Surveillance: Investing in Lyft With NYU’s Segram (Correct)

did I talk about it? Let's talk about it because he's been on the cards for absolutely h s And finally, I guess it's official now that they're actually in talk do we just assume it's executed? Um, well, I think that they're probably are a whole bunch of potential challenges here still, I mean, I think that the question is what form is this going to take? Is this murder? And I think Luigi's and Galis actually has some views

on this. He's a finance professor at the Niversity of Chicago at the Booth School of Business and he joins us here in our Bloomberg Director Broker Studios. Luigi, thank you so much for being here. What do you think

about this murger? So this is a merger of failed banks banks that don't succeed in the marketplace by themself, and they have to merge because they're very weak, even if in the past they have shown that they are not very good at merging, because if you remember comments back comes from a very bad merger with Dresden and Deutsche Bank tried to integrate deutge post Bank and did not do very well and at some point try to

sell it and they couldn't even sell it. So I don't think they have a good record in merging, and the only reason why they're emerging is because they're trying to basically achieve three things. One is fire more people, and they have to have the permission of the German government to fire people. They got it that that's a Hinterestly, it comes from a Social Democratic minister, so imagine what the Conservative would have done so in so that's one.

The second is probably they can gain a little bit of market power, but most importantly they certainly become too big to fail, and they are trying to sell that this is the German national champion. Now, Germany has a lot of good things going for itself, but this is not one of those. Deutsche as a tradition of cheating. I think it's more, uh pay more fines than it is worth in the equity market today because and so

I don't think and it's not very profitable. So I think that a bank in this condition is not in the situation to acquire another one. And the fact that that's the only thing that they figure out means how bad the banking sector is in Europe this moment, Alouigi. For a long time, we've referred to Many is the powerhouse of Europe. The banking sector is certainly not the powerhouse of Europe. Why does the German banking sector have these problems still? Actually, I think that that's uh strategic

to maintain industry. I think that the banking sector in Italy in Germany is dominated by the spreadcast and the cooperative and both these institutions don't have profits as an objective. They have basically the well being of their partners and their um of the of the company's they financed. So I think that the banking sector in Germany is postponed to the industor sector, and that's the reason why the industa sector is so strong and the banking sector is

a weak. I'm struggling to understand how Commerce Bank, how Deutsche Bank still has about a six steak in Commerce Bank and will probably roll over that stake into the Deutsche Bank Commerce Bank Merger. I mean, basically, is this now ftionalization. I think that Germany, that is very taff with the other European countries system of state eight when it comes to its own banks, has been extremely generous

in state aid. I think that most Americans don't know that top is nothing by comparison to what Germany did for its bank in two thousand and eight. So I guess if we can broaden out a little bit, given the fact that we do have the FED week coming up and we have this persistently weak data in Europe, is this joytsche Bank Commerce Bank merger emblematic of the persistent weakness in the euroregion that could potentially deepen beyond

what people are expecting. I think that that's certainly one reason I think that Germany does sphere is low down. There are two views of the world here. There are those who say that there's been a temporary thing due to a couple of accident like the low water in the Rhine River that made it difficult to export, and given some regulation the car industry that has low down production and then now we're back to two normal Um I am more sort of worried, especially with the softness

coming out of China. China is a big export market for Germany and if this is an issue, German manufacturing will suffered. And nobody talks about this. But if we were to go into a very hard Brexit, the problem would not just be for the United Kingdom. Germany exports a lot of car to the UK, and so hot Brexit will be a pretty bad news for Europe in general,

but particularly for Germany. So with with this context, I think that there we is a need to do something with the banking sector that is too big and too unprofitable. And part of this unprofitability is the fact that uh, the cost to income ratio is very high. So unfoldedly, I think with structuring and job cuts are on the line, the question is why do you need to merge to

do that? And I fear that this is just a political play that on the one end, the German politician allow for job cuts, on the other hand, they do form a national champion that would be easier for the German government to control and direct Luigi, can a national champion compete on the international stage if it is efficient, Yes, but given the record of Deutscher, my answer is not. Luigi is in fantastic to catch up with your finance

