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Business

Elon Musk Explores Raising Up to $3 Billion to Help Pay Off Twitter Debt

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Elon Musk

‘s team has been exploring using as much as $3 billion in potential new fundraising to help repay some of the $13 billion in debt tacked onto Twitter Inc. for his buyout of the company, people familiar with the matter said.

In December, Mr. Musk’s representatives discussed selling up to $3 billion in new Twitter shares, people familiar with the matter said.

Mr. Musk’s team has said to people familiar with the finances of the company that an equity raise, if successful, could be used to pay down an unsecured portion of the debt that carries the highest interest rate within the $13 billion Twitter loan package, people familiar with the matter said.

Paying off the debt would provide welcome financial relief to Twitter, which has struggled to keep advertisers on the platform. In November, Mr. Musk said Twitter had suffered “a massive drop in revenue” and was losing over $4 million a day. He also said that month that bankruptcy was a possibility for the company, although Mr. Musk later shared more upbeat prospects for the company, saying he expects Twitter to be roughly cash-flow break-even in 2023 as he has slashed some 6,000 jobs.

The state of the fundraising talks couldn’t be learned. In mid-December, Mr. Musk’s team reached out to new and existing backers about raising new equity capital at the original Twitter takeover price.

Mr. Musk’s advisers had hoped to reach a deal to raise cash at the initial takeover price by the end of 2022, according to an email sent to prospective investors at the time. However, some prospective backers said they balked at the terms, given concerns about Twitter’s financial performance. The Musk team didn’t specify a funding amount or purpose for the fundraise in the email.

Fidelity, one of the co-investors that backed Mr. Musk’s takeover of Twitter, wrote down its stake in Twitter by 56% in November, public filings show, suggesting Mr. Musk would face an uphill battle raising funds at the original valuation from outside investors. The banks holding the $13 billion in debt that backed his takeover of the company haven’t yet received any formal notice of any repayments, people familiar with the matter said.

Layoffs Across the Tech Industry

Representatives for Mr. Musk didn’t respond to requests for comment.

Twitter’s unsecured bridge loans, which total $3 billion, are the most expensive portion of the $13 billion debt package Mr. Musk incurred as part of his $44 billion acquisition of the social-media company. They carry an interest rate of 10% plus the secured overnight financing rate, a benchmark interest rate that has shot up in recent months and currently sits at 4.3%.

With every quarter that passes without Twitter refinancing the debt, the interest rate goes up by an additional 0.50 percentage point, according to regulatory filings. Twitter’s first quarterly interest payment is due at the end of the month, the filings show.

Twitter’s annual interest burden has increased by over $100 million since he announced the takeover deal last April, as the overnight rate has increased. At the time of the announcement, the overnight rate was 0.3%.

Elon Musk has said that Twitter is losing over than $4 million a day.



Photo:

Marlena Sloss/Bloomberg News

Twitter’s total interest expense has been estimated to be roughly $1.25 billion a year, according to a December analysis by

Jeffrey Davies,

a former credit analyst and founder of data provider Enersection LLC. By that estimate, Twitter is incurring roughly $3.4 million every day in interest-payment obligations.

On Dec. 13, Mr. Musk tweeted “beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates.”

Repaying the unsecured bridge loans would leave Twitter with a debt burden that has much more manageable interest rates. Twitter’s $6.5 billion in term loans and $3 billion in secured bridge loans carry an annual interest burden of 4.75% and 6.75%, respectively, plus the overnight rate, according to public filings.

Tesla CEO Elon Musk is set to testify in a federal trial over tweets from 2018 in which he floated the possibility of taking the company private. WSJ’s Rebecca Elliott explains what to know about the trial. Illustration: Adele Morgan

A potential deal would also provide a degree of relief for the banks that backed Mr. Musk’s takeover of the social-media company and that intended to sell the debt to third-party investors but changed course after deteriorating market conditions sank Wall Street’s appetite for exposure to risky bonds and loans.

The $13 billion of Twitter debt on bank balance sheets, one of the biggest “hung deals” of all time, has helped contribute to a drag in the number of mergers and acquisitions as banks’ firepower to back deals is tied up.

Morgan Stanley,

the lead bank on Twitter’s debt deal, has approximately $807 million in unsecured bridge debt on its balance sheet, while

Bank of America Corp.

,

Barclays

PLC and MUFG Bank Ltd. each have approximately $623 million of exposure, according to public documents and calculations by The Wall Street Journal.

Each of the four banks have more than $2 billion in other Twitter debt commitments on their balance sheets separate from the unsecured bridge facility, including term loans and other secured debt, the documents show.

Representatives of those banks declined to comment.

—Corrie Driebusch, Alexa Corse and Laura Cooper contributed to this article.

Write to Berber Jin at berber.jin@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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Technology

Microsoft’s Cloud Doesn’t Quite Cover All

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Demand for Windows operating-system software has fallen with sales of the personal computers that use it.



Photo:

STEVE MARCUS/REUTERS

Microsoft’s

MSFT -0.22%

latest results are like a blast from the past—and not in a good way. 

The software titan has come a long way from the days when it depended on its ubiquitous Windows operating system. But it is still a lucrative business—enough so that a slump in personal computer sales can weigh on Microsoft’s financial results. And a slump this is; IDC reported earlier this month that PC unit sales slid 28% year over year during the December quarter—the biggest drop tracked by the market research firm’s numbers going at least back to 2015. 

Not surprisingly then, Microsoft said Tuesday in its fiscal second quarter results report that Windows revenue slid 27% year over year to about $4.9 billion for the same period. That is less than 10% of the company’s revenue now, but it is a profitable contributor given that much comes from PC makers simply paying Microsoft to bundle Windows onto their machines. Hence, operating profits in Microsoft’s More Personal Computing segment that includes the Windows business slid 48% year over year. That played a big part in the company’s total operating profit for the quarter coming about 3% shy of Wall Street’s forecasts, at $20.4 billion.   

