1 00:00:00,080 --> 00:00:12,960 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 2 00:00:13,480 --> 00:00:17,560 Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:30,040 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg I 5 00:00:30,120 --> 00:00:31,880 Speaker 1: do want to dig into that Deutsche Bank barger. I 6 00:00:31,920 --> 00:00:34,839 Speaker 1: think if it's fascinating for a lot of perspectives, what 7 00:00:34,920 --> 00:00:36,640 Speaker 1: did I talk about it? Let's talk about it because 8 00:00:36,640 --> 00:00:38,800 Speaker 1: he's been on the cards for absolutely h s And finally, 9 00:00:38,800 --> 00:00:41,400 Speaker 1: I guess it's official now that they're actually in talk 10 00:00:41,520 --> 00:00:45,920 Speaker 1: do we just assume it's executed? Um, well, I think 11 00:00:45,920 --> 00:00:49,919 Speaker 1: that they're probably are a whole bunch of potential challenges 12 00:00:49,960 --> 00:00:52,320 Speaker 1: here still, I mean, I think that the question is 13 00:00:52,400 --> 00:00:55,640 Speaker 1: what form is this going to take? Is this murder? 14 00:00:55,640 --> 00:00:58,280 Speaker 1: And I think Luigi's and Galis actually has some views 15 00:00:58,280 --> 00:01:00,400 Speaker 1: on this. He's a finance professor at the Niversity of 16 00:01:00,440 --> 00:01:03,560 Speaker 1: Chicago at the Booth School of Business and he joins 17 00:01:03,600 --> 00:01:06,560 Speaker 1: us here in our Bloomberg Director Broker Studios. Luigi, thank 18 00:01:06,600 --> 00:01:09,000 Speaker 1: you so much for being here. What do you think 19 00:01:09,040 --> 00:01:13,600 Speaker 1: about this murger? So this is a merger of failed 20 00:01:13,640 --> 00:01:17,120 Speaker 1: banks banks that don't succeed in the marketplace by themself, 21 00:01:17,240 --> 00:01:20,720 Speaker 1: and they have to merge because they're very weak, even 22 00:01:20,760 --> 00:01:23,119 Speaker 1: if in the past they have shown that they are 23 00:01:23,160 --> 00:01:26,720 Speaker 1: not very good at merging, because if you remember comments 24 00:01:26,760 --> 00:01:30,800 Speaker 1: back comes from a very bad merger with Dresden and 25 00:01:32,080 --> 00:01:37,280 Speaker 1: Deutsche Bank tried to integrate deutge post Bank and did 26 00:01:37,280 --> 00:01:39,319 Speaker 1: not do very well and at some point try to 27 00:01:39,400 --> 00:01:41,840 Speaker 1: sell it and they couldn't even sell it. So I 28 00:01:41,880 --> 00:01:44,959 Speaker 1: don't think they have a good record in merging, and 29 00:01:45,520 --> 00:01:48,919 Speaker 1: the only reason why they're emerging is because they're trying 30 00:01:48,960 --> 00:01:54,400 Speaker 1: to basically achieve three things. One is fire more people, 31 00:01:54,720 --> 00:01:58,040 Speaker 1: and they have to have the permission of the German 32 00:01:58,080 --> 00:02:02,200 Speaker 1: government to fire people. They got it that that's a Hinterestly, 33 00:02:02,480 --> 00:02:06,480 Speaker 1: it comes from a Social Democratic minister, so imagine what 34 00:02:06,520 --> 00:02:09,799 Speaker 1: the Conservative would have done so in so that's one. 35 00:02:10,520 --> 00:02:13,320 Speaker 1: The second is probably they can gain a little bit 36 00:02:13,320 --> 00:02:17,760 Speaker 1: of market power, but most importantly they certainly become too 37 00:02:17,760 --> 00:02:20,920 Speaker 1: big to fail, and they are trying to sell that 38 00:02:20,960 --> 00:02:24,760 Speaker 1: this is the German national champion. Now, Germany has a 39 00:02:24,800 --> 00:02:27,680 Speaker 1: lot of good things going for itself, but this is 40 00:02:27,720 --> 00:02:32,680 Speaker 1: not one of those. Deutsche as a tradition of cheating. 41 00:02:32,880 --> 00:02:37,200 Speaker 1: I think it's more, uh pay more fines than it 42 00:02:37,280 --> 00:02:41,720 Speaker 1: is worth in the equity market today because and so 43 00:02:42,320 --> 00:02:44,440 Speaker 1: I don't think and it's not very profitable. So I 44 00:02:44,480 --> 00:02:47,440 Speaker 1: think that a bank in this condition is not in 45 00:02:47,480 --> 00:02:51,639 Speaker 1: the situation to acquire another one. And the fact that 46 00:02:51,639 --> 00:02:55,080 Speaker 1: that's the only thing that they figure out means how 47 00:02:55,240 --> 00:02:58,560 Speaker 1: bad the banking sector is in Europe this moment, Alouigi. 48 00:02:58,639 --> 00:03:00,400 Speaker 1: For a long time, we've referred to Many is the 49 00:03:00,440 --> 00:03:03,960 Speaker 1: powerhouse of Europe. The banking sector is certainly not the 50 00:03:03,960 --> 00:03:06,760 Speaker 1: powerhouse of Europe. Why does the German banking sector have 51 00:03:06,960 --> 00:03:12,440 Speaker 1: these problems still? Actually, I think that that's uh strategic 52 00:03:12,760 --> 00:03:16,639 Speaker 1: to maintain industry. I think that the banking sector in 53 00:03:16,680 --> 00:03:20,760 Speaker 1: Italy in Germany is dominated by the spreadcast and the 54 00:03:20,840 --> 00:03:26,200 Speaker 1: cooperative and both these institutions don't have profits as an objective. 