A Start-Up Run by Friends Takes on Shaving Giants

EISFELD, Germany - For more than 93 years, the Feintechnik factory in this small German town an hour north of Nuremberg has produced billions of razors, its machinery transforming steel by the ton into the mathematically precise blades that end up in low-end safety blades and the hardest-to-manufacture five-blade razors.

But as of Monday, the sprawling factory now belongs to Harry’s, an Internet shaving start-up that was not even open for business 10 months ago.

Few companies contemplate striking $100 million deals before their first birthday. But Harry’s is wagering that owning its own factory will help it better compete against Gillette and Schick, the titans that together control nearly 85 percent of the market.

“For a nine-month-old company to buy a 93-year-old one is a lot to bite off,” Andy Katz-Mayfield, 31, one of the start-up’s co-founders, said with a laugh in an interview at Feintechnik’s offices here.

Harry’s is but the latest start-up to reimagine a prosaic product and give it a panache that helps it stand out from the crowd. But virtually all other e-commerce ventures of recent years â€" from Warby Parker, the red-hot eyewear brand, to the clothiers Everlane and Bonobos â€" have relied on using the same factories that bigger and more entrenched players use, and then selling their wares for less.

Harry’s and its backers, including the investment firm Tiger Global, are betting that buying Feintechnik will give Harry’s a huge advantage. By running everything from the manufacturing of the razors to selling them online directly, they believe, the start-up will control its entire customer experience, while allowing the company to change its products quickly.

(Harry’s also recently opened a two-chair barbershop in the SoHo neighborhood of Manhattan. It provides haircuts and shaves and, of course, sells the company’s products.)

“In one fell swoop, we’ve become the only really vertically integrated shaving brand,” said Jeffrey Raider, the start-up’s other co-founder. (Mr. Raider, 33, helped found Warby Parker with three classmates at the Wharton School of the University of Pennsylvania and he still sits on the eyewear maker’s board.)

The deal also has the benefit of instantly making the company profitable since Feintechnik is profitable, though Harry’s is not (the co-founders said that is because they are reinvesting the profits back in the business). The deal also gives Harry’s a tidy side business of making razors for an array of other customers. It will also swell Harry’s employee roster more than tenfold, to more than 400.

To analysts, the men’s shaving business has long been ripe for disruption. The business has posted tepid growth since the financial crisis â€" sales grew just 2.25 percent last year, to $2.4 billion, according to the research firm Euromonitor â€" as customers have shown weariness at paying for traditional razors.

That has left room for new entrants. Among the splashiest is the Dollar Shave Club, which sells razor blades bought largely from the Dorco factory in South Korea to subscribers at a considerable discount.

And Gillette has made a play for the upscale market with its Art of Shaving brand, whose creams and Mach 3 razor handles are priced at luxury levels.

Harry’s is trying a different approach. The company calls itself value-oriented, with a shaving set of razor, two replacement blades and a tube of cream for $15, compared with roughly $12 for a Gillette Fusion razor with two blade heads. Its five-blade razor, in fact, is similar to the Gillette Fusion, though the head and blades are angled slightly differently. The handles, made in China, are also different â€" more ergonomic than the Fusion’s.

The start-up also promotes itself as technologically advanced, emailing customers when it is time to buy more blades.

Tim Barrett, an analyst at Euromonitor, said Harry’s may have found a profitable niche, pointing out that upscale beauty and grooming products tend to grow much faster than mass-market brands, especially after the recession. And it seizes on a growing interest in shaving differently.

“Given their positioning and increasing product profile offerings, I think it will be doing decently well among people with a bit more money to spend,” Mr. Barrett said.

The approach is drawn from the playbook of Warby Parker, which has become a darling of the start-up world by offering trendy eyeglass frames for far less than Luxottica, the behemoth of the industry.

The deal to buy the Feintechnik factory had long been on the minds of the Harry’s co-founders, childhood friends who had worked together at Bain & Company. The two had discussed building or buying their own factory back in late 2011, when the company was the germ of an idea discussed in late-night phone calls.

They began months of research, reading several online shaving forums and conducting a battery of product tests. The pair discovered that only a handful of factories around the world made the five-blade razors they wanted, with many belonging to Gillette or Schick.

But Harry’s founders soon set their eyes on Feintechnik because of the quality of its blades and the positive reviews in Internet forums. Mr. Raider called the German company to see if it would take on two entrepreneurs who did not yet even have a business.

Their first visit to the plant convinced them that building their own factory was all but impossible. The machines alone, which Feintechnik had extensively customized, cost millions of dollars each. Mr. Katz-Mayfield began flying regularly to Eisfeld, hoping to persuade Feintechnik to make blades for his nascent start-up. Over the course of several visits, including a five-hour dinner at a Russian restaurant in a nearby town, the American formed a bond with the factory’s manager, Heinz Dieter Becker.

“Here we had people with ideas, who needed help but also wanted to have input,” said Mr. Becker, who is about 6-foot-8 and whose giant hands dwarf the plastic Harry’s Truman razor handle. “We have lots of ideas, but since we didn’t have a strong brand, it was hard to bring new ideas to market.”

Even then, the two entrepreneurs were pondering a bid for their new German partner. Lee Fixel, a top executive at Tiger Global and a board member of Warby Parker, told Mr. Raider that he would help finance a deal â€" after they had built a business.

Last March, Harry’s began selling its first razor kits, promoting them as designed in America and engineered in Germany. Sales of the brand took off, through word of mouth at first and then augmented by Facebook advertising. Mr. Katz-Mayfield said that the company had sold thousands of razor kits and millions of blades, though he declined to elaborate.

In July, Harry’s two co-founders called Mr. Becker and told him of their plans. Through the fall, Harry’s pulled together the necessary funds: about $100 million in equity and debt financing to pay for the factory, and an additional $22.5 million to invest in the company’s further growth. With the capital coming together, Mr. Raider and Mr. Katz-Mayfield approached Feintechnik’s current owners, a pair of private equity firms.

Harry’s already sells razor kits through J. Crew and recently struck an agreement to sell products at the Standard line of boutique hotels. Mr. Katz-Mayfield and Mr. Raider hinted that other partnerships would be forthcoming, as well as possibly bigger advertising campaigns in which its German partner could be highlighted.

“There’s still a massive opportunity to tell the world what Harry’s is,” Mr. Katz-Mayfield said.

$2 Billion Deal in Works for Puerto Rico

Puerto Rico, which is battling a financial crisis of high unemployment and a crushing debt load, is under pressure to show investors and credit-rating agencies that it can still borrow money from the capital markets.

A group of hedge funds and private equity firms may help it do just that, but at a high price.

Bankers at Morgan Stanley have been reaching out to about a dozen hedge funds, private equity firms and other large investors to gauge their interest in providing up to $2 billion in financing to Puerto Rico, according to people briefed on the discussions.

The talks are fluid, but one of these people, who spoke on the condition of anonymity, said the debt could carry yields as high as 10 percent, more than double what a highly rated city or state pays to borrow in the current municipal debt market.

The proposed financing shows just how dire Puerto Rico’s situation has become. “It’s unprecedented,” said Robert Donahue, managing director at Municipal Market Advisors. “It’s a reflection of the increasing realization that Puerto Rico has exceeded the risk appetite of the traditional municipal bond market.”

A spokesman for the Government Development Bank for Puerto Rico, which oversees debt deals for the island, declined to comment. A Morgan Stanley spokeswoman also declined.

Investors have been driving down prices of the island’s bonds in recent months, fearing Puerto Rico could default on its outstanding debts. Hedge funds have already been buying Puerto Rico debt at steep discounts, but in relatively small amounts.