Investors have largely learned to look past Windows these days in favor of Microsoft’s far more important cloud business. But as Microsoft’s last report three months ago proved, even that isn’t immune to the slumping global economy. Azure, the cloud computing service that competes squarely with

Amazon

‘s AWS, grew revenue by 31% year over year. That slightly exceeded Wall Street’s forecasts, but it was still a record-low pace for the business. Things also aren’t looking like they will get much better anytime soon. Chief Financial Officer

Amy Hood

noted that cloud growth moderated, “particularly in December,” and projected revenue growth of 14% to 15% year over year for the company’s Intelligent Cloud segment during the March quarter—a deceleration of 11 percentage points from the same period last year. 

Investors were at least better-prepared for bad news this time. Microsoft’s share price slipped 1% in after-hours trading following the results and forecast compared with the 8% drop sparked by its previous quarterly report. As the first major tech player to post results for the December quarter, Microsoft also casts a large shadow. It has a highly diversified business that spans corporate and consumer software, cloud services, videogame systems and even online advertising. The company even noted that the recent spate of big tech layoffs will hurt its LinkedIn business, which is a major corporate recruiting tool in the tech sector. Those layoffs include 10,000 positions to be cut from Microsoft’s own payroll–another sign that even a cloud titan can’t keep floating above the economy. 

Write to Dan Gallagher at dan.gallagher@wsj.com

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Business

Microsoft Earnings Fell Last Quarter Amid Economic Concerns

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Microsoft Corp.

MSFT -0.22%

recorded its slowest sales growth in more than six years last quarter as demand for its software and cloud services cooled on concerns about the health of the global economy.

The Redmond, Wash., company’s revenue expanded 2% in the three months through Dec. 31 from a year earlier to $52.7 billion. Its net income fell 12% to $16.4 billion. That is the company’s lowest revenue growth since the quarter that ended in June 2016.

“Organizations are exercising caution given the macroeconomic uncertainty,” Microsoft Chief Executive

Satya Nadella

said on an earnings call Tuesday.

The software company is the first of the tech titans to announce earnings for the quarter. It and others have recently announced layoffs of thousands of people to reflect a sudden lowering of expectations about future demand. Last week Microsoft announced plans to eliminate 10,000 jobs in response to the global economic slowdown, the company’s largest layoffs in more than eight years.

Microsoft said it expects around $51 billion in revenue this quarter, a 3% increase from the same quarter last year. Its shares, which had initially risen on the results in after-hours trading, gave up their gains after the company announced its guidance. 

Microsoft’s Intelligent Cloud business, which includes its Azure cloud-computing business, grew 18% to $21.51 billion. Azure grew 31%, which was slightly above some analysts’ expectations.

Microsoft is one of the top companies in cloud-computing services that have boomed during the pandemic. In the middle of the health crisis, Microsoft reported several quarters in a row of 50% or more year-over-year sales growth for its cloud-computing platform, the world’s No. 2 behind

Amazon.com Inc.’s

cloud. While Azure and Microsoft’s other cloud services remain the main engine for the company’s growth, demand isn’t what it was even a year ago as customers try to manage their cloud computing costs.

The company has been betting the next wave of demand for cloud services could come from more companies and people using artificial intelligence. It has been deepening its relationship with the AI startup OpenAI, the company behind the image generator Dall-E 2 and the technology behind ChatGPT, which can answer questions and write essays and poems.

“The age of AI is upon us and Microsoft is powering it,” Mr. Nadella said Tuesday.

Microsoft had been sheltered from much of the recent downturn because it gets most of its sales from companies rather than advertising and consumer spending. However, it isn’t immune to the end of pandemic trends that turbocharged demand, hiring and investment as well as economic headwinds such as high interest rates.

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Demand for Windows operating-system software has fallen with sales of the personal computers that use it. Households, companies and governments that bought computers during the pandemic are scaling back.

That was reflected in Microsoft’s personal computing segment revenue, which fell 19% to $14.24 billion. Sales related to its Windows operating system declined 39% and sales of devices like its Surface tablets fell 39%.

Worldwide PC shipments were down 29% in the fourth quarter last year compared with the previous year, according to preliminary data from the research firm Gartner Inc. Financial analysts don’t expect that trend to improve until 2024.

Photos: Tech Layoffs Across the Industry

Microsoft said its videogaming revenue fell 12% during the quarter. Videogames and Microsoft’s Xbox videogame consoles are increasingly important businesses for the company. The videogaming industry is going through a slowdown as pandemic-related restrictions ease and people spend less time at home.

The company made a huge bet on the sector a year ago with its $75 billion plan to acquire videogame giant

Activision Blizzard Inc.

Last month the Federal Trade Commission sued to block the acquisition, saying the deal would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft then filed a rebuttal saying the deal won’t hurt competition in the videogaming industry. It could take months before it is decided in the U.S. and elsewhere whether the deal can go through.

After the close of regular stock trading on Tuesday, Microsoft shares had slipped around 18% over the previous year, broadly in line with the tech-heavy Nasdaq Composite Index.

Write to Tom Dotan at tom.dotan@wsj.com

Write to Tom Dotan at tom.dotan@wsj.com

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Business

DOJ Sues Google, Seeking to Break Up Online Advertising Business

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The Justice Department is seeking the breakup of Google’s business brokering digital advertising across much of the internet, a major expansion of the legal challenges the company faces to its business in the U.S. and abroad.

A lawsuit filed Tuesday, the Justice Department’s second against the

Alphabet Inc.

GOOG -1.98%

unit following one filed in 2020, alleges that Google abuses its role as one of the largest brokers, suppliers and online auctioneers of ads placed on websites and mobile applications. The filing promises a protracted court battle with wide-ranging implications for the digital-advertising industry.

Filed in federal court in Virginia, the case alleges that Google abuses monopoly power in the ad-tech industry, hurting web publishers and advertisers that try to use competing products. Eight states, including California and New York, joined the Justice Department’s lawsuit.

The lawsuit asks the court to unwind Google’s “anticompetitive acquisitions,” such as its 2008 purchase of ad-serving company DoubleClick, and calls for the divestiture of its ad exchange.

“For 15 years Google has pursued a course of anticompetitive conduct that has allowed it to halt the rise of rival technologies, manipulate auction mechanics, insulate itself from competition, and forced advertisers and publishers to use its tools,” Attorney General

Merrick Garland

said at a press conference Tuesday. “Google has engaged in exclusionary conduct that has severely weakened if not destroyed competition in the ad-tech industry.”

