks in large part to their brick and mortar locations. There are numerous other retailers across industries that are faring extremely well in the physical space.

The younger generations of consumers, particularly Generation Z (“Gen Z”), warrant examination, as they have largely been deemed responsible for the downturn in retail shopping in physical stores. Gen Z is the first generation that essentially has not lived without cellular phones. Gen Z’s purchasing power is also substantial. It will almost definitively be the largest generation of consumers by 2020 and already accounts from $29 billion to $143 billion in direct spending annually. Its members have been defined by the infamous “instant gratification” label. And, contrary to expectations, “when it comes to shopping, Gen Z consumers are far more traditional – and substantially more patient – than many thought.”

A survey released by Euclid shocked many when it showed that Gen Z actually prefers to shop in and purchase from brick-and-mortar stores than online. For example, when asked if Gen Zers would prefer to purchase makeup straight from their smartphone or in a store, a resounding 72% signified that they would still prefer to purchase in a store despite the fact that 94% of millennials purchased makeup straight from their phone. So what can retailers like Payless do to feed this preference?

There’s no single answer, but a key will be understanding the distinct facets and preferences of the generation in the shopping context. Studies repeatedly find that Generation Zers deem personal relationships – which extend to brands – extremely important in informing their purchasing habits, along with transparency, convenience, and more.

The lesson that should be learned is that brick-and-mortar stores are not dead. Gen Zers actually want a physical shopping experience. Accordingly, retailers like Payless need not abandon the brick-and-mortar model, but they need to supplement their models by integrating elements like the convenience or experiential shopping that these young shoppers seek. If retailers like Payless can find avenues to translate these shopping preferences, they may be able to tap into the tremendous purchasing power of the young generation.

Brick-and-Mortar Retailers’ Unlikely Hero – Generation Z

In today’s modern age of technology, there is an increasing use of online websites for everyday shopping needs by average consumers. In the midst of this online shopping, many consumers have begun to notice advertisements for recently browsed electronics or clothing items. This is no coincidence; rather, these personalized ads are a part of a larger internet practice actively used by online businesses called “internet-based advertising.” This form of advertising is beginning to be used by larger companies, such as Amazon, and has become an additional pillar of its business, worth a total of $125 billion.

Many of Amazon’s internet-based advertising features are similar to those of Google and Facebook and has largely become successful by offering ways to target users based on their interests, searches and demographics. This targeting is done by directly working with Amazon’s staff, who placed the orders themselves. Additionally, Amazon provides advertisers and their agencies access to the self-serve system to run their own campaigns on and off Amazon’s websites. The advertising is useful to consumers given that the service consolidates advertisements based upon one’s interest and may provide additional information to a shopper regarding a product they would not normally have access to. For advertisers, the service allows for larger access to their products and the ability to target consumers that have an interest in their product. This interrelationship has proven to be successful as businesses have seen an increase in “clicks” on their websites and a reciprocal increase in the amount of orders for their products.

Although internet-based advertising represents a mutual relationship between consumers and businesses by delivering both convenience and a broader customer base, to what extent is there a boundary for the sake of consumer privacy? The tracking of customers’ online activities is typically invisible to consumers. Therefore, the average consumer does not know that due to their shopping on Amazon, an additional business knows where they live simply because they provided a delivery address. They likely do not know that Amazon knows how old their children are from access to their baby registries and even knows who has a cold, from cough syrup ordered with two-hour delivery. Although Amazon does not provide advertisers the name of the customers, it does provide additional information that the average consumer may not want others to have access to. Therefore, there must be additional regulations in place to ensure that there is opportunity for the protection of privacy while also allowing for business advertisements. Many websites have already taken theses additional steps by providing real time warnings on webpages that notify visitors that “you are giving implied consent to the use of tracking cookies on this website.” These types of “warnings” allow consumers to know their behavior is being tracked and allows the opportunity to gauge their future use of the respective website accordingly. This initiative, along with further regulations regarding businesses’ use of consumer information, could allow for an effective relationship between shoppers and corporations such as Amazon.

Consumer Convenience and the Invasion of Privacy

Navient Corp, the second largest student loan services provider, rejected the takeover bid of $12.5 a share with total worth of about $3.2 billion from Canyon Capital and Platinum Equity in a board vote on February 18.

The takeover offer was a 6.6% premium over Navient’s closing price on Friday of $11.73 a share. This price, however, was substantially lower than the $14-$15 informal price Canyon had given Navient in the past. Navient also said the offer “substantially undervalue[d] the company” and did not take into account the bidders’ approach to pending litigations against Navient or the financing information of the proposed acquisition. Particularly, upon a change of control, Navient’s $10 billion debt would become due but the bidders did not seem to “have a plan.”

