The Chips Are Down

Plus: Hand it to Amazon for figuring out new ways to take your money. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

July 21, 2023

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Morning Brief

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These hedge funds hate the dealmaking slump.

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TSMC forecasts a bear chip market.

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Amazon wants to turn your hand into a credit card.

Private Equity

The M&A Slump is Killing Deal-Driven Hedge Funds

Betting on mergers and acquisitions? In this economy?

Perhaps nobody feels the pain of 2023’s dealmaking slump worse than so-called merger arbitrage traders, or hedge funds that essentially bet on the success of M&A deals, according to an analysis published Thursday by the Financial Times. And that’s not all: new US M&A guidelines announced earlier this week could mean the worst may be yet to come.

Hedge Your Bets

The arbitrage strategy is quite simple: hedge funds buy stakes in companies set to be acquired, in the expectation, based on the announced per-sale price, that shares will ultimately be sold at that price. But so far this year, the betting strategy hasn’t gone as planned. Merger arbitrage traders have lost 2% on average in 2023, according to Hedge Fund Research data, making them among 2023’s biggest losers in the hedge fund world.

For starters, in the first half of the year, only $1.3 trillion worth of deals have been announced around the world, a 37% year-over-year decline, according to Refinitiv. Meanwhile, increased scrutiny from the Federal Trade Commission and the Department of Justice has already stopped some major deals dead in their tracks — creating turbulence for merger arbitrage traders:

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For example, when TD Bank announced a $25-a-share offer to acquire First Horizon, First Horizon’s share price rose from under $18 to nearly $25 — good action for the arbitrage traders. But when the deal got scrapped, share prices plummeted to nearly $10, squashing the traders betting on the deal to close.

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Amgen’s $28 billion acquisition of Horizon Therapeutics has also been disrupted, and one manager of a merger arbitrage trader fund told the FT he prematurely sold shares in Activision Blizzard in February when its acquisition by Microsoft looked in doubt.

Please Let Us Make a Deal: Regulator scrutiny should only increase. On Wednesday, the FTC and the DOJ officially unveiled 13 draft guidelines that signal a tougher M&A environment. Chief among the new rules — still subject to 60 days of public comment before final implementation — are stipulations that “Mergers should not eliminate a potential entrant in a concentrated market” as well as calls for increased examination on competition “when an acquisition involves partial ownership or minority interests.” In other words, the FTC didn’t like when Meta bought or invested in a series of metaverse start-ups.

Future Bets: Then again, there may be reason to be bullish on M&A activity, at least, according to Blackstone president Jonathan Gray, who told the FT on Thursday that the “shock” of inflation and interest rates that hindered M&A activity so far this year is fading, meaning “markets will normalize and transaction activity will pick back up.” For the ailing hedge funds, that almost sounds like hope.

– Brian Boyle

Chips

Chipmaker Giant TSMC Warns of a Rough Road

The semiconductor market is about to hit some headwinds, according to the sector’s most valuable player.

TSMC, the world’s largest manufacturer of the nano-sized tech that helps power pretty much everything, said Thursday it expects 2023 revenue to drop by more than it originally thought. Not only that, but the Taiwanese company’s plans for a factory in Arizona have been delayed by a lack of workers.

Not Feeling Chipper

In 2022, worldwide chip sales reached an all-time high of $574 billion, and are expected to grow to $1.4 trillion by 2029. And although demand for chips to power AI processors and large language models is high, it still may not be enough to counter a weak global economy.

“Three months ago we were probably more optimistic, but now [we are] not. The recovery of the Chinese economy is weaker than we thought, so end-market demand is not as we expected,” TSMC Chief Executive CC Wei said. In addition to China’s domestic problems, the US wants to further restrict the sale of certain chips and semiconductor technologies to the Asian nation for fear of spying and military advancement. But lobbyist group Semiconductor Industry Association warned the moves would “risk diminishing the US semiconductor industry’s competitiveness, disrupting supply chains, causing significant market uncertainty, and prompting continued escalatory retaliation by China.”

All of this has made for a particularly bearish outlook:

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TSMC had forecast a revenue dip of less than 5% for 2023, but it’s now expecting that to double to a 10% drop, which the company also has attributed to shrinking demand for chips among the smartphone, automotive, and industrial sectors.

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Other chipmakers are feeling the pain, too. Samsung expects a 96% profit plunge in the second quarter, and in April, Intel reported the largest quarterly loss in company history with a 133% annual reduction in earnings per share.

Best-laid Plans: TSMC expects to pump $40 billion into building two factories in Arizona, which are also likely to receive at least $7 billion to $8 billion in government subsidies through the CHIPS and Science Act. The first plant was set to open next year, but a shortage of skilled workers has delayed its opening until 2025. The upside of the chip industry’s struggles is that production is too slow to meet AI demand, so all you software engineers, writers, musicians, data scientists, and customer service workers have a little breathing room.

– Griffin Kelly

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Tech

Amazon Doubles Down on Palm-Scanning Payments

(Photo via Amazon Press Center)

Cross my palm with silver… actually don’t bother with the silver.

Amazon announced on Thursday that it’s rolling out Amazon One, technology that lets you pay for things by simply waving your palm over a scanner, to all of its 500-plus Whole Foods locations.

That’s Handy

Amazon One first launched in September 2020, but the rollout has been slow. The way it works is: You scan your palm on a device that maps the veins and bones inside (so goth), and the scan is then linked to an account with a credit card on it. On your next trip to Whole Foods, you place your hand over the scanner and boop, you just bought some Twinkies.

At the moment, Amazon One is only available in about 200 Whole Foods stores plus some cashierless Amazon Go grocery stores. Making it ubiquitous at Whole Foods suggests Amazon might be looking to normalize the tech, which it can leverage into a business opportunity:

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Amazon has sold Amazon One to third parties. In March, Panera Bread announced it’d be the first restaurant chain to use the scanner, and in May, Coors Field in Denver adopted the tech both for payment and age-verification for baseball fans buying alcohol.

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Amazon One has marketed itself as an ID system to venues in the past, but its progress was somewhat hampered by privacy concerns around its use of biometrics. In March 2022, Red Rocks Amphitheater in Denver canceled its plans to use Amazon One following pressure from privacy activists and artists.

Cereal Offender: Amazon is a force of nature in e-commerce, but it still gets things wrong now and then. This week, a British man received what should have been an Amazon package containing his new laptop, but inside was two boxes of Weetabix, a sort of oaty-breakfast-cereal brick favored by Brits. Well, except when they were expecting a laptop.

– Isobel Asher Hamilton

Extra Upside

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We’ll see ourselves out: Google’s planning an AI tool that writes news articles.

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Cheesy bargain: Domino’s sells cheapest pizza at 60 cents in India.

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Touchdown: NFL approves $6 billion sale of Washington Commanders.

Just For Fun

Aquatic jazz.

Like a basketball.

Have a great weekend!

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