professor at university if Chicago Birth School. We are so lucky to have Herrin Seagram joining us here in our Blueberg Interactive Broker Studios in New York. Ran Stagram is a New York University. Stern Up professor of Finance. Heard the two point one billion dollar valuation on its face four lifts, I p O and I believe that values accompanied about eighteen plus billion dollars. How do you even value that? Thanks for having me, Lisa. So the way to look about LIFT is think about it as a

platform business. And if you take the EV two sales for the market overall is about two to and a half. But generally platform business is priced between seven and ten x. So if you take the current revenues on face value at two billion dollars to point one billion, if you grow that at twenty five per year for the next five years, that gives a future value of roughly between thirty and thirty five billion. And if you discount that back at the cost of capital that will give you

roughly around twenty one billion. So investors are pretty much paying for the future rather than the current state of affairs for this company. This is important. They're paying for the future, and they're paying for the future at a very expensive time. It just raises a question, are people getting in at the peak? Is lift uh and and and and our our lift and Uber kind of trying to capitalize here on this potential Peakye, that is absolutely right.

It is more liquidity event for the private equity investors who got into Lift and Uber earlier, so they are cashing out, no doubt. UM. But I have a feeling this valuation would grow into this UM. So although they are catching it at peak, UM, I have a feeling this company. I'm optimistic generally about this company, your optimist company, and and thinking that people will probably get good value or at least fair value if they buy into the I p o of fair values better I would say,

not good value, fair value. But this raises a question really on a broader level, because right now the SMP is poised for its best quarterly performance since we are we are looking at a market that is so uh robust, and melting up, And there is a question, you know, is this a bad time to get in or is it also fair value? UM I abuse tend to come towards the peaks of the market because original investors, early

investors are trying to cash out. But I have a feeling SMP has some room to run, especially then federal reserves on hold, and US is the best place to invest compared to rest of the globe. I have a feeling this melt up is going to continue for a while, Okay, And then what does that say for the other I p o s that are slated like the Ubers and all the other high profile unicorns. Um Uber is um planning to go to the market between hundred and one

twenty billion. It is similar again with thinking about that as a platform business, and they are also diversified into other types of businesses. So market is again attaching a seven to between seven and ten multiple to this company, but I don't think it is the current current valuation. We are being We are valuing these companies on a forward multiple. That is my humble opinion. Just what your thoughts on on Lift and Uber and how one company is very very focused on what it does it's a

right hailing service that's left. Uber seems to be spread out a little bit more doing various different things. What are your thoughts on the kind of premium you've attached to the focused company versus the one that's trying to do a whole lot more. Thanks for having me, Jonathan, good to be with you. Um, there are two types of businesses. If you think about it's a focused company, Um, they have as you said, they're very focused on right

hailing and they're planning to expand the business. They're currently in the North Hamn region right now, so that's the target market. But when you take Uber for example, they have more levers to pull, so it is more of a diversified business. So investors think about these businesses in a different way. Um, simple folks, business can be valued in a different way and a diversified business would be

valid in a different way. So for us to compare these two companies at this moment, I don't think it is advisable, just in terms of how mature some of the companies are coming to market as well. I think a lot of people find that interesting relative to where we were, so maybe ten twenty years ago, where relatively young companies would come to market, they would become public companies for very good reasons. Now it seems they remain private for a whole lot longer, Professor, Why do you

think that is? Because private market funding so available. If you take Master's Sun buying into uber so three or four billion dollars being pumped into Even last week he invested into Grab in Singapore. So the private market funding is readily available. Cash is cheap at this lower interest rates. That's why these companies are staying long a private. They have no need to come to the public markets, but they want to cash out rate if they have gotten in.

For a take for example, what master Son did with Ali Baba put in twenty million and the stake is sitting at one and twenty billion today, So people are comfortable sitting with it in the private market, they don't have to really cash out. But then markets that that are such a high why don't you take advantage of it?

