M&A Goes Out with a Bang

Plus: Stability AI doesn't live up to its name. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

November 30, 2023

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Good morning.

Well, they did say it was all-you-can-eat. In America, diners take that as a dare.

Red Lobster said its $20 "Ultimate Endless Shrimp" deal is partly to blame for its $11 million loss in its most recent third quarter. On the low end, a pound of shrimp runs about $5 or $6, so all those free portions can really add up. It's like Bubba says: Shrimp is the fruit of the sea. Red Lobster plans to raise the price of shrimp endlessness to $25 as it sits on the verge of a $20 million loss for 2023. Earlier this year, parent company Thai Union Group hinted that it might drop Red Lobster entirely if losses continued to mount. The restaurant chain might have to start fishing for a new backer. What's Bubba up to, anyway?

Morning Brief

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GM wants to make it up to investors.

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An AI superstar heads for unstable times.

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The year's biggest deal is in the works.

Autos

GM Sets Out to Soothe Shareholders with Spending Cuts, Dividend Boost

(Photo by Brad Killen via Unsplash)

General Motors is getting a head start on its 2024 New Year's resolution — make the shareholders happy again.

America's largest auto manufacturer is trying to regain Wall Street's favor with buybacks, spending cuts on less promising projects, and more. GM hopes its plan outlasts most resolutions, which dissolve long before the calendar turns to February.

Strike Out

One of GM's biggest obstacles in 2023 hit much of the industry: The recent United Auto Workers strike — which saw 40,000 employees of GM, Stellantis, and Ford walk off the job for a month and a half — cost GM roughly $800 million, which is equivalent to nearly 10% of its profit for all of 2022. To end the strike, GM tentatively agreed to raise its wages by 25% and place joint-venture battery plants under its main contract with the union.

On top of that, GM, like many car companies, has been experiencing "evolving demand," i.e. poor sales, for electric vehicles. Most car manufacturers have set out to go all-electric by 2035, but adoption rates aren't cooperating. The average $50,000-plus price tag for an EV just isn't in the budget for anyone who wasn't an early adopter.

All of that has contributed to GM's stock slumping 14% so far this year. But lo, a plan to return "significant capital" to shareholders has, for the moment, won hearts and minds:

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GM announced Wednesday that it will boost its quarterly dividend by one-third, initiate a $10 billion buyback, and also reinstate its full-year earnings guidance that it had pulled when the strike started. And despite the new union contracts, CEO Mary Barra said, "We are finalizing a 2024 budget that will fully offset the incremental costs of our new labor agreements." GM's stock shot up 9% on the news.

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To achieve those offsets, GM is delaying investments in EV production and taking down the goalposts altogether for near-term output. Additionally, the company intends to cut spending on Cruise, its self-driving unit. GM originally planned to test its autonomous vehicles in San Francisco and three other cities, but is scaling down its focus after a crash last month that injured a pedestrian.

Down Mexico Way: While GM and Ford have solid grips on the domestic market, competition is growing south of the border. Last year, Mexico was the leading importer of Chinese cars, and so far in 2023 it trails only Russia, Bloomberg reported. With some Chinese cars running $10,000 less than US-made equivalents, American automakers might have to readjust their pricing, or throw in a free air freshener.

- Griffin Kelly

Artificial intelligence

Stability AI Is Reportedly Shopping Around for a Buyer

They jinxed themselves with their own name.

Stability AI, the London-based startup behind popular AI-powered image-generator Stable Diffusion, is shopping itself to potential acquirers, sources told Bloomberg. The sources said a deal isn't definite, but a major investor has raised red flags about the state of the company's finances and is pressuring CEO Emad Mostaque to step down. 'Tis the season for ousting AI CEOs, which also makes us wonder how much more unstable AI could get.

Instability AI

Stability has been a pretty big name in the generative AI explosion that followed ChatGPT's public release last year — big enough for Getty to target in a copyright lawsuit filed last January. And Mostaque himself has subtly fed into the idea that the investment pouring into AI companies may be a tad exuberant, telling analysts in July that he believes AI will be the "biggest bubble of all time." The company raised $101 million in October last year, reportedly achieving a valuation of $1 billion. Truth to power, Mostaque. Right on.

But one of the investors behind that round of funding, Coatue Management, has internally sounded the alarm about both the company's finances and Mostaque's leadership, sources told Bloomberg. Now the company might be exploring options to sell itself — though it's not necessarily shopping itself to bigger tech fish:

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Sources told Bloomberg that Stability has held a few early-days talks with companies that could potentially purchase the company, including two other AI tech startups, Jasper and Cohere.

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A Stability spokesperson pushed back against that claim. "While several parties have expressed interest in the purchase of Stability AI, we are not trying to sell the company and are focused on releasing leading models," the spokesperson told Bloomberg.

Try Pirelli's Miracle Algorithm: The AI gold rush has been in full swing for 12 months now, but that hasn't actually translated into a ton of M&A activity in the sector (unless you count Microsoft briefly adopting Sam Altman before he returned to OpenAI). An October EY survey of CEOs across all sectors found this is because so many AI startups are promising marvels of technology that CEOs with acquisitions on their minds have a hard time separating the legitimately cool tech from the more snake-oily variety. There's gotta be AI that can help them with that.

- Isobel Asher Hamilton

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Healthcare

Cigna, Humana Eyeing a Merger

What do you call it when two hulking health insurance companies form a union? Insurance.

In a bid to scale up against larger rivals, health insurance players Cigna and Humana are in talks over a possible merger, according to a Wall Street Journal report on Wednesday.

Beefing Up

Cigna and Humana are both relatively small businesses (emphasis on relatively) compared to the industry's top two companies, United Health and CVS Health. Last year, the latter two generated revenue of just over $320 billion, while Cigna and Humana generated about $181 billion and $83 billion, respectively.

But both companies have relatively narrow-scoped businesses, and, at least on paper, they'd each bring something to the table that the other sorely lacks:

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Cigna would bring its massive pharmacy-benefit unit, Express Scripts, which manages prescription drug plans. It also has a strong foothold in the commercial insurance sector.

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Humana, meanwhile, fills a longstanding hole at Cigna: a strong Medicare practice. Humana's Medicare insurance unit is No. 2 in the industry, behind just UnitedHealth, while Cigna has barely cracked the sector.

Antitrust Me: With Cigna's market cap of roughly $83 billion and Humana's market cap of $62 billion, any deal — which the companies hope to complete before the end of the year, sources told the WSJ — would mark the largest M&A transaction of 2023. It'd also likely trigger an antitrust response. In fact, to pre-empt any action from the FTC, Cigna is already exploring a sale of its existing, albeit measly, Medicare Advantage unit. Even then, health insurance has faced particularly tough scrutiny in recent years. Cigna and Humana explored a merger in 2015, but that brief dalliance died when Humana instead agreed to a deal with Aetna — which itself ended up scuttled over antitrust concerns. Maybe the second time's the charm?

- Brian Boyle

Extra Upside

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We're all trying to find the guy who did this: Elon Musk accuses boycotting advertisers of killing Twitter.

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News of the world: Google agrees to pay Canadian publishers $100 million annually.

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