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Duopolists Oppose Aerospace Merger – CEO Daily, Wednesday 6th September

Good morning.

United Technologies’ plan for a $23 billion takeover of Rockwell Collins got a cold reception yesterday from the company’s two largest customers, and from shareholders.

In a statement, Boeing said it was skeptical the deal “would be in the best interest of – or add value to – our customers and our industry,” and threatened to pursue “appropriate regulatory options.” And Airbus, which has suffered from delays in UTC’s delivery of its latest batch of Pratt & Whitney engines, said it hoped the deal “would not distract UTC from their top operational priority.”

Meanwhile, UTC shares fell more than 5%, as shareholders reacted to the company’s plan to halt billions of dollars worth of share buybacks for the next three to four years to help finance the giant takeover. Rockwell’s share price only rose to $131, well below the $140 offer price, indicating doubts about whether the deal can go through, given the Boeing and Airbus opposition.

UTC CEO Greg Hayes spent the day vigorously defending the deal, with two main arguments:

1) It will provide some $500 million in cost savings by the fourth year of operation (which actually seems kind of small given the size of the deal);

2) It will enable UTC to provide digital connectivity among a much greater share of an airplane’s parts.

But it’s also clear that in a duopoly market, size matters. And the stakes here are huge. A Boeing official said yesterday that China alone is likely to buy $1.1 trillion in commercial airplanes over the next two decades.

Separately, I jumped the gun yesterday in writing about the new MIT Sloan Management Review/BCG study on the gap between expectations and reality in applying AI to business. The report wasn’t published until this morning. But you should be able to read it now, here. Apologies for yesterday’s bad link.

News below.

Top News

•  It Never Rains But It Pours

A combination of fears about North Korea, bad weather and a sputtering economy battered stock markets and drove the prices of haven assets such as bonds and gold higher. Factory orders fell by 3.3% in July, their biggest monthly drop since 2014. The Federal Reserve’s Lael Brainerd warned that stubbornly low inflation could stop the central bank raising interest rates further, something that hit bank stocks particularly hard as the Dow had its worst day in nearly three weeks. The warning also hit Japan’s Nikkei, which fell to a four-month low on the prospect of a stronger yen-dollar rate, coupled with rising tensions over North Korea. WSJ, subscription required

Irma La Not-So-Douce

Miami announced a partial evacuation and officials closed Key West aiport as Hurricane Irma approached. Since Sunday, storm path projections from the National Oceanic and Atmospheric Administration have shown Irma moving farther west than initially forecast. The most recent model shows the storm headed toward Cuba and possibly southern Florida this weekend. Officials said it still wasn’t possible to say whether, or where, it could strike. Stocks in reinsurers were battered by fears about their ability to cope with two catastrophic events in quick succession, while shares in cruise lines that plow the Caribbean also suffered badly. Fortune

Tech Leaders Protest Rescinding of DACA

Business leaders, notably in the tech sector, reacted strongly to the rescinding of the DACA program, exposing some 800,000 people to deportation. Attorney General Jeff Sessions said the measure was necessary to regularize the law and correct an overstepping of presidential authority by Barack Obama, and he gave Congress (as expected) six months to work out a new solution. Microsoft President Brad Smith promised ‘Dreamer’ employees the company’s full legal support, while Apple CEO Tim Cook said he was “deeply dismayed” by the news, which affects over 250 Apple employees. Facebook’s Mark Zuckerberg called the move “a sad day for the country” and “particularly cruel.” The CATO Institute has estimated that deportations alone could cost $60 billion directly, and deprive the economy of up to $280 billion in the long run. Fortune

•  Intel Gets a Reprieve With EU Fine

Intel won a victory of sorts in its long-running fight against a €1.06 billion ($1.26 billion) antitrust fine that was levied against it by the European Commission eight years ago. The EU’s top court set aside a 2014 ruling of its General Court, which upheld the 2009 fine, on the basis that the General Court hadn’t thoroughly examined whether some of the discounts and rebates Intel had offered to PC makers had indeed harmed competition. The ruling doesn’t get Intel off the hook, but gives it a chance of reducing the fine.  Fortune

Around the Water Cooler

•  HPE Surges on Strong Networking Business

Shares in Hewlett-Packard Enterprise rose more than 5% in after-hours trading after the company handily beat expectations in its latest quarterly report. Strong sales of flash storage equipment and Aruba networking gear (which specializes in secure connections for wireless devices) drove a 2.5% rise in overall revenue. That persuaded investors to overlook a sharp drop in net income due to divestments, as well as a profit forecast for the current quarter that fell short of expectations. CEO Meg Whitman promised a strategic decision about the company’s commodity server business before the company’s regular analyst meeting which normally takes place in October. Fortune

Nissan Turns Over a New Leaf

Nissan threw down the gauntlet to Tesla with a relaunch of the Leaf, the world’s best-selling battery-powered car to date. The new model has a range of 150 miles on a single charge, up from its predecessor’s 107 miles, but still well short of the 220 miles promised by Tesla’s Model 3 and the 280 miles offered by Chevrolet’s new Bolt. At just under $30,000, however, it is between 10%-20% cheaper than its rivals. The new Leaf goes on sale in Japan in October, and in the U.S. ‘early next year.’ Fortune

•  Facebook Widens Its Hunt for Content

Facebook is reportedly in talks with major record labels and music publishers to reach a deal that would allow its 2 billion users to include copyrighted music in videos uploaded to the platform. Bloomberg’s sources said the social media giant is offering hundreds of millions of dollars to the music industry for the rights to songs in videos uploaded by users. A deal could benefit both sides, as music owners won’t have to continuously ask Facebook to take infringing content down, and Facebook won’t have to deal with legal issues over hosting content it doesn’t have the rights to use. Facebook is countenancing ever heavier investments to keep users on its site. It offered $600 million in an unsuccessful bid to stream Indian Premier League cricket earlier this month, losing out to 21st Century Fox’s Star India network.    Fortune

•  Variations on a Theme of Amazon Hit Blackstone

Blackstone Group called off the sale of a $2.8 billion portfolio of shopping malls in Australia in what a Reuters source said reflected concern about the impact of Amazon on bricks-and-mortar stores. Blackstone’s move to put its malls on the block in April came just as the property market hit a peak and as Amazon announced the planned launch of its online shopfront service in Australia. Having failed to attract bids at the desired level for the 10-mall package, the company will now concentrate on renovating the individual assets. Fortune

Summaries by Geoffrey Smith;