What You Need To Know This Week — August 1st, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
KODAK STOCK SURGES AS IT PIVOTS TO COVID DRUG INITIATIVE
Kodak, the iconic camera company that briefly pivoted to cryptocurrency in 2018, is once again attempting a dramatic change in business models with a pivot to pharmaceuticals in attempt to capitalize on the COVID-19 pandemic. Despite having no experience in pharmaceutical manufacturing and zero potential products, the company received a $765 million loan from the U.S. government to kickstart the initiative, in what the government claimed to be an attempt to re-shore industrial manufacturing back to the states. Kodak’s stock was up over 10x this week on the news, adding more than $1 billion to its market cap.
AFTER SITTING OUT THE ENTIRE PANDEMIC BEAR MARKET, LEVERAGED BUYOUTS FINALLY MAKE A COMEBACK
It has been a busy couple of weeks for private equity firms as they have announced four leveraged buyouts of public companies in the U.S. and Canada since July 20th. After basically sitting out for the entire pandemic, when acquisition targets were their cheapest yet debt financing difficult to attain, lately we’ve seen leveraged buyouts come roaring back. Buyout firms active in July include Oak Hill Capital, Thoma Bravo and HGGC, all with deals below $600 million. Madison Dearborn announced two LBOs in July, including the $1-billion buyout of Canadian-listed IPL Plastics. We won’t consider it a bull market until we see a LBO larger than $5 billion, which would indicate that private equity firms have their mojo back.
BIG TECH DEFIES HISTORIC RECESSION WITH BLOCKBUSTER Q2 RESULTS
“The four horsemen of tech”, including Apple, Google, Facebook and Amazon, reported second quarter financial results that easily topped expectations. The large-cap growth companies showed remarkable resiliency as they released results ahead of analyst consensus estimates in a quarter in which GDP declined nearly -10%. Blockbuster results from the tech leaders came at an awkward time, given that the companies’ CEOs were grilled on their market dominance in front of congress just one day before. Off the back of their quarterly results, Apple’s stock was up 6.4%, Facebook up 7.5%, Amazon up 3.7%, while Google was down -4.8%. The four companies combined represent 16% of the S&P 500.
Notable Insights, Articles, Podcasts, and Tweets
Listen to quant investing pioneer Cliff Asness discuss long-short factor investing on the Flirting with Models podcast.
Oakland A’s executive Billy Beane, of Moneyball fame, has teamed up with private equity firm RedBird Capital Partners to launch a Sports-Focused SPAC.
Microsoft is in talks to acquire social media app TikTok in what could be the biggest deal of the year. The catalyst for the potential deal is President Trump, who indicated he may ban the app from the United States given its current Chinese ownership.
The U.S. economy suffered its biggest decline on record in the second quarter, with GDP falling -9.5% compared with the second quarter of 2019 (-32.9% on an annualized basis). Surprisingly, the result was better than the consensus economist forecast calling for a -34.5% annualized drop. The record decline in economic activity can be blamed solely on the lockdown measures implemented by states as they battled to contain the coronavirus.
A common misconception with private equity IRRs is that they represent the return an investor has earned in a private equity fund. However, private equity IRRs are only used for marketing purposes and are not considered to be a realistic account of investment performance. Why are private equity IRRs unhinged from reality? According to the FT, “Baked into the formula is an expectation that all cash distributions can be reinvested at the same rate that the fund in question is earning. Even when measuring the returns of a single fund over its own lifetime, this is a heroic assumption that can lead to returns being materially overstated.”
Montreal-based Taiga Motors is capitalizing on the move to electric vehicles by manufacturing the first electrically powered personal watercraft (similar to a sea-doo) in the world. Given the success of electric-vehicle related stocks in the market, I’m sure SPAC sponsors are knocking on their door regarding a go-public transaction.
Patient and deep pocketed Chinese companies have been acquiring beaten-down Canadian-listed gold miners, including Guyana Goldfields and TMAC Resources (the Accelerate Arbitrage Fund owns shares in both). Why have the Chinese been buying when no one else wants to? “The Chinese have a durable advantage in terms of both capital cost and cost of capital.”
Typically in M&A, a publicly-traded target company is acquired at a premium to its trading price. Not so for Stuart Olson, which is being acquired by rival Bird Construction for only $0.13 per share, representing a shocking -85% discount to its trading price. As you could have guessed, Stuart Olson’s balance sheet is in bad shape and the deal is part of a rescue plan.
A massive semiconductor deal is in the works, as U.S. chip company Nvidia is in talks to buy U.K. chip designer Arm from Softbank for more than $32 billion in cash and stock.
Private financial technology startup Affirm is preparing to go public at a valuation as high as $10 billion. The point-of-sale lender was founded by Paypal co-founder Max Levchin.
A profile on the media company Business Insider and its founder Henry Blodget, the former disgraced sell-side analyst who was banned from the industry after the tech bubble burst. Under his leadership, Business Insider has become a smashing success story, lending credence to the notion of second chances.
In another story about second chances, Steve Cohen’s new hedge fund has closed to new investment after raising $10 billion since its launch less than three years ago. He was forced to close his previous fund due to insider trading convictions and securities fraud charge.
Some market neutral hedge funds are thriving in the current market environment. Castle Ridge’s AI-powered market neutral hedge fund is up double digits this year, according to Institutional Investor.