The proposed debt deal being cobbled together by Morgan Stanley would be among the largest wagers on Puerto Rico â€" if not the entire municipal debt market â€" by hedge funds and other so-called alternative investment firms. Hedge funds are big buyers of debt and stocks of troubled companies, but they are relative newcomers to municipal bonds.

Puerto Rico’s persistent financial problems have taken on a new urgency. Last month, Moody’s Investors Service said it was putting Puerto Rico’s credit rating on review for a downgrade. A one-notch downgrade by any of the ratings agencies could have painful consequences. About $1 billion of debt repayments would be accelerated and additional collateral would have to be posted for interest rate swaps, according to Moody’s, which now rates Puerto Rico Baa3, one notch above junk.

Officials in Puerto Rico have insisted that there is ample liquidity to last through the end of the government’s fiscal year, June 30, without additional borrowing. They say they have made progress on increasing tax revenue and cutting pension liabilities.

Still, Moody’s is prodding Puerto Rico to tap the debt market before the end of the month â€" which would show that it can do so under financial strain.

“An inability or unwillingness to access the market in January 2014 would be a negative rating factor” for Puerto Rico, Moody’s said in a research note just before Christmas.

The people briefed on the proposed financing said Morgan Stanley had not been hired by Puerto Rico to underwrite a deal. Rather, the bankers are acting on their own to put together a proposal to take to Puerto Rican officials.

The people said the bank’s strategy was to line up buyers before Puerto Rico sold the bonds. Analysts say that if any bond sale failed to attract enough investors, it would send a dangerous signal to the broader market.

Puerto Rican officials have discussed other possible bond deals, including selling debt backed by sales tax revenue. Such deals could come by the end of February.

Moody’s said the new debt could be used to help close an $820 million budget gap and repay various short-term debts that financed last year’s budget deficit.

While selling bonds in the municipal debt markets is a vital financing source for many states and cities, Puerto Rico has come to depend on debt to keep the government operating. For decades, the commonwealth has found near limitless demand for its bonds, which carry interest that is exempt from federal, city and state taxes, making them attractive investments for residents of the United States mainland.

The last Puerto Rican government entity to borrow in the municipal market was the island’s electrical authority, which sold $673 million in bonds last August at yields of about 7 percent. Since then, investors have grown more skittish about the prospect of a default by Puerto Rico, and their fears were heightened by Detroit’s bankruptcy filing.

As a United States territory, Puerto Rico cannot file for Chapter 9 federal bankruptcy protection. But some investors fear that the lack of a court-supervised bankruptcy process could lead to a free-for-all among Puerto Rico’s creditors or the need for a bailout from a reluctant federal government.

Such fears caused traditional holders of Puerto Rico bonds â€"mutual funds and wealthy individuals â€" to sell their bonds. That’s when hedge funds stepped in as buyers, betting that default concerns were overblown.

“I don’t think the commonwealth is near the precipice,” said David D. Tawil, co-founder of the hedge fund Maglan Capital, which owns some Puerto Rico debt. “They still have some arrows left in the quiver before they have to resort to restructuring.”

Yields on Puerto Rico’s 30-year general obligation bonds are now at 8.6 percent, according to Thomson Reuters Municipal Market Data. By comparison, yields on a benchmark of highly rated municipal bonds are 3.9 percent.

Some investors may have been too early in betting on Puerto’s Rico recovery.

In a letter to investors on Tuesday, Third Point, the hedge fund run by Daniel S. Loeb, said Puerto Rico bonds were among his firm’s top five losing investments in the fourth quarter.

Search for the ‘Next Big Thing’ Yields Soaring Valuations

You probably saw that Google is paying $3.2 billion in cash for Nest Labs, a maker of smart thermostats that has no profit and perhaps $300 million in revenue.

The search giant can obviously afford to pay a rich price, and scarily high valuations are nothing new in Silicon Valley. Yet, the Nest purchase also illustrates how cozy the Valley is â€" and how that coziness removes any check on more sober pricing. Higher prices are in everyone’s short-term interest.

Nest makes smart electronics for the home, starting with that thermostat and more recently an intelligent smoke detector. Nest makes sleek, highly functional products developed by a team led by Tony Fadell, who was formerly with Apple, and is sometimes known as the father of the iPod.

Sales are good, with some reports stating that Nest has sold more than one million thermostats. Profit may still be absent, but revenue is estimated by a Morgan Stanley analyst, Scott Devitt, to be $300 million a year.

Founded in 2010, Nest had three rounds of investment, according to Standard & Poor’s Capital IQ, a research service. It was looking to raise $150 million that would have valued the company at more than $2 billion when Google swooped in.

The Google deal is a party for Silicon Valley insiders. Not only is Mr. Fadell a prince of Silicon Valley with deep roots in Apple’s rise, but his initial investors included Google’s own venture capital arm, Google Ventures, as well as the top-tier venture capital firms Shasta Ventures and Kleiner Perkins Caufield & Byers. Shasta Ventures is a super winner â€" earning back the full amount it raised for its fund of $200 million, according to Tech Crunch. Tech Crunch and Dan Primack at Fortune both reported that Kleiner earned 20 times its money on an investment of roughly $20 million.

The $3.2 billion price tag significantly drives up valuations for other hardware companies. Now, the new thing in Silicon Valley will be looking for the next Nest (as opposed to the next Uber, which was last week’s search). This new interest will also benefit venture capital firms. Shasta Ventures, for example, has been deep in hardware, also investing in Ouya, a game console where users can try the games free. Venture capital firms will now be able to raise more money from the same Silicon Valley executives at higher valuations because the bigger exit is out there.

What about Google, you may ask? Surely, it has an incentive not to overpay.

Google may also benefit from higher valuations. Google Ventures will benefit from a rise in the value of its investments, and Google itself will get the same benefit from these rising valuations in its stock price.

Not only that, and perhaps more important, it will get the valuable publicity of being in on the next big thing and keep its reputation as a “hero” company. In Silicon Valley, no one wants to be known as a company that can’t keep up.

That’s really what is going on here. If there was skepticism in the coverage of the deal, it was limited. Mr. Fadell told the technology news and analysis site Recode that “the crux of this is that we thought a lot about what is it going to take to realize our vision and change the world.” Business Insider declared the deal a “great acquisition for both companies.”

There was not a lot of coverage about the uncertainty behind this $3.2 billion play. First, Nest’s basic intellectual property for its thermostat is being challenged. Honeywell, the dominant maker of thermostats, has sued Nest, accusing it of violating its patents.

Nest may also have limits to its potential reach, as products to run the home are often sold through repair distribution channels. For example, the bulk of thermostats are sold through home furnace and air-conditioning repair services, which have had longstanding relationships with Honeywell and others. Thermostats are products that people feel are too complicated to install themselves, even though Nest has had great reviews for its ease of use and installation. So even if Nest continues to have success, it may be limited in how much market penetration it can achieve.

The $3.2 billion value can thus be justified only if Nest is the way to access the home, a company that will eventually bring out a variety of other products to change the way we live. Google is betting that the Nest team â€" which just made millions and millions of dollars â€" is willing to stick around to make that push and not move to another start-up. (Any arrangements with Nest employees to continue with the company were not disclosed, though Mr. Fadell said “nothing would change” and that he would remain, as would Matt Rogers, Nest’s co-founder and head of engineering.)

These are some sobering thoughts and perhaps a view heralding caution or perhaps a lower price.

But that is the problem generally with Silicon Valley these days. In recent years, we have seen Facebook’s purchase of Instagram at a relatively “cheap” $1 billion, which was purchased to keep users in the Facebook network, and Google’s purchase of Waze also at almost $1 billion, which was likely completed to keep the company out of the hands of Facebook. And Yahoo bought Tumblr for $1.1 billion in pursuit of reviving its own mojo.

