What Caused General Electric’s Third Quarter $22.8 Billion Loss?

General Electric Company (GE) released its third quarter results on October 30, showing a loss of $22.8 billion where $21 billion was attributed to a goodwill write-down of its power division. The company plans to restructure its power unit to help recover.

Companies are required to test their goodwill for impairment at least annually. GE tests its goodwill for impairment each year at the end of the third quarter and uses data as of July 1 of that year. According to its 10Q, fair values for each of its reporting units exceeded the carrying values except for the Power Generation and Grid Solutions reporting units within their power segment. Most goodwill in the power segment was recognized because of the Alstom acquisition, which contributed an astonishing $15.8 billion to goodwill.

GE closed the Alstom acquisition in November 2015 as it was eager to enhance its position as the most competitive infrastructure company with a financial service business. As part of its closing conditions, GE made promises to the French Government, one of which was to add 1,000 jobs by the end of 2018.

GE unwittingly touted to its investors that the deal was struck at an opportune moment. It entered the natural gas power market only to face increased competition from renewable energy and cheaper oil and gas prices. GE made these matters worse when it ramped up production in an already waning market, which created a backlog of inventory. This misjudgment severely affected cash flows, and GE was forced to lay off 12,000 people from its power business in December 2017, none of whom were in France due to the deal GE struck with the French Government.

The combination of a challenging market and poor management already impaired the expected returns from the Alstom deal. The commitment with the French Government further exacerbated this since GE could not alter its cost structure to mitigate its expected loss of income. These conditions resulted in the downward revision of future projected earnings on the Alstom deal, which was the primary cause of the $21 billion Goodwill write-down of GE’s power division.

What Caused General Electrics Third Quarter Loss

Fox Poised to Repurchase Regional Sports Networks

Fox and Disney agreed to a $71.3 billion merger in July. Fox was eager to divest parts of the company that had shed earnings in light of online streaming, while Disney hoped to strengthen an upcoming streaming service intended to rival Hulu and Netflix.

Ultimately, Disney defeated Comcast’s $65 billion all-cash offer with a $71.3 billion bid. Fox thereby sold Disney the rights to Fox’s movie studios, television productions, regional sports networks, and international businesses, including Star and Europe-based Sky.

Consequently, Fox parted with a massive amount of the original company and retained only a post-merger organizational structure of “New Fox.” New Fox will have a myopic focus on live sports entertainment and news in hopes of resistance to a changing media landscape.

In spite of near-unanimous shareholder approval, the Department of Justice concluded that Disney must divest itself of Fox’s twenty-two regional sports networks. The Department feared that consumers would be hurt by the deal, as Fox and Disney had previously competed for viewership of regional sports programming. Without such competition, cable prices could climb to consumers’ detriment. As a result, Disney must now find potential acquirers of the twenty-two regional sports networks.

Interestingly, Fox is among the potential acquirers. The company’s executives have discussed the possibility of buying back the networks. Fox was willing to sell the networks as part of the merger with Disney because their value had significantly declined. Millions of consumers had cut their cable cords, and cable companies had increasingly treated regional sports networks as “add-ons.” Nevertheless, Fox was able to sell these networks at a premium when Comcast sparked a bidding war with Disney. Therefore, Fox may be able to buy back the networks for less than the amount paid by Disney.

The potential addition of the regional sports networks seemingly fits New Fox’s refined focus on sports and news. And, of course, Fox’s buyback of the regional sports networks will likely result in substantial tax benefits related to tax-deductible amortization.

Fox Poised to Repurchase Regional Sports Networks

Silicon Valley’s Tainted Cash

Saudi Arabian journalist and political dissident Jamal Khashoggi was likely murdered by his own government. The Saudi government has more or less admitted its involvement in Khashoggi’s death. In response, many startups have declined to attend a major investment summit in Saudi Arabia. However, some startups have continued to accept money from an investment fund backed by Saudi Arabia’s sovereign wealth.

Is Saudi money tainted cash? Is it wrong for Silicon Valley to receive this money?

Saudi money is not tainted in the way something like conflict diamonds might be. The country’s wealth is the product of legitimate oil exports. But, the revenue from the petroleum trade no doubt supports the Saudi regime. A reasonable argument can be made that doing business with the Saudi regime is akin to condoning its evil conduct.

The human rights violations of the Saudis, however, did not start yesterday. If reports are to be believed, the Saudi government routinely targets dissidents and murders LGBT people. Thus, there is little moral distinction between Silicon Valley taking Saudi cash and Americans consuming Saudi oil.

