Category: Snip Threads

Prologue

In any sector, the company that has a control over its whole vertical – from the underlying infrastructure to the products delivered through – tends to provide the best results both for the customer as well as the business itself. For the business, it leads to better management, reduced costs, better integration etc. which, for the customer, translates to an overall better experience.

Take the case of Amazon for instance. Over the past few years, Amazon has been investing heavily on its infrastructure, from fulfillment centers and warehouses to logistics division. In the past year, it invested 80% more compared to year before. The reason? Vertical Synergy.

In this story we’ll look into a case in which such an attempt led to a bitter end.

Introduction

This story revolves around the US telecom giant AT&T. At around 2014, the telecom market was going through a phase characterized by stagnation. 4G was well into its third year and 5G was not in the near horizon. At the same time, media content and entertainment companies were growing like anything.

Companies like Netflix were widely appreciated by everyone. While actually network companies like AT&T, Verizon etc. provided the underlying infrastructure for people to access the internet in order to watch Netflix, they were pushed to the side as mere utilities, and were taken as granted.

AT&T, the second largest telecom provider in the US at that time, wanted a piece of media. It started with DirecTV.

AT&T Splurging on Media

AT&T’s shopping spree involved 2 major deals: –

DirecTV

In 2015, AT&T paid $49 Billion for DirecTv, the satellite TV service provider. The rationale behind this being that they could now bundle their broadband and landlines together with a cable connection. It wasn’t media as such but AT&T bought added it to its cart. What the heck! The deal was costly for AT&T whose debt now rose to $126 Billion from $86 Billion before the deal.

Becomes World’s Largest Pay TV Provider and Video Distribution Leader Across TV, Mobile & Broadband

AT&T blog(July 2015)

Timewarner Inc(WarnerMedia)

Just the next year, in 2016, AT&T offered to buy TimeWarner. This time they were looking to expand on their media content library mainly with Warner Bros. Pictures and HBO among other Timewarner assets like CNN. It would give them a huge library of movies and shows which they could then leverage on the streaming space.

But this deal took about 20 months to close due to an antitrust lawsuit initiated by the then President Donald Trump. The court finally ruled in AT&T’s favor in 2018. The deal was closed for about $102 Billion including TimeWarner’s debt. By then, AT&T was in about $177 Billion in debt, becoming the largest debt holder other than banks.

This would seem like the perfect case of a well executed and integrated vertical synergy. But it did not go like that. It all came crumbling down.

The Undeals

Six years into the media game, AT&T began selling stakes in its media businesses.

Un-deal #I – DirecTV

In March 2021, AT&T announced that it would spinoff DirecTV into a separate entity called “New DIRECTV”. For this, AT&T sold a stake in DirecTV to the private equity firm TPG for about $16 Billion. The rationale behind this was to streamline its focus more on wireless networks, media and content.

This agreement aligns with our investment and operational focus on connectivity and content, and the strategic businesses that are key to growing our customer relationships across 5G wireless, fiber and HBO Max. And it supports our deliberate capital allocation commitment to invest in growth areas, sustain the dividend at current levels, focus on debt reduction and restructure or monetize non-core assets,

As the pay-TV industry continues to evolve, forming a new entity with TPG to operate the U.S. video business separately provides the flexibility and dedicated management focus needed to continue meeting the needs of a high-quality customer base and managing the business for profitability.

AT&T CEO John Stankey

The Undeal of the Decade – WarnerMedia

Though it is still the barely the beginning of this decade, this un-deal is significant.

Since 2019, investors have raised concerns about Warnermedia and its future goals as apart of AT&T.

In May 2021, AT&T announced that it would merge its media assets under WarnerMedia Inc with that of Discovery Inc’s and spinoff into a separate entity. This seems to be a downer considering the fact that in 2019, AT&T CFO had said HBO Max, its streaming service, was to be “the key aspect of [AT&T’s] video strategy going forward.”

After this deal, AT&T will walk of with $43 billion in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. AT&T shareholders will retain a 71% in the combined entity with Discovery holding 29%. The new entity will be headed by Discovery CEO David Zaslav.