Attorney General Merrick Garland said Tuesday that the digital-advertising industry was harmed by Google’s allegedly monopolistic conduct.



Photo:

Al Drago/Bloomberg News

A Google spokesman said the lawsuit “attempts to pick winners and losers in the highly competitive advertising technology sector.”

“DOJ is doubling down on a flawed argument that would slow innovation, raise advertising fees, and make it harder for thousands of small businesses and publishers to grow,” the spokesman said.

By calling for specific divestitures from Google’s ad-tech business, the Justice Department lawsuit went further in seeking a breakup than some antitrust experts had expected. Shares of Alphabet fell by about 2% in trading on Tuesday.

Though largely invisible to internet users, the ad-tech tools controlled by Google facilitate much of the buying and selling of digital ads that helps fund online publishers. Google’s business includes a tool publishers can use to offer ad space, a product for advertisers to buy those slots and an exchange that automatically links bidders with webpages as they are being loaded for individual users.

Big tech companies such as Google are under a barrage from lawmakers and regulators across multiple continents who have targeted the companies’ dominance in online markets. Justice Department officials also are investigating

Apple Inc.

The Federal Trade Commission has sued

Meta Platforms Inc.’s

Facebook unit over antitrust allegations and

Microsoft Corp.

to block its planned $75 billion acquisition of

Activision Blizzard Inc.

President Biden recently urged lawmakers from both parties to unite behind legislation seeking to rein in tech giants. The European Union also has opened cases looking at alleged anticompetitive conduct by Google, Meta and other companies.

The Justice Department’s 2020 lawsuit against Google targeted its position in online search markets, including an agreement to make Google search the default in Apple’s Safari web browser. Google is fighting the case, which is expected to go to trial this year.

Alphabet gets about 80% of its business from advertising. The Justice Department’s new suit targets the subset of that ad business that brokers the buying and selling of ads on other websites and apps. Google reported $31.7 billion in revenue in 2021 from that ad-brokering activity, or about 12% of Alphabet’s total revenue. Google distributes about 70% of that revenue to web publishers and developers.

Last year, Google offered to split off parts of its ad-tech business into a separate company under the Alphabet umbrella to fend off the most recent Justice Department investigation. DOJ officials rejected the offer and decided to pursue the lawsuit instead.

For years, Google has faced allegations from advertising- and media-industry executives, lawmakers and regulators that its presence at multiple points of the online ad-buying process harms publishers and gives it an unfair advantage over rivals. Google also operates the most popular search engine and the largest online video-streaming site, YouTube, giving rise to allegations it has tilted the market in its own favor.

Rivals say that Google’s power in digital advertising stems from a series of acquisitions Google used to build its ad-tech business, beginning with the company’s $3.1 billion purchase of DoubleClick. The FTC approved the merger in a controversial decision. Google went on to purchase a host of other startups including the mobile-advertising company AdMob.

“Having inserted itself into all aspects of the digital advertising marketplace, Google has used anticompetitive, exclusionary, and unlawful means to eliminate or severely diminish any threat to its dominance over digital advertising technologies,” the complaint read.

Google has said it has no plans to sell or exit the ad-tech business. It has also strongly contested claims in a lawsuit filed by state attorneys general, led by Texas, containing allegations similar to the Justice Department complaint. A federal judge denied the bulk of Google’s motion to dismiss the case last year, allowing it to proceed to the discovery stage and ultimately toward trial.

Google’s Android operating system is the most popular in the world—you can find Android code on everything from Peloton bikes to kitchen appliances and even NASA satellites. WSJ’s Dalvin Brown explains why it is the world’s most-used OS. Illustration: Rami Abukalam

Any divestiture of parts of Google’s ad-tech business would cause big ripple effects across the online advertising industry, which has recently shown signs of weakness as consumers dial back purchases in response to worsening economic conditions.

Breaking off parts of Google’s ad-tech business from the rest of the company could take years of litigation to resolve. Depending on the outcome of the case, ad-tech executives have said the results could range from a higher share of ad dollars flowing to publishers to lower overall spending because digital ads would be less efficient without Google brokering them.

The 149-page complaint makes detailed allegations about the internal workings of Google’s ad-tech operations. The suit alleges, for instance, that Google used anticompetitive tactics to build up the market share of its own ad server, which issues requests for advertisements on behalf of websites, and then used that market power to effectively push publishers into sending their ad inventory only to Google’s in-house ad exchange, AdX.

The Justice Department argues, in part, that this conduct locked out rival ad-tech providers, increasing prices for advertisers and costs of publishers.

“Google keeps at least thirty cents—and sometimes far more—of each advertising dollar flowing from advertisers to website publishers through Google’s ad tech tools,” the lawsuit alleges. “Google’s own internal documents concede that Google would earn far less in a competitive market.”

The lawsuit also alleges that Google executives worked to kill a rival online-bidding technology called “header bidding,” which the lawsuit says the company referred to internally as an “existential threat.” As part of a plan dubbed Project Poirot, the company allegedly changed its own ad-buying tools to underbid on behalf of advertisers when they turned to outside ad exchanges that used header bidding, so those rivals would lose more auctions and “dry out,” the complaint says.

At one point, Google also approached

Amazon.com Inc.,

to ask “what it would take for Amazon to stop investing in its header bidding product,” the complaint alleges, adding that Amazon rebuffed those requests.

“Google uses its dominion over digital advertising technology to funnel more transactions to its own ad tech products where it extracts inflated fees to line its own pockets at the expense of the advertisers and publishers it purportedly serves,” the complaint read.

The Justice Department case overlaps in some ways with the late 2020 lawsuit from the group of U.S. states led by Texas.

In Tuesday’s complaint, the Justice Department quotes some of the same internal communications as the Texas-led lawsuit, including how one Google executive compared the company’s control over ad-tech to the financial sector: “The analogy would be if Goldman or Citibank owned the NYSE,” referring to the New York Stock Exchange.