55 00:03:26,600 --> 00:03:30,040 Speaker 1: They have basically the well being of their partners and 56 00:03:30,120 --> 00:03:34,120 Speaker 1: their um of the of the company's they financed. So 57 00:03:34,440 --> 00:03:39,120 Speaker 1: I think that the banking sector in Germany is postponed 58 00:03:39,160 --> 00:03:41,880 Speaker 1: to the industor sector, and that's the reason why the 59 00:03:41,920 --> 00:03:44,360 Speaker 1: industa sector is so strong and the banking sector is 60 00:03:44,360 --> 00:03:49,160 Speaker 1: a weak. I'm struggling to understand how Commerce Bank, how 61 00:03:49,200 --> 00:03:52,840 Speaker 1: Deutsche Bank still has about a six steak in Commerce 62 00:03:52,880 --> 00:03:56,800 Speaker 1: Bank and will probably roll over that stake into the 63 00:03:56,840 --> 00:03:59,680 Speaker 1: Deutsche Bank Commerce Bank Merger. I mean, basically, is this 64 00:03:59,800 --> 00:04:06,440 Speaker 1: now ftionalization. I think that Germany, that is very taff 65 00:04:06,640 --> 00:04:09,600 Speaker 1: with the other European countries system of state eight when 66 00:04:09,640 --> 00:04:13,480 Speaker 1: it comes to its own banks, has been extremely generous 67 00:04:13,800 --> 00:04:17,320 Speaker 1: in state aid. I think that most Americans don't know 68 00:04:17,800 --> 00:04:22,760 Speaker 1: that top is nothing by comparison to what Germany did 69 00:04:22,839 --> 00:04:25,599 Speaker 1: for its bank in two thousand and eight. So I 70 00:04:25,640 --> 00:04:27,760 Speaker 1: guess if we can broaden out a little bit, given 71 00:04:27,760 --> 00:04:30,200 Speaker 1: the fact that we do have the FED week coming 72 00:04:30,279 --> 00:04:33,920 Speaker 1: up and we have this persistently weak data in Europe, 73 00:04:34,640 --> 00:04:38,960 Speaker 1: is this joytsche Bank Commerce Bank merger emblematic of the 74 00:04:39,120 --> 00:04:44,119 Speaker 1: persistent weakness in the euroregion that could potentially deepen beyond 75 00:04:44,160 --> 00:04:47,839 Speaker 1: what people are expecting. I think that that's certainly one 76 00:04:47,920 --> 00:04:52,279 Speaker 1: reason I think that Germany does sphere is low down. 77 00:04:53,640 --> 00:04:56,200 Speaker 1: There are two views of the world here. There are 78 00:04:56,240 --> 00:04:59,200 Speaker 1: those who say that there's been a temporary thing due 79 00:04:59,279 --> 00:05:03,560 Speaker 1: to a couple of accident like the low water in 80 00:05:03,600 --> 00:05:06,359 Speaker 1: the Rhine River that made it difficult to export, and 81 00:05:06,440 --> 00:05:09,560 Speaker 1: given some regulation the car industry that has low down 82 00:05:09,600 --> 00:05:13,240 Speaker 1: production and then now we're back to two normal Um 83 00:05:13,640 --> 00:05:16,960 Speaker 1: I am more sort of worried, especially with the softness 84 00:05:17,040 --> 00:05:20,320 Speaker 1: coming out of China. China is a big export market 85 00:05:20,360 --> 00:05:25,040 Speaker 1: for Germany and if this is an issue, German manufacturing 86 00:05:25,120 --> 00:05:28,920 Speaker 1: will suffered. And nobody talks about this. But if we 87 00:05:28,920 --> 00:05:32,640 Speaker 1: were to go into a very hard Brexit, the problem 88 00:05:32,720 --> 00:05:35,920 Speaker 1: would not just be for the United Kingdom. Germany exports 89 00:05:35,960 --> 00:05:39,200 Speaker 1: a lot of car to the UK, and so hot 90 00:05:39,279 --> 00:05:43,880 Speaker 1: Brexit will be a pretty bad news for Europe in general, 91 00:05:43,920 --> 00:05:48,080 Speaker 1: but particularly for Germany. So with with this context, I 92 00:05:48,120 --> 00:05:51,960 Speaker 1: think that there we is a need to do something 93 00:05:51,960 --> 00:05:56,839 Speaker 1: with the banking sector that is too big and too unprofitable. 94 00:05:57,240 --> 00:06:00,760 Speaker 1: And part of this unprofitability is the fact that uh, 95 00:06:00,800 --> 00:06:04,720 Speaker 1: the cost to income ratio is very high. So unfoldedly, 96 00:06:05,120 --> 00:06:09,919 Speaker 1: I think with structuring and job cuts are on the line, 97 00:06:10,440 --> 00:06:12,719 Speaker 1: the question is why do you need to merge to 98 00:06:12,839 --> 00:06:16,400 Speaker 1: do that? And I fear that this is just a 99 00:06:16,480 --> 00:06:21,440 Speaker 1: political play that on the one end, the German politician 100 00:06:21,600 --> 00:06:25,200 Speaker 1: allow for job cuts, on the other hand, they do 101 00:06:25,440 --> 00:06:30,760 Speaker 1: form a national champion that would be easier for the 102 00:06:30,839 --> 00:06:34,440 Speaker 1: German government to control and direct Luigi, can a national 103 00:06:34,520 --> 00:06:40,280 Speaker 1: champion compete on the international stage if it is efficient, Yes, 104 00:06:40,560 --> 00:06:44,960 Speaker 1: but given the record of Deutscher, my answer is not. 105 00:06:46,040 --> 00:06:48,640 Speaker 1: Luigi is in fantastic to catch up with your finance 106 00:06:48,680 --> 00:07:06,280 Speaker 1: professor at university if Chicago Birth School. We are so 107 00:07:06,400 --> 00:07:09,200 Speaker 1: lucky to have Herrin Seagram joining us here in our 108 00:07:09,200 --> 00:07:12,880 Speaker 1: Blueberg Interactive Broker Studios in New York. Ran Stagram is 109 00:07:12,960 --> 00:07:16,880 Speaker 1: a New York University. Stern Up professor of Finance. Heard 110 00:07:17,120 --> 00:07:19,840 Speaker 1: the two point one