The pending litigations facing Navient were brought by Federal Consumer Financial Protection Bureau and five states including Illinois, Washington, California, Pennsylvania, and Mississippi over its services of student loans.

CFPB initiated the lawsuit against Navient just two days before President Trump’s inauguration, alleging that the company harmed the interests of borrowers by “failing to steer them toward the loan repayment options” more affordable for them. As a result of Navient’s tactics, almost $4 billion additional interest charges were incurred to borrowers.

The five states filed similar lawsuits against Navient for alleged misallocation of payments and misleading borrowers into more expensive repayment plans. These pending litigations may take years to go through discovery, trial and possible appeals, which may mean a huge burden of legal fees and media pressure on Navient.

After Navient’s turndown of the takeover bid, Canyon Capital “has withdrawn its expression of interest” to acquire Navient according to the Schedule 13D/A filed by Canyon Capital on February 20 as an update of the acquisition. Instead, it plans to nominate four candidates for the election of independent board directors at the 2019 annual meeting.

Navient Turns Down $3.2 Billion Takeover Bid

Everyone loves rewards. With every swipe, dip, and tap, consumers are converting everyday purchases into points for travel, fine dining, and entertainment. From the solid metal Chase Sapphire Reserve to the Rose Gold American Express, rewards credit cards promise consumers a desirable lifestyle.

However, no one likes fees. When a consumer makes a purchase at a store using their credit card, the store is charged an interchange fee, which is a percentage of the total sale. The store pays the bank that issued the credit card the interchange fee. These interchange fees are set by payment card networks like Visa and MasterCard and are roughly 1-2.5% of the total sale.

Recently, Visa and MasterCard have been preparing to increase their cards’ interchange fees. One reason could be the increasing risk of transactions due to data breaches like Equifax, affecting 143 million Americans, and the increase in fraud in online transactions. Another reason for the fee increase could be costly rewards programs due to savvy consumers strategically maximizing rewards. For example, in Q2 2018, rewards cost Chase $330 million because credit card users were redeeming points faster than anticipated.

Merchants strongly dislike the power that card networks have in setting interchange fees. In 2005, merchants filed an antitrust lawsuit against Visa and MasterCard that settled for a record $6.2 billion. In 2018, merchants sued American Express (Ohio v. American Express) for restricting merchants from encouraging customers to use other cards with lower fees. On the other hand, in Europe, interchange fees are capped, and card networks fear similar regulation in the U.S.

Most recently, major retailers, such as Amazon, Target, and Home Depot, have been pushing to stop accepting some rewards cards, pushing to end card network’s “honor all cards” rule. At the same time, to counteract higher fees, like from increased rewards card usage, merchants have historically passed those costs to consumers by raising prices. Therefore, although some reap the benefit of rewards cards, everyone, including those who use cash and debit or do not have access to credit, bears the costs of paying for those rewards.

At the end of the day, rewards cards are here to stay. Customers love rewards, the cards generate significant revenue for issuing banks, and they grow payment volume for card networks. However, nothing is free, and someone, whether it be merchants, customers, or banks, will have to pay for the rewards.

Everyone loves rewards. No one likes fees

PG&E has filed for bankruptcy amidst an outcry from key investors. Roughly one month ago, the investor-owned utility announced plans to file for Chapter 11, prompting investors to offer emergency funds in an effort to keep the company afloat—one investor group offered $4 billion to help avoid bankruptcy. Despite these pleas from shareholders, PG&E has nonetheless launched the bankruptcy proceedings—recently, it signed a commitment letter with several large banks, thereby obtaining $5.5 billion in DIP financing. Using this combination of revolving credit and term loans, PG&E will be able to continue its operations while it restructures.

At the same time, the PG&E bankruptcy has triggered fear among regional power producers. Energy companies (such as NextEra Energy, Inc.) generate power and sell it to PG&E. In an effort to reduce its financial obligations during the bankruptcy proceedings, PG&E may seek to void or invalidate its power purchase agreements. As such, NextEra and its subsidiaries have filed an action before the Federal Energy Regulatory Commission, seeking an injunction which would prevent PG&E from abrogating or amending the terms of its power purchase agreements.

Further still, while the bankruptcy and attendant legal disputes continue, ordinary consumers are worried that PG&E will raise rates as it tries to cover the cost of its contingent liabilities. Altogether, the utility company is embroiled in a legal mess, entangled in a web of various competing interests and financial obligations. The question presents itself: how did PG&E end up drowning in $30 billion of potential liability, swallowed in a morass of legal proceedings, and demonized by consumers who fear a rate increase? The answer lies in the doctrine of inverse condemnation.

