The Magic Kingdom goes to war

This is an audio transcript of the FT News Briefing podcast episode: ‘The Magic Kingdom goes to war’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, April 27th, and this is your FT News Briefing.

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What would have been Microsoft’s biggest ever deal just got squashed. British companies are fleeing abroad for a start-up capital, and one reason is the UK pension system.

Harriet Agnew
Pension funds have had the risks that are beaten out of them.

Marc Filippino
Plus, break out the popcorn. Disney is taking on the governor of Florida. I’m Marc Filippino, and here’s the news you need to start your day.

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We’ll get the latest snapshot of the US economy this morning. Economists expect gross domestic product to have expanded a modest 2 per cent in the first quarter. That’s on an annual basis, and it would be slower than the 2.6 per cent growth of the previous quarter. The number will give us an idea of how effective the Federal Reserve’s interest rate rises have been.

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Disney is suing the governor of the US state of Florida. It says Ron DeSantis violated the company’s right to free speech when he allegedly retaliated against it for speaking out against the so called, “Don’t say gay” law. The law bans public schools from teaching about sexual orientation or gender identity. Since then, the Republican governor has been targeting Disney’s longstanding tax privileges in the state. I’m joined now by the FT’s Chris Grimes for more. Hey, Chris.

Christopher Grimes
Hey, how are you?

Marc Filippino
So, Chris, just to sum it all up, Disney executives have spoken out against the “Don’t say gay” law. That angered Ron DeSantis, who then starts going after Disney’s economic privileges in the state. Is that right?

Christopher Grimes
That’s correct, yes. So Disney has been trying to preserve its powers that it’s had for 55 years to run the area around its theme parks the way it wants. And that’s kind of the core issue that they’ve been fighting about for the last year.

Marc Filippino
So can you talk more about Disney’s legal case against DeSantis?

Christopher Grimes
So I think what’s going to be really interesting to watch here is that Disney is pressing a case that is in part based on this attack that they claim has happened, has been on its First Amendment rights that protect Americans right to free speech. Historically, I think particularly Republican politicians like Ron DeSantis have always been stalwart champions of the rights of business, including the right to free speech. So I think this is an interesting wrinkle to this whole thing, that it shows how the, you know, the party may be kind of tangled up in some knots on these things.

Marc Filippino
Now, of course, we should also remind listeners that DeSantis is seen as a likely Republican presidential candidate in 2024, and his campaign against Disney really fits right into his broader war on progressive liberal values.

Christopher Grimes
You know, he has been able to take his status as Florida governor and make it into kind of getting national attention for himself by talking about his war on woke. He’s taken other measures that have made liberals in Florida and around the country really upset, that he took over the board of a liberal college in Florida. You know, he’s revising curriculum in schools over issues like, you know, Black History Month. So he’s really made a name for himself, kind of pushing back on diversity issues and things like that.

Marc Filippino
Chris Grimes is the FT’s LA bureau chief. Thanks, Chris.

Christopher Grimes
Sure. Thanks a lot.

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Marc Filippino
British regulators yesterday blocked Microsoft’s $75bn acquisition of the video game maker Activision Blizzard. The move will likely kill what would have been Microsoft’s biggest deal ever. Microsoft said it would appeal. Activision makes the hit video game Call of Duty. It blasted the regulator and said Britain was clearly, “closed for business”. Activision’s share price dropped more than 11 per cent yesterday. Shares in Microsoft were up 7 per cent, but that was on the back of Tuesday’s strong earnings report.

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Activision’s criticism of Britain as, “closed for business”, may have been tapping into an existing anxiety. In the UK, there’s growing concern about the country’s ability to retain entrepreneurs. British companies have been struggling to get the capital they need, and many have gone overseas to find equity funding, often in US stock markets. And a big reason they can’t raise funds in the UK is the British pension system. The FT’s Harriet Agnew joins me now to talk more. Hey, Harriet.

Harriet Agnew
Hi, Marc.

Marc Filippino
So, Harriet, your story talks about a biotech company called Immunocore. It was spun out of Oxford university about 20 years ago, and it pioneered new medicines for cancers and viral infections and other diseases. What happened with this company?

Harriet Agnew
Initially, it managed to secure some backing from UK investors, but then as it grew, it failed to raise any more domestic money, so ended up tapping investors in the US. And then when it came to thinking about where it was going to do an initial public offering, naturally it chose Nasdaq rather than London. And I spoke to Sir John Bell, who’s one of the UK’s leading immunologists and is also the chair of Immunocore. And he told me that the main problem was just a lack of access to long-term, scale-up capital in the UK ecosystem. The way he phrased it was that UK venture capitalists didn’t have pockets deep enough, and domestic pension plans had no interest because they were too conservative to invest in the growth sector.

Marc Filippino
OK, so you just mentioned pension plans. I want to make the connection between this and start-ups, and the connection is pension funds are the kind of institution that investors can invest, you know, buy shares, to support companies like Immunocore.

Harriet Agnew
If you look at other countries like Canada and Australia, you see pension funds and sovereign wealth funds that have way more leeway from regulators to invest in early-stage companies, listed companies in other asset classes. I think the Canadian model is a pretty interesting one. So we talked to the Ontario Teachers’ Pension Plan, which has this very enviable investment track record. They’ve gained almost 10 per cent a year since it was set up in 1990, and last year they were at 4 per cent when nearly every global market sold off. And they’ll say the big part of this is due to the way that they were set up to allow them to, to make bold choices about where they invest and to have maximum flexibility. It’s also set up to be able to take advantage of its long-term time horizon by having a big allocation to private assets such as your own stakes in things like the National Lottery operator Camelot in London City Airport and also has a stake in Birmingham Airport.

Marc Filippino
So why don’t UK pension funds have that same flexibility?

Harriet Agnew
I think that risk aversion from British pension funds plays a huge part. And this all goes back to the introduction of a new accounting standard in the year 2000. And it required companies to calculate the surplus or deficit on their defined benefit pension schemes each year. And then they had to disclose any deficit as a financial liability in their accounts, just as they would with a bank loan or a bond issue. Company boards were horrified by both the magnitude and volatility of liabilities, and so they rushed to close down these defined benefit schemes. And then trustees of the schemes began shifting assets out of equities into government bonds that were supposedly low risk. And then the net result of this big move by DB pension schemes out of equities and into fixed income was that UK companies were increasingly starved of capital from their domestic investor base, who really ought to be a natural investor for them.

Marc Filippino
Harriet Agnew is the FT’s asset management editor. She’s co-writing a series on the UK pension system. Thanks, Harriet.

Harriet Agnew
Thank you.

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Marc Filippino
You can read more on all of these stories at FT.com and for briefing listeners, all the stories we put in the show notes from here on out are free to read. So have at it. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.