billion dollar valuation on its face 111 00:07:19,960 --> 00:07:22,880 Speaker 1: four lifts, I p O and I believe that values 112 00:07:22,880 --> 00:07:27,040 Speaker 1: accompanied about eighteen plus billion dollars. How do you even 113 00:07:27,160 --> 00:07:31,360 Speaker 1: value that? Thanks for having me, Lisa. So the way 114 00:07:31,400 --> 00:07:34,880 Speaker 1: to look about LIFT is think about it as a 115 00:07:35,040 --> 00:07:38,760 Speaker 1: platform business. And if you take the EV two sales 116 00:07:38,960 --> 00:07:41,680 Speaker 1: for the market overall is about two to and a half. 117 00:07:42,200 --> 00:07:46,720 Speaker 1: But generally platform business is priced between seven and ten x. 118 00:07:47,560 --> 00:07:51,320 Speaker 1: So if you take the current revenues on face value 119 00:07:51,640 --> 00:07:54,240 Speaker 1: at two billion dollars to point one billion, if you 120 00:07:54,320 --> 00:07:56,800 Speaker 1: grow that at twenty five per year for the next 121 00:07:56,880 --> 00:07:59,880 Speaker 1: five years, that gives a future value of roughly between 122 00:08:00,000 --> 00:08:02,800 Speaker 1: thirty and thirty five billion. And if you discount that 123 00:08:02,840 --> 00:08:04,800 Speaker 1: back at the cost of capital that will give you 124 00:08:04,960 --> 00:08:09,280 Speaker 1: roughly around twenty one billion. So investors are pretty much 125 00:08:09,320 --> 00:08:12,680 Speaker 1: paying for the future rather than the current state of 126 00:08:12,720 --> 00:08:15,120 Speaker 1: affairs for this company. This is important. They're paying for 127 00:08:15,160 --> 00:08:17,320 Speaker 1: the future, and they're paying for the future at a 128 00:08:17,480 --> 00:08:21,400 Speaker 1: very expensive time. It just raises a question, are people 129 00:08:21,440 --> 00:08:24,280 Speaker 1: getting in at the peak? Is lift uh and and 130 00:08:24,280 --> 00:08:26,720 Speaker 1: and and our our lift and Uber kind of trying 131 00:08:26,720 --> 00:08:31,320 Speaker 1: to capitalize here on this potential Peakye, that is absolutely right. 132 00:08:31,520 --> 00:08:35,560 Speaker 1: It is more liquidity event for the private equity investors 133 00:08:35,600 --> 00:08:38,320 Speaker 1: who got into Lift and Uber earlier, so they are 134 00:08:38,360 --> 00:08:42,440 Speaker 1: cashing out, no doubt. UM. But I have a feeling 135 00:08:42,520 --> 00:08:46,320 Speaker 1: this valuation would grow into this UM. So although they 136 00:08:46,320 --> 00:08:49,360 Speaker 1: are catching it at peak, UM, I have a feeling 137 00:08:49,360 --> 00:08:53,480 Speaker 1: this company. I'm optimistic generally about this company, your optimist company, 138 00:08:53,480 --> 00:08:57,360 Speaker 1: and and thinking that people will probably get good value 139 00:08:57,400 --> 00:08:59,440 Speaker 1: or at least fair value if they buy into the 140 00:08:59,440 --> 00:09:03,000 Speaker 1: I p o of fair values better I would say, 141 00:09:03,120 --> 00:09:05,360 Speaker 1: not good value, fair value. But this raises a question 142 00:09:05,400 --> 00:09:07,880 Speaker 1: really on a broader level, because right now the SMP 143 00:09:08,760 --> 00:09:14,520 Speaker 1: is poised for its best quarterly performance since we are 144 00:09:14,640 --> 00:09:19,120 Speaker 1: we are looking at a market that is so uh robust, 145 00:09:19,240 --> 00:09:22,120 Speaker 1: and melting up, And there is a question, you know, 146 00:09:22,800 --> 00:09:24,880 Speaker 1: is this a bad time to get in or is 147 00:09:24,920 --> 00:09:29,079 Speaker 1: it also fair value? UM I abuse tend to come 148 00:09:29,120 --> 00:09:33,400 Speaker 1: towards the peaks of the market because original investors, early 149 00:09:33,440 --> 00:09:36,080 Speaker 1: investors are trying to cash out. But I have a 150 00:09:36,120 --> 00:09:40,680 Speaker 1: feeling SMP has some room to run, especially then federal 151 00:09:40,720 --> 00:09:44,000 Speaker 1: reserves on hold, and US is the best place to 152 00:09:44,040 --> 00:09:46,760 Speaker 1: invest compared to rest of the globe. I have a 153 00:09:46,760 --> 00:09:51,160 Speaker 1: feeling this melt up is going to continue for a while, Okay, 154 00:09:51,200 --> 00:09:53,360 Speaker 1: And then what does that say for the other I 155 00:09:53,520 --> 00:09:56,280 Speaker 1: p o s that are slated like the Ubers and 156 00:09:56,520 --> 00:10:01,959 Speaker 1: all the other high profile unicorns. Um Uber is um 157 00:10:01,960 --> 00:10:04,280 Speaker 1: planning to go to the market between hundred and one 158 00:10:04,360 --> 00:10:08,240 Speaker 1: twenty billion. It is similar again with thinking about that 159 00:10:08,320 --> 00:10:11,960 Speaker 1: as a platform business, and they are also diversified into 160 00:10:12,000 --> 00:10:15,240 Speaker 1: other types of businesses. So market is again attaching a 161 00:10:15,360 --> 00:10:19,040 Speaker 1: seven to between seven and ten multiple to this company, 162 00:10:19,040 --> 00:10:22,000 Speaker 1: but I don't think it is the current current valuation. 