The Saturday - 12/05/2020 Edition
Volume 1, Issue 10
Morning!
2020 has wreaked havoc on national economies and, while some countries have reacted better than others, none are taking on deficits as proactively as Colombia.
With coca leaf eradication programs costing the South American country over $1B/yr, government officials have devised a new, innovative cost-cutting plan: purchase the country’s entire coca harvest for $680M/yr, nationalize cocaine production and, as one senator suggests, raise cocaine prices to juice up margins.
Now that’s a strategy they don’t teach you in Econ class! I guess modern problems require modern solutions?
It’s Saturday December 5, 2020.
Slackforce
On Tuesday, Salesforce entered into an agreement to acquire Slack for $27.7B. While I admittedly didn’t pour over either companies’ financials and have no basis to opine on their fair value, this cash-and-stock deal makes all the sense in the world to me.
Salesforce is a $200B+ customer relationship management behemoth providing a slew of customer service, sales, and analytics tools to enterprises. The San Francisco company is arguably the world’s foremost CRM service provider; it’s market share is double that of its nearest competitor (SAP) and its stock ticker is literally CRM.
Although its $17B in yearly revenues is nothing to scoff at, Salesforce CEO Marc Benioff is intent on pushing that number to $50B. To do so, the company needs to integrate deeper into its clients’ internal management operations and expand its suite of services, but a big obstacle stands in its way: Microsoft and its wildly popular Office 365 suite of products.
As for the target, Slack is an app that aims to make intracompany emailing obsolete by allowing employees (or groups of employees) to seamlessly communicate with each other, share files, speak via audio or video, calendar meetings, etc.
Having used Slack every day for over 4 years, I can personally attest to its platform’s capabilities. Still, despite the pandemic-fueled boom in work from home companies, its stock hovered well below its 2019 IPO price. The biggest hurdle in its way: Microsoft’s competing Teams product that boasts over 75 million users thanks to being bundled, for free, with Office 365.
Through this acquisition, Salesforce picks up a leading WFH company at a slight premium to Slack’s pre-COVID IPO valuation and adds a popular app to its repertoire of enterprise solutions.
For Slack, the deal immediately allows them to reach existing Salesforce customers in a manner somewhat akin to Teams and Office 365. On the long run, the combination with a leading CRM company can also accelerate Slack’s expansion into intercompany communications, potentially disrupting dinosaur-era email technology.
Did Salesforce overpay? I don’t know and I’m not sure I care. This isn’t your run of the mill “synergies” based acquisition; it’s a perfectly logical deal between two companies with a common competitor and complimentary capabilities.
That’s only my take though. Salesforce stock dropped about 10% on the news, so maybe this a terrible idea!
EVs Part One
Speaking of terrible ideas, you may recall the September announcement that GM would take an 11% stake in embattled electric vehicle company Nikola.
On Monday, GM finally came to its senses and decided against taking an equity piece in Nikola and stated that it would not produce the (allegedly) fraud-ridden company’s pickup truck either.
For GM, this was better late than never. For Nikola, its shares took a 25% plunge.
Side note regarding GM: the WSJ reported last week that the automaker is expected to file an application for a banking charter. This would allow it to accept FDIC-insured deposits that it would then use to offer lower cost financing options to its customers.
GM previously had a similar charter (GMAC). That experiment didn’t go well and resulted in a 2008 bailout, although to be fair, GMAC also dabbled in subprime mortgages, which the new lending arm isn’t expected to do. We’ll follow this story as it develops.
CMBX.6
On Monday, S&P Global acquired rival IHS Markit for a staggering $44B. This deal joins two of the world’s largest data providers and index makers. IHS, for example, created the CMBX Indices, which are indices tracking different tranches of commercial mortgage-backed securities.
For those who nerd out on this stuff, I’d recommend reading this article by Esquire, detailing a small hedge fund’s timely short of the CMBX.6 index (that tracks the value of shopping mall debt).
Esquire’s not usually my first stop for structured finance news, but this is an easy, compelling story with The Big Short-like qualities and paints a relatively grim picture for the traditional shopping mall industry.
EVs Part Two
No conversation on electric vehicles is complete without discussing Tesla. Here are some fun, new tidbits:
According to S3 Partners, Tesla bears have lost $35B on short positions in 2020. For scale: the airline industry, going through its worst year ever, combined for “only” $24.2B in losses this year.
Say what you want about Elon Musk, but the guy is doing something right: up 790% on the year, Tesla is now worth more than Toyota, GM, Ford, Hyundai, and Volkswagen combined.
On Wednesday, Musk announced that he is open to merging with another car maker. At a $564B market cap, this would be a shrewd and opportunistic move, especially after Tesla reaps the rewards of additional, upcoming tailwinds…On December 21st, TSLA will officially be added to S&P 500 Index and the S&P Dow Jones Indices will need to buy roughly $72B of its stock to rebalance their positions.
If you thought such massive buying would be done in waves to avoid demand shocks, you’d be wrong: this week, the S&P announced that it would effectively buy all that stock… at once! Ha!
I’ll spare you another rant about efficient markets and passive investing.
Have a great weekend!