The case also shares similarities with an investigation that the EU’s top antitrust enforcer, the European Commission, opened in 2021, as well as one by the U.K.’s Competition and Markets Authority. Those probes are exploring allegations that Google favors its own ad-buying tools in the advertising auctions it runs, but also look at other elements of Google’s ad-tech business. The EU, for instance, is also looking at Google’s alleged exclusion of competitors from brokering ad-buys on its video site YouTube.

Mr. Garland said Tuesday that the Justice Department filed its own lawsuit because the federal government was harmed by Google’s allegedly monopolistic conduct. Federal agencies have since 2019 spent over $100 million on display ads, the complaint says. The government paid inflated fees and was harmed by manipulated advertising prices because of Google’s anticompetitive conduct, the lawsuit alleges.

Microsoft is deepening its partnership with OpenAI, the company behind ChatGPT and Dall-E. That has investors and analysts speculating whether Microsoft could challenge Google’s dominance in search. WSJ Heard on the Street columnist Dan Gallagher joins host Zoe Thomas to discuss how AI could affect search and at what cost.

Jonathan Kanter,

the assistant attorney general for antitrust, said while there are similarities with other lawsuits against Google, the Justice Department’s complaint is based on its own investigation that yielded “meticulous detail” about Google’s ad-tech business.

“We detail many facts, many episodes that in the individual and in the aggregate have maintained numerous monopolies,” Mr. Kanter said.

Google has attempted to settle the claims against its ad-tech business. In addition to offering to split off parts of its ad-tech business to avoid the Justice Department suit, the company last year discussed with the EU an offer to allow competitors to broker the sale of ads directly on the video service.

In 2021, the company agreed to give U.K. antitrust regulators effective veto power over elements of its plans to remove a technology called third-party cookies from its Chrome browser to settle an investigation there into the plan.

In France, Google agreed to pay a fine of 220 million euros, equivalent to about $239 million, and to improve data access to competing ad-tech companies, to not use its data in ways rivals couldn’t reproduce to settle a similar antitrust investigation in the country.

—Keach Hagey contributed to this article.

Write to Miles Kruppa at miles.kruppa@wsj.com and Sam Schechner at Sam.Schechner@wsj.com

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Business

3M to Cut Jobs as Demand for Its Products Weakens

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3M Co.

said it is cutting 2,500 manufacturing jobs globally as the company confronts turbulence in overseas markets and weakening consumer demand.

The maker of Scotch tape, Post-it Notes and thousands of other industrial and consumer products said Tuesday that it expects lower sales and profit in 2023 after demand weakened significantly in late 2022, pulling down quarterly performance.

The St. Paul, Minn., company forecast sales this year to slip from last year’s level with weak demand for consumer products and electronic items, particularly smartphones, tablets and televisions, for which 3M provides components. Fourth-quarter sales for 3M’s consumer business dropped nearly 6% from the same period a year earlier.

“Consumers sharply cut discretionary spending and retailers adjusted their inventory levels,” 3M Chief Executive

Mike Roman

said during a conference call. “We expect the demand trends we saw in December to extend through the first half of 2023.”

3M shares were down 5.2% at $116.25 Tuesday afternoon, while major U.S. stock indexes were little changed.

The company said demand for its disposable face masks is receding, as healthcare providers spend less on Covid-19 measures, and mask demand returns to prepandemic levels. 3M said it expects mask sales to decline between $450 million and $550 million this year from 2022.

3M executives said the spread of Covid infections in China is weighing on sales there, and sporadic plant closings are interrupting industrial production. China also is reducing production of consumer electronics because of weakening consumer demand, they said, and 3M’s exit from its business in Russia last year will also contribute to lower sales this year.

The 2,500 layoffs represent roughly 2.6% of the company’s workforce, which a regulatory filing said was about 95,000 at the end of 2021. Mr. Roman declined to specify where the job cuts will take place, or whether the company might make further reductions as it reviews its supply chains and prepares to spin off its healthcare unit.

“We’re looking at everything that we do as we manage through the challenges that we’re facing in the end markets and we focus on driving improvements,” he said.

The company said it would take a pretax restructuring charge in the first quarter of $75 million to $100 million.

Mr. Roman said the job cuts were unrelated to litigation facing the company. 3M is defending against allegations that the so-called forever chemicals it has produced for decades have contaminated soil and drinking water. It is also involved in litigation over foam earplugs its subsidiary Aearo Technologies LLC sold to the military. About 230,000 veterans have filed complaints in federal court alleging the earplugs failed to protect them from service-related hearing loss.

3M has said the earplugs were effective when military personnel were given sufficient training on how to use them. In litigation over firefighting foam that incorporated forms of forever chemicals, 3M is expected to argue that the products were produced to U.S. military specifications, granting the company legal protection as a government contractor.

In both cases, Mr. Roman said the company is focused on finding a way forward.

3M said the strong value of the U.S. dollar continues to erode sales from other countries when foreign currencies are converted to dollars.

The company forecast that sales for the quarter ending March 31 will be down 10% to 15% from the same period last year. For the full year, the company projects sales to fall between 6% and 2%, and expects adjusted earnings of $8.50 a share to $9 a share. The company earned $10.10 a share in 2022, excluding special charges, and analysts surveyed by FactSet were expecting the company to earn $10.22 in 2023.

For the fourth quarter, the company posted a profit of $541 million, or 98 cents a share, compared with $1.34 billion, or $2.31 a share, a year earlier.

Stripping out one-time items, including costs tied to exiting the company’s operations making forever chemicals, adjusted earnings came to $2.28 a share. Analysts were looking for adjusted earnings of $2.36 a share, according to FactSet.

Sales fell 6% to $8.08 billion for the quarter, slightly topping expectations of analysts surveyed by FactSet.

Mr. Roman said there were promising signs for some of 3M’s businesses, including in biopharma processing, home improvement and automotive electrification, the last of which he said grew 30% in 2022 to become a roughly $500 million business.

“There’s more to it than consumer electronics, but certainly the consumer-electronics dynamics are the story of the day,” he said.

Write to John Keilman at john.keilman@wsj.com and Bob Tita at robert.tita@wsj.com

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Business

Microsoft to Deepen OpenAI Partnership, Invest Billions in ChatGPT Creator

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Microsoft Corp.