The purchases are driven by a venture community that must feed the beast. Their friends at the few dominant players in technology â€" Google, Microsoft and Facebook â€" are all trying to find the next big thing and have core products that are money machines. The money is redirected into these acquisitions that are add-on products with great hype, but are undeveloped. It all builds the Silicon Valley prestige, driving valuations higher.

So everyone wins, at least until these great concepts don’t pan out and the bubble pumped up by these prices bursts.

Just ask Yahoo, which paid $5.7 billion for broadcast.com and $3.6 billion for GeoCities in the last Internet bubble more than a decade ago. It drove off a crazy round of overvalued acquisitions culminating in America Online’s $165 billion deal with Time Warner in which funny money bought an old-line media business. It was fun for a while, but when these businesses didn’t produce, it all fell apart. Mojo can’t sustain itself.

Let’s hope this is not what we are seeing again, but it’s hard not to be worried. Silicon Valley has no incentive to stop the valuation madness.

Key Witness in Martoma Trial Says He Lied to F.B.I.

Dr. Sidney Gilman, the government’s star witness in its case against Mathew Martoma, a former SAC Capital Advisors portfolio manager, testified on Tuesday that he lied to F.B.I. agents and regulators for nearly a year about passing inside information to Mr. Martoma.

“I was intensely ashamed of it,” Dr. Gilman said. “I was hoping the whole thing would go away.”

The disclosure emerged as prosecutors questioned Dr. Gilman, a retired University of Michigan professor, for a second day. It could take the sting out of the defense’s strategy to discredit him.

Dr. Gilman’s testimony is at the heart of the government’s case against Mr. Martoma who, they contend, cultivated a friendship with Dr. Gilman and then “corrupted” him by seeking to gain confidential information about a clinical trial for an experimental Alzheimer’s drug being developed by Elan and Wyeth.

This gave Mr. Martoma an “illegal edge” that allowed him to make profits and avoid losses of $276 million by trading in Elan and Wyeth stock, prosecutors contend. The insider trading case is the biggest the government has brought on record and is part of a wider decade-long investigation into SAC.

From 2006 to 2008, Dr. Gilman was chairman of the safety committee for the clinical trial and had access to regular confidential updates about patients. He was also working as a paid consultant for the Gerson Lehrman Group, a firm that connects industry experts with hedge funds. Mr. Martoma and Dr. Gilman began to speak in January 2006 through consultations arranged by Gerson Lehrman. The two continued to talk until the end of July 2008.

Last week, Dr. Gilman, who is 81, told the jury that although he signed confidentiality agreements related to both positions, at some point at the end of 2006 or beginning of 2007 he “slipped” and breached those agreements in a meeting with Mr. Martoma, disclosing in “minute detail” the side effects of the drug.

The doctor also testified on Tuesday that he had given inside information to David Munno, another SAC employee, after Mr. Martoma asked him to give Mr. Munno specific dropout rates of patients. Dr. Gilman said he gave Mr. Munno this information during a consultation set up through Gerson Lehrman.

Mr. Munno’s lawyer could not be reached for comment.

When asked whether he had admitted to F.B.I. agents during an interview on Sept. 1, 2011, that he had provided inside information to Mr. Martoma, Dr. Gilman said that while he recalled providing inside information, he told agents that he had not.

Dr. Gilman continued to deny passing any confidential information on to Mr. Martoma until the next summer, when he changed his story.

“I told them the truth, meaning I told the government that I had provided inside information to Mr. Martoma repeatedly,” Dr. Gilman testified.

Facing the jury, seated in the front row of the gallery behind Mr. Martoma and wearing an oversize knitted sweater with deer on it, Mr. Martoma’s wife, Rosemary, focused her gaze at individual jurors. Other members of Mr. Martoma’s extended family also attended court on Tuesday, as well as their parents. The family took up the first two rows of the gallery. During a 20-minute break, the family members embraced Ms. Martoma and then convened downstairs in the courtroom canteen.

Last week, another doctor involved in the clinical trial, Joel S. Ross, testified that he had also provided inside information to Mr. Martoma. The jury heard how Mr. Martoma arranged to meet Dr. Ross immediately after a crucial meeting during which other doctors involved in the clinical trial received the final results. Dr. Ross told the jury he was impressed with the level of knowledge Mr. Martoma had about the results. “It was as if he was in the room with me and the slides I had just seen,” he told them.

Both doctors have signed nonprosecution agreements that give them immunity. Dr. Gilman said he paid back the $186,000 he received in consulting fees.

Mr. Martoma’s lawyers plan to seek to discredit Dr. Gilman’s testimony and told the jury during opening statements that the government gave Dr. Gilman an offer he could not refuse. After accepting the agreement, he would take the witness stand to “sell that deal,” they said.

Mr. Martoma’s lawyers will begin their cross-examination of Dr. Gilman when court reconvenes.

S.&P.’s Account of an Irate Treasury Secretary

Government officials made no secret of their displeasure when Standard & Poor’s downgraded the debt of the United States in 2011.

But, according to Standard & Poor’s, that indignation led to more than harsh words. It also motivated the government’s lawsuit last year that accused S.& P. of fraud, the ratings agency claims.

Now, S.&P. is using an account of a conversation between Timothy F. Geithner, the former Treasury secretary, and Harold W. McGraw III, the chairman of S.&P.’s parent company, to bolster its defense.

In a telephone call in August 2011, days after the downgrade was announced, an angry Mr. Geithner told Mr. McGraw that S.&P. had made an error in its assessment and that “you are accountable for that,” according to an affidavit by Mr. McGraw that was filed on Monday in United States District Court for the Central District of California.

“You have done an enormous disservice to yourselves and to your country,” Mr. Geithner said, according to Mr. McGraw. The conduct of S.&P. would be “looked at very carefully.”

A spokeswoman for Mr. Geithner, Jenni LeCompte, said in an email: “The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S.&P. is false.”

At the time of the downgrade â€" which represented the first time any major credit rating agency had removed the United States government from its list of risk-free borrowers â€" the Treasury Department issued a harsh critique of the methodology used by S.&P., saying its math was wrong.

That war of words resurfaced in 2013, when S.&P. was trying to fend off the Justice Department’s first â€" and, to date, only â€" significant action against the credit rating industry. The department claimed in its suit that S.&P. inflated the ratings of mortgage investments, setting them up for a crash when the financial crisis struck.

After trying unsuccessfully to get the lawsuit dismissed, S.&P. claimed in September that the legal action amounted to “retaliation” for the government downgrade, a claim the government denied.

$1 Billion for a Perfect N.C.A.A. Bracket, Courtesy of Warren Buffett

Each March, tens of millions of brackets are filled out in the hopes of predicting the outcome of the N.C.A.A.’s men’s basketball tournament. But the odds that a bracket will be perfect, that is, every game guessed correctly, are long â€" to the tune of 9.2 quintillion to one.

So don’t bet on anyone winning the $1 billion being offered by Quicken Loans, the Detroit-based mortgage lender, with the backing of Warren Buffett’s Berkshire Hathaway, to anyone who fills out a perfect 2014 tournament bracket. The prize money will be paid out in 40 annual payments of $25 million, or a one-time lump sum of $500 million. The first ten million people who enter the contest will be eligible for the grand prize.

“It’s going to be fun,” said Mr. Buffett from Omaha, Neb. “If there’s one left at the end, I plan to go to the game with him or her. I’ll take a check along in my pocket.”