163 00:10:22,440 --> 00:10:24,680 Speaker 1: We are being We are valuing these companies on a 164 00:10:24,760 --> 00:10:27,560 Speaker 1: forward multiple. That is my humble opinion. Just what your 165 00:10:27,559 --> 00:10:30,160 Speaker 1: thoughts on on Lift and Uber and how one company 166 00:10:30,240 --> 00:10:33,320 Speaker 1: is very very focused on what it does it's a 167 00:10:33,400 --> 00:10:36,319 Speaker 1: right hailing service that's left. Uber seems to be spread 168 00:10:36,320 --> 00:10:38,760 Speaker 1: out a little bit more doing various different things. What 169 00:10:38,760 --> 00:10:40,600 Speaker 1: are your thoughts on the kind of premium you've attached 170 00:10:40,640 --> 00:10:42,600 Speaker 1: to the focused company versus the one that's trying to 171 00:10:42,640 --> 00:10:45,800 Speaker 1: do a whole lot more. Thanks for having me, Jonathan, 172 00:10:46,440 --> 00:10:49,040 Speaker 1: good to be with you. Um, there are two types 173 00:10:49,080 --> 00:10:52,600 Speaker 1: of businesses. If you think about it's a focused company, Um, 174 00:10:52,640 --> 00:10:55,040 Speaker 1: they have as you said, they're very focused on right 175 00:10:55,120 --> 00:10:59,120 Speaker 1: hailing and they're planning to expand the business. They're currently 176 00:10:59,360 --> 00:11:01,920 Speaker 1: in the North Hamn region right now, so that's the 177 00:11:02,040 --> 00:11:04,720 Speaker 1: target market. But when you take Uber for example, they 178 00:11:04,760 --> 00:11:07,480 Speaker 1: have more levers to pull, so it is more of 179 00:11:07,520 --> 00:11:12,720 Speaker 1: a diversified business. So investors think about these businesses in 180 00:11:12,720 --> 00:11:16,200 Speaker 1: a different way. Um, simple folks, business can be valued 181 00:11:16,200 --> 00:11:18,920 Speaker 1: in a different way and a diversified business would be 182 00:11:18,960 --> 00:11:22,240 Speaker 1: valid in a different way. So for us to compare 183 00:11:22,240 --> 00:11:24,680 Speaker 1: these two companies at this moment, I don't think it 184 00:11:24,760 --> 00:11:27,520 Speaker 1: is advisable, just in terms of how mature some of 185 00:11:27,520 --> 00:11:29,400 Speaker 1: the companies are coming to market as well. I think 186 00:11:29,400 --> 00:11:32,160 Speaker 1: a lot of people find that interesting relative to where 187 00:11:32,200 --> 00:11:35,320 Speaker 1: we were, so maybe ten twenty years ago, where relatively 188 00:11:35,360 --> 00:11:38,200 Speaker 1: young companies would come to market, they would become public 189 00:11:38,240 --> 00:11:41,439 Speaker 1: companies for very good reasons. Now it seems they remain 190 00:11:41,559 --> 00:11:43,960 Speaker 1: private for a whole lot longer, Professor, Why do you 191 00:11:43,960 --> 00:11:49,199 Speaker 1: think that is? Because private market funding so available. If 192 00:11:49,240 --> 00:11:53,080 Speaker 1: you take Master's Sun buying into uber so three or 193 00:11:53,080 --> 00:11:56,000 Speaker 1: four billion dollars being pumped into Even last week he 194 00:11:56,080 --> 00:12:01,800 Speaker 1: invested into Grab in Singapore. So the private market funding 195 00:12:01,960 --> 00:12:06,800 Speaker 1: is readily available. Cash is cheap at this lower interest rates. 196 00:12:06,880 --> 00:12:09,960 Speaker 1: That's why these companies are staying long a private. They 197 00:12:10,000 --> 00:12:12,320 Speaker 1: have no need to come to the public markets, but 198 00:12:12,720 --> 00:12:15,800 Speaker 1: they want to cash out rate if they have gotten in. 199 00:12:15,840 --> 00:12:18,840 Speaker 1: For a take for example, what master Son did with 200 00:12:18,880 --> 00:12:21,679 Speaker 1: Ali Baba put in twenty million and the stake is 201 00:12:21,720 --> 00:12:25,360 Speaker 1: sitting at one and twenty billion today, So people are 202 00:12:25,360 --> 00:12:27,520 Speaker 1: comfortable sitting with it in the private market, they don't 203 00:12:27,520 --> 00:12:30,280 Speaker 1: have to really cash out. But then markets that that 204 00:12:30,360 --> 00:12:33,480 Speaker 1: are such a high why don't you take advantage of it? 205 00:12:33,480 --> 00:12:37,199 Speaker 1: It's well great. Some people would say that the availability 206 00:12:37,200 --> 00:12:40,000 Speaker 1: of capital and the private markets to some degree, and 207 00:12:40,080 --> 00:12:41,720 Speaker 1: you can tell me to what degree you think this 208 00:12:41,840 --> 00:12:44,960 Speaker 1: is true, is breeding arrogance of leadership of some of 209 00:12:45,000 --> 00:12:47,560 Speaker 1: these tech companies and when they do come public, the 210 00:12:47,600 --> 00:12:50,480 Speaker 1: ownership structures are different. So we'll let me make this 211 00:12:50,600 --> 00:12:53,960 Speaker 1: really simple. For a typical investor who's looking to participate 212 00:12:54,080 --> 00:12:56,920 Speaker 1: in an I p O, they won't actually own the company, 213 00:12:56,960 --> 00:12:58,839 Speaker 1: won't have the voting rights that maybe they would have 214 00:12:58,880 --> 00:13:01,560 Speaker 1: got ten twenty years ago, because the leadership are able 215 00:13:01,600 --> 00:13:04,320 Speaker 1: to keep hold of the ownership and voting rights the 216 00:13:04,320 --> 00:13:06,920 Speaker 1: management of the company a way that maybe they didn't 217 00:13:07,120 --> 00:13:09,640 Speaker 1: many years ago. Why do you think that is