Microsoft 2.0 – A New Company Under Satya Nadella
In the late 1990s, Microsoft could do no wrong. The company, founded by Bill Gates and Paul Allen, was the most valuable in the world and Windows was selling like hotcakes. In December of 1999, the company even set a record by reaching nearly $620 billion in market capitalization at the height of the tech bubble. The company would subsequently begin to lose its way. Bill Gates passed the torch to Steve Ballmer in 2000, but remained on as the Chief Software Architect until 2006. Later on that decade, Microsoft had its first negative earnings quarter in 23 years. The new kids on the block like Apple, Google, and Facebook would surpass Microsoft in terms of the “cool” factor and become the de facto employment targets for computer science grads everywhere. They were building more innovative products, and hit the right market segments. The final blow was more recent, when Apple topped Microsoft’s record-setting market capitalization in absolute terms, though not yet from an inflation-adjusted perspective. Criticism of Ballmer reached its pinnacle in 2012. A damning Forbes article cited Ballmer as “the worst CEO of a large publicly traded American company”, claiming that he had “steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets)”. Shortly after, Bill Gates announced as Chairman that Ballmer would leave sometime within the next 12 months. It is since then that Microsoft has made a remarkable transition, with plenty of credit to new CEO Satya Nadella at the helm. The company, which is famously known for its fiercely uncooperative nature, has started collaborating with other large tech companies including Apple. Microsoft’s stock is now lurking near its highest point since early 2000 and the company has new and exciting products again like the HoloLens, Windows 10, Delve, Skype translator, and Sway. Nadella is also taking the company on a journey to the hot areas of technology, such as the internet of things and wearables. It’s only a year into Nadella’s journey as CEO, but the future again looks like it could be bright. Original graphic from: UAB School of Business
on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