Mr. Buffett was in Detroit on November 26 for Goldman Sachs’s “10,000 Small Businesses” initiative when he met up with Dan Gilbert, the chairman of Quicken Loans. As the two toured Detroit, Mr. Buffett said, they hatched the idea for the billion-dollar payout. The two plan to fill out their own brackets and have a side bet on this year’s tournament.

Indeed, Mr. Buffett seems to have an appetite for insuring unusual events. (A Quicken Loans spokesperson would not disclose the premium it paid to Mr. Buffett.) For example, he said, Berkshire Hathaway insured a $260 million permanent disability policy on the baseball player Alex Rodriguez when he joined the Texas Rangers. The company did not have to pay on the policy.

Still, the odds of filling out a perfect bracket are almost non-existent.

“I don’t think we need to lose any sleep for Mr. Buffett tonight,” said Jeffrey Bergen, a professor of mathematics at DePaul University who is an expert in bracketology. With 64 teams (the four play-in teams are excluded in the contest), the odds are more than the number nine quintillion, or the number nine followed by 18 zeros. The odds go down if you know something about basketball to one in 128 billion, he said.

Limiting the number of brackets to 10 million does not help much. The chances of even one perfect bracket is still only one in 100 billion. That is the same odds as those for picking the winning party in every presidential election through 2164, assuming a two-party system, or having a favorite football team win the Super Bowl seven years in a row.

There has never been a documented perfect bracket, as far as Mr. Bergen is aware.

Despite the long odds, Jay Farner, the president and chief marketing officer of Quicken Loans said he is “super hopeful” there will be a billion-dollar winner. But whether or not there is a winner, Mr. Farner said he is looking forward to the publicity the contest will bring to his company.

As part of the contest, Quicken Loans, the nation’s fourth largest home mortgage lender, will also award the 20 contestants with the most accurate, albeit imperfect, brackets $100,000 to be used toward buying, refinancing or remodeling a home. Quicken Loans also announced on Tuesday that it will donate $1 million to inner-city Detroit and Cleveland nonprofit organizations.

On a Facebook page created in conjunction with the contest announcement, there was some skepticism (“obviously, the grand prize isn’t going to be won”) and a lot of discussion of what people would do with $1 billion: pay their bills, pay off their mortgages, go on vacation and “buy the St. Louis Rams and move them back to LA.”

But while Mr. Buffett said he thinks the odds are against having a billion-dollar winner, he acknowledged there was a slight possibility. “You never know,” he said, “You just never know what’s going to happen.”

Pope Urges Davos Notables to Remember the Less Fortunate

DAVOS, Switzerland â€" Participants of the World Economic Forum, from corporate chieftains to government ministers, are expected â€" encouraged, actually â€" to spend their time amid the snowy hills of Davos networking and talking shop.

But at the opening ceremony of the forum, a notable speaker urged those gathered to remember the needs of the less fortunate.

Pope Francis I offered an address to the notables here that reiterated many of the themes that have defined his papacy thus far, including a focus on economic inequality. His speech, delivered by Cardinal Peter Turkson, the president of the Pontifical Council for Justice and Peace, was careful to praise the work of business as a “noble vocation.”

But capitalism can only rise to that highest level if it’s animated by a higher purpose, the pontiff continued. And while business has been the spark for much progress in the world, it has also left many people behind.

“The successes which have been achieved, even if they have reduced poverty for a great number of people, often have led to a widespread social exclusion,” Pope Francis wrote.

Pope Francis’ message came as a sober note at the beginning of one of the highest-profile schmooze-fests around, where business leaders hope to do deals and government officials catch up with each other. That gathering of wealth and talent, however, should be coupled with more humanistic impulses, the pope said.

“I urge you to draw upon these great human and moral resources and to take up this challenge with determination and far-sightedness,” he said. “Without ignoring, naturally, the specific scientific and professional requirements of every context, I ask you to ensure that humanity is served by wealth and not ruled by it.”

The pope’s message was amplified by the handing out of several Crystal Awards, recognitions of humanitarian work. Fitting in with the celebrity element of Davos, the first winner was the actor Matt Damon, for his work in bringing clean water to impoverished communities through the nonprofit group Water.org and his support of the ONE Campaign, an antipoverty initiative.

But he leavened the mood a bit from the start. “I’d like to thank the Hollywood Foreign press Association,” Mr. Damon began, drawing laughter from the crowd as he explained that he was reading from the wrong speech. (That, of course, was a winner’s speech meant for last week’s Golden Globe Awards that he didn’t deliver, having lost the race for best actor in a miniseries or TV movie.)

El-Erian to Step Down From Pimco

Mohamed El Erian is unexpectedly resigning from the giant asset manager Pimco, dashing expectations that he would take over management of the firm.

Pimco, the Newport Beach, Calif.-based firm that is famous for its bond funds, announced on Tuesday that it had “reorganized its leadership structure,” leading to Mr. El Erian’s resignation.

Since joining Pimco in 2007, Mr. El Erian has become the public face of Pimco, taking over from the firm’s famous chief investment officer, William H. Gross. In 2012, Mr. Gross said, ““Mohamed is my heir apparent.”

Since then, though, Pimco has hit rough waters as its famous bond funds have struggled in the face of rising interest rates, and falling bond prices. Last year, the firm’s signature Total Return Fund, which was the largest mutual fund in the world, saw customers pull over $40 billion.

Pimco did not provide any detailed explanation for Mr. El Erian’s departure. A statement from the company said that Mr. El Erian would leave Pimco in March, but keep some leadership roles with Pimco’s parent company, Allianz.

Funds Created to Offload Credit Risk From Big Projects

The Mariner Investment Group, a $10 billion global alternative investment firm, has created two funds that will buy up credit risk from deals used to finance large projects in areas like infrastructure, transportation and energy, allowing financial institutions, including European banks, to free up capital they would otherwise need to hold under regulatory requirements.

At the same time that Mariner announced the creation of the two funds, worth a total of $450 million, it closed its first such deal. UniCredit, the largest bank in Italy by assets, sold default risk on a 910 million euro portfolio of loans for energy and infrastructure projects to Mariner. Mariner bought that risk with credit-linked notes â€" a kind of credit derivative.

The notes effectively free UniCredit from holding large amounts of capital against potential risk from the loans. In an ideal world, UniCredit could then use that money to increase lending, which is in short supply in Europe. It could also use the capital to protect against other assets on its balance sheet.

“The magnitude of the capital requirements for banks substantially exceeds available capacity in equity markets,” said Andrew Hohns, senior portfolio manager for the new Mariner funds. “Banks are currently developing alternative strategies to meet these stringent new demands, and this business initiative is designed to be a flexible partner to banks to assist them in meeting the new requirements.”

European banks are facing stricter capital rules under the so-called Basel III accord, which requires that they hold higher-quality assets like stock to protect against possible losses. Under the new rules, the banks may conclude that they cannot earn a satisfactory return on capital held against the loans for infrastructure projects. By selling some of the credit risk from the energy and infrastructure loans, the bank can hold less money against those assets. Investors gain access to the credit risk of an unusual group of assets: Instead of stocks or bonds, it can be bridges or tunnels.

“This is it the first operation of this kind involving a project financing portfolio, and we do expect to see more deals like this one,” said a UniCredit spokeswoman. “The deal could be followed by similar transactions, as UniCredit seeks to increase loans to Italian companies at a time when the first signs of economic recovery will emerge.”

Banks will have to be careful, however, that such risk-transfer deals do not provoke regulators. “We have designed the strategy as best we can in response to the articulated best practices that the regulators have put forth,” Mr. Hohns said.

The bank can use the deal to reduce its calculation of risk-weighted assets, but it cannot use the deal to calculate its leverage levels.