In absolute terms, for AT&T, these 2 media deal and un-deal fiasco ended up in a loss of $92 billion(just in terms of the amount paid and sold for)! i.e :
($49B + $102B) – ($16B + $43B) = ($92B) (loss)

The New Entity – Some Stats and Facts

• The combined entity will have assets like HBO, HBO Max, CNN, Warner Bros. Pictures, Discovery+, TLC, Eurosports etc.
• Currently HBO Max has roughly 20 million subscribers and Discovery+ has about 15 million subscribers.
• The combined entity will spend $20 billion in content for this year, compared to $17 billion that Netflix has as its budget for the year.

WarnerMedia – A Timeline

• In 1990, Warner Media merged with Time Inc to form TimeWarner Inc.
• In 2001, TimeWarner sold itself to AOL for $164 Billion in the hopes that AOL will help TimeWarner propel through the digital age.
• By 2009, both the companies split up to become independent entities.
• In 2015, Verizon bought AOL for $4.4 billion and later sold it to Apollo Global Management together with Yahoo, which it had bought in 2017 for $4.5 billion for $5 billion(half of what was paid for both).
• In 2016, AT&T offered to buy TimeWarner, the deal closed in 2018.
• In 2021, just after 3 years, WarnerMedia was spun off and merged with Discovery.

Closing Comments

The thought of vertical integration is indeed a good one, but that must not be at the cost of the core product or service. The time at which they proposed their intention to buy Timewarner was already too late. The lawsuit made it worse.

By the time AT&T could do something with it, there came the pandemic. This forced them to launch their content directly on streaming, ended up costing HBO about $1 billion. Not just that. They had to make huge investments to setup the 5G infrastructure too. This was why their competitor Verizon too dislodged their media assets recently.

Now AT&T is back to where it started – Just a telecom company – but with a huge crater in its balance sheet to the tune of tens of billions. Compared to the time they completed their deal in July 2015, AT&T stock now trades about 11% lower($34 then, $30 now), while the general market increased more than 100%!

In hindsight, it seems, this merger was never meant to be!

“The Tiger” here refers to Tiger Global Management LLC

Prologue

To do anything remotely tangible in a business, you need funds. To materialize your idea, hire employees and all that stuff requires money. So yeah, as they say, Finance is the life-blood of business.

You could either bootstrap your business with your own money or borrow from others. Without sufficient track-record or credit score, don’t even think of going to a bank. But how do you grow your business and develop a track record without funds? That itself poses a chicken first or the egg first situation.

The solution? Venture Funds, Angel Investors Or those with boatloads of money like, I don’t know, Hedge Funds?

What is a Hedge Fund?

Hedge funds are usually pooled funds that are aggregated from investors which is managed by an experienced fund manager. The funds are then invested in different avenues using sophisticated investment strategies in a way that it provides maximum return to the investors of the fund.

The fund is usually setup as a limited partnership and the investors of such funds are called Limited Partners(LPs). They usually comprise of other businesses or High Net-worth Individuals as entry to such funds require huge initial investments and these investments usually have a lock-in period ranging from one to n number of years.

The star of this thread is a such a Hedge Fund called Tiger Global Management LLC.

Beginnings

Julian Robertson, one of the greatest fund managers of all time managed a hedge fund called Tiger Management. He is credited with turning his start-up capital of $8 million into over $22 billion over a period of about 20 years.

During his time at Tiger, Robertson mentored many young minds under him. They were called Tiger Cubs and they went on to manage around 50 of the world’s top hedge funds, including Andreas Halvorsen’s Viking, Philippe Laffont of Coatue Management, Lee Ainslie of Maverick Capital and Chase Coleman of Tiger Global Management.

In 2000, Robertson closed Tiger Management, and entrusted Coleman with over $25 million to manage with which he started Tiger Technology as a hedge fund investing in public equity market. It was later renamed to Tiger Global Management LLC and started investing in the private equity markets from 2003, making it a crossover hedge fund.

How Traditional Venture Capital Works?

In a way, Venture Capital funds are like hedge funds that invest in startups.

A typical VC fund will raise capital from its investors(LPs) and will use the funds to invest in startups that they believe will earn them higher returns in the future. Most of them also provide advisory services too. After a particular point, in the future, the VCs exit their position by selling their stake.