One might argue that Jamal Khashoggi’s cold-blooded murder was particularly egregious compared to the garden-variety human rights violations that occur in Saudi Arabia. Even then, it is not clear whether there is a moral difference between a Saudi monarch sanctioning the killing of its dissident journalist and an American president ordering a drone strike against an American citizen abroad without due process (not to mention the collateral damage).

Whether Silicon Valley should accept tainted cash is not a question of right or wrong. This point is beyond debate. The real question is this: Are we willing to hold ourselves to the same moral standard?

Silicon Valley’s Tainted Cash

Under Armour: Long Stemming Issues Rise to the Surface

Under Armour (UA) has come under attack due to a recent report alleging a hostile work environment for women. The report, conducted through dozens of interviews with current and former employees, exposed UA officials for charging strip club visits and gambling excursions onto company credit cards. Further, the report found many women felt demeaned in the workplace. In response to the report, UA emailed employees in February to advise them that UA would no longer reimburse adult entertainment or gambling. However, there was no mention that they were not allowed to attend such events with perspective clients.

This is not the first time that the company has been under public scrutiny. Just last year, UA CEO, Kevin Plank, notoriously joined President Trump’s American Manufacturing Council (AMC) and stated that Trump was “a real asset for the country.” Plank’s open support of Trump caused a backlash on social media, as many consumers felt UA had become aligned with the same xenophobic, racist, and fear mongering rhetoric that helped propel Trump to the Presidency. While Plank quickly tried to distance himself from the political Pandora’s box which he had opened, he refused to name Trump when Plank denounced of the Charlottesville White Supremacy rally. Though, Plank later dropped out of the AMC without comment. Many saw Plank’s actions as particularly egregious considering he only changed his tune after strong public outcry. This public pushback included a biting tweet from UA’s own most profitable athlete, Stephen Curry, and an online boycott.

While UA claims that the company culture has begun its overhaul already, it seems as though much more is needed and the damage has already been done. Analysts are predicting that the company will face long term negative effects as the report was just one among other practices which women found demeaning. As the #MeToo movement continues to swell across the country, and consumers become more aware of the political leanings of the manufacturers of their favorite products, UA may face an increased backlash compared to what it may have experienced in years past. Further, a major company’s stance regarding hotly debated topics amongst consumers can pay major dividends, as seen with NIKE’s stock increase post Kaepernick gamble. It remains to be seen what will happen to companies, like UA, that make a major mistake.

Under Armour- Long Stemming Issues Rise to the Surface

The Day Google Stopped Working

When the clock hit 11 a.m. on November 2nd, almost 17,000 Google employees around the world walked out of their offices to protest the company’s poor handling of what seemed to be a pattern of sexual misconduct allegations against employees. The walkout, which commenced in Singapore and traveled its way to Google’s headquarters in California, was the first of its kind at a major tech firm.

The protest followed a New York Times article delineating Google’s haphazard responses to a host of employee misconduct allegations against senior executives and management. The most shocking revelation was Google’s silence about a credible misconduct claim brought against Andy Rubin, the “Father of Android.” The company had continued to praise Mr. Rubin and agreed to a $90 million exit package for the executive when he left the company in 2014. In addition to the walkout, protesting Google employees also demanded a list of changes to the tech giant’s internal policy, which included “an end to forced arbitration in cases of harassment and discrimination” and “a clear, uniform, globally inclusive process for reporting sexual misconduct safely and anonymously”.

Incidents of sexual misconduct and mishandling of employee allegations have long plagued Silicon Valley, and the Google protest further heightens the need for tangible policy changes. However, the grassroots movement that grew within Google to call for concrete company changes suggests that non-government actors like employees themselves may be the source of change needed to finally circumscribe a sense of accountability, responsibility, and consequences for abusers of power and the entities behind them.

The role and power of non-government actors should not be understated. In fact, they are responsible for initiating and perpetuating some of history’s biggest social, political, and cultural movements, such as the global fight to end AIDS/HIV stigma. Where U.S. labor laws might be deficient, thousands of employees in one of the world’s biggest technology companies have successfully sounded the alarm and voiced grievances to Sundar Pichai, Google’s chief executive, and Larry Page, a co-founder of Google and the chief executive of its parent company, Alphabet.