It has been relatively common to sell credit risk for small and midsize business loans, but it is more unusual to do it for large project deals.

“What is novel about the strategy is to bring many of those well established tools and apply them to a new asset class on bank balance sheets, specifically infrastructure assets,” Mr. Hohns said.

Mariner has committed to donating 5 percent of its management fees to the Unicef Bridge Fund, which helps the organization expedite help for children in emergency situations.

Discovery Takes Controlling Stake in Eurosport

Discovery Communications on Tuesday said it had taken a controlling 51 percent stake in Eurosport International, a pan-European sports media group, in a deal that values the company at $1.2 billion.

Eurosport, which is vying to become the Europe version of American sports behemoth ESPN, operates one to four channels in 54 countries. Its flagship Eurosport network reaches 133 million homes, and the company is growing as it acquires additional rights to air soccer, cricket and motorsport events.

“The platform itself, together with the brand, which is very strong, makes it a very very unique asset,” Discovery’s chief executive, David Zaslav, said in an interview.

Discovery already owned 20 percent of Eurosport, with TF1, the French media group, owning the other 80 percent until Tuesday. Discovery had the right to acquire control of the asset next year, but approached TF1 and asked to do the deal earlier. TF1 can ask Discovery to buy its remaining 49 percent stake next year, or hold on to it.

Mr. Zaslav said Discovery would marry its local operations with Eurosport’s continental scale, allowing the group to benefit from sales teams that know individual markets. “In every one of this countries we have local sales, local people doing distribution,” he said.

For Discovery, already the largest provider of cable content in Europe, Eurosport offers it the potential to take a dominant position in the lucrative business of broadcasting sporting events.

In the United States, that market is dominated by the four broadcast networks â€" ABC, CBS, Fox and NBC â€" and ESPN, which is owned by ABC’s parent, Disney.

But in Europe, the market remains more fragmented. Regional operators compete with Eurosport for rights, and Sky Sports, partly owned by News Corporation, is another dominant force in European sports media.

Discovery is hoping that with its backing, Eurosport can grow to resemble ESPN in both influence and profitability.

“ESPN is a fantastic asset in the U.S.,” Mr. Zaslav said. “We’ve seen the value of owning sports rights domestically and around the world.”

Rothschild advised Discovery and DLA Piper provided legal advice. Darrois Villey Maillot Brochier provided legal advice to TF1.

Verizon to Buy Intel’s TV Unit

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G.E. to Buy Health Care Workforce Analytics Firm

General Electric announced on Tuesday that it had agreed to purchase API Healthcare, a software and analytics firm that helps medical companies manage their workforce.

Terms of the deal, which is still subject to regulatory approval, were not disclosed. G.E. expects the deal to close in the first quarter of 2014, according to announcements on both companies’ websites.

“Labor costs represent over 50 percent of hospital operating budgets,” said Michael Swinford, the president and chief executive of GE Healthcare Services, in the statement. “With this acquisition, GE Healthcare will be able to address a significant portion of hospital operations costs - assets, patients and labor - with a mix of software, real-time data, powerful analytics and professional services.”

More than 1,600 hospitals and staffing agencies use API’s scheduling, staffing and other human resource technology, according to the announcement. The company provides tools help hospitals to match patients with the right health care worker quickly.

“Fifty percent of the hospitals in this country still schedule their people manually,” said J.P. Fingado, API’s president and chief executive. “By putting optimization technology in place, you can start to have a massive effect on the quality of care and the cost-savings at a hospital.”

G.E. generated 73 percent of its revenue from its industrial operations, which includes power and water, aviation, oil and gas and health care activities. While a significant portion of the company’s sales still comes from its financial services unit, GE Capital, the conglomerate has moved away from some of the riskier activities that got it into the financial crisis.

The company reported that net earnings had risen 5 percent to $4.2 billion last quarter, reflecting a renewed focus on industrial products like oil pumps, jet engines and home appliances. G.E.’s health care unit generated about $1 billion in profit in the fourth quarter, a 4 percent increase over the same period a year earlier.

GE Healthcare helps hospitals improve their operational efficiency, and has been looking for ways to expand into the labor side of the healthcare industry. The company provides tools, for example, to help a nurse in an emergency department track down a piece of equipment quickly, or allow staff to track patients as they move around the hospital.

A Welcome Formula for Dow Chemical

The activist investor Dan Loeb is putting the right accelerant into Dow Chemical. Shares of the $52 billion company jumped more than 7 percent at one point on Tuesday after Mr. Loeb called for a split of its petrochemicals and specialty chemicals businesses. He may be overly optimistic about the financial benefits, but a rough sum-of-the-parts suggests merely breaking up Dow could increase its value by a fifth.

Dow’s chief executive, Andrew Liveris, is by no means averse to splitting off some commodity businesses. The company is already planning about $3 billion to $4 billion of divestments by the end of 2015. That’s on top of cost-cutting that Credit Suisse expects to produce $750 million in savings this year, up from about $500 million in 2013. So far, though, Dow has resisted going the route of DuPont, which is pursuing a full commodity chemical spinoff.

Mr. Loeb’s proposal to split off commodity petrochemicals would leave a company focused on more attractive growth businesses like agriculture, electronics and pharmaceuticals. That might warrant a richer trading multiple than the combined company. The separated businesses would also be free to focus on their own profitability, potentially generating higher earnings over time.

Dow may fret that dividing commodity and specialty chemicals would add costs because of integration between their supply chains. Mr. Loeb thinks that concern is overblown. He estimates the separated companies could generate combined earnings before interest, tax, depreciation and amortization of up to $14 billion in a few years’ time, compared with this year’s forecast of $8.7 billion and a consensus analysts’ forecast of $10.2 billion for 2016.

That may be aggressive. But the effect of doing no more than spinning off these businesses could have an immediate benefit. Assume commodity chemicals account for about two-thirds of Dow’s forecast $8.7 billion of Ebitda in fiscal 2014. Then apply chemical peers’ average 7.5 times forward enterprise multiple to forecast commodity Ebitda, and agriculture-focused Monsanto’s 11.5 times to the rest.

Adding the two together implies an enterprise value of about $77 billion for the company - a 20 percent premium to its current enterprise value, based on Credit Suisse’s assumption for this year’s net debt. Of course, Mr. Liveris still needs to act. But it’s no wonder investors reacted favorably.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Martoma Defense Walks a Tightrope

The trial of Mathew Martoma presents a challenge often seen in recent insider trading prosecutions: how to mount a defense denying any wrongdoing when the defendant is unlikely to testify. One way to persuade a jury to return a not-guilty verdict is by focusing on the ordinary nature of the trading to raise questions about whether any confidential information was even used.

Mr. Martoma, a former portfolio manager at SAC Capital Advisors, is charged with receiving advance notice about a failed drug trial being conducted by Elan and Wyeth and then persuading Steven A. Cohen, the firm’s founder and owner, to sell large positions in both companies. As DealBook reported, prosecutors called two doctors, Sidney A. Gilman and Joel Ross, to testify about how they gave Mr. Martoma confidential information on the study.

The two doctors received nonprosecution agreements from the government, but undermining their credibility can be difficult when each offers a similar story about disclosing information to Mr. Martoma. The government has shown in a number of cases that jurors are willing to credit such testimony, even from those who cut deals.

Overcoming that type of evidence can be difficult when the defendant does not tell the jury he did not receive the information or contend that it had no influence on the trading decision. Yet I expect there is little chance that Mr. Martoma will testify on his own behalf.

In the cases that have gone to trial in recent years, only one insider trading defendant, Douglas Whitman, took the witness stand to deny having traded on confidential information. He was still convicted and received a two-year prison sentence.