MSFT 0.98%

said Monday it is making a multiyear, multibillion-dollar investment in OpenAI, substantially bolstering its relationship with the startup behind the viral ChatGPT chatbot as the software giant looks to expand the use of artificial intelligence in its products.

Microsoft said the latest partnership builds upon the company’s 2019 and 2021 investments in OpenAI.

The companies didn’t disclose the financial terms of the partnership. Microsoft had been discussing investing as much as $10 billion in OpenAI, according to people familiar with the matter. A representative for Microsoft declined to comment on the final number.

OpenAI was in talks this month to sell existing shares in a tender offer that would value the company at roughly $29 billion, The Wall Street Journal reported, making it one of the most valuable U.S. startups on paper despite generating little revenue.

The investment shows the tremendous resources Microsoft is devoting toward incorporating artificial-intelligence software into its suite of products, ranging from its design app Microsoft Designer to search app Bing. It also will help bankroll the computing power OpenAI needs to run its various products on Microsoft’s Azure cloud platform.

At a WSJ panel during the 2023 World Economic Forum, Microsoft CEO Satya Nadella discussed the company expanding access to OpenAI tools and the growing capabilities of ChatGPT.

The strengthening relationship with OpenAI has bolstered Microsoft’s standing in a race with other big tech companies that also have been pouring resources into artificial intelligence to enhance existing products and develop new uses for businesses and consumers.

Alphabet Inc.’s

Google, in particular, has invested heavily in AI and infused the technology into its operations in various ways, from improving navigation recommendations in its maps tools to enhancing image recognition for photos to enabling wording suggestions in Gmail.

Google has its own sophisticated chatbot technology, known as LaMDA, which gained notice last year when one of the company’s engineers claimed the bot was sentient, a claim Google and outside experts dismissed. Google, though, hasn’t made that technology widely available like OpenAI did with ChatGPT, whose ability to churn out human-like, sophisticated responses to all manner of linguistic prompts has captured public attention.

Microsoft Chief Executive

Satya Nadella

said last week his company plans to incorporate artificial-intelligence tools into all of its products and make them available as platforms for other businesses to build on. Mr. Nadella said last week at a Wall Street Journal panel at the World Economic Forum’s annual event in Davos, Switzerland. Mr. Nadella said that his company would move quickly to commercialize tools from OpenAI.

Analysts have said that OpenAI’s technology could one day threaten Google’s stranglehold on internet search, by providing quick, direct responses to queries rather than lists of links. Others have pointed out that the chatbot technology still suffers from inaccuracies and isn’t well-suited to certain types of queries.

“The viral launch of ChatGPT has caused some investors to question whether this poses a new disruption threat to Google Search,” Morgan Stanley analysts wrote in a note last month. “While we believe the near-term risk is limited—we believe the use case of search (and paid search) is different than AI-driven content creation—we are not dismissive of threats from new, unique consumer offerings.”

OpenAI, led by technology investor

Sam Altman,

began as a nonprofit in 2015 with $1 billion in pledges from

Tesla Inc.

CEO

Elon Musk,

LinkedIn co-founder

Reid Hoffman

and other backers. Its goal has long been to develop technology that can achieve what has been a holy grail for AI researchers: artificial general intelligence, where machines are able to learn and understand anything humans can.

Microsoft first invested in OpenAI in 2019, giving the company $1 billion to enhance its Azure cloud-computing platform. That gave OpenAI the computing resources it needed to train and improve its artificial-intelligence algorithms and led to a series of breakthroughs.

OpenAI has released a new suite of products in recent months that industry observers say represent a significant step toward that goal and could pave the way for a host of new AI-driven consumer applications.

In the fall, it launched Dall-E 2, a project that allowed users to generate art from strings of text, and then made ChatGPT public on Nov. 30. ChatGPT has become something of a sensation among the tech community given its ability to deliver immediate answers to questions ranging from “Who was George Washington Carver?” to “Write a movie script of a taco fighting a hot dog on the beach.”

Mr. Altman said the company’s tools could transform technology similar to the invention of the smartphone and tackle broader scientific challenges.

“They are incredibly embryonic right now, but as they develop, the creativity boost and new superpowers we get—none of us will want to go back,” Mr. Altman said in an interview in December.

Mr. Altman’s decision to create a for-profit arm of OpenAI garnered criticism from some in the artificial-intelligence community who said it represented a move away from OpenAI’s roots as a research lab that sought to benefit humanity over shareholders. OpenAI said it would cap profit at the company, diverting the remainder to the nonprofit group.

—Will Feuer contributed to this article.

Write to Berber Jin at berber.jin@wsj.com and Miles Kruppa at miles.kruppa@wsj.com

Corrections & Amplifications
The design app Microsoft Designer was misidentified as Microsoft Design in an earlier version of this article. (Corrected on Jan. 23)

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Business

U.S. Treasurys at ‘critical point’: Stocks, bonds correlation shifts as fixed-income market flashes recession warning

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Bonds and stocks may be getting back to their usual relationship, a plus for investors with a traditional mix of assets in their portfolios amid fears that the U.S. faces a recession this year.

“The bottom line is the correlation now has shifted back to a more traditional one, where stocks and bonds do not necessarily move together,” said Kathy Jones, chief fixed-income strategist at  Charles Schwab, in a phone interview. “It is good for the 60-40 portfolio because the point of that is to have diversification.”

That classic portfolio, consisting of 60% stocks and 40% bonds, was hammered in 2022. It’s unusual for both stocks and bonds to tank so precipitously, but they did last year as the Federal Reserve rapidly raised interest rates in an effort to tame surging inflation in the U.S.

While inflation remains high, it has shown signs of easing, raising investors’ hopes that the Fed could slow its aggressive pace of monetary tightening. And with the bulk of interest rate hikes potentially over, bonds seem to be returning to their role as safe havens for investors fearing gloom.

“Slower growth, less inflation, that’s good for bonds,” said Jones, pointing to economic data released in the past week that reflected those trends. 

The Commerce Department said Jan. 18 that retail sales in the U.S. slid a sharp 1.1% in December, while the Federal Reserve released data that same day showing U.S. industrial production fell more than expected in December. Also on Jan. 18, the U.S. Bureau of Labor Statistics said the producer-price index, a gauge of wholesale inflation, dropped last month.