VCs in general, try to invest in a company at the early stage and exit after it goes public so as to maximize their returns. They can do this only with those companies that survive till it goes public. Therefore, they put in a lot of work, analyzing different metrics to select and invest in the best startups.

Thereafter, they place a member on the board of the new business to have a say in its workings and make sure they burn through the funds they have provided. As such, they usually tend to invest their funds over a long period of time say 1-5 years or more.

Clearly, it is a long process from the beginning to the end.

The Momentum of The Tiger

Tiger Global, on the other hand, plays it entirely different than the rest. To begin with, it is a crossover hedge fund with about $65 billion in AUM and has more than 650 investments to its name!

They raise funds ever so often, it seems. They raised their 13^th fund totaling $6.65 billion in March, which they initially mentioned in their letter to shareholders to be of $3.75 billion but ended up raising almost double the amount. Just last week, they were said to raise another $10 billion for a new fund.

They are not just raising funds. The rate at which they invest is ridiculous. According to an article in The Information, Tiger averaged four deals per week during the first quarter. If you think that’s a lot, how about the fact that they did 26 deals in just the month of April(according to Jason Calacanis)!

The Modus Operandi Here

It is explained thoroughly and in detail in Everett Randle’s Substack post. Be sure to check it out!

In short, there are 2 main elements here – deal velocity and BFC capital.

1. Deal Velocity – Tiger invests it at a high velocity. This leads to more investments and thus a diversified portfolio wherein even if one of the businesses blows up, it won’t affect the overall return much.
2. BFC capital – It stands for Better, Faster and Cheaper capital. They spot high growth startups and bid the highest offer, a lot higher than anything on the table and don’t place any members on the board like traditional VCs.

What Tiger does is just invest in the business and let the founders and let the founders do their thing. This is the main reason why even if there are other VCs that have a better brand come with offers, founders tend to take Tiger’s deal as it is easy money with almost “no strings attached“!

Closing Comments

On the face of it, it may seem that the Tigers of the world will takeover VCs. But there still will be startups at the earlier stages that might want a hand-holding investor and does not bother giving up board seats for better guidance. They also take offers from VCs with a better brand value at even higher cost of capital with the hope that it will boost their prospects to attract better talents and investors down the line. For those companies at their later stage, the Tiger proposition is the best way to go ahead.

Introduction

Tesla is the world’s biggest Electric Vehicle maker also the largest automobile manufacturer by Market Capitalization for that matter. It’s CEO aka “Technoking” Elon Musk is one of the most influential people in Twitter these days, so influential that the CEO of Volkswagen, had to start an account in Twitter of his own. Apart from all that, Tesla is an interesting business. We’ll look at the beginnings, the Q1 2021 earnings report and some other stuff in this thread.

Hello @Twitter! I’m here to make an impact with @VWGroup, especially on political issues. And, of course, to get some of your market shares, @elonmusk – after all, our ID.3 and e-tron have won the first markets in Europe. Looking forward to productive discussions!

— Herbert Diess (@Herbert_Diess) January 20, 2021

Beginnings

Founded in 2003 by Martin Eberhard and Marc Tarpenning, took 5 years to release their first car – Roadster – in 2008, the same year Musk was named the fourth CEO. The original Roadster cost around $100,000 – in line with luxury cars.

In 2011, it stopped the production of Roadster(a total of 2500 was produced) to concentrate on more budget friendly models and those that could be mass produced. It introduced Model S sedan in 2012. Also, starting in 2012, Tesla built stations called Superchargers in the United States and Europe designed for charging batteries quickly and at no extra cost to Tesla owners. Later on, these were renamed to Tesla Stations.

From there on, there has been constant innovation and improvements at Tesla that has culminated in it being the biggest automobile manufacturer in the world!

Q1 2021

For the first quarter of 2021, Tesla made a profit of $438 million on a revenue of $10.39 billion which itself is about $100 million above Wall Street’s expectations. According to CFRA senior analyst Garrett Nelson, of the past 7 quarters, Tesla beat analyst expectations for 6 of them! Revenue grew 74% Year over Year.

During the quarter, Tesla produced just over 180,000 vehicles and delivered nearly 185,000 vehicles. Tesla is now aiming to produce 2,000 Model S and X vehicles per week later this year. Its unit sales increased by more than 100% year over year!