Prominent defendants with otherwise impeccable reputations, like Rajat K. Gupta, a former Goldman Sachs director convicted of leaking the bank’s boardroom secrets to the hedge fund manager Raj Rajaratnam, did not testify. Defense lawyers understand the danger of opening up a client to cross-examination by prosecutors that can give the jury the impression that the person is untruthful; such an outcome is the death knell for a white-collar crime defendant.

Even if Mr. Martoma wanted to testify, the disclosure that he was dismissed from Harvard Law School for doctoring a transcript and then tried to cover it up should be enough to keep him off the witness stand. When a defendant testifies, prior bad acts can be used to establish the person’s intent and knowledge, so prosecutors are sure to pounce on a prior instance of misconduct to show the jury that Mr. Martoma understood how to commit a fraud.

The crux of the case is that soon after Mr. Martoma received confidential information about the drug trial, SAC quickly sold its positions in Elan and Wyeth, two of its largest holdings, and then shorted the companies to avoid losses and realize profits of $276 million. The sheer size of the trading, along with the timing, creates a strong suspicion that it involved inside information.

To counter the suspicious nature of the transactions, the defense is arguing that SAC’s sales of Elan and Wyeth were unremarkable and therefore not indicative of insider trading. In the opening statement at trial, Mr. Martoma’s lawyer argued that hedge funds like SAC “take big positions to sell big positions, often around events,” and that the trading was “exactly the kind of prudent investment decision that a super-sophisticated and experienced investor like Steven Cohen was paid to make.” Mr. Cohen has not been charged with any wrongdoing.

To bolster its argument, the defense showed the jury charts about large trades by SAC in four other stocks â€" Altria, Anheuser-Busch, General Electric and Yahoo â€" to counter the notion that the Elan and Wyeth trades were extraordinary. Mr. Martoma did not deal with those companies, but the transactions can help show that SAC sold large positions on other occasions.

Mr. Martoma is offering the “there’s nothing to see here” defense by arguing that SAC’s trading was not out of the ordinary for a hedge fund with its investing style. Without being able to call him to testify, this is the next best way to contend that there is no basis to conclude the trades were based on inside information.

The government responded last week in a filing that asked Judge Paul G. Gardephe, who is presiding over the trial, to prohibit the defense from using other SAC trades, arguing that they were irrelevant because Mr. Martoma had nothing to do with them. Prosecutors then offered an explosive alternative to barring the evidence by asking for permission to introduce evidence of other insider trading at SAC as a counterbalance to show how the firm operated.

The government argues that Mr. Martoma wants to contend that these other trades were not based on inside information to bolster his defense that transactions in Elan and Wyeth were not improper. Usually a defendant cannot introduce evidence of other legal conduct to show the person did not act illegally, much as the government cannot show the person has a bad character to prove a crime.

To this point, Judge Gardephe has prohibited discussion of SAC’s guilty plea to insider trading charges because it is unrelated to the case against Mr. Martoma. But the reference in the opening statement to Mr. Cohen being “a super-sophisticated and experienced investor” raises the possibility that SAC’s dealings in other stocks might be a subject of inquiry during the trial.

The government’s filing also contains a veiled jab at SAC’s role in the case. It notes that the firm “has cooperated extensively with the Martoma defense team” by providing access to witnesses and documents without giving the government copies of what it furnished to defense lawyers. An individual or company can provide whatever help it wants to a defendant as long as it does not obstruct justice. SAC has been reported to be paying for Mr. Martoma’s lawyers, no doubt raising the government’s suspicions about the firm’s motives in this case.

This is certainly a difficult case for the defense because it wants to deflect as much attention away from Mr. Martoma as possible by contending that Mr. Cohen’s decision to sell the firm’s stakes in Elan and Wyeth had nothing to do with confidential information about the drug trial. The danger is that putting too much focus on SAC’s business practices raises the possibility that the government can point to other instances of insider trading admitted by the firm to show it had a culture tolerant of such misconduct.

Although Judge Gardephe is unlikely to allow the government to introduce evidence of SAC’s guilty plea at this point in the trial, the problem for the defense is that - in a phrase often heard at trial - it might “open the door” to otherwise inadmissible evidence by focusing on other trading by the firm. Courts are fond of giving the defense leeway in putting on its case, but there is a danger in offering too much.

Fiat Completes Acquisition of Chrysler

A classic American car manufacturer has officially become 100 percent Italian.

On Tuesday, the Italian automobile manufacturer Fiat announced it had completed its deal to purchase the 41 percent it did not already own of Chrysler, the once-troubled American car company. The transaction completes the $4.35 billion deal Fiat announced earlier this month, and makes Fiat the world’s seventh-largest automaker.

Fiat has shared ownership of Chrysler with the United Automobile Workers health care fund since Chrysler emerged from bankruptcy in 2009. Since then, Fiat has made no secret about wanting to acquire the U.A.W.’s stake.

“The unified ownership structure will now allow us to fully execute our vision of creating a global automaker that is truly unique in terms of mix of experience, perspective and know-how â€" a solid and open organization that will ensure all employees a challenging and rewarding environment,” Sergio Marchionne, Fiat’s chief executive and the chairman and chief executive of Chrysler Group, said in a statement when the deal was first announced.

As part of the plan, Fiat agreed to pay the U.A.W. trust $1.75 billion in cash. Chrysler agreed to make $1.9 billion in contributions, along with $700 million in installments over the next four years.

President Obama forced Chrysler into federal bankruptcy protection as part of the government’s broader restructuring of the struggling American auto industry. Chrysler, an iconic automaker founded in 1925, was the third-largest automaker in the country at the time. Chrysler’s restructuring gave Fiat a 58.5 percent stake in the company and the remaining interest to the union’s voluntary employee benefits association.

Chrysler, the maker of the Jeep Grand Cherokee, Ram pickup truck and Dodge Dart, saw sales rise 13.5 percent in the third quarter of last year compared to the same period a year earlier.

Apple Wins Temporary Stay on Court Monitor

Apple Inc. won a small victory on Tuesday in its attempt to oust a court-appointed monitor who is responsible for overseeing the company’s compliance with federal antitrust laws.

An appellate judge temporarily stayed the monitor’s work until a three-judge federal appeals panel can decide whether the stay should be kept in place longer while Apple undertakes a full challenge to the appointment of a monitor. Federal Judge Raymond Lohier Jr., in issuing the administrative stay, said Apple’s request for a permanent stay should be heard by the appellate panel “as soon as possible.”

The temporary stay comes days after Federal Judge Denise Cote rejected a request by Apple that she remove Michael Bromwich, a Washington lawyer whom she appointed as a monitor in October after determining the company conspired with five publishers to fix prices for e-books. Judge Cote also urged Apple and its lawyers to stop challenging Mr. Bromwich’s authority and let him do his work.

Apple contends that Mr. Bromwich is embarking on a “roaming” investigation of the company that goes beyond making sure the company puts in place procedures to comply with antitrust laws when it comes to pricing its products. The company also objects to Mr. Bromwich’s $1,100-an-hour fee and said his activities threaten to interfere with its operations.

In court papers, Apple contends Judge Cote’s appointment of a monitor over its objection is unprecedented in a “litigated civil antitrust case.” Apple also argues that judge has “vested the monitor with extremely broad” powers.

Apple contends the stay in the case is warranted because its appeal challenging the two-year monitor appointment is likely to prevail.

Third Point Discloses Large Stake in Dow Chemical

Updated, 10:23 a.m. |
Shares of the Dow Chemical Company rose more than 6 percent in morning trading on Tuesday after the activist hedge fund Third Point said it had taken a large stake.

