The Saturday - 10/24/20 Edition
Volume 1, Issue 5
Morning!
I don’t have a witty intro today, but I’m glad you’re here.
It’s Saturday October 24, 2020.
Quick Bye
In April, streaming platform Quibi (short for “Quick Bites”) went live.
For those unfamiliar with the company, Quibi was founded in 2018 by former Disney chairman and Dreamworks founder Jeffrey Katzenberg, and is led by former Hewlett Packard CEO Meg Whitman. The startup quickly raised a staggering $1.8B from backers such as Warner Bros., Alibaba, Disney, Goldman Sachs, and others who bought into its audacious bet to reinvent entertainment by delivering high quality, sub-10 minutes, made-for-mobile video “chapters.”
On Wednesday, six months after launch, the company announced it was shutting down. This is an astonishingly quick turn of events for a company with prodigious managers and serious money behind it. I mean… Juicero made it to four years.
In an interview with the New York Times, Katzenberg attributed the entirety of Quibi’s struggles to the coronavirus - people aren’t spending as much time waiting in line at the coffee shop, a prime “in-between” moment during which to watch a chapter. Frankly, this sounds like a convenient excuse for an inconvenient truth: the concept didn’t pan out.
Pandemic life has no shortage of in-between moments, where people confined in their homes need a break from the monotony of quarantine. According to the World Economic Forum, “nearly nine out of 10 young people said they had increased their use of at least one digital tool during the pandemic.” These are activities and interactions that take place primarily on mobile - Quibi’s battleground.
If a single factor is to blame for the company’s demise, I would suggest it’s poor product-market fit. Give people two hours of Oscar-worthy productions and they will pay $15 for popcorn. Give them a phone and five minutes, however, and they will watch TikToks or scroll through friends’ #throwback Cabo pictures.
Something always felt off about Quibi’s strategy and I think others agreed:
Quibi’s shortcomings can also be explained by a more basic point: it tried solving a problem that didn’t exist. The company’s “[Netflix / Prime / YouTube], but for mobile” model is nice and all, until you realize that those services are already on mobile!
In the end, Quibi was true to its business model to a fault: its lifespan, like its content, was bite-sized.
A New Deal for United
Many news outlets have recently reported a significant worldwide spike in COVID-19 cases. You would think that’s a bearish signal for the airline industry. Apparently it’s not.
On Tuesday, the Financial Times reported that United Airlines raised $3B in new financing secured by its planes and spare parts. This isn’t the sexiest story, but it does mark a stark turnaround from United’s failed financing efforts just a few months ago:
“This deal was rejected at 10 per cent [in May] and now it’s being accepted around 6 per cent. It’s pretty amazing,” Mr King said. “It’s an amazing feat of financial engineering.”
It gets better. After labelling the company’s debt as Junk last spring, Moody’s and S&P both gave this new offering an Investment grade. Goldman Sachs even agreed to setup a credit line to guarantee the first 18 months of interest!
Either the market knows something we don’t about a vaccine or there’s too much institutional money floating around. After working from home for 6+ months, I hope it’s the former.
Snitches Get Millions
On Thursday, the SEC announced its largest whistleblower reward ever: a whopping $114M. If that sounds like a lot of money, that’s because it is. The award obliterated the previous record of $50M, set last June.
If you’re like me, you’re wondering who the whistleblower is and how the award was calculated. Per The Hill:
The SEC does not disclose the names of whistleblowers or the cases they helped cement in order to protect their identities. Rewards range from 10 percent to 30 percent of fines above $1 million collected by the agency, according to the SEC.
The stated compensation range suggests that the fines were somewhere between $380M and $1.14B. While those are big figures to the average mortal, they aren’t earth-shattering. If a Wall Street bank has never been fined $1B, is it even a bank?
The SEC does reserve the right to lower the percentage payout on higher-dollar fines, so the reward could stem from a larger enforcement action. Really, I just want to know who the whistleblower told on. Unfortunately, connecting the fine to a specific company would be highly speculative and we don’t do that here!
Anyways…
Goldman Sachs Hit With A $2.5B Fine
We previously handed Wirecard the fraud of the year award, but the 1MDB Scandal takes the crown from 2017 to 2019.
1Malaysia Development Berhad is a government-owned development company formed to increase foreign direct investment in the country. In 2009, then-Prime Minister Najib Razak became President of the fund’s board and (allegedly) retained a mysterious character named Jho Low as an “unofficial adviser.” The fund then raised over $7B to fund largely fictitious projects sponsored by a slew of shell companies setup by Low.
Instead of promoting investment in the country, the money infamously funded Dumb and Dumber To and The Wolf of Wall Street, the latter of which was (coincidentally?) produced by Prime Minister Razak’s son-in-law.
Low also (still allegedly) used 1MDB monies to purchase a stake in Manhattan’s Park Lane Hotel, to gift Leonardo Di Caprio a Picasso, and to throw “the wildest party Vegas ever saw” MC’d by Jamie Foxx and featuring performances by Psy, LMFAO, Busta Rhymes, Q-Tip, Pharrell, Swizz Beatz, Ludacris, Chris Brown, and Britney Spears (who jumped out of a birthday cake to serenade Low).
Back in Malaysia, $700M also somehow appeared in Razak’s bank account - “gifts from friends”, according to the Prime Minister - and he was recently sentenced to twelve years in prison for money laundering and abuse of confidence. Truly juicy stuff and this is just scratching the surface. For those interested in the full story, I recommend Billion Dollar Whale by Tom Wright and Bradley Hope.
Now, you might wonder how 1MDB managed to raise so much money. The short answer: Goldman Sachs.
Between 2012 and 2013, Goldman helped sell $6.5B of bonds for the fund, netting $600M in fees for its efforts. Let’s just say that a 9% fee is… not market. In fact, the bond sale was considered such a good deal for Goldman that the company gave it one of its “most prestigious internal awards, [praising the deal] for its ‘spirit of creativity and entrepreneurial thinking.’” Yeah…
On Tuesday, Goldman entered into a settlement with American authorities to settle a Foreign Corrupt Practices Act (FCPA) investigation, agreeing to pay a $2.8B fine. This is on top of another $2.5B fine it already paid to Malaysia. Not such a good deal after all.
On Thursday, Goldman also announced that it would seek to claw back “$174 million in compensation from current and former employees including CEO David Solomon and former CEO Lloyd Blankfein.” Ouch! Those guys will be OK, but that’s a steep price to pay for a lucite “deal of the year” trophy.
Given the circumstances, however, the settlement wasn’t bad for Goldman. An Asian subsidiary pled guilty to some charges, but Goldman-proper entered into a deferred prosecution agreement with the DOJ. This is a win for the investment bank, as the filing of criminal charges against the parent company would have materially hindered its ability to conduct business. Case in point, shares rose 1.1% after the fine was announced! Financial markets, man.
Have a great weekend.