The Week in Breakingviews: Deals during wartime

LONDON, March 29 (Reuters Breakingviews) - Welcome back! I spent the week in New York, talking to contacts and enjoying the spring sunshine. Maybe it was the weather, but for all the anxiety and uncertainty caused by conflict in the Middle East, there’s still plenty of activity. Is Wall Street buoyant or blinkered? Let me know, opens new tab what you think. If this newsletter was forwarded to you, sign up here, opens new tab to ​get it in your inbox every weekend.

OPENING LINE

“The model of seeking forgiveness rather than permission has served Silicon Valley well, but a chunky bill is coming due.”

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Read more: Social-media verdicts preview AI legal hazards

FIVE THINGS ‌I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. The number of African cities with more than 1 million residents is set to rise from 60 to almost 160. (Consumer groups are salivating)

2. Multi-strategy hedge funds have twice as much leverage as in 2019. (Yet weathered the selloff)

3. The lead time for transformers used in data centres in Europe is up to 100 weeks. (AI has physical bottlenecks)

4. The cost of insuring a ship passing through the Strait of Hormuz has risen to 6% of its value, from 0.25% prior to the Gulf conflict. (And replacing one is hard)

5. Hong Kong house prices are still a fifth below their 2021 peak. (It’s a two-tier ​market)

THIS AIN’T NO DISCO

One of this newsletter’s persistent motifs is the enduring disconnect, opens new tab between geopolitical turmoil and buoyant corporate and financial activity. The tension was tangible in New York this week, as my discussions with senior executives and ​financiers switched rapidly from extreme uncertainty caused by fighting in the Middle East to intense enthusiasm about the opportunities created by deregulation and artificial intelligence.

Dealmakers have a trillion reasons to ⁠feel optimistic. That’s the rough dollar value of mergers and acquisitions announced worldwide since the start of the year, a level only bettered during the post-pandemic boom of 2021. The upsurge is most pronounced among big companies. There have been ​twice as many deals valued at over $10 billion as there were a year ago. And these figures exclude what on paper was the largest merger of all time: the union of Elon Musk’s SpaceX rocket company with his xAI artificial intelligence venture. The ​tycoon’s control of both private firms and the deal’s fuzzy financial details means it does not feature in official industry league tables.

Four weeks of conflict with Iran have dampened the mood. The price of a barrel of Brent crude ended the week above $110, and looks set to keep climbing as long as Iran dictates which ships pass through the Strait of Hormuz. The S&P 500 Index is down roughly 7% this year while yields on 10-year U.S. government bonds have once again hit 4.4%. Though there’s little sign of the panic that gripped markets during ​Donald Trump’s trade war last year, a prolonged conflict could mean a bigger and broader selloff.

This makes the outbreak of merger activity this week all the more curious. Estee Lauder said it was in talks with $10 billion cosmetics rival Puig Brands, while booze ​purveyors Pernod Ricard and Brown-Forman confirmed they were mixing a $30 billion cocktail of French anise liqueur and Jack Daniel’s whiskey. Government-backed Poste Italiane launched a $12 billion offer for Telecom Italia. Meanwhile, SpaceX appears to be forging ahead with an initial public offering that could be by ‌far the largest-ever ⁠stock market debut.

There’s no guarantee that any of these transactions will be consummated. But the determination to push on is nonetheless striking. All have good reasons to do so: fragrance makers are under pressure following L’Oreal’s purchase of Kering’s beauty brands. Meanwhile, shares in Pernod Ricard and Brown-Forman are both down 60% in the past five years as consumers switch to cheaper brands or stop drinking altogether. Musk appears determined to secure a market listing before AI rivals OpenAI and Anthropic.

Global shortages of fuel and food, combined with soaring inflation, could derail the plans of even the most insistent CEO. Yet the lesson of the past six years is that the global economy can shrug off intense upheaval. That resilience is being tested again.

CHART OF THE ​WEEK

One of the many lessons from the latest conflict in ​the Middle East is that, when it comes to ⁠energy, there is no such thing as a single global price. Take liquefied natural gas. While the price of these hydrocarbons in Europe has almost doubled since the attacks on Iran started, the U.S. benchmark has barely budged. This creates an arbitrage, which big energy producers and groups like Venture Global can exploit. George Hay has the receipts.

THE WEEK IN PODCASTS

At Breakingviews we ​spend a lot of time talking about - and writing about - OpenAI’s business model. The creator of ChatGPT has raised tens of billions of dollars and attracted hundreds of millions ​of users, but its financial future ⁠remains fuzzy. So when the tech analyst Benedict Evans published a perceptive essay called “How will OpenAI compete?, opens new tab” I was interested in his analysis. He joined me on The Big View, opens new tab to discuss what makes an enduring competitive advantage, and how to think about past technological breakthroughs.

It was a big week in the little nation of Denmark. On Tuesday, voters went to the polls to elect a new government in an election overshadowed by Donald Trump’s recent threats over Greenland. And on Thursday troubled Danish obesity drug maker Novo Nordisk ⁠held its annual ​meeting. Aimee Donnellan spent a few days in Copenhagen, and joined Jonathan Guilford and Neil Unmack on the Viewsroom, opens new tab to discuss Novo’s recent stumbles and ​whether it can recover.

PARTING SHOT

The United States may lead the field in artificial intelligence models, but China is way ahead when it comes to robots. This conventional wisdom received an endorsement recently when Chinese robot champion Unitree got the green light for an initial public offering in Shanghai. Yet as Robyn ​Mak points out, the company delivered just 5,500 robots last year and faces multiple challenges. The robot race is far from over.

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Editing by Jonathan Guilford; Production by Pranav Kiran

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Peter Thal Larsen

Thomson Reuters

Peter is Global Editor of Reuters Breakingviews, based in London. He was previously EMEA editor, and before that spent four years in Hong Kong as Asia Editor, where he oversaw the launch of Breakingviews’ Asian edition. Prior to joining Reuters in 2009, Peter spent 10 years at the Financial Times, including five years as the paper’s banking editor, leading its award-winning coverage of the credit crunch. Between 2000 and 2004 Peter reported for the FT from New York, where he covered a range of stories including the 9/11 attacks and their aftermath. A Dutch national, Peter has degrees from Bristol University and the London School of Economics.

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