The Day Google Stopped Working

Facebook Removes Iranian Based Accounts for Spreading Falsehoods in Misinformation Campaign

On October 26th Facebook removed 82 “Pages, Groups and accounts” that originated primarily in Iran. These Pages, Groups and accounts represented an organized effort to spread disinformation in the United States as a means of influencing public opinion and US midterm election results. While this particular network was seemingly minor, Facebook revealed that about 1 million accounts followed these Pages, 25,000 accounts joined one of the Groups, and 28,000 accounts followed one of the Instagram accounts. These figures indicate that these efforts may have affected a far wider swath of the American population than the limited number of Pages and Groups would suggest.

This coordinated effort is only the latest instance of the social media behemoth’s war on the weaponization by foreign agents seeking to subvert or undermine the US democratic process. Facebook similarly deleted 652 accounts, Pages and Groups originating primarily in Iran and Russia in late August of this year for similar reasons. Such policing is largely conducted by Facebook’s new misinformation “war room.” The “war room,” led by Facebook head of cyber security Nathaniel Gleicher, seeks to root out such “false content.”

Facebook’s new unit aims to counteract the use of its platform to “sow discord” through circulating false information and disruptive or divisive content. Facebook’s “war room” also seeks to make political advertising more transparent and to eliminate fake or “spam” accounts. All of Facebook’s efforts serve a role in preventing the use of Facebook as a weapon designed to achieve dubious political objectives through propaganda and misinformation. Further, Facebook’s “war room” personnel work in conjunction with the FBI, Homeland Security and the Associated Press to curb abuses arising from domestic and foreign attempts to influence public opinion and action.

The impetus of Facebook’s “war room” is largely a response to the particular revelations following the 2016 presidential elections. One revelation was the large-scale Russian influence in the campaign which lasted at least two years prior to the election. These efforts have since been linked to Russian Intelligence. In conjunction with the indictments carried out by the Department of Justice following Russian attempts to commit election fraud, Facebook revealed that Russian backed companies with ties to the Kremlin used more than $100,000 to develop false or misleading advertising. The purpose of the ads was to tamper with US election results, cause chaos and disseminate Russian propaganda.

In a press release in September 2017, Facebook’s CEO Mark Zuckerberg also revealed that the Kremlin-linked Internet Research Agency (IRA) had influence over American campaigns. Such influence included a number of designs to harm Secretary Clinton’s candidacythrough fake  or “troll” accounts, fictional news and purposely misleading advertisements. This media was  estimated to have been viewed by 150 million Americans. Further, although it is difficult to determine the impact this media had on the 2016 election results, it is clear that this information manipulation was far from immaterial.

The consequences of misinformation are readily apparent from the deaths and mob lynching in India. These actions were sparked by fake stories propagated through WhatsApp, a Facebook subsidiary. Further, consequences were also unveiled in Myanmar. There, an explosion of hate speech on WhatsApp resulted in violence and genocide. In addition, the continued presence of unsubstantiated rumors and innuendo has caused similar harms in Sri Lanka.

Although Zuckerberg has pledged to do better, seeking to head off influence campaigns before they gain traction, many critics feel that Facebook’s recent efforts remain ineffectual. Critics are primarily concerned that other actors have adopted Russia’s strategy of using Facebook and its subsidiaries to spread misinformation and false news stories. The most recent account of this was in Brazil and the UK. During the UK’s exit from the European union, anonymous and factually dubious information was presented through a Facebook based ad campaign. The ads, which have reached up to 11 million British citizens, have continued to be released through this last October and appear to operate with the primary objective of sewing conflict and cementing divisions during a politically precarious time for the UK.

Facebook has already suffered a notable decline in its stock price over the past year due to the unauthorized release of user’s personal data to Cambridge Analytica. This scandal left many analysts and shareholder’s disillusioned with Facebook’s apparent disregard for transparency in its own practices. Further, this scandal caused many investors to question Facebook’s dedication to protecting its users’ privacy and well-being, let alone its dedication to insuring greater transparency. The breach of trust has left many critics asking if Facebook is truly doing everything in its power to root out pernicious false information and political manipulation through suspect ad campaigns and news stories.