It also recorded a $101 million positive impact from sales of bitcoin during the quarter.

Quarter-end cash and cash equivalents decreased to $17.1B in Q1, driven mainly by a net cash outflow of $1.2B in cryptocurrency (Bitcoin) purchases,

Q1 report, Tesla

https://giphy.com/gifs/bitcoin-cryptocurrency-diamond-hands-gwJjNHTGaktNICuOvU

This together with sale of regulatory credits was a significant part of its first quarter.

Regulatory what?

Regulatory credits. Automakers in the US are required to meet a certain level of emission standard. These are to be complied by holding a stipulated level of emission credits. If an automaker doesn’t have enough credits by the end of the year, it could face punitive actions by the authorities.

These credits are given to companies that produce Electric Vehicles(EV). Companies that don’t produce EVs will have to purchase them from those producing EVs to stay in business.

Since Tesla only produces EVs, it racks up way more credits than it needs to meet the minimum regulatory requirements, so it turns around and sells the excess credits to other automakers so that they don’t invite any penalties.

This is like free money for Tesla. Revenue from regulatory credits for Q1 increased 46% to $518 million! Perks of being eco-friendly, eh?

Leading The “Pack”

According to a report by Sam Jaffe, of energy industry advisory firm Cairn ERA, Tesla will maintain a lead in procuring and installing EV battery packs at the lowest possible cost till at least 2030, followed by General Motors.

According to Cairn ERA, Tesla pays an average of $142 per kilowatt hour (kWh) for battery cells purchased from its suppliers while GM pays an average of  $169 per kWh for its battery cells and the industry average runs at about $186 per kWh.

Cairns data estimates that Tesla’s battery packs cost(i.e. the cost to put the cells into a pack on each individual car), on average, $187 per kWh while GM’s packs cost $207 per kWh and the auto industry spends an average of $246 per kWh for battery packs.

This mostly comes down to economies of scale according to Jaffe.

They see this as the crucial period and they’re building out their capacities,

Look at what they’re doing in Shanghai and in Berlin and now in Austin, Texas. They’re just piling factory upon factory.

Sam Jaffe, managing director of Cairn ERA.

Closing Comments

Tesla being the first EV to scale has created a personal moat by having large troves of data, giant battery plants and just huge volume of production. But now with other car makers making pledges about converting a significant part of their fleet with EVs and substantiating that with some huge investments, It will be interesting to see how Musk and Tesla plays out this space in the future!

ICYMI

Elon Musk hosted yesterday’s Saturday Night Live. Checkout the playlist below!

The What now?

The popular cryptocurrency called Dogecoin aka the meme coin has been in the news for a while thanks to its “CEO by popular social media vote” Elon Musk. In 2020 it got Musk’s attention and thereafter, its value has been soaring whenever he mentions it. Like this tweet, after which it rose about twice in the week that followed –

Doge

— Elon Musk (@elonmusk) February 4, 2021

The recent hike started with his tweet wherein he changed the original title of the 1926 painting “Dog Barking At The Moon” to “Doge barking at the moon”. The following day, it reached $0.32, an all time high till then.

Doge Barking at the Moon pic.twitter.com/QFB81D7zOL

— Elon Musk (@elonmusk) April 15, 2021

A day to commemorate!

Then came the Doge Day. Fans of Dogecoin declared April 20 as ‘Doge Day’ with the aim of pushing the coin up to reach every Dogecoin enthusiast’s goal of $1. On Twitter and Reddit, crypto enthusiasts posted memes featuring the Dogecoin logo, a Shiba Indu dog, with the hashtag #DogeDay and #Doge420. Even businesses such as Slim Jim and Snickers got involved.

We become LEGENDARY today. #DogeDay pic.twitter.com/jYEaNHE3p6

— Weezy (@StayWeeezy) April 20, 2021

Social media users also drew links between Doge Day and Weed Day, which is celebrated on April 20 by marijuana smokers. Though it couldn’t reach its ultimate goal, that day it reached up to $0.42 and took its market cap to $53 billion. It became the fifth largest cryptocurrency by market value, higher than the market cap of Ford, Honda or Marriott International!

Humble Beginnings

It all started as a joke.