Third Point, which is run by Daniel S. Loeb, did not disclose the size of the Dow Chemical stake but said it was now its largest investment by dollar value.

In a quarterly letter to investors released on Tuesday morning, Third Point said Dow Chemical should hire outside advisers for a review of its business strategy. In particular, Third Point argued that the company, based in Midland, Mich., should separate its petrochemical operations through a spinoff.

Dow Chemical’s shares shot higher after the market opened on Tuesday, climbing above $46 a share before paring some gains. The stock closed at $43.07 on Friday.

In its letter, Third Point took a critical tone, saying Dow Chemical’s stock price had lagged behind those of rivals. The hedge fund pointed to “a poor operational track record across multiple business segments, a history of under-delivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm & Haas,” referring to a $16.5 billion deal in 2009.

“We believe that Dow would best serve shareholders’ interests by engaging outside advisers to conduct a formal assessment of whether the current petrochemical operational strategy maximizes profits and if these businesses align with Dow’s goal of transforming into a ‘specialty’ chemicals company,” the letter said. “The review should explicitly explore whether separating Dow’s petrochemical businesses via a spinoff would drive greater stakeholder value.”

Rebecca Bentley, a spokeswoman for Dow Chemical, said in a statement that the company had delivered shareholder value. “We engage with all of our owners to understand their views and we welcome all constructive input with a common goal of enhancing long-term value,” she said. “We constantly review our company at the management and board level to increase our shareholder value and competitiveness.”

In December, Dow Chemical announced a plan to shed about $5 billion worth of assets in a streamlining effort.

Mr. Loeb, an investor known for his poison pen, has previously taken on companies likes Yahoo and Sony. The Yahoo campaign culminated in the hiring of Marissa Mayer as chief executive of the web company. But Sony has rebuffed Mr. Loeb’s proposal that it spin off part of its entertainment arm.

Activist Investor Joins Mondelez International Board

Mondelez International, the snack company that Kraft Foods spun off in 2012, announced on Tuesday that it had added the activist investor Nelson Peltz to its board, as Mr. Peltz seemed to end his push for a merger between Mondelez and PepsiCo.

“We respect his more than 40 years of business and investment experience as well as his expertise helping consumer products companies leverage their brands and improve operating and financial performance,” said Irene Rosenfeld, the chairman and chief executive of Mondelez, in a statement on the company’s website. “We welcome his input as we deliver superior shareholder returns.”

Mr. Peltz will be the 12th member of Mondelez’s board and will be included in the company’s nominees for election at its annual shareholder meeting later this year. Mondelez reported revenue of $35 billion in 2012.

Mr. Peltz, the chief executive and founding partner of the multi-billion-dollar investment firm Trian Fund Management, has been agitating for change at the Deerfield, Illinois-based Mondelez for months.

Trian had pushed for a merger between PepsiCo and Mondelez, which owns Cadbury chocolate and other brands, in a white paper the company issued last July. In it, Mr. Peltz criticized Pepsi’s “slow-growth” beverage business (the Americas beverage unit declined 4.5 percent in 2012) and urged the company to consider a merger with Mondelez. After a merger, Trian said it wanted Pepsi to spin off its snack operations into a new entity that would house the Frito-Lay, Cadbury, Oreo and Nabisco brands under one roof.

Trian owns a stake in both PepsiCo and Mondelez, which fueled merger speculation at the time. The white paper went on to suggest that if Pepsi was not interested in a merger with Mondelez that it consider separating its snack and beverage units.

“Given that Pepsi’s not interested in Plan A, we are encouraging them to pursue Plan B,” a spokesman for Trian said on Tuesday.

A spokesperson for Mondelez or PepsiCo could not be immediately reached.

Why Bitcoin Matters

Editor’s note: Marc Andreessen’s venture capital firm, Andreessen Horowitz, has invested just under $50 million in Bitcoin-related start-ups. The firm is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a de minimis amount of Bitcoin.

A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers.

Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it.

On the other hand, technologists â€" nerds â€" are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.

Eventually mainstream products, companies, and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start.

What technology am I talking about? Personal computers in 1975, the Internet in 1993, and â€" I believe â€" Bitcoin in 2014.

One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcon is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is.

First, Bitcoin at its most fundamental level is a breakthrough in computer science â€" one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.

Bitcoin is the first practical solution to a long-standing problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the BGP: “[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”

More generally, the BGP poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet.

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.

All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.

How does this work?

Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can buy into or sell out of the ledger any time they want â€" with no approval needed, and with no or very low fees. The Bitcoin “coins” themselves are simply slots in the ledger â€" analogous in some ways to seats on a stock exchange, except much more broadly applicable to real world transactions.

The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees.

That last part is enormously important. Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of around 2 percent to three percent â€" and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher. We’ll come back to that.

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no preexisting trust: a string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks â€" this is the part that is literally like cash â€" if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today â€" volume and velocity of payments running through the ledger â€" and speculation on future use of the payment system. This is one part that is confusing people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value.

It is perhaps true right at this moment that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible. The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. This is the classic “chicken and egg” problem with new technology: new technology is not worth much until it’s worth a lot. And so the fact that Bitcoin has risen in value due in part to speculation is making the reality of its usefulness arrive much faster than it would have otherwise.

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against P.C.’s and the Internet at the same stage. Every day more and more consumers and merchants are buying, using, and selling Bitcoin, all around the world; the overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.

The criticism that merchants will not accept Bitcoin due to its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.

Why would any merchant â€" online or in the real world â€" want to accept Bitcoin as payment, given the currently small number of consumers who want to pay with it? My partner Chris Dixon recently gave this example:

“Let’s say you sell electronics online. Profit margins in those businesses are usually under 5 percent, which means conventional 2.5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers, or taxed by the government. Of all of those choices, handing 2.5 percent to banks to move bits around the Internet is the worst possible choice. Another challenge merchants have with payments is accepting international payments. If you are wondering why your favorite product or service isn’t available in your country, the answer is often payments.”

In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers.

Since Bitcoin is a digital bearer instrument, the receiver of a payment doesn’t get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.

Credit card fraud is such a big deal for merchants, credit card processors, and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraud. As a result, many online merchants are forced to turn away between 5 percent and 10 percent of incoming orders that they could take without fear if the customers were paying with Bitcoin, where such fraud would not be possible. Since these are orders that were coming in already, they are inherently the highest margin orders a merchant can get, and so being able to take them will dramatically boost many merchants’ profit margins.

Bitcoin’s anti-fraud properties even extend into the physical world of retail stores and shoppers.

For example, with Bitcoin, the massive hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. Here’s how that would work:

You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting U.S. dollars from your account to Bitcoin, if you didn’t own any Bitcoin).

Target is happy because it has the money in the form of Bitcoin, which it can immediately turn into U.S. dollars if it wants, and it paid no or very low payment processing fees, you’re happy because there is no way for hackers to steal any of your personal information, and organized crime is unhappy. (Well, maybe criminals are still happy: they can try to steal money directly from poorly-secured merchant computer systems. But even if they succeed, consumers bear no risk of loss, fraud, or identity theft.)

Finally, I’d like to address the claim made by some critics that Bitcoin is a haven for bad behavior, for criminals and terrorists to transfer money anonymously with impunity. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology. Much like email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Further, every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin blockchain, or permanent record, available for all to see. As a result, Bitcoin is considerably easier for law enforcement to trace than cash, gold, or diamonds.

What’s the future of Bitcoin?

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.

In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in growing the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (2) merchants who accept Bitcoin, (3) “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (4) developers and entrepreneurs who are building new products and services with and on top of Bitcoin.

All four sides of the network effect are playing a valuable part in growing the value of the overall system, but the fourth is particularly important.

