Silicon Valley’s newest boardroom fiasco

One thing to start: The US Department of Justice is seeking more than $4bn from Binance to settle a criminal investigation that has ensnared the world’s biggest cryptocurrency exchange and its co-founder. More here.

In today’s newsletter:

A boardroom drama threatens to unravel OpenAI

This summer Tiger Global acknowledged that the future of artificial intelligence start-ups was uncertain, despite having poured billions of dollars into the industry. 

“There are likely to be many casualties before its long-term beneficiaries are clear,” the hedge fund warned investors in an August letter seen by DD.

Little could Tiger have known that it would be OpenAI, the paragon of the AI community in which it is an investor, that would risk becoming one of the industry’s first calamities. 

The maker of ChatGPT software, which has recently been looking to sell shares at a whopping $86bn valuation, unravelled over a 72-hour period in ways even AI would have had difficulty predicting.

Late on Friday, OpenAI’s board of directors fired its founder and chief executive Sam Altman in a surprise coup that caught everyone by surprise. 

(Read the FT’s breakdown of a weekend of drama at the world’s hottest tech start-up.)

Backers such as Tiger, Microsoft and venture capitalist Vinod Khosla recovered from the shock just quickly enough to demand that Altman and another co-founder, Greg Brockman, be reinstated. That ultimately came to no fruition and on Monday, most of OpenAI’s employees said they would soon quit if Altman wasn’t brought back. 

But the concerted effort by investors to exercise control over a start-up they had poured billions of dollars into came a little too late. It boils down to a risk that has long plagued Silicon Valley: corporate governance.

All of these investors have backed a start-up without any real investor protections. 

OpenAI’s six-person board of directors doesn’t represent the interests of investors. It’s a non-profit foundation committed to ensuring that the advanced artificial intelligence the company is building will always serve humanity.

Strong governance to match the gargantuan checks venture firms write when backing promising start-ups was supposed to be one of the takeaways of the collapse of FTX, which imploded a year ago.

In the case of FTX, which is starkly different to that of OpenAI, a who’s who of venture investors, including Sequoia Capital, Andreessen Horowitz and Tiger had backed a crypto-trading exchange that had no board of directors. Without any oversight, FTX founder Sam Bankman-Fried was recently convicted of committing one of the biggest financial frauds in history.

But Silicon Valley has a short memory. Firms like Josh Kushner’s Thrive Capital stood ready to put enormous amounts of cash to work in OpenAI without any governance representing their interests.

How the OpenAI story plays out remains unclear. By the end of a tumultuous weekend, during which the company’s board seemed to be playing musical chairs with the chief executive role, Altman said he would join Microsoft.

Some believe this is a genius move by Microsoft CEO Satya Nadella. Shares in Microsoft were up 2 per cent following the announcement. Meanwhile, OpenAI employees remain hopeful Altman will return to the start-up.

Look who’s Zuckin’ up the Telegraph auction

Ever since it was seized by Lloyds Banking Group earlier this year, the race to buy control of the UK’s Telegraph Media Group has seen multiple twists and turns. 

The latest one, however, could end up prematurely scuppering a multi-month auction process run by bankers at Goldman Sachs that was just in its infancy. 

Abu Dhabi-backed RedBird IMI, the investment vehicle led by former CNN boss Jeff Zucker, has made an audacious offer to buy the parent company of the Daily Telegraph and Spectator magazine through a complicated debt-for-equity swap.

The auction had attracted names such as Will Lewis, who is now off to run the Washington Post, Rupert Murdoch and DMGT’s Lord Rothermere. But all the jostling will be for naught if the intervention by the Redbird IMI consortium goes as they plan.

The trick? Rather than enter the auction, they have agreed to back the Barclay family — who had owned the Tory-supporting newspaper for two decades until it was seized by Lloyds — with the repayment of the £1.1bn debt behind the newspaper.

