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Never Give A Sucker An Even Break
Peter T. Treadway

Since Uber’s shareholders aim to fetch the highest possible price for the company, it is better for Uber, which remains unprofitable, to go public before its growth slows too much. If Uber times it right, it can make investors in public markets believe it is a good buy—even at a valuation greater than its most recent $68 billion.

Wall Street Journal, August 9, 2016

The above quote is from a Wall Street Journal article on a possible Uber IPO. While WSJ tech reporter Christopher Mims supposedly wrote the article, I am convinced he was ghost writing for the late and great American cynic and comedian, W. C. Fields. (If you haven’t heard of W.C. Fields, Google the above title which is in turn the title of a movie Fields made in 1940.) The article offers advice to Uber which in my opinion implicitly assumes public market investors are “suckers”. The article is no doubt incisive and gives Uber and its investors good advice. But that’s if Uber can pull it off.  Unfortunately for Uber and its investors, it may not be able to do this, at least at the inflated price that the private investors would wish for.

I have written about this phenomenon in past blogs. It’s a very simple model. Wealthy retail and institutional private investors become richer by multiples in ever higher pre IPO rounds of investment. After a company runs through its early hyper growth phase, the plan is to dump the shares at ultra-high valuations in an IPO into the eager hands of the great hoi polloi of heretofore excluded public market investors.  No rush on this. Privately held unicorns could take their time about going public. And at least until recently, they had an advantage in that they had an unlimited and lower cost of capital than their publicly traded competitors.

But Things Have Changed

The private money avalanche into money-losing cash-burning unicorns has slowed and the IPO market has become more difficult. The public market “suckers” aren’t so dumb after all. Ironically the big winners may be the monster mature (or maturing) public tech companies with lots of cash and managements that are not brain dead, e.g., Facebook, Google, Amazon, Microsoft, Intel, Qualcomm and Apple to name some leading candidates. And even the e-commerce left-behinds like Walmart which has some extra cash and just bought Amazon wannabe for $3.0 billion plus some stock. It’s looking like a buyers market bonanza for the publicly traded cash rich big companies. Time to hunt unicorns. Especially those in the tech space. And public companies like LinkedIn which have stalled out or could benefit from being in a larger organization.

I’m not going to compile a list of possible takeover candidates. That’s a tricky game and guests on the business stations are happy to do that.  There’s a luck element for investors in picking acquisition targets. Not everyone who walks across a golf course waving a nine iron in a thunderstorm gets struck by lightning. But it seems to me the big public guys with the cash can come out winners in this environment if they stay focused and disciplined in their buying.

But What Is Softbank Doing?

Masayoshi Son, the CEO of Softbank is the genius who picked up substantial positions in early stage Alibaba and Yahoo Japan for pennies and who turned around Vodafone Japan. Still it’s hard to figure out his latest move. Softbank has announced that it is going to purchase Britain’s ARM Holdings for a cool $32 billion, a premium of 43% over the market price of ARM the day the deal was announced. Softbank may be a major global player but, thanks to its money draining $22 billion Sprint acquisition in 2013, it can hardly be considered cash rich.

ARM Holdings is a great company. Today ARM-based RISC (Reduced Instruction Set Computing) application processors can be found in about an 85% share of mobile devices, including smartphones, tablets and laptops. The company doesn’t make anything. It is a pure intellectual property model.

But what does Softbank bring to the table? ARM was doing just fine before the Softbank deal. Unless Son has some major new capital intensive strategy in mind for ARM, Softbank will not be bringing added capital nor will ARM be needing it. Nor will it be bringing technology or the prospect of some kind of synergistic integration with Softbank’s other operations. Nor can it make growth speed up in the now slowing global smartphone market. Futuristic comments about ARM dominating the Internet of Things (IoT) as it has mobile chip architecture are pure speculation. Every big tech company wants to own that space. For example, just because Intel got caught flat-footed with its unsuccessful power hungry smartphone chips doesn’t mean it’s going to be stupid again. It remains to be seen how big this IoT market will be and who will dominate.

Companies should have a reason for an acquisition and offer some value for any proposed combination. For example, it may be hype (I actually don’t think so) but Microsoft has promised synergistic gains in its LinkedIn acquisition. With, Walmart bolsters its flagging e-commerce efforts.  In its Sprint acquisition, Softbank was going to merge Sprint with T Mobile. That wasn’t a bad plan but it was derailed by the anti-business attitude of the Obama Administration. Bad luck. But at least Softbank had a plan.

A Macro Note on Tech Acquisitions

A friend of mine pointed out that many acquisitions could be justified by the low discount rates which are the result of a dysfunctional capital market. By this he meant the global central banks’ negative interest rate and quantitative easing programs. Economic historians may one day agree with this assessment.

Nevertheless nobody can be really sure about this. For my doctoral studies I concentrated on monetary theory. There are two things I can remember from this now distant experience. One was that printing huge amounts of money was inflationary and the other was that negative interest rates were unimaginable. But yet today, we have low to no inflation in the major countries where money (high powered money) is being printed and we have negative interest rates.  Maybe I went to the wrong school. In fact, today we don’t even know for sure that the negative interest rates are the result of central bank excesses.

Several noted billionaire investors have predicted a bad end for all of this and are advocating buying gold. The questions I get constantly is “what happens when rates go back up?” and “when does this happen?” My answer to that is that in the short term rising rates are not going to be a problem. I note that economist Gary Shilling has been bullish on bonds since 1981 and, as of his last letter, is still bullish. Globalization, technology and massive global debt keeps economic growth and interest rates low. (Of course Shilling has been too negative on the stock market. But nobody’s perfect.)

The average investor – and that includes the big institutions – faces a reality. Go out the risk curve or be in cash and earn nothing. I believe we are at an evolutionary turning point with accelerating technology the driving force. Given the acceleration of technology particularly in artificial intelligence, the cloud, deep learning, big data, IoT, virtual/augmented reality and genomics and given the solid financial position of the big tech companies, I prefer technology over gold. Perhaps a diversified investor should own both.

Softbank strategy Tech acquisitions Uber IPO