changing 218 00:13:09,720 --> 00:13:11,640 Speaker 1: and you think eventually there will be pushed back from 219 00:13:11,679 --> 00:13:15,880 Speaker 1: the investor community. There will be eventually be a push back, 220 00:13:16,000 --> 00:13:17,960 Speaker 1: but I don't think that is the case right now. 221 00:13:18,080 --> 00:13:20,480 Speaker 1: Investors have come to terms with it. This is the 222 00:13:20,520 --> 00:13:25,080 Speaker 1: norm for technology companies. You take Sergio Brain, Mark Zuckerberg, 223 00:13:25,160 --> 00:13:27,160 Speaker 1: all the top leaders, I don't know, I don't want 224 00:13:27,160 --> 00:13:29,760 Speaker 1: to call them top, but the leaders they tend to 225 00:13:29,800 --> 00:13:32,640 Speaker 1: hold on a majority of the voting rights. Investors are 226 00:13:32,679 --> 00:13:36,480 Speaker 1: not currently punishing the valuations of these companies. I know 227 00:13:36,679 --> 00:13:40,920 Speaker 1: it weakens the corporate governance structure of the company, but 228 00:13:41,000 --> 00:13:43,320 Speaker 1: I don't think that is impacting the valuation. Maybe there 229 00:13:43,400 --> 00:13:45,560 Speaker 1: might be a push back in the future, but I 230 00:13:45,600 --> 00:13:47,960 Speaker 1: don't think I don't see that right now. Do you 231 00:13:48,000 --> 00:13:52,240 Speaker 1: think that these companies being public will impede their growth 232 00:13:52,480 --> 00:13:56,480 Speaker 1: because these an these these leaders have never been accountable 233 00:13:57,000 --> 00:13:59,200 Speaker 1: to shareholders in the same kind of way and having 234 00:13:59,240 --> 00:14:03,320 Speaker 1: to sort of deal with quarter to quarter expectations versus 235 00:14:03,360 --> 00:14:07,720 Speaker 1: longer term plans and just burning through cash. Lisa, You're right, 236 00:14:07,880 --> 00:14:11,040 Speaker 1: it's going to be tough for them. They had their wish. 237 00:14:11,080 --> 00:14:13,200 Speaker 1: When they are private, they can do whatever they want 238 00:14:13,240 --> 00:14:16,400 Speaker 1: to Now they're accountable to the market and the investors. 239 00:14:16,960 --> 00:14:20,320 Speaker 1: But when you come into public markets with valuations of 240 00:14:20,400 --> 00:14:24,560 Speaker 1: twenty billion one and twenty billion, investors would give a 241 00:14:24,640 --> 00:14:28,960 Speaker 1: leeway for those leaders because they have a proven track record. 242 00:14:29,000 --> 00:14:31,280 Speaker 1: If these valuations are holed up for the next year 243 00:14:31,360 --> 00:14:34,640 Speaker 1: or two, they have proven that they can grow this business, 244 00:14:34,920 --> 00:14:36,560 Speaker 1: and I think investors are going to be on the 245 00:14:36,600 --> 00:14:40,920 Speaker 1: sideline letting these companies grow on their own. Paren Segrim, 246 00:14:41,160 --> 00:14:43,320 Speaker 1: thank you so much for being with us. Thank you, Lisa, 247 00:14:43,400 --> 00:14:45,840 Speaker 1: thank you Jonathan for having Thank you sir, Thank you 248 00:14:46,000 --> 00:15:01,400 Speaker 1: very much. Boeing shares down a little bit lessan two 249 00:15:01,400 --> 00:15:04,240 Speaker 1: and a half percent following news that the f a 250 00:15:04,320 --> 00:15:07,840 Speaker 1: A had been warned that Boeing had too much power 251 00:15:07,960 --> 00:15:11,960 Speaker 1: in the approval process seven years ago and they had 252 00:15:12,000 --> 00:15:14,360 Speaker 1: not paid any attention. This looks terrible for the f A, 253 00:15:14,720 --> 00:15:17,960 Speaker 1: looks terrible for Boeing. Here to talk about the potential 254 00:15:18,040 --> 00:15:22,240 Speaker 1: ramifications for it is Brook Sutherland Bloomberg opinion columnists joining 255 00:15:22,320 --> 00:15:25,320 Speaker 1: us here in our interactive Broker Studios. Broke just give 256 00:15:25,400 --> 00:15:29,680 Speaker 1: us a sense of what the Seattle Times investigation found 257 00:15:29,960 --> 00:15:32,880 Speaker 1: that really showed this should have been on the radar 258 00:15:32,960 --> 00:15:36,160 Speaker 1: of the f A A and frankly Boeing as well. No, absolutely, 259 00:15:36,200 --> 00:15:37,560 Speaker 1: I mean, and I think to your point. So this 260 00:15:37,600 --> 00:15:39,760 Speaker 1: is seven years ago, two thousand twelve. This is actually 261 00:15:39,840 --> 00:15:43,280 Speaker 1: pre the Dreamline or battery problems as well, which did 262 00:15:43,360 --> 00:15:45,680 Speaker 1: of course result in the f A grounding those planes. 263 00:15:45,720 --> 00:15:48,280 Speaker 1: So this has been sort of an ongoing issue that 264 00:15:48,320 --> 00:15:51,680 Speaker 1: everybody should have been rather abundantly aware of and perhaps 265 00:15:51,720 --> 00:15:54,040 Speaker 1: looking at a little bit more aggressively. So a couple 266 00:15:54,040 --> 00:15:56,920 Speaker 1: of things from the Seattle Times investigation. What they have 267 00:15:57,040 --> 00:16:00,120 Speaker 1: found is, you know, it's been well documented that f 268 00:16:00,280 --> 00:16:04,840 Speaker 1: A has been outsourcing certification work to the aircraft manufacturers. 