That repayment, a legal obligation for Lloyds, would short circuit the auction, bringing the business out of receivership. Then, RedBird IMI would trigger a debt-for-equity swap to gain control of the Telegraph.

And there is another reason why this could be a masterclass in dealmaking. By bringing TMG out of receivership rather than buying it at auction, the situation would allow RedBird IMI to evade some scrutiny from British authorities. 

A person close to one of the rival bidders said the Barclay family was trying to “hand two treasured media assets to an autocratic government without regulatory scrutiny”, adding: “This is a heist taking place in full daylight.”

Private equity’s new target: its IPO flops

In 2021, UK private equity firm Cinven listed European healthcare company Synlab on the Frankfurt stock exchange. The company, riding high off a Covid-related surge in demand for its services, was valued at about €4bn excluding debt.  

In a statement announcing the deal, Cinven partner Alex Leslie said: “Synlab is in an excellent position to deliver on its future growth strategy.”

Things haven’t quite worked out that way. 

Since listing, Synlab’s share price has tanked. Earlier this year, the company posted a profit warning. Cinven has struggled to cash out its position, still holding more than 40 per cent of a company worth significantly less than it was two years ago.

The firm’s solution: buy Synlab back for about half the price it took it public at.

Synlab is one among nearly 300 companies that private equity groups floated in the 2021 bull market. Many of these are languishing well below their initial offering prices and they have been forced to hold on to their stakes far longer than anticipated. 

Some groups are turning to additional leverage to generate liquidity by taking out margin loans. Others, like Cinven, are buying back the companies outright.

Doing so can give the buyout firm more time to build a more profitable business away from the scrutiny of public markets. But they can also be controversial.

It raises questions about how private equity will exit further down the line. If public markets didn’t like the company the first time round, why would they the second?

Job moves

• Airbnb has hired former White House Chief of Staff Ron Klain to be its chief legal officer.

• Goldman Sachs’s Masanori Mochida has resigned as president of its Japanese business and will step down with immediate effect in a surprise departure that ends the career of one of the biggest figures in Tokyo’s financial industry.

• Citigroup has named senior banker Nacho Gutiérrez-Orrantia as banking head for Europe. Jens Welter will become head of investment banking for Emea and the UK. The announcement came as the bank starts a first big round of lay-offs as part of a sweeping restructuring.

• London Stock Exchange Group has appointed Michel-Alain Proch as its chief financial officer. He is currently group CFO for Publicis.

• General Motors-owned Cruise said on Sunday that its co-founder and chief executive Kyle Vogt had resigned.

• NRG Energy said that its chief executive Mauricio Gutierrez had left his role, while it had appointed four new directors as part of a “co-operation agreement” with Elliott Management following a months-long campaign by the activist investor. Lawrence Coben, NRG’s chair, has been appointed interim chief executive.

Smart reads

Garda world The story of Ireland’s Kinahan crime family has it all: drugs, cash, murder, gangs, boxing, feuds, prison and, of course, succession. This is a must-read via the Sunday Times.

Golden power The forced sale of Italy’s largest refinery has been a convoluted situation. The FT reveals that mining executive Beny Steinmetz, who was convicted of corruption in Switzerland, is linked to the company that was chosen by Rome to take it over.

Soapy mess Brazil’s Natura learned the hard way that retailing is not a simple business. Here’s how the company blew nearly $1bn at The Body Shop in a tale of immense value destruction via the FT.

News round-up

Junior analyst’s lawsuit against top bank puts Wall Street hours on trial (FT) 

Italy intervenes in Safran deal over national security concerns (FT)

Julius Baer warns on profits weeks after Signa crisis (FT)

Short seller Jim Chanos to close his main hedge funds (FT)

Generali executive warns on private equity funds in insurance (FT)

KPMG UK partnership shrinks to half the size of rival PwC (FT)

X chief Linda Yaccarino resists pressure from advertisers to quit (FT)

Talks between PGA Tour and Saudi PIF set to drag into next year (FT)