It's well great. Some people would say that the availability of capital and the private markets to some degree, and you can tell me to what degree you think this is true, is breeding arrogance of leadership of some of these tech companies and when they do come public, the ownership structures are different. So we'll let me make this

really simple. For a typical investor who's looking to participate in an I p O, they won't actually own the company, won't have the voting rights that maybe they would have got ten twenty years ago, because the leadership are able to keep hold of the ownership and voting rights the management of the company a way that maybe they didn't many years ago. Why do you think that is changing and you think eventually there will be pushed back from

the investor community. There will be eventually be a push back, but I don't think that is the case right now. Investors have come to terms with it. This is the norm for technology companies. You take Sergio Brain, Mark Zuckerberg, all the top leaders, I don't know, I don't want to call them top, but the leaders they tend to hold on a majority of the voting rights. Investors are

not currently punishing the valuations of these companies. I know it weakens the corporate governance structure of the company, but I don't think that is impacting the valuation. Maybe there might be a push back in the future, but I

don't think I don't see that right now. Do you think that these companies being public will impede their growth because these an these these leaders have never been accountable to shareholders in the same kind of way and having to sort of deal with quarter to quarter expectations versus longer term plans and just burning through cash. Lisa, You're right, it's going to be tough for them. They had their wish.

When they are private, they can do whatever they want to Now they're accountable to the market and the investors. But when you come into public markets with valuations of twenty billion one and twenty billion, investors would give a leeway for those leaders because they have a proven track record. If these valuations are holed up for the next year or two, they have proven that they can grow this business, and I think investors are going to be on the

sideline letting these companies grow on their own. Paren Segrim, thank you so much for being with us. Thank you, Lisa, thank you Jonathan for having Thank you sir, Thank you very much. Boeing shares down a little bit lessan two and a half percent following news that the f a A had been warned that Boeing had too much power in the approval process seven years ago and they had not paid any attention. This looks terrible for the f A,

looks terrible for Boeing. Here to talk about the potential ramifications for it is Brook Sutherland Bloomberg opinion columnists joining us here in our interactive Broker Studios. Broke just give us a sense of what the Seattle Times investigation found that really showed this should have been on the radar of the f A A and frankly Boeing as well. No, absolutely, I mean, and I think to your point. So this

is seven years ago, two thousand twelve. This is actually pre the Dreamline or battery problems as well, which did of course result in the f A grounding those planes. So this has been sort of an ongoing issue that everybody should have been rather abundantly aware of and perhaps looking at a little bit more aggressively. So a couple

of things from the Seattle Times investigation. What they have found is, you know, it's been well documented that f A has been outsourcing certification work to the aircraft manufacturers. Now this is something that's actually gotten approval from people in government and sort of you know, one over their support because the f A does not have very much money, and this is also a rather timely process that these

aircraft certified. Before you continue, is there some sort of external check on the in house corporate overseers that are overseeing themselves. Well, in theory, the f A has the ability to approve the Boeing employees that are you know, put in place to act as sort of officials of the f A as far as the certification process, and if they have issues of conflicts of interests that arrived,

they can replace them. But what the Seattle Times is reporting is that employees did raise concerns about certain Boeing managers, and their managers at the f a A basically overruled that, and we're pushing them to sort of speed up the certification process to try to get this bowing blank out.

Because remember the reason why Boeing was investing in the seven Max is because air Bus came out with a three Neo, which had much more fuel efficient engines, was very attractive to airlines for a lot of different reasons, and Boeing needed a response, and they needed one very quickly.

They were already behind air Bus in terms of production. Um, you know, the other really key things from the Seattle Times report for me were the details of this safety analysis that Boeing did on the maneuvering Characteristics Augmentation system, which is that slight control system that's being sort of

pinpointed as a possible cause for both of these fatal crashes. Now, so in that safety analysis which Boeing did as part of the certification process, as part of this outsourcing of the work, um, they understate the thrust that can put

the degree of thrust on the plane's nose down. Um. They also failed to acknowledge the fact that this system resets, so if the plane's nose is diving and the pilot corrects that, the system can go through the process all over again, which is what happened that we heard about with the Ladish crash. And that really sort of undermines Bowing's narrative because with the first crash they said, oh, well, pilot should have known about this. They have all this,

you know, basic training of how to handle a dive. Well, pilots are trained for sort of a continuous dive. That's not what happened. This was sort of up and down, step by step, and you know, with the degree of thrust the system is capable of. That was sort of what led to this being so disastrous. So I want to pick up on this idea that it goes counter

to Boeing's narrative. I'm wondering how much liability Bowing is going to have here given the fact that they were aware of potential risks, the fact that they were lobbying f A A and the f A was not getting them in check, and they are their own overseers. The fact that that they have that onus, does that leave

