What You Need To Know This Week — October 31st, 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.
CENOVUS WALKS INTO THE ENERGY M&A BUZZAW, SHARES GET SLICED WITH HUSKY TAKEOVER
Last weekend, Cenovus Energy announced the friendly acquisition of Husky Energy in an all-stock, $10.2 billion merger. The consolidation play’s primary strategic rationale is to cut costs between the organizations, unfortunately resulting in as many as 2,150 lost jobs. Will this much-needed oil patch consolidation continue? It appears unlikely given the trading dynamics around these mergers. For example, Cenovus’ stock dropped as much as -14% on news of the deal and fell -10.7% this week. Shareholders are not supportive of oil companies making acquisitions and have punished shares prices to express their displeasure. Oil patch CEOs will think twice before walking into the buzzsaw that is energy M&A.
TIFFANY AND LVMH MAKE PEACE, STRIKE NEW DEAL AT SLIGHTLY REDUCED PRICE
In a dramatic change of heart, that did not come as a complete surprise to seasoned arbitrageurs, LVMH and nearly spurned target Tiffany & Co. rekindled their romance and struck a new merger deal. In November 2019, LVMH agreed to buy Tiffany for $135.00 per share, representing a $16.2 billion transaction value. As the pandemic caused retail stores to close and Tiffany’s results to suffer, LVMH’s CEO and Europe’s richest man, Bernard Arnault, had a change of heart and tried litigation to extract a lower price. In the end, the Tiffany board of directors accepted a -2.6% price reduction to $131.50. the gambit ultimately saved LVMH a few hundred million dollars, but their reputation as a credible acquiror has certainly taken a hit. Tiffany stock, which is held in the Accelerate Arbitrage Fund (TSX: ARB), was up 6.3% on news of the rehashed deal.
QUALTRICS FOUNDS RYAN SMITH BUYS UTAZ JAZZ FOR $1.66 BILLION
Ryan Smith, the 42-year-old co-founder and CEO of Qualtrics, sold the firm to SAP for $8 billion in 2018. He utilized some of the proceeds from the sale to diversify into the professional sports team asset class, paying $1.66 billion for the Utah Jazz NBA franchise. The team’s previous owners, the Miller family, bought their interest in the Jazz in the mid-80’s for $22 million, which was a risky bet at the time. The investment turned out well for them, returning 13.1% annualized over the following 35 years. In addition, the investment brought them the bonus of two NBA Finals and all-star Karl Malone.
Notable Insights, Articles, Podcasts, and Tweets
Listen to Chamath Palihapitiya, the Founder and CEO of Social Capital, talk about how to think in first principles and the psychology of successful investing on the Knowledge Project podcast.
Chinese payments company Ant Financial conducted the largest initial public offering of all time, raising $37 billion in its dual Shanghai and Hong Kong market debut. Demand was off the charts, with the issue 870x oversubscribed as retail and institutional investors put in orders for $2.8 trillion of stock (allegedly). Some local brokerage firms were offering up to 20x leverage for speculators participating in the offering. More than 5 million retail investors participated.
In this month’s Journal of Investing, Private Equity Is Still Equity, Nothing Special Here: “US private equity returns can be replicated systematically through public equities, historically by selecting small, cheap, and levered stocks. Investing in private equity entails the same economic exposure as investing in public equities, resulting in the high correlation of both asset classes. The volatility of private equity returns is understated as a result of smoothing, and the risk-adjusted returns are comparable to those of public equities.” The Accelerate Private Equity Alpha Fund (TSX: ALFA) provides a systematic private equity replication strategy.
A French state-backed entity is bringing private equity to retail investors. The issue is, the annual fees will be as high as 3.9% and returns are expected to be 5–7%.
David Wallack, manager of the T. Rowe Price Mid Cap Value fund, stays away from companies that were once leveraged buyouts: “By the time private-equity firms are through with them, they’ve milked as much profitability as they can and often you have a smoldering husk that remains prettied up for the IPO [initial public offering].”
E-cigarette maker Juul Labs was once one of the hottest private startups out there, with a $38 billion valuation. It just dropped its valuation to about $10 billion, a -74% reduction. Regulatory crackdowns and lawsuits have plagued the company.
“Valuation, I find, is a useless tool,” according to one of the top Canadian mutual fund managers.
Greenlight Capital’s David Einhorn believes the growth stock bubble has finally popped: “Our working hypothesis, which might be disproven, is that September 2, 2020 was the top and the bubble has already popped.” I agree.
Some of the market’s hottest growth stocks, such as Shopify, are beating analyst expectations, yet their shares are still underperforming. Perhaps the growth / value divide has run its course and valuations are once again beginning to matter. The outperformance of value over growth is a dynamic worth watching.
Value stocks are on their worst run of relative performance in two hundred years, down -64% from its peak in 2007. If the trend reverses, it is reasonable to expect substantial multi-year outperformance of value as it reverts to the mean.
MicroStrategy CEO Michael Saylor on whether he’s nervous putting $500 million of the company’s cash into bitcoin: “What would I be nervous about? If I had $500 million in cash, that would make me nervous because I think it would go to zero [in purchasing power] over five years. So what’s my choice? I think bitcoin is better than gold as a store of value.”
The pandemic has made the world’s billionaire’s even wealthier. How did they do it? “It’s been hard emotionally, but the key to performance this year was to remain invested.” Our brains weren’t wired for investing, but the best strategy is usually to pick a well-diversified asset allocation and stick with it through thick and thin.
Looking for bonds with yields above inflation? China’s bond market is perhaps the only one with sensible prices. Chinese 10-year sovereign bonds yield 3.18% before inflation; U.S. 10-year bonds yield 0.81%.