All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. And at our venture capital firm, Andreessen Horowitz, we are seeing a rapidly increasing number of outstanding entrepreneurs â€" not a few with highly respected track records in the financial industry â€" building companies on top of Bitcoin.

For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have dramatic improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.

One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. Every day, hundreds of millions of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries â€" over $400 billion in total annually, according to the World Bank. Every day, banks and payment companies extract mind-boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. In fact, it is hard to think of any one thing that would have a faster and more dramatic positive effect on so many people in the world’s poorest countries.

Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what we would consider to be fully modern banking and payment systems; the other roughly 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a poweful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.

And even here in the United States, a long recognized problem is the extremely high fees that the “unbanked” â€" people without conventional bank accounts â€" pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low fee services to people outside of the traditional financial system.

A third fascinating use case for Bitcoin is micropayments, or ultra-small payments. Micropayments have never been feasible, despite 20 years of attempts, because it isn’t cost effective to run small payments (think $1 and below, down to pennies, or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems make that nonviable.

All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free.

Think about content monetization, for example. One reason media businesses such as newspapers struggle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then results in all those terrible banner ads everywhere on the web). All of a sudden, with Bitcoin, there’s an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert.

Another potential use of Bitcoin micropayments is to fight spam. Future email systems and social networks could refuse to accept incoming messages unless they are accompanied with tiny amounts of Bitcoin â€" tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.

Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news story a few months ago. A random spectator at a televised sports event held up a placard with a QR code and the text “Send me Bitcoin!” He received $25,000 US in Bitcoin in the first 24 hours, all from people he had never met. This was the first time in history that you could see someone holding up a sign, in person or on TV or in a photo, and send them money with two clicks on your smartphone: take the photo of the QR code on the sign, and click to send the money.

Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anti-capitalist political organizer.

The coming years will be a time of great drama and excitement revolving around this new technology.

For example, some prominent economists are deeply skeptical of Bitcoin, even though Ben Bernanke, the former Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.” And in 1999 legendary economist Milton Friedman said, “One thing that’s missing but will soon be developed is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A â€" the way I can take a $20 bill and hand it over to you, and you may get that without knowing who I am.”

Economists who attack Bitcoin today might be correct, but I’m with Ben and Milton.

Further, there are no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin.

But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.

JPMorgan Bows Out of Hong Kong I.P.O.

HONG KONGâ€"JPMorgan Chase has removed itself from a potential $1 billion share sale by a Chinese chemical company as a United States investigation into hiring practices in China by it and other Wall Street banks steps up, people with direct knowledge of the matter said Tuesday.

JPMorgan previously employed the daughter of the chairman of the privately held Chinese company, Tianhe Chemicals Group, as a junior banker in Hong Kong, and recently bowed out as a potential underwriter of the company’s planned Hong Kong initial public offering , the people said, declining to be named because of the sensitivity of the matter.

It is at least the second Chinese I.P.O. that the bank has disassociated itself from since The New York Times disclosed the United States investigation in August. The Securities and Exchange Commission and federal prosecutors in Brooklyn have have been investigating whether JPMorgan’s ‘‘Sons and Daughters’’ program of hiring the children of executives at state-owned Chinese companies was directly linked to winning business from those companies. Six other banks have also come under scrutiny over their hiring practices. Neither JPMorgan nor any of the other banks have been accused of wrongdoing.

In November, JPMorgan withdrew as one of the underwriters of the state-owned China Everbright Bank’s share sale. JPMorgan had previously employed the son of Tang Shuangning, China Everbright Group’s chairman, a relationship that U.S. investigators have been examining. Everbright Bank went on to raise $3 billion in December, in Hong Kong’s biggest I.P.O. of 2013.

Two of the people briefed on the matter said the decision to remove itself from an underwriting role on Tianhe’s planned I.P.O. was made on JPMorgan’s own initiative. “This really starts and stops at JPMorgan’s compliance department in New York battening down the hatches under all this regulatory scrutiny,” one of the people briefed on the Tianhe deal said.

Unlike Everbright Bank, Tianhe is not a state-owned company. As a result it is unlikely to be central to the U.S. investigation, which is based on the Foreign Corrupt Practices Act, a 1977 law that makes it illegal for United States companies to exchange “anything of value” with foreign officials to win “an improper advantage” in obtaining business.

Hong Kong authorities investigating the practices, however, may be interested in the ties to a private company.

International Financing Review, or IFR, reported JPMorgan’s exit from the potential Tianhe deal on Monday.

Joyce Wei, the daughter of Tianhe’s chairman, Wei Qi, was licensed as a financial professional at JPMorgan’s Hong Kong unit from Jan. 2012 until Aug. 2013, according to a database maintained by Hong Kong’s securities regulator.

Efforts to contact Joyce Wei were unsuccessful, and Tianhe did not immediately respond to emails sent after normal working hours seeking comment.

Since October she has been working at UBS in Hong Kong, according to the database. She is employed in the Swiss bank’s equities and capital markets group but is not involved in the planned Tianhe I.P.O., according to one person with direct knowledge of with the matter.

Morgan Stanley, UBS and Bank of America Merrill Lynch are currently leading Tianhe’s plans to raise $1 billion or more in a Hong Kong share sale that could take place by June, the people said, but they haven’t been formally hired to run the deal yet. Morgan Stanley’s private equity unit made a $300 million investment in te Chinese chemical firm in 2012.

JPMorgan had been one of several Wall Street banks that worked with Tianhe in 2011 on plans for a dual listing in London and Hong Kong, but those plans were shelved in the wake of the European debt crisis, one of the people said.

Vivendi Said to Consider Sale of SFR to Numericable

Vivendi, the French conglomerate that once owned Universal Studios, is considering selling its mobile and Internet unit to the cable operator Numericable, according to a report from Bloomberg News on Tuesday.

Vivendi announced its plans to split off the business, SFR, last year as part of a broader corporate overhaul to focus more on entertainment. The European cellphone and cable operator Altice, which owns 40 percent of Numericable, has previously said it is seeking acquisitions as it plans a $1 billion initial public offering. SFR’s 5.2 million broadband subscribers would give a big boost to Numericable, which has 1.7 million broadband customers.

Speculation about a Numericable-SFR deal has persisted for months, and it was unclear on Tuesday just how serious any current talks might be.

“There was always the feeling that Numericable and SFR would come together,” said Ian Whittaker, an analyst with Liberum Capital. “I think the way people thought it would happen is Vivendi would spin off SFR and then Numericable and SFR would come together post-spin.”

One question, according to Mr. Whittaker, is whether Vivendi, valued at 11.5 billion to 12 billion euros, or around $16 billion, might retain a minority stake in the new business. Numericable raised about $1 billion through its own I.P.O. in November.

“It’s very difficult to see how Vivendi could be paid €12 billion in cash by any new entity,” Mr. Whittaker said.

SFR reported revenue of €11.3 billion in 2012, down 7.3 percent from the previous year. The company, with its 21.2 million wireless customers, accounted for 47 percent of Vivendi’s third-quarter revenue.

Representatives of Vivendi and Numericable declined to comment on Tuesday’s report.

Vivendi has been shedding assets to focus more on its entertainment activities, which include the Universal Music Group and the pay television channel Canal Plus. In October, Vivendi agreed to pay about $1.39 billion to buy the 20 percent stake of Canal Plus France it did not already own.

Around the same time, it also sold the majority of its controlling interest in the video game maker Activision Blizzard for $8.2 billion. In November, the company sold its 53 percent stake in Morocco’s Maroc Telecom to Emirates Telecommunications for €4.2 billion. The company expects to complete that deal early this year.