269 00:16:04,840 --> 00:16:07,640 Speaker 1: Now this is something that's actually gotten approval from people 270 00:16:07,640 --> 00:16:10,720 Speaker 1: in government and sort of you know, one over their 271 00:16:10,760 --> 00:16:13,760 Speaker 1: support because the f A does not have very much money, 272 00:16:13,800 --> 00:16:16,840 Speaker 1: and this is also a rather timely process that these 273 00:16:16,880 --> 00:16:20,920 Speaker 1: aircraft certified. Before you continue, is there some sort of 274 00:16:21,080 --> 00:16:26,480 Speaker 1: external check on the in house corporate overseers that are 275 00:16:26,560 --> 00:16:30,800 Speaker 1: overseeing themselves. Well, in theory, the f A has the 276 00:16:30,840 --> 00:16:34,640 Speaker 1: ability to approve the Boeing employees that are you know, 277 00:16:34,920 --> 00:16:37,480 Speaker 1: put in place to act as sort of officials of 278 00:16:37,560 --> 00:16:39,720 Speaker 1: the f A as far as the certification process, and 279 00:16:39,720 --> 00:16:42,880 Speaker 1: if they have issues of conflicts of interests that arrived, 280 00:16:42,920 --> 00:16:46,160 Speaker 1: they can replace them. But what the Seattle Times is 281 00:16:46,200 --> 00:16:50,640 Speaker 1: reporting is that employees did raise concerns about certain Boeing managers, 282 00:16:50,720 --> 00:16:53,960 Speaker 1: and their managers at the f a A basically overruled that, 283 00:16:54,080 --> 00:16:56,080 Speaker 1: and we're pushing them to sort of speed up the 284 00:16:56,120 --> 00:16:58,880 Speaker 1: certification process to try to get this bowing blank out. 285 00:16:58,920 --> 00:17:02,200 Speaker 1: Because remember the reason why Boeing was investing in the 286 00:17:02,200 --> 00:17:04,800 Speaker 1: seven Max is because air Bus came out with a 287 00:17:04,920 --> 00:17:08,320 Speaker 1: three Neo, which had much more fuel efficient engines, was 288 00:17:08,440 --> 00:17:10,920 Speaker 1: very attractive to airlines for a lot of different reasons, 289 00:17:10,920 --> 00:17:13,879 Speaker 1: and Boeing needed a response, and they needed one very quickly. 290 00:17:13,880 --> 00:17:17,399 Speaker 1: They were already behind air Bus in terms of production. Um, 291 00:17:17,480 --> 00:17:19,800 Speaker 1: you know, the other really key things from the Seattle 292 00:17:19,840 --> 00:17:23,440 Speaker 1: Times report for me were the details of this safety 293 00:17:23,440 --> 00:17:27,919 Speaker 1: analysis that Boeing did on the maneuvering Characteristics Augmentation system, 294 00:17:27,960 --> 00:17:30,240 Speaker 1: which is that slight control system that's being sort of 295 00:17:30,240 --> 00:17:34,600 Speaker 1: pinpointed as a possible cause for both of these fatal crashes. Now, 296 00:17:34,920 --> 00:17:37,960 Speaker 1: so in that safety analysis which Boeing did as part 297 00:17:37,960 --> 00:17:40,720 Speaker 1: of the certification process, as part of this outsourcing of 298 00:17:40,760 --> 00:17:46,120 Speaker 1: the work, um, they understate the thrust that can put 299 00:17:46,160 --> 00:17:49,680 Speaker 1: the degree of thrust on the plane's nose down. Um. 300 00:17:49,800 --> 00:17:53,400 Speaker 1: They also failed to acknowledge the fact that this system resets, 301 00:17:53,760 --> 00:17:56,359 Speaker 1: so if the plane's nose is diving and the pilot 302 00:17:56,480 --> 00:17:59,760 Speaker 1: corrects that, the system can go through the process all 303 00:17:59,800 --> 00:18:03,119 Speaker 1: over again, which is what happened that we heard about 304 00:18:03,720 --> 00:18:06,080 Speaker 1: with the Ladish crash. And that really sort of undermines 305 00:18:06,119 --> 00:18:08,679 Speaker 1: Bowing's narrative because with the first crash they said, oh, well, 306 00:18:08,720 --> 00:18:10,840 Speaker 1: pilot should have known about this. They have all this, 307 00:18:11,040 --> 00:18:13,960 Speaker 1: you know, basic training of how to handle a dive. Well, 308 00:18:13,960 --> 00:18:17,000 Speaker 1: pilots are trained for sort of a continuous dive. That's 309 00:18:17,000 --> 00:18:19,399 Speaker 1: not what happened. This was sort of up and down, 310 00:18:19,520 --> 00:18:21,760 Speaker 1: step by step, and you know, with the degree of 311 00:18:21,920 --> 00:18:24,719 Speaker 1: thrust the system is capable of. That was sort of 312 00:18:24,760 --> 00:18:27,440 Speaker 1: what led to this being so disastrous. So I want 313 00:18:27,480 --> 00:18:29,719 Speaker 1: to pick up on this idea that it goes counter 314 00:18:29,960 --> 00:18:34,800 Speaker 1: to Boeing's narrative. I'm wondering how much liability Bowing is 315 00:18:34,840 --> 00:18:37,400 Speaker 1: going to have here given the fact that they were 316 00:18:37,520 --> 00:18:41,960 Speaker 1: aware of potential risks, the fact that they were lobbying 317 00:18:42,080 --> 00:18:44,040 Speaker 1: f A A and the f A was not getting 318 00:18:44,040 --> 00:18:46,720 Speaker 1: them in check, and they are their own overseers. The 319 00:18:46,760 --> 00:18:49,720 Speaker 1: fact that that they have that onus, does that leave 320 00:18:49,800 --> 00:18:54,800 Speaker 1: them with more responsibility? Uh, financially at this point, the 321 00:18:54,840 --> 00:18:58,760 Speaker 1: fact that the risks were understated in this safety analysis 322 00:18:58,760 --> 00:19:01,840 Speaker 1: that was submitted they f A is not a good 323 00:19:01,880 --> 00:19:04,440 Speaker 1: look for Boeing, especially because they're now saying, Okay, we'll 324 00:19:04,480 --> 00:19:07,399 Speaker 1: know this is actually how it worked. Um, I think 325 00:19:07,920 --> 00:19:10,119 Speaker 1: you know, you're already starting to see sort of lawsuits 326 00:19:10,160 --> 00:19:12,439 Speaker 1: from the families of of the people who died in 327 00:19:12,440 --> 00:19:14,960 Speaker 1: these crashes. I am not a lawyer, so I'm not 328 00:19:15,200 --> 00:19:17,080 Speaker 1: going to speculate onto the outcome of that, but just 329 00:19:17,240 --> 00:19:19,960 Speaker 1: looking at it, it does not look good for Boeing. 