them with more responsibility? Uh, financially at this point, the fact that the risks were understated in this safety analysis that was submitted they f A is not a good look for Boeing, especially because they're now saying, Okay, we'll know this is actually how it worked. Um, I think you know, you're already starting to see sort of lawsuits from the families of of the people who died in

these crashes. I am not a lawyer, so I'm not going to speculate onto the outcome of that, but just looking at it, it does not look good for Boeing. I mean just in terms of their culpability here, in terms of not really taking ownership of some of these issues. I think that just raises a lot of questions and and and not to not to diminish the personal tragedy aspect of this. I mean a lot of people, hundreds

of people lost their lives because of what happened. I do have to wonder from a business perspective with Boeing, is the big risk the liability is the potential lawsuits or is it that companies airlines are not going to order from Boeing because they have that much less confidence. I think the bigger risk as far as, um, you know, Boeing's liability is first of all, what happens as a result of this grounding, and a lot of it is to pendant on how long the grounding is and what

regulators ultimately decide is the problem here. Um. So after the Lion Air crash, I mean Boeing was sort of saying, well, this is a software issue. They were supposedly working on a fix that was reportedly supposed to be out by year end. Obviously that did not happen, and said we had the Ethiopian Airlines crash, which in my mind sort of ups the stakes as far as how you actually fix this I don't think it's as simple anymore. It's

just a software download. I think you're certainly going to have to have retraining of pilots, which is going to be expensive. That's probably going to be a bill that Boeing has to front, including the cost of, you know, replenishing airlines lost revenue for having these planes out of service.

Um Now, the more dire scenario is that the f a A is forced to sort of revisit the whole certification of the seven thirties seven Max designed to say, Okay, we needed to be more rigorous about this, we need

to go through a more in depth process. There's also a question about the f a and what happens here with that agency, especially given the fact that any potential badness around the organization was just magnified by the fact that they were so late to the game in terms of halting the use of the seven thirty seven Max

A jet. I'm wondering is there any potential recourse that lawmakers could take with the f a A, uh, possibly appropriating a little more money so they could have outside investigators, or perhaps making sure that they have the personnel who are not going to do this again. I certainly think that this idea of outsourcing the certification work to Boeing is going to be under a lot of scrutiny. You're

certainly gonna have a lot of hearings. Now. I will say the Trump administration actually expanded that outsourcing program just a couple of months ago to include, um, you know, other types of products. So it will be interesting to see how this plays out because, of course, the Trump administration is very big on deregulation, and obviously in this case and some of the President's tweets would suggest that, you know, we we need to have stronger oversight here.

So it's gonna be really interesting to see how that tension plays out. But I will say the f A is not the only game in town anymore, like it used to be that the FAYS were carried in the aviation industry. And what you saw in this case, which I just think is remarkable, is that other aviation regulators are saying, we don't really trust what you have to say. We're going to make our own decisions as far as

whether or not this plane as air worth. Other other regulators are talking about internationally, right, I mean, I think you saw that with like how quick they were to ground the plane regardless of what THEA was, which to me raises also a question of how this affects the companies in the United States that are regulated by the f a A and others that are outsourcing some of

their their their services. To me, it makes me wonder whether that's going to put these companies at a disadvantage competitively internationally because people will have less faith that they have truly passed all of the tests. Well, I mean, I think so any of these aircraft have to be sort of certified by all of these aviation regulators anyway, and so like all of these companies are going to

be very intimately familiar with the criteria other regulators. But what you could see to your point is that you know, the Europeans, the Brazilians, China steps up their scrutiny and they have more stringent requirements in the f A because they feel like they need to fill that void. Did any other agencies sign off on the seven thirty seven max yet in the United States internationally? I would have to double check that, but I would believe, I mean,

if they're flying, then they probably are. So it might be the f a A that's got egg on its face right now. But it seems like perhaps it wasn't them alone that signed off on it. No, it wasn't. But so Brazil and the Europeans did push back on some of the really re certification processes that they ultimately, you know, put that plane in the sky. But they did have more concerns and there was a little bit more of a pushback in those conversations. Brook Sutherland, thank

you so much for being with us today. Brook Sutherland is a Bloomberg opinion columnist and she is fabulous. Read her columns. You can find them online. You can find them on the Bloomberg of brook Sutherland. She is really one of our top notch columnists here. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You

can always catch us worldwide. I'm Bloomberg Radio.