The doctrine is typically invoked when the government takes or damages private property without paying the ‘just compensation’ required by eminent domain law. Essentially, where the government appropriates or damages private property for public use, the owner is entitled to just compensation. Where the government initiates a ‘taking’ of private property without compensating the owner, the doctrine of inverse condemnation provides an avenue for the property-owner to recover damages. Importantly, the doctrine can be invoked when the government has expropriated property, or when the government has damaged property so irreparably that it is no longer usable by the owner.

For example, in the midst of Hurricane Harvey, the Army Corps of Engineers released water from swollen reservoirs, causing nearby homes to flood. This was a necessary measure, helping to redirect the torrent and thereby averting far greater property damage in downstream communities. In short, they damaged private property, in order to serve the broader public good. Inverse condemnation provided a means for the flooded homeowners to seek redress; the Army Corps was forced to compensate the homeowners for the damage to their houses. How does inverse condemnation relate to PG&E’s bankruptcy?

Traditionally, inverse condemnation has been applied to government “takings.” It allowed private property-holders to extract compensation from public agencies. However, CA courts have ruled that investor-owned, publicly traded utilities are subject to the inverse condemnation doctrine as well. Thus, where investor-owned utilities (such as PG&E) take or damage private property, they can be forced to ‘justly compensate’ the property-holders. Importantly, damages arising from wildfires technically constitutes a ‘taking’—that is, if a utility is found to have proximately caused a wildfire that, in turn, causes damage to private property, then the utility can be held liable under the inverse condemnation doctrine. And, perhaps most importantly, liability does not require a showing of negligence—so long as the utility caused the damage or taking, it is liable.

This brings us to PG&E’s current troubles. In the past few years, California has been ravaged by wildfires, shattering the lives of thousands across the state as entire towns have been engulfed in flames. It is believed that PG&E’s operations caused many of these tragic fires. Altogether, the utility is facing up to $30 billion in liability. This contingent liability is what prompted PG&E to file for bankruptcy.

As the company spirals into legal and financial turmoil, the PG&E case raises important questions about the doctrine of inverse condemnation. Why should inverse condemnation apply to non-governmental agencies? Why should a doctrine intended for government takings be used to hold investor-owned, publicly traded utilities liable? And wouldn’t allowing PG&E to pass the cost of its liability on to ratepayers defeat the purpose of the doctrine? Supposedly, by imposing strict liability on utilities for property damage, we encourage these utilities to take more-than-reasonable, higher-than-ordinary care. But if utilities can simply shift liability costs along to consumers, then companies like PG&E have little incentive to invest in taking such extraordinary care. Altogether, the complex PG&E crisis may prompt state lawmakers to reconsider the value of an inverse condemnation doctrine with respect to publicly traded utilities.

PGE Bankruptcy Presents Questions on Inverse Condemnation

Last week, JPMorgan Chase became the first major United States bank to introduce its own digital token. The bank had already released a blockchain platform called Quorum that other institutions use to keep track of financial data. JPM Coin will operate differently than other popular cryptocurrencies like bitcoin and ethereum because it will be run by JPMorgan and backed by dollars in JPMorgan accounts. This contrasts with the wildly unregulated cryptocurrencies whose volatile values spike and fall depending on fluctuations in the market.

The reported advantage of the digital token is its speed. JPMorgan services major corporations and other banks who need to move large sums of money quickly and securely. Traditionally this would require a wire transfer that could take hours or even days, with transaction costs resulting from international transfers with changes in currency rates. In contrast, the digital token will be able to move instantly on the blockchain platform Quorum, and once transfers are completed the tokens can be converted back to dollars. JPMorgan moves more than $6 trillion per day, so any technology that can make that a more seamless process is obviously welcomed by the bank and its clients.

Unlike other cryptocurrencies, JPMorgan’s digital coins are not for public investment or individual use – they have been created strictly for institutional use. This has led some to question whether JPM Coin is a cryptocurrency at all.  Cryptocurrencies generally operate on public networks whereas JPM Coin will simply mimic real currency and operate on an internal payment system. In many ways, the process is no different than the typical online banking that JPMorgan already does – the only difference appears to be the speed at which large sums can be transferred as outlined above. Some critics say calling JPM Coin a “cryptocurrency” is simply a marketing ploy for the bank’s new platform that will attract business. It will be interesting to see if other traditional banks begin to test the waters with blockchain technology as well.

JPMorgan Chase Introduces Digital Coin