330 00:19:20,000 --> 00:19:22,840 Speaker 1: I mean just in terms of their culpability here, in 331 00:19:22,960 --> 00:19:25,960 Speaker 1: terms of not really taking ownership of some of these issues. 332 00:19:26,080 --> 00:19:28,240 Speaker 1: I think that just raises a lot of questions and 333 00:19:28,080 --> 00:19:31,680 Speaker 1: and and not to not to diminish the personal tragedy 334 00:19:31,760 --> 00:19:34,320 Speaker 1: aspect of this. I mean a lot of people, hundreds 335 00:19:34,320 --> 00:19:38,480 Speaker 1: of people lost their lives because of what happened. I 336 00:19:38,520 --> 00:19:41,920 Speaker 1: do have to wonder from a business perspective with Boeing, 337 00:19:42,359 --> 00:19:45,600 Speaker 1: is the big risk the liability is the potential lawsuits 338 00:19:45,840 --> 00:19:48,719 Speaker 1: or is it that companies airlines are not going to 339 00:19:48,880 --> 00:19:51,400 Speaker 1: order from Boeing because they have that much less confidence. 340 00:19:51,840 --> 00:19:54,639 Speaker 1: I think the bigger risk as far as, um, you know, 341 00:19:54,680 --> 00:19:57,960 Speaker 1: Boeing's liability is first of all, what happens as a 342 00:19:58,000 --> 00:19:59,800 Speaker 1: result of this grounding, and a lot of it is 343 00:19:59,840 --> 00:20:02,119 Speaker 1: to pendant on how long the grounding is and what 344 00:20:02,680 --> 00:20:07,160 Speaker 1: regulators ultimately decide is the problem here. Um. So after 345 00:20:07,200 --> 00:20:09,399 Speaker 1: the Lion Air crash, I mean Boeing was sort of saying, well, 346 00:20:09,440 --> 00:20:11,760 Speaker 1: this is a software issue. They were supposedly working on 347 00:20:11,800 --> 00:20:14,359 Speaker 1: a fix that was reportedly supposed to be out by 348 00:20:14,400 --> 00:20:16,480 Speaker 1: year end. Obviously that did not happen, and said we 349 00:20:16,480 --> 00:20:19,560 Speaker 1: had the Ethiopian Airlines crash, which in my mind sort 350 00:20:19,600 --> 00:20:21,800 Speaker 1: of ups the stakes as far as how you actually 351 00:20:21,800 --> 00:20:23,960 Speaker 1: fix this I don't think it's as simple anymore. It's 352 00:20:23,960 --> 00:20:26,720 Speaker 1: just a software download. I think you're certainly going to 353 00:20:26,760 --> 00:20:29,119 Speaker 1: have to have retraining of pilots, which is going to 354 00:20:29,160 --> 00:20:31,199 Speaker 1: be expensive. That's probably going to be a bill that 355 00:20:31,240 --> 00:20:34,520 Speaker 1: Boeing has to front, including the cost of, you know, 356 00:20:34,600 --> 00:20:38,160 Speaker 1: replenishing airlines lost revenue for having these planes out of service. 357 00:20:38,560 --> 00:20:42,440 Speaker 1: Um Now, the more dire scenario is that the f 358 00:20:42,440 --> 00:20:44,720 Speaker 1: a A is forced to sort of revisit the whole 359 00:20:44,720 --> 00:20:48,399 Speaker 1: certification of the seven thirties seven Max designed to say, Okay, 360 00:20:48,400 --> 00:20:50,240 Speaker 1: we needed to be more rigorous about this, we need 361 00:20:50,280 --> 00:20:54,720 Speaker 1: to go through a more in depth process. There's also 362 00:20:54,760 --> 00:20:57,440 Speaker 1: a question about the f a and what happens here 363 00:20:58,000 --> 00:21:02,320 Speaker 1: with that agency, especially given the fact that any potential 364 00:21:02,920 --> 00:21:06,000 Speaker 1: badness around the organization was just magnified by the fact 365 00:21:06,040 --> 00:21:07,760 Speaker 1: that they were so late to the game in terms 366 00:21:07,800 --> 00:21:10,760 Speaker 1: of halting the use of the seven thirty seven Max 367 00:21:10,800 --> 00:21:14,840 Speaker 1: A jet. I'm wondering is there any potential recourse that 368 00:21:15,000 --> 00:21:18,480 Speaker 1: lawmakers could take with the f a A, uh, possibly 369 00:21:18,480 --> 00:21:21,480 Speaker 1: appropriating a little more money so they could have outside investigators, 370 00:21:21,880 --> 00:21:24,719 Speaker 1: or perhaps making sure that they have the personnel who 371 00:21:24,760 --> 00:21:27,040 Speaker 1: are not going to do this again. I certainly think 372 00:21:27,080 --> 00:21:30,399 Speaker 1: that this idea of outsourcing the certification work to Boeing 373 00:21:30,480 --> 00:21:31,919 Speaker 1: is going to be under a lot of scrutiny. You're 374 00:21:31,920 --> 00:21:33,600 Speaker 1: certainly gonna have a lot of hearings. Now. I will 375 00:21:33,640 --> 00:21:38,119 Speaker 1: say the Trump administration actually expanded that outsourcing program just 376 00:21:38,160 --> 