Stock prices fell sharply that day amid fears of a slowing economy, but Treasury bonds rallied as investors sought safe-haven assets. 

“That negative correlation between the returns from Treasuries and U.S. equities stands in stark contrast to the strong positive correlation that prevailed over most of 2022,” said Oliver Allen, a senior markets economist at Capital Economics, in a Jan. 19 note. The “shift in the U.S. stock-bond correlation might be here to stay.”

A chart in his note illustrates that monthly returns from U.S. stocks and 10-year Treasury bonds were often negatively correlated over the past two decades, with 2022’s strong positive correlation being relatively unusual over that time frame.


CAPITAL ECONOMICS NOTE DATED JAN. 19, 2023

“The retreat in inflation has much further to run,” while the U.S. economy may be “taking a turn for the worse,” Allen said. “That informs our view that Treasuries will eke out further gains over the coming months even as U.S. equities struggle.” 

The iShares 20+ Year Treasury Bond ETF
TLT,
-1.62%
has climbed 6.7% this year through Friday, compared with a gain of 3.5% for the S&P 500
SPX,
+1.89%,
according to FactSet data. The iShares 10-20 Year Treasury Bond ETF
TLH,
-1.40%
rose 5.7% over the same period. 

Charles Schwab has “a pretty positive view of the fixed-income markets now,” even after the bond market’s recent rally, according to Jones. “You can lock in an attractive yield for a number of years with very low risk,” she said. “That’s something that has been missing for a decade.”

Jones said she likes U.S. Treasurys, investment-grade corporate bonds, and investment-grade municipal bonds for people in high tax brackets. 

Read: Vanguard expects municipal bond ‘renaissance’ as investors should ‘salivate’ at higher yields

Keith Lerner, co-chief investment officer at Truist Advisory Services, is overweight fixed income relative to stocks as recession risks are elevated.

“Keep it simple, stick to high-quality” assets such as U.S. government securities, he said in a phone interview. Investors start “gravitating” toward longer-term Treasurys when they have concerns about the health of the economy, he said.

The bond market has signaled concerns for months about a potential economic contraction, with the inversion of the U.S. Treasury market’s yield curve. That’s when short-term rates are above longer-term yields, which historically has been viewed as a warning sign that the U.S. may be heading for a recession.

But more recently, two-year Treasury yields
TMUBMUSD02Y,
4.193%
caught the attention of Charles Schwab’s Jones, as they moved below the Federal Reserve’s benchmark interest rate. Typically, “you only see the two-year yield go under the fed funds rate when you’re going into a recession,” she said.

The yield on the two-year Treasury note fell 5.7 basis points over the past week to 4.181% on Friday, in a third straight weekly decline, according to Dow Jones Market Data. That compares with an effective federal funds rate of 4.33%, in the Fed’s targeted range of 4.25% to 4.5%. 

Two-year Treasury yields peaked more than two months ago, at around 4.7% in November, “and have been trending down since,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Jan. 19. “This further confirms that markets strongly believe the Fed will be done raising rates very shortly.”

As for longer-term rates, the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.479%
ended Friday at 3.483%, also falling for three straight weeks, according to Dow Jones Market data. Bond yields and prices move in opposite directions. 

‘Bad sign for stocks’

Meanwhile, long-dated Treasuries maturing in more than 20 years have “just rallied by more than 2 standard deviations over the last 50 days,” Colas said in the DataTrek note. “The last time this happened was early 2020, going into the Pandemic Recession.” 

Long-term Treasurys are at “a critical point right now, and markets know that,” he wrote. “Their recent rally is bumping up against the statistical limit between general recession fears and pointed recession prediction.”

A further rally in the iShares 20+ Year Treasury Bond ETF would be “a bad sign for stocks,” according to DataTrek.

“An investor can rightly question the bond market’s recession-tilting call, but knowing it’s out there is better than being unaware of this important signal,” said Colas.   

The U.S. stock market ended sharply higher Friday, but the Dow Jones Industrial Average
DJIA,
+1.00%
and S&P 500 each booked weekly losses to snap a two-week win streak. The technology-heavy Nasdaq Composite erased its weekly losses on Friday to finish with a third straight week of gains.

In the coming week, investors will weigh a wide range of fresh economic data, including manufacturing and services activity, jobless claims and consumer spending. They’ll also get a reading from the personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge. 

‘Backside of the storm’

The fixed-income market is in “the backside of the storm,” according to Vanguard Group’s first-quarter report on the asset class.

“The upper-right quadrant of a hurricane is called the ‘dirty side’ by meteorologists because it is the most dangerous. It can bring high winds, storm surges, and spin-off tornadoes that cause massive destruction as a hurricane makes landfall,” Vanguard said in the report. 

“Similarly, last year’s fixed income market was hit by the brunt of a storm,” the firm said. “Low initial rates, surprisingly high inflation, and a rate-hike campaign by the Federal Reserve led to historic bond market losses.”

Now, rates might not move “much higher,” but concerns about the economy persist, according to Vanguard. “A recession looms, credit spreads remain uncomfortably narrow, inflation is still high, and several important countries face fiscal challenges,” the asset manager said. 

Read: Fed’s Williams says ‘far too high’ inflation remains his No. 1 concern

‘Defensive’

Given expectations for the U.S. economy to weaken this year, corporate bonds will probably underperform government fixed income, said Chris Alwine, Vanguard’s global head of credit, in a phone interview. And when it comes to corporate debt, “we are defensive in our positioning.”

That means Vanguard has lower exposure to corporate bonds than it would typically, while looking to “upgrade the credit quality of our portfolios” with more investment-grade than high-yield, or so-called junk, debt, he said. Plus, Vanguard is favoring non-cyclical sectors such as pharmaceuticals or healthcare, said Alwine.  

There are risks to Vanguard’s outlook on rates. 

“While this is not our base case, we could see a Fed, faced with continued wage inflation, forced to raising a fed funds rate closer to 6%,” Vanguard warned in its report. The climb in bond yields already seen in the market would “help temper the pain,” the firm said, but “the market has not yet begun to price such a possibility.”

