Malt Liquidity 4
Is tech investing a cheap-cash societal construct?
Keep your Options less open
First we had the London whale, and now we have the NASDAQ whale. They don’t have much in common, but apparently whales as a whole aren’t very good at trading. What do we call a winning trader then? The Chipotle Rat? Hmm… maybe that one doesn’t go so well either. Anyway:
SoftBank has decided to unwind its large US equity options trades, pulling back from a controversial strategy that has cost the group $2.7bn in derivatives losses…
…The options trades have been carried out via a Cayman Islands-based entity called SB Northstar, one-third of which is owned by Mr Son himself. As of the end of September, the unit had purchased almost $17bn of shares in US tech companies and invested another $3.4bn in equity derivatives.
Ok, maybe they purchased everything at the end of August - would be hilariously unfortunate timing, but buying All Time Highs on indices is never really a bad idea, contrary to what people expect, as they are usually followed by more ATH.
But by the end of September, Northstar had purchased nearly $17bn of shares in US tech companies, including $6.3bn in Amazon, $2.2bn in Facebook, $1.8bn in Zoom and $1.4bn in Alphabet. It invested another $3.4bn in equity derivatives. The trades included “long call options” — bets on rising stock prices that provide the right to buy stocks at a preset price on future dates — that were worth $4.7bn by the end of September. It also traded “short call options”, that assume falling stock prices, that SoftBank booked as $1.3bn in liabilities.
??!!!! How do you lose money on tech in this market??
When the Financial Times revealed in September that the company was the mystery “whale” that had driven US technology stocks to record highs, shares in SoftBank initially fell 14 per cent
As a “tech investment conglomerate”, if your shares are dropping double-digit percentages on your positions in tech being revealed, you should probably be concerned. This is how you get slides like this appearing in investor presentations:
Before poisoning the IPO pond, the announcement that SoftBank was in on a tech investment probably generated a small positive bump in the vein of when Warren Buffett announces a position. The difference is Buffett takes a few positions a year, while SoftBank splashes its money around in every investment possible, and then some. Inevitably, as your returns peter out - it is simply impossible to make large bets in a lot of things and outpace large bets in a few things - your reputation decreases, and, I dunno, you’re stuck with buying a bunch of short-dated calls and spreads to juice your returns. Frankly, these trades look like something I’d find in a Robinhood account, if that account had 100 billion in AliBaba as collateral.
I view SoftBank as the ultimate test of whether you can manufacture returns through sheer deployment of capital. They take the concept of Blitzscaling and apply it to early stage startups, late Series startups, public companies, derivatives bets, large cap stock purchases, and whatever else they deploy money in. Interestingly enough, they run in to the same problem the BOJ has - when people know your positions are that large, you are sort of screwed if you ever try to close your position, because the market simply will not provide you liquidity to seamlessly exit, ever. SoftBank’s solution was to continue buying tech stocks - to keep their massive bets green, it can only keep buying more. Naturally, people will piggy-back on this, because why wouldn’t you? You’re not deploying anywhere near the capital SoftBank is. They don’t purchase because they think valuation does not represent reality, they have to maintain this environment of valuation not representing reality.
Speaking of splashing money around…
What do you do when you think your company’s stock is overvalued? You can either sell more stock, as you believe your company is trading at a premium, and buy it back later at a more reasonable valuation, or you can try and acquire as many companies as possible through as much stock as possible, borrowing against your valuation rather than funding the purchase solely through debt.
Salesforce.com Inc. agreed to buy messaging company Slack Technologies Inc. in a $27.7 billion deal that shows how the biggest players in cloud computing are racing to add muscle amid the pandemic’s remote-work boom.
To make things even more juicy, money has been cheap for over a decade now, thanks to a pandemic ruining the Fed’s ability to raise rates.
Slack shareholders are due to receive $26.79 in cash and 0.0776 Salesforce share for each share of Slack stock. That equates to $45.52, based on Salesforce’s closing share price Tuesday, or more than 50% above Slack’s closing price the day before the Journal broke news of the talks last week.
Predictably, Slack shares jumped massively on the news, but part of me wonders if this is premature. $26.79, after all, is nearly 30% lower than $WORK’s year high, and prior to explicit news of the merger, the stock was trading comfortably in the 25-32 range - it’s not so unrealistic for the shareholders to think this stock could continue to run up, given how tech stocks in particular have people and institutions piling left and right into them. Given that the deal has to make it through both shareholders and regulators, it almost feels like Salesforce would be getting away with a steal by paying the premium entirely in equity.
However, if I’m heavily invested in the future of Slack, it makes sense to take mostly equity - I’m not cashing out, I believe in the future of the product. Forcing Salesforce to borrow cash and pay interest would be fine if I planned on cashing out, but it would only hurt the combined company compared to taking equity, as transferring stock isn’t the same as issuing new stock - no capital is being raised, it’s just being transferred.
If SoftBank is an experiment on whether gobs of capital can manufacture returns, Salesforce is an experiment on whether rich valuations and cheap money accelerating growth through heavy acquisitions can turn a company into an industry stalwart equivalent to a Google or Microsoft (I am invariably reminded of my admiration for Apple’s steadfastness in not playing the big-sum acquisition game in any meaningful way to grow.) Hmm.. I can’t think of any other examples of acquisition fueled growth… guess we’ll have to wait and see how this goes.
On that note…