Facebook Removes Iranian Based Accounts for Spreading Falsehoods in Misinformation Campaign

Goldman Sachs – 1MDB Fraud Scandal is a Potential Optical Setback for a Firm Striving to Improve its Post 2008 Image

Last week, federal prosecutors brought charges against two parties believed to be at the helm of a massive fraud scheme involving Goldman Sachs and 1MDB, a Malaysian sovereign-wealth fund. Prosecutors alleged that the charged parties, one a Goldman Sachs banker and the other a Malaysian businessman/financier, embezzled billions from the fund – the former helping the latter steal funds for lavish, personal use via a bribe and money laundering scheme that began not long after the financial crisis. The same day, federal prosecutors announced that the former head of Goldman’s Southeast Asia banking division, Tim Leissner, plead guilty to his participation in the scheme. Overall, the scheme netted $600 million in fees for Goldman over three bond offerings, facilitated by bribes and pushbacks from the Goldman Sachs bankers and payed out to the private bank accounts of various co-conspirators.

Malaysia’s former Prime Minister and the fund’s overseer, Najib Razak, lost his reelection as a result of the scandal surrounding its misappropriation. When authorities raided his home, they discovered $266 million worth of luxury items, tens of millions of which took the form of jewelry the former Prime Minister purchased for his wife. Tim Leissner, the Senior Goldman banker who plead guilty, has forfeited nearly $44 million he earned from his role in the scheme as part of his plea deal. The starkest and perhaps strangest beneficiary of the scheme, however, was the aforementioned Malaysian businessman/financier and alleged mastermind behind the scheme, Jho Low.

Leissner had on multiple occasions attempted to engage in other business dealings with Jho Low through his capacity as a partner at Goldman Sachs. His efforts, however, were repeatedly rebuffed by Goldman’s compliance group, which harbored serious doubts and concerns about Low, the source of his wealth, and his spending habits. Low was a renowned partier and used the money he stole from the fund to support his over the top lifestyle, purchasing high end real-estate, fine art, gifts for Hollywood celebrities, and, perhaps ironically, poured some of that money into the production of Martin Scorsese’s 2013 The Wolf of Wall Street, a film about, ironically, financial fraud.

Although Goldman Sachs has presented the scandal as a consequence of the actions of rogue players who do not represent the interests or practices of the firm, it may nonetheless damage the image of transparency and responsibility that Goldman has been pursuing since the financial crisis. The apparent intimate relationship between Leissner and Jho Low as well as concerns about a prevailing corporate culture that encourages bankers to prioritize deal-making over honest business practices may warrant further consideration and investigation on the firm’s part, especially as the scandal continues to unfold and additional parties and infractions come to light.

Goldman Sachs – 1MDB Fraud Scandal is a Potential Optical Setback for a Firm Striving to Improve its Post 2008 Image

Arbitration: New Court, New Rules?

The U.S. Supreme Court recently indicated that it will be taking an even more pro-business stance regarding arbitration. The Court heard arguments in two cases involving company agreements to determine whether these disputes must be handled through an arbitrator rather than a judge.

The first case, Henry Schein, Inc. v. Archer & White Sales, Inc., focuses on a Texas dental equipment distributor and seeks to clarify whether a particular dispute should be decided in arbitration, rather than at court. Currently, if both parties agreed to give the arbitrator discretion, the arbitrator decides whether the particular dispute is sufficiently related to the contract in dispute to warrant arbitration proceedings. However, citing the U.S. Court of Appeals for the Fifth Circuit, a “court will not send a case to an arbitrator to decide the question ofarbitrability” even if both parties have agreed so long as the court finds the claims “wholly groundless.” Yet, in this case, the plaintiff agreed to arbitrate claims for damages but not in the actions seeking injunctive relief. Ultimately, this is controversial since such an exception is neither covered by the Federal Arbitration Act (FAA) or the Court’s existing cases.

The second case, Lamps Plus Inc. v. Varela, regards an employee, Frank Varela, suing Lamps Plus for negligence, breach of contract, and invasion of privacy. Arising from a phishing scam on the company in 2016, Varela’s personal information was accessed, and he is now seeking a class action complaint on behalf of current and former employees. The issue here is whether the FAA precludes state-law interpretations of arbitration to allow aggregated arbitrations, such as a class action when the agreement is silent on the issue. As a result, the largest issue that has divided the Court is whether the contract’s language arguably allows aggregated arbitration.

Outside these two cases, a larger debate is ongoing. Companies prefer to arbitrate claims because it is cost effective, efficient, and carries less risk than arguing in court, which may establish an unfavorable precedent. Nevertheless, critics argue that arbitration forces individuals to fight alone and prevents them from raising public support for issues such as sexual assault, which was recently highlighted by the #MeToo movement.

