The Saturday - 10/10/20 Edition
Volume 1, Issue 3
Good morning, friends!
The best day of the week is finally upon us. Grab a cup of java and let’s get right into it.
It’s Saturday October 10, 2020.
Holy Hertz!
Few companies have made as many headlines in 2020 as car rental giant, Hertz. Last May, as the travel industry ground to a halt and payments on over 650,000 cars became due, Hertz filed for bankruptcy. The announcement of the Chapter 11 filing led to a precipitous drop in stock price, as investors fled to safety. Even billionaire Carl Icahn, the company’s largest shareholder, liquidated his position and took a $1.9B loss.
What happened next was one of the most memorable storylines of the year: no less than 160,000 retail investors from the Church of Robinhood piled into the bankrupt company and the stock price shot up 900% in a week. It was such an unlikely turn of events that Hertz tried to capitalize by issuing $500M in new stock that it admitted was likely “worthless.” The SEC shot that down.
On Wednesday, the Hertz saga took its latest, incredible turn. According to the Financial Times, “part of a €528m Vatican portfolio derived from donations [for the poor and needy] bought structured notes containing CDS as part of a bet that Hertz would not default on its debts by April 2020.” Huh?
(For the unacquainted, credit default swaps are financial products that allow investors to sell the default risk on a loan to other investors, in exchange for a fee. It’s effectively an insurance product. For a more thorough description, here is a primer on CDS.)
It’s no secret that the Vatican has vast resources, but I was taken aback by this story of Cardinal Giovanni Angelo Becciu placing multi-million euro bets on Hertz credit default swaps. I don’t recall learning about derivatives until after I left Catholic school, but in fairness, that was in the seventh grade. Maybe they covered CDS in the eight?
Anyways, the best part of this story is that this investment worked: the three year old trade paid out a month before Hertz filed for bankruptcy. Talk about timing!
Still, don’t go placing bets on Becciu being the next Pope: the Wolf of the Holy See was stripped of his cardinalate last month. Apparently YOLO’ing tithes on derivatives is an inappropriate use of funds. Who knew?
Becciu should have known. As it turns out, his boss, Pope Francis, has oddly strong opinions about credit default swaps. Still from FT:
In 2018, Pope Francis said credit default swaps “encouraged the growth of a finance of chance and of gambling on the failure of others, which is unacceptable from the ethical point of view”. The instruments, he said, were “a ticking time bomb”.
I wonder what he thinks about SPACs.
The End of an Era
Last year, IBM acquired open source software company Red Hat for $34B, in a bid to expand its hybrid cloud product lines. Thursday, the 109-year old company took its commitment to the cloud a (big) step forward, announcing that the American icon would be broken up.
Under its plan, IBM’s legacy IT infrastructure business will be spun out in a yet-to-be-named NewCo., that will begin its existence with “more than 4,600 technology- intensive, highly regulated clients in 115 countries, including more than 75% of the Fortune 100.” Not bad for a start-up.
Well, that was IBM’s version of events. For a less positive spin on NewCo.’s outlook:
“IBM is essentially getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation,” Wedbush Securities analyst Moshe Katri said.
In any event, International Business Machines Corp will transition to being a business “laser-focused on the $1 trillion hybrid cloud opportunity” and aim to be the leading cloud and AI company. That’s not the IBM your grandparents grew to love, but it might be the IBM that powers your grandchildren’s businesses or TikToks.
Although this is the most dramatic reorganization in its history, IBM has shown a willingness to dump under-performing business lines throughout the years. Still from Reuters:
“We divested networking back in the ‘90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago because all of them didn’t necessarily play into the integrated value proposition,” Krishna [IBM’s CEO] said on a call with analysts.
IBM seems to be following a more proactive rejuvenation strategy than GE, which is probably a good idea. This is no small endeavor though: the company expects to record “nearly $5 billion in expenses related to the separation and operational changes.”
The market took the news well, sending shares up 7% on Thursday. Shareholders will also be happy to know that the company intends to maintain its 5%+ dividend across the two companies. The tax-free spin-off should be completed by the end of 2021.
Free Ad Placement
WeWork had a terrific banner ad on the WSJ’s website Friday, letting people know that the company was absolutely, categorically, definitely not broke. Though the co-working startup didn’t pay for ad placement on The Saturday, we’re reposting the banner as a freebie:
“We’re liquid!” might be the best slogan since “It’s Toasted.”
From Traitors to Mafiosi
In 1957, eight engineers left the employ of Nobel Prize winner William Shockley and founded Fairchild Semiconductor Corp. This move earned them the moniker of the Traitorous Eight and helped create the Silicon Valley we know today.
Per MarketWatch, Fairchild gained “iconic status as the company that developed the manufacturing process for the earliest silicon chips and inventing the first commercially produced integrated circuit.”
Still, the Traitorous Eight are best known for their post-Fairchild accomplishments: two went on to co-found Intel (market cap: $224B), one co-founded Advanced Micro Devices (market cap: $97B), and another still, Eugene Kleiner, went on to co-found Kleiner Perkins, the famous venture capital firm who backed companies such as Amazon, AOL, Google, Square, Twitter, and many more.
On Thursday, lending startup Affirm announced that it had confidentially filed for an IPO. The company was started by Max Levchin, who previously co-founded the $230B payments behemoth, PayPal. Affirm provides financing options for online shoppers who want to purchase items today but pay over time, and the IPO could value the company at $10B.
What I find most interesting about this story, however, is how it deepens the similarities between Fairchild’s Traitorous Eight and PayPal’s own iconic founding team: the PayPal Mafia.
In addition to Levchin, PayPal’s cofounders include Peter Thiel (who subsequently founded Palantir, market cap: $16B) and Elon Musk (Tesla, market cap: $400B; Space X, valuation: $46B). Early PayPal employees also included future founders Reid Hoffman (LinkedIn), Chad Hurley (YouTube), Joe Lonsdale (Palantir and OpenGov), and Russel Simmons (Yelp).
That’s all I have here. I’m just amazed at how two companies were able to have so much talent in one place at the same time. Perhaps that’s why 41 years passed between the founding of Fairchild and PayPal; teams this good only come around once per generation.
Another One
Forest Road Acquisition Corp. filed a Form S-1 with the SEC on Thursday, seeking to raise $250M. Before you ask, the answer is: yes. It’s another SPAC.
SPACs are very two months ago and it’s not my intention to cover them every week, but this one is sponsored by…. Shaquille O’Neal and Martin Luther King III! How do you pass on that?
The group also includes former high-ranking Disney executives and will pursue tech, media, and telecom opportunities. With this combination of star power and industry expertise, this SPAC sounds like a legitimate contender.
Speaking of business expertise, while O’Neal is best known for his Hall of Fame basketball career, his business track record is equally impressive. According to NBC Sports:
[O’Neal] is the joint owner of 155 Five Guys Burgers restaurants, 17 Auntie Annie's Pretzels restaurants, 150 car washes, 40 24-hour fitness centers, a shopping center, a movie theater, and several Las Vegas nightclubs.
In addition to owning these businesses, O’Neal has also earned a doctoral degree in education, served as a reserve police officer, and released a platinum rap album.
The point here is that I don’t care about which company this SPAC acquires. If the ticker symbol is $SHAQ, I’m in.
Have a great weekend.