Alwine said he expects the Fed will lift its benchmark rate to as high as 5% to 5.25%, then leave it at around that level for possibly two quarters before it begins easing its monetary policy. 

“Last year, bonds were not a good diversifier of stocks because the Fed was raising rates aggressively to address the inflation concerns,” said Alwine. “We believe the more typical correlations are coming back.”

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Business

How Apple Has So Far Avoided Layoffs: Lean Hiring, No Free Lunches

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No company is certain to avoid significant cutbacks in an economic environment as volatile as the current one, and Apple isn’t immune to the business challenges that have hit other tech giants. It is expected next month to report its first quarterly sales decline in more than three years. Apple has also slowed hiring in some areas.

But the iPhone maker has been better positioned than many rivals to date in part because it added employees at a much slower clip than those companies during the pandemic. It also tends to run lean, with limited employee perks and businesses focused on hardware products and sales that have so far largely dodged the economic downturn, investors say.

An Apple spokesman declined to comment.

From its fiscal year-end in September 2019 to September 2022, Apple’s workforce grew by about 20% to approximately 164,000 full-time employees. Meanwhile, over roughly the same period, the employee count at Amazon doubled, Microsoft’s rose 53%, Google parent

Alphabet Inc.’s

increased 57% and Facebook owner Meta’s ballooned 94%.

Apple has about 65,000 retail employees working in more than 500 stores who make up roughly 40% of the company’s total workforce.

On Friday, Alphabet became the latest tech company to announce widespread layoffs, with a plan to eliminate roughly 12,000 jobs, the company’s largest-ever round of job cuts.

Alphabet’s cut follows a wave of large layoffs at Amazon, Microsoft and Meta. The tech industry has seen more than 200,000 layoffs since the start of 2022, according to Layoffs.fyi, a website that tracks cuts in the sector as they surface in media reports and company releases.

The last big round of layoffs at Apple happened way back in 1997, when co-founder

Steve Jobs

returned to the company, which then cut costs by firing 4,100 employees.

So far, Apple’s core business has shown itself to be resilient against broader downturns in the market. The other four tech giants have suffered amid slowdowns in digital advertising, e-commerce and PCs. In its September quarter, Apple reported that sales at its most important business—the iPhone—advanced 9.7% from the previous year to $42.6 billion, surpassing analyst estimates.

After a period of aggressive hiring to meet heightened demand for online services during the pandemic, tech companies are now laying off many of those workers. And tech bosses are saying “mea culpa” for the miscalculation. WSJ reporter Dana Mattioli joins host Zoe Thomas to talk through the shift and what it all means for the tech sector going forward.

Apple may face a rougher December quarter, which it is scheduled to report on Feb. 2, as the company encountered manufacturing challenges in China, where strict zero-Covid policies damped much economic activity. Many analysts expect that demand hasn’t subsided for its iPhones and as the company continues to ramp back up manufacturing, demand is anticipated to move to the March quarter.

The company’s business model hasn’t been totally immune to broader slowdowns. Revenue from its services business continued to slow, growing 5% annually to $19.2 billion in the September quarter, shy of the gains posted in recent quarters.

Tom Forte,

senior research analyst at investment bank D.A. Davidson & Co., said he expects Apple to reduce head count, but it might do that quietly through employee attrition—by not replacing workers who leave. The company could move in the direction of making other cuts or adjustments to perks that are common in Silicon Valley. Apple doesn’t offer free lunches to employees on its corporate campus, unlike other big tech companies such as Google and Meta.

Some of the tech giants cutting jobs have spent heavily on projects that are unlikely to turn into strong businesses anytime soon, said Daniel Morgan, a senior portfolio manager at Synovus Trust Co., which counts Apple among its largest holdings. “Both Meta and Google are terribly guilty of that,” he said.

Meta has been pouring billions of dollars into its Reality Labs for its new ambitions in the so-called metaverse. Meta Chief Executive

Mark Zuckerberg

has defended the company’s spending on Reality Labs, suggesting that virtual reality will become an important technological platform.

After announcing the layoffs, Alphabet Chief Executive

Sundar Pichai

said the company had seen dramatic periods of growth during the past two years. “To match and fuel that growth, we hired for a different economic reality than the one we face today,” he wrote in a message to employees on Friday.

Apple also is working on risky future bets, such as an augmented-reality headset due out later this year and a car project whose release date is uncertain, but at a more measured pace.

Write to Aaron Tilley at aaron.tilley@wsj.com

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Business

Google Parent Alphabet to Cut 12,000 Jobs Amid Wave of Tech Layoffs

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Google’s parent company said it would cut its staff by 6% in its largest-ever round of layoffs, extending a retrenchment among technology companies after record pandemic hiring.

Alphabet Inc.

GOOG 5.72%

said the cuts would eliminate roughly 12,000 jobs across different units and regions, though some areas, including recruiting and projects outside of the company’s core businesses, would be more heavily affected.

The layoffs reached as high as the vice president level and affected divisions including cloud computing and Area 120, an internal business incubator that had already faced cuts last year, said people familiar with the matter.

The Google cuts make January the worst month yet in a wave of tech layoffs that began last year, according to estimates from Layoffs.fyi, which tracks media reports and company announcements. This week,

Microsoft Corp.

said it would eliminate 10,000 jobs, the largest layoffs in more than eight years. Online furniture seller

Wayfair Inc.

said it is laying off about 10% of its workforce, and

Unity Software Inc.,

which provides tools for creating videogames and other applications, also cut staff.

Earlier this month,

Amazon.com Inc.

said layoffs would affect more than 18,000 employees and

Salesforce Inc.

said it was laying off 10% of its workforce. Last year,

Meta Platforms Inc.

said it would cut 13% of staff.

Technology companies including Google expanded rapidly during the pandemic as life moved online. Recent cuts have been part of a broader pivot toward protecting profit and cementing the end of a growth-at-all costs era in technology. Google executives have in recent months said the company would be tightening its belt, reflecting a new period of more disciplined and efficient spending. But the company hadn’t announced cuts as deep as those of its Silicon Valley peers. 