Volkswagen Pumps the Breaks on Rising Research and Development Costs

Volkswagen, still recoiling from their 2015 emission scandal, faces yet another costly lawsuit. U.S. semiconductor supplier Broadcom recently filed a claim against Volkswagen for $1 billion. Broadcom’s lawsuit concerns Volkswagen’s integration of various patents into its navigation and entertainment system. Toyota and Panasonic were also hit with patent infringement lawsuits from Broadcom earlier this year.

Patent issues are not new to the auto industry and have occurred since George Seldon sued Henry Ford in 1903. However, in an age where cars can speak and drive themselves, the growing number of IP lawsuits demanding royalties threatens to raise transaction costs and impede innovation.

We’ve seen it happen before. Enforcing exclusive IP rights in the biomedical sphere led to widespread patent fragmentation. Research and development costs skyrocketed as companies were required to purchase countless licenses for basic yet requisite technology. Increased operating costs and subsequent litigation led to unaffordable products and substandard down-stream research.

However, carmakers face a more significant challenge because outside industries invent the technologies they need. Thus, the informal patent sharing system that emerged in biomedical subgroups will not materialize to provide relief in the auto industry.

Nevertheless, Volkswagen attempted to address this issue. They retained talent and provided funds to make Audi, one of their brands, a leading development center. But their efforts were not enough. In the race to make energy efficient and develop autonomous vehicles, Volkswagen spent an unsustainable $13.1 billion on research and development in 2017. Consequently, CEO Herbert Diess intends to develop a 10-year plan to slash research costs by partnering with rival companies.

An increase in IP litigation, stringent environmental regulations, and consumer pressure require other car companies to follow suit. Further, the auto-industry’s growing dependence on large-scale tech licensing necessitates industry collaboration. Without this shift, carmakers will not be able to endure nor avoid the patent prosecution and subsequent settlements that historically inhibit affordable innovation.

Volkswagen Pumps the Breaks on Rising Research and Development Costs

Snapchat Rallies After a Disastrous 2018, Reveals Original TV Content

When the Snapchat (SNAP) app launched in 2011, it quickly became known amongst teenagers and young adults for its revolutionary new way of instantly sharing photos, videos, and disappearing messages. Now, the company is scrambling to keep users engaged with its social media platform following a disastrous application redesign in February. Analysts say that the redesign contributed to an “exodus” of 3 million daily users in the second quarter of 2018. Further, the redesign was so disliked it even led to a petition with hundreds of thousands of signatures to bring back the previous design. In addition, influencer Kylie Jenner tweeted her disappointment in the app redesign. This tweet has been widely linked to a $1.3 billion drop in Snapchat’s stock. Although Snapchat quickly modified some aspects of the app, it has yet to completely reboot the design to the previous levels of user satisfaction. Moreover, Snapchat’s struggles continue. In October, Snapchat’s stock was being traded at all-time lows.

To compound Snapchat’s recent troubles, the company faces increasing competition from Instagram, a social media platform owned by Facebook, which in the past two years has begun offering similar features. Some argue that “Instagram Stories” are a “clone” of “Snapchat Stories,” and that other Snapchat features are also being copied. In fact, Instagram Stories have not only successfully captured the company’s consumers who are frustrated with Snapchat’s redesign, but also appear to be more than twice as popular as Snapchat Stories. As such, daily users of Instagram Stories have risen to over 400 million after only two years with the feature.

In an attempt to combat these obstacles and regain users, Snapchat is continuing to implement new updates for the app. One of these updates, which was introduced in October, includes a television lineup available in the app. These “Snap Originals” include five-minute episodes of shows and docuseries in genres including drama, horror, and comedy. In the hopes of gaining traction with its target audience, mostly people 25 and under, the company is partnering with social media “stars” and television writers from shows such as Riverdale and Friday Night Lights. Another update that will distinguish Snap Originals is the integration of Snapchat’s augmented reality technology into the shows themselves. This means that Snapchat viewers can virtually “interact” with the content in a variety of ways, such as going to the beach with a reality TV star or even walking around a crime scene in a show.

Snapchat’s recent move to provide users with innovative and interactive television content is likely aimed at addressing its biggest obstacle: “capturing consumers’ attention.” This is especially true for users that currently use Instagram’s features that are similar to Snapchat’s features. Despite events of the past year, Snapchat CEO Evan Spiegel is optimistic about the company’s future, with the goal of “achieving full-year profitability in 2019.” In all, the outcome of Snapchat’s recent efforts to regain users will foreshadow whether Snapchat will be able to reach its goals.

Snapchat Rallies After a Disastrous 2018, Reveals Original TV Content