Wednesday, October 16, 2019

M&A Checklist

In the textbook, we discuss how to value an acquisition. But what are the some considerations in the valuation of the target? The recent acquisition of Wells Fargo's retirement and trust business by Principal can give you some insight. For example, Principal had to consider whether recent problems at Wells Fargo had extended into the retirement area. Additionally, future revenues from the acquisition depend on how many of the current customers stay when the acquisition is complete. In this case, a payment will be made in two years contingent on the percentage of current customers of Wells Fargo remain at that time.

Finally, an important consideration is the cultural fit between the two companies. The value of the synergies, as well as the continuation of the current cash flows of the target company into the future, often depend on culture. If employees of the target company are thrust into a new culture, it may lead to an exodus of employees, resulting in a decrease in ongoing cash flows as well as reducing expected synergies. A culture clash was allegedly a major cause of why the AOL-Time Warner flopped so badly.

Wednesday, September 25, 2019

WeWork's Neumann Ousted

Last week, we mentioned that WeWork had pulled its IPO, and now, CEO Adam Neumann appears to be paying the price. WeWork's biggest investor, SoftBank, called for his ouster this past weekend, and today, Neumann announced he would be stepping down as CEO. Even though Neumann co-founded WeWork in 2010, investors apparently lost faith in him to lead the company going forward.

Tuesday, September 17, 2019

A Stock Up In Smoke

As we discussed in the textbook, an unsystematic risk affects a small number of companies, often only one company. Investors in cannabis producer CannTrust learned about systematic risk today as the stock fell 14 percent when the company's license to grow marijuana was suspended. The stock has fallen since July, when it was discovered the company was growing plants in an unlicensed room, resulting in the destruction of thousands of pounds of plants. Investors received a bigger shock in in July when the unlicensed plants were discovered: The stock fell about 22 percent that day. The company's CEO has been fired, but whether the license will be reinstated is unknown.

WeWork Postpones IPO

Shared workspace company WeWork has apparently delayed its IPO. The company was expected to go public at the end of the month, but low investor demand apparently halted this plan. It was reported last week that the company might value its stock between $10 and $12 billion, lower than the $12.8 billion in equity already invested in the company, and dramatically lower than the $47 billion valuation in January when SoftBank invested $2 billion.

Monday, September 16, 2019

A Digitized Athlete

Brooklyn Nets sixth man Spencer Dinwiddie signed a contract for $34 million over three years. Now, Dinwiddie hopes to digitize his contract into a digital token. The plan is to pay back investors principal plus interest from his future salary. For investors, an advantage is that the tokens will have little correlation with other financial assets. There are numerous examples of securitizing cash flow from future earnings, from Bowie bonds, physicians who sell part of the future revenue in their practice, to fledgling golfers, who get money from backers in exchange for future winnings. However, these assets are not without risk. In November 2015, Fantex pulled an IPO that planned to sell future earnings for running back Arian Foster. Foster retired from the NFL less than a year later after several injuries.

Century Bond Issues Increase

Interest rates continue to be at or near historic lows, which presents a unique opportunity for borrowers. And universities are beginning to realize the opportunity. Rutgers University announced that it would sell $330 million worth of 100-year bonds, and the University of Virginia recently sold 100-year bonds at a YTM of 3.23 percent. So far this year, $1.3 billion in century bonds have been issued. Corporate bond issuers Walt Disney and Coca-Cola have also issued century bonds. Demand for these bonds is being driven by low interest rates, causing investors to seek out yield in riskier investments.

Tuesday, September 10, 2019

Ford: A Fallen Angel

Moody's downgraded Ford's bonds to Ba1, into junk bond territory. The downgrade was due to lower operating margins, weak earnings, and lower cash flow creation. Some of the increased costs are due to Ford's restucturing plan, designed to improve performance in the future. S&P and Fitch did not downgrade Ford's debt to junk territory, indicating a split-rating in the company's bonds.