Google hired aggressively as demand for its services rose during the health crisis, leading to more than 50% growth in total employee count across Alphabet since the end of 2019. The cuts this week appeared to fall short of the almost 12,800 employees Alphabet added to its roster in the third quarter last year.

“Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today,” Alphabet Chief Executive

Sundar Pichai

wrote in a message to employees sent out Friday and posted on the company’s website.

“I take full responsibility for the decisions that led us here,” Mr. Pichai wrote. The corporate mea culpa for overhiring has become a recurring message in recent months at tech companies as executives realized that some of the hiring they undertook to keep pace with soaring demand for all things digital early in the pandemic left them overstaffed as the business environment soured.

Among the executives who have made such apologies are Salesforce Co-Chief Executive

Marc Benioff,

Meta Platforms CEO

Mark Zuckerberg

and Twitter Inc. co-founder

Jack Dorsey.

The recent headlines about tech layoffs don’t seem to match broader economic indicators, which show a strong job market and a historically low unemployment rate. WSJ’s Gunjan Banerji explains the disconnect. Illustration: Ali Larkin

Alphabet recorded $17.1 billion of operating income in the third quarter last year, an 18.5% decrease from the same period in 2021. Google executives partly blamed a slowdown in revenue growth on the company’s historic performance during the tail end of the pandemic. Alphabet shares rose 4.5% to $97.24 in morning trading Friday.

Alphabet earlier this month said it would cut more than 200 jobs at its Verily Life Sciences healthcare business, accounting for about 15% of the roles at the unit. Before that, some of the last major cuts Google announced were in 2009, when the company said it was reducing the number of jobs in its sales and marketing teams by roughly 200 globally.

Activist hedge fund TCI Fund Management, which had called on Alphabet to cut costs aggressively in November, said Friday the company should go further.

“Management should aim to reduce headcount to around 150,000, which is in line with Alphabet’s headcount at the end of 2021,”

Christopher Hohn,

TCI managing director, said in a letter. “This would require a total headcount reduction in the order of 20%.”

Current and former Google employees said layoffs would likely affect the company’s famously loose and collegial culture, which has been widely imitated in the tech industry.

Google employees have long enjoyed one of the most accommodating environments among large U.S. companies. A letter to potential investors in Google’s 2004 initial public offering said the company provided many unusual benefits, such as washing machines, and would likely add more over time.

As job cuts have accumulated in the tech industry, many employees at Google have pressed executives about the possibility of layoffs at the company. At a companywide meeting in December, Mr. Pichai told employees that the company had tried to “rationalize where we can so that we are set up to better weather the storm regardless of what’s ahead.”

A Google spokesman said that Friday’s cuts would affect not just Google, but also other Alphabet subsidiaries, but didn’t specify at what levels. Alphabet subsidiaries include Verily and the Waymo self-driving-car unit. The spokesman didn’t comment on which specific products or engineering units would be affected.

“Alphabet leadership claims ‘full responsibility’ for this decision, but that is little comfort to the 12,000 workers who are now without jobs,” said Parul Koul, executive chair of the Alphabet Workers Union, in a statement. “This is egregious and unacceptable behavior by a company that made $17 billion dollars in profit last quarter alone.”

Alphabet said it would offer U.S.-based employees two months notice, plus 16 weeks of severance pay, along with two additional weeks for each year an employee being laid off from the nearly 25-year-old company has worked there. In other countries, the company will follow local processes and laws, which sometimes require consultations with employee representatives before workers are laid off.

The company will also offer former employees access to resources to help them with their immigration status, job placement and mental health, the spokesman said. Tech companies in the U.S. often have employees on work visas tied to their employment.

Write to Sam Schechner at Sam.Schechner@wsj.com and Miles Kruppa at miles.kruppa@wsj.com

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Business

T-Mobile Says Hackers Stole Data on About 37 Million Customers

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T-Mobile

TMUS -0.52%

US Inc. said hackers accessed data, including birth dates and billing addresses, for about 37 million of its customers, the second major security lapse at the wireless company in two years.

The company said in a regulatory filing Thursday that it discovered the problem on Jan. 5 and was working with law-enforcement officials and cybersecurity consultants. T-Mobile said it believes the hackers had access to its data since Nov. 25 but that it has since been able to stop the malicious activity.

The cellphone carrier said it is currently notifying affected customers and that it believes the most sensitive types of records—such as credit card numbers, Social Security numbers and account passwords—weren’t compromised. T-Mobile has more than 110 million customers.

The company said its preliminary investigation indicates that data on about 37 million current postpaid and prepaid customer accounts was exposed. The company said hackers may have obtained names, billing addresses, emails, phone numbers, birth dates and account numbers. Information such as the number of lines on the account and plan features could have also been accessed, the company said.

“Some basic customer information (nearly all of which is the type widely available in marketing databases or directories) was obtained,” T-Mobile said in a statement. “No passwords, payment card information, social security numbers, government ID numbers or other financial account information were compromised.”

The company said its systems weren’t breached but someone was improperly obtaining data through an API, or application programming interface, that can provide some customer information. The company said it shut down the activity within 24 hours of discovering it.

The company’s investigation into the incident is ongoing. T-Mobile warned that it could incur significant costs tied to the incident, though it said it doesn’t currently expect a material effect on the company’s operations. The company is set to report fourth-quarter results on Feb. 1.

T-Mobile acknowledged a security lapse in 2021 after personal information regarding more than 50 million of its current, former and prospective customers was found for sale online. T-Mobile later raised its estimate and said about 76.6 million U.S. residents had some sort of records exposed.

A 21-year-old American living in Turkey claimed credit for the 2021 intrusion and said the company’s security practices cleared an easy path for the theft of the data, which included Social Security numbers, birth dates and phone-specific identifiers. T-Mobile’s chief executive later apologized for the failure and said the company would improve its data safeguards.

T-Mobile proposed paying $350 million to settle a class-action lawsuit tied to the 2021 hack. As part of the settlement, the company also pledged to spend $150 million for security technology in 2022 and this year.

Write to Will Feuer at Will.Feuer@wsj.com

Corrections & Amplifications
T-Mobile US Inc. acknowledged a security lapse in 2021. An earlier version of this article incorrectly said it was last year. (Corrected on Jan. 19)

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