00:21:40,159 Speaker 1: a couple of months ago to include, um, you know, 377 00:21:40,200 --> 00:21:43,439 Speaker 1: other types of products. So it will be interesting to 378 00:21:43,440 --> 00:21:45,280 Speaker 1: see how this plays out because, of course, the Trump 379 00:21:45,280 --> 00:21:49,359 Speaker 1: administration is very big on deregulation, and obviously in this 380 00:21:49,400 --> 00:21:51,960 Speaker 1: case and some of the President's tweets would suggest that, 381 00:21:52,119 --> 00:21:54,960 Speaker 1: you know, we we need to have stronger oversight here. 382 00:21:54,960 --> 00:21:56,800 Speaker 1: So it's gonna be really interesting to see how that 383 00:21:57,119 --> 00:21:58,919 Speaker 1: tension plays out. But I will say the f A 384 00:21:59,080 --> 00:22:01,399 Speaker 1: is not the only game in town anymore, like it 385 00:22:01,520 --> 00:22:04,600 Speaker 1: used to be that the FAYS were carried in the 386 00:22:04,680 --> 00:22:07,200 Speaker 1: aviation industry. And what you saw in this case, which 387 00:22:07,200 --> 00:22:10,200 Speaker 1: I just think is remarkable, is that other aviation regulators 388 00:22:10,200 --> 00:22:12,120 Speaker 1: are saying, we don't really trust what you have to say. 389 00:22:12,160 --> 00:22:13,959 Speaker 1: We're going to make our own decisions as far as 390 00:22:14,000 --> 00:22:16,560 Speaker 1: whether or not this plane as air worth. Other other 391 00:22:16,680 --> 00:22:19,800 Speaker 1: regulators are talking about internationally, right, I mean, I think 392 00:22:19,800 --> 00:22:21,560 Speaker 1: you saw that with like how quick they were to 393 00:22:21,680 --> 00:22:24,359 Speaker 1: ground the plane regardless of what THEA was, which to 394 00:22:24,480 --> 00:22:27,919 Speaker 1: me raises also a question of how this affects the 395 00:22:28,040 --> 00:22:32,000 Speaker 1: companies in the United States that are regulated by the 396 00:22:32,080 --> 00:22:34,760 Speaker 1: f a A and others that are outsourcing some of 397 00:22:34,800 --> 00:22:37,920 Speaker 1: their their their services. To me, it makes me wonder 398 00:22:38,000 --> 00:22:41,920 Speaker 1: whether that's going to put these companies at a disadvantage 399 00:22:41,960 --> 00:22:46,600 Speaker 1: competitively internationally because people will have less faith that they 400 00:22:46,640 --> 00:22:50,120 Speaker 1: have truly passed all of the tests. Well, I mean, 401 00:22:50,160 --> 00:22:52,679 Speaker 1: I think so any of these aircraft have to be 402 00:22:52,800 --> 00:22:55,679 Speaker 1: sort of certified by all of these aviation regulators anyway, 403 00:22:55,680 --> 00:22:57,320 Speaker 1: and so like all of these companies are going to 404 00:22:57,320 --> 00:23:01,199 Speaker 1: be very intimately familiar with the criteria other regulators. But 405 00:23:01,240 --> 00:23:03,359 Speaker 1: what you could see to your point is that you know, 406 00:23:03,800 --> 00:23:08,040 Speaker 1: the Europeans, the Brazilians, China steps up their scrutiny and 407 00:23:08,080 --> 00:23:10,560 Speaker 1: they have more stringent requirements in the f A because 408 00:23:10,600 --> 00:23:13,120 Speaker 1: they feel like they need to fill that void. Did 409 00:23:13,160 --> 00:23:15,960 Speaker 1: any other agencies sign off on the seven thirty seven 410 00:23:15,960 --> 00:23:20,760 Speaker 1: max yet in the United States internationally? I would have 411 00:23:20,800 --> 00:23:22,239 Speaker 1: to double check that, but I would believe, I mean, 412 00:23:22,240 --> 00:23:24,639 Speaker 1: if they're flying, then they probably are. So it might 413 00:23:24,720 --> 00:23:26,560 Speaker 1: be the f a A that's got egg on its 414 00:23:26,600 --> 00:23:29,320 Speaker 1: face right now. But it seems like perhaps it wasn't 415 00:23:29,359 --> 00:23:31,400 Speaker 1: them alone that signed off on it. No, it wasn't. 416 00:23:31,440 --> 00:23:34,800 Speaker 1: But so Brazil and the Europeans did push back on 417 00:23:34,880 --> 00:23:37,760 Speaker 1: some of the really re certification processes that they ultimately, 418 00:23:37,840 --> 00:23:39,400 Speaker 1: you know, put that plane in the sky. But they 419 00:23:39,440 --> 00:23:41,679 Speaker 1: did have more concerns and there was a little bit 420 00:23:41,720 --> 00:23:45,000 Speaker 1: more of a pushback in those conversations. Brook Sutherland, thank 421 00:23:45,040 --> 00:23:47,560 Speaker 1: you so much for being with us today. Brook Sutherland 422 00:23:47,600 --> 00:23:50,800 Speaker 1: is a Bloomberg opinion columnist and she is fabulous. Read 423 00:23:50,840 --> 00:23:53,560 Speaker 1: her columns. You can find them online. You can find 424 00:23:53,600 --> 00:23:57,200 Speaker 1: them on the Bloomberg of brook Sutherland. She is really 425 00:23:57,280 --> 00:24:02,080 Speaker 1: one of our top notch columnists here. Thanks for listening 426 00:24:02,119 --> 00:24:06,680 Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 427 00:24:06,680 --> 00:24:11,919 Speaker 1: on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. 428 00:24:12,480 --> 00:24:15,840 Speaker 1: I'm on Twitter at Tom Keene before the podcast. You 429 00:24:15,840 --> 00:24:19,280 Speaker 1: can always catch us worldwide. I'm Bloomberg Radio.