Wall Road Breakfast: A New Framework

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A new framework

Looking to boost its economic profile in Asia and create another counter-balance to China, President Biden has unveiled a new US strategy called the Indo-Pacific Economic Framework. Joining the deal are a dozen initial partners, including Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. Together, the countries represent 40% of global GDP and “some of the world’s fastest-growing, most dynamic economies.”

Fine print: The IPEF is not structured as a free trade deal, but is rather a framework that is being called a “21st-century economic arrangement.” As a result, most of its components will likely not have to go through Congress, where there is little appetite for new trade deals. Many still remember the Trans-Pacific Partnership, which was scrapped by the Trump administration, only to see the remaining signatories go on to ratify the agreement (now known as CPTPP) without the United States. China also magnified its influence in the area with the Regional Comprehensive Economic Partnership, which became the largest trade bloc in history after being signed in November 2020.

Exact details of the IPEF have not been scoped out yet, but the deal will focus on four economic pillars: the digital economy, supply chain pledges, clean energy, and tax and anti-corruption. There will be firm commitments that will be enforceable, according to US Commerce Secretary Gina Raimondo, but will steer clear of tariff arrangements and other traditional market opening tools. Those have become toxic in American politics in recent years despite “greater market access” historically serving as a carrot for the US to set stricter labor standards and intellectual property protections.

Comments: “The United States needs to enhance its economic competitiveness in the region,” said Ali Wyne, senior analyst for Global Macro at Eurasia Group. “Even those countries that have significant and growing apprehensions about China’s foreign policy and strategic objectives appreciate that they cannot meaningfully decouple from its economy over the short term.” (2 comments)

#Monkeypox

Pharma companies focused on vaccines and therapeutics against the smallpox virus are making headlines amid an ongoing outbreak of its close relative monkeypox. Drugmakers SIGA Technologies (SIGA) and Chimerix (CMRX) added more than 68% other 41% last week, while vaccine makers Emergent Biosolutions (EBS) and Bavarian Nordic (OTCPK:BVNRY) surged over 23% other 79%, respectively. Their recent price performance and valuations may suggest further upside ahead, with most of the companies up another 15%-40% in premarket trading.

latest updates: The World Health Organization said on Saturday that over 92 cases of monkeypox have been confirmed in at least 12 countries. Another 28 suspected cases are currently under investigation, according to the global body, which called the recent outbreaks “atypical as they are occurring in non-endemic countries.” The US confirmed its first monkeypox infection last Wednesday following reports of scattered cases in Europe.

Monkeypox is a rare viral disease endemic in Nigeria, the Democratic Republic of the Congo, and the Central African Republic. While the virus does not readily spread between humans, smallpox vaccines can offer 85% effectiveness in preventing monkeypox, which has a mortality rate ranging from 1% to 15%. Since the US stopped routine smallpox vaccinations in 1972 following the eradication of the disease, young Americans could become particularly vulnerable in the event of a monkeypox outbreak, a narrative that has seen investors support the companies mentioned above.

Outlook: “As we enter the summer season in the European region, with mass gatherings, festivals and parties, I am concerned that transmission could accelerate, as the cases currently being detected are among those engaging in sexual activity, and the symptoms are unfamiliar to many, “said Dr. Hans Kluge, WHO Regional Director for Europe. Monkeypox symptoms are milder than those of smallpox, with the disease leading to skin rashes and lesions that can spread throughout the body. (144 comments)

Merger Monday

Chipmaker Broadcom (AVGO) is in talks to acquire cloud service provider VMware (VMW) in what could be one of the biggest deals of 2022. It would see the deal-hungry semiconductor group diversify into the enterprise software business as sentiment in the market sends Stock prices lower. Demand for cloud computing services and data centers has surged in recent years and VMware has long been considered one of the industry’s most important companies.

Backdrop: M&A has played a central role in Broadcom’s growth strategy. It acquired Symantec’s enterprise security business in 2019 for $11B, scooped up CA Technologies in 2018 for about $18B and landed Brocade Communications in 2016 for $5.9B. Broadcom also tried buying US chip giant Qualcomm (QCOM) for $117B in 2018, though it withdrew its bid after the deal was blocked by the Trump administration on national security concerns.

Many outlets have leaked the Broadcom-VMware talks, but the discussions are still ongoing and could fall apart. At the time of writing, VMware has a market cap of about $40B, while Broadcom has a market cap of $223B. Premarket movement: AVGO -5.4%; VMW +21.2%.

Go deeper: A deal would be a windfall for billionaire Michael Dell, who owns about 36% of VMware’s outstanding shares (and is company chair). He acquired the business in 2016 alongside private equity firm Silver Lake in a $67B takeover of tech conglomerate EMC. In November, Dell Technologies (DELL) completed the spinoff of its 81% equity ownership in VMware, with company shareholders receiving a $11.5B cash dividend (including Dell, which received $9.3B). (31 comments)

To the moon

A day doesn’t go by without Elon Musk making headlines, especially in recent weeks. His space venture called SpaceX (SPACE) is looking to bring in up to $1.7B in new capital, at a price of $70 per share, according to a company-wide email obtained by CNBC. That would boost its valuation to $127B, making it the second largest startup in the world behind China’s ByteDance (BDNCE), which owns popular video-sharing app TikTok.

Bigger picture: Private SpaceX shares were last valued at $56 per share in February following a 10-for-1 split. The new valuation of $70 would represent a 25% increase in share price as the firm works on two capital-intensive projects. Its next generation rocket Starship hopes to take the first humans to Mars (and the moon), while its global satellite internet network Starlink (STRLK) recently gained publicity after being deployed in Ukraine.

SpaceX is separately conducting a secondary sale to company insiders and existing shareholders for up to $750M in common stock. Don’t forget that Elon Musk had also been raising serious capital to fund his takeover of Twitter, before saying it could not move forward until there is “transparency over bots and fake accounts.” Meanwhile, Tesla (TSLA) shares have lost nearly half their market value after tumbling from an all-time high of $1,243 seen back in November.

Ready for liftoff: The space industry is on its way to achieve $1T in revenue by 2040, according to Citigroup, after reaching $424B in 2020 and expanding 70% since 2010. “Fundamentally, with the new generation of space being driven by the commercial sector, the launch industry is seeing a secular shift from being largely cost-plus pricing-based to being value-based in order to open up new markets and maximize profitability.Previously, the launch market had a limited number of government-supported companies that were more concerned with military capability and creating revenue and jobs than with increasing operational efficiency.” (5 comments)

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