It was created by Jackson Palmer and Billy Markus to satirize the growth of altcoins by making the doge internet meme into a cryptocurrency. While it was birthed as a joke, it actually led to some practicality as it’s large supply and low price facilitated efficient micro-tipping content on social media.

Coindesk

Founder’s dilemma?

The founder, Billy Markus Dogecoin in 2015. He said “…the community started to strongly shift from one that I was comfortable with”. Thereafter, he liquidated all his cryptos – Bitcoin, Dogecoin and Litecoin, which cost $258.55, 0.0002, and $3.93 respectively – for nearly $10,000 in the July of 2015.

Thereafter occurred the 2 crypto booms and as of last week,  BTC has risen more than 25,000%, DOGE has shot up 224,900%, and LTC is up by more than 10,000%! ! 

Closing Comments

Though it seems like a good bet to hop on the Dogecoin Train, It must be noted that it is basically what it claims to be – a meme coin. Unlike Bitcoin, Dogecoin doesn’t have a fixed supply. Infinitely many tokens can be minted. As of now, about 130 Billion coins are in circulation as opposed to about 18 Million for BTC. That sums up the value proposition. But as long as the Elon Musks of the world continue to exist, Dogecoin might be around to finally have at its MOONSHOT!

Introduction

Money forms the basis of an economy. It is a store of value and is vital for trade. As such, those who control the currency, control the economy. That is the main reason that currencies are regulated by a central authority(central banks) so that the economy doesn’t disintegrate. This control over the currency by the Central Bank(CB) can be manifold- they can issue the currency, demonetize it(make it valueless), toggle the interest rates so that that the supply of money is controlled etc.

Overtime, money has taken several forms – Barter, grains, precious metals, bank notes, e-banking etc. Out of these, though physical bank notes are in circulation, with the increasing penetration of internet, e-banking appears to be on the rise. Even CBs push for increased e-payment adoption. The primary reason is that it makes it easy to track illicit funding. This lets CBs have a better control over the currency and thus the economy. In the US, the government implemented it stimulus package electronically. They did not need to print trillions of physical notes. So it does make sense to promote e-banking.

US and the Dollar

USD has been the reserve currency since the Bretton Woods Conference in 1945. The shift to fiat currency in 1971 further hardened its position. Thereafter, the demand for USD grew as every country wanted it for foreign trade. This made the Federal Reserve(CB of US) more powerful.

It used this power to impose economic sanctions on parties whom they found required condemnation. These sanctions basically prevent such parties from using the currency. By cutting off the ability to transact in dollars, the United States can make it difficult for those it blacklists to do business. For example, in 2015, the French bank BNP Paribas was given a record penalty of nearly $9 billion for violating U.S. sanctions by processing dollar payments from Cuba, Iran, and Sudan. This has led some major economies to find methods to reduce their dependencies on the greenback.

Russia and China last year tried to build a cross-border inter-bank payment systems parallel to the SWIFT. Both these countries have significantly reduced their US sovereign debt holdings significantly. Other countries like India, UAE, Japan etc. are entering into currency swap agreements to bypass using USD.

China and the Digital Yuan

Though China is the largest exporter in the world, the Yuan just accounts for 2% of global trade as against 62% of USD. This coupled with the sanctions US imposes made led to China trying to look for an out from the USD regime.

One way how China tried to increase its influence is through overseas lending, lending to foreign banks and governments. According to HBR Review, the Chinese State and its subsidiaries have lent a total of $1.5 trillion in direct loans and trade credits to more than 150 countries worldwide – making China the biggest lender surpassing World Bank or IMF! But still, transacting over the existing payment infrastructure makes it easy for the service provider to collect data on them. This, China is not much fond of.

The other move is what we are interested in. The Digital Yuan or a Central Bank Digital Currency(CBDC).
A digital currency is like a cryptocurrency in the sense that it is a block of code. But unlike cryptos, the CBDC is centralized and controlled by an authority – Central Bank(CB) in this case.

China has been looking at the possibility of a Digital Yuan since 2014. For a country where there is already a greater penetration of e-payments, a shift to digital currency does not change a lot for the users. But for the CB, it gives them more power. Earlier, CBs could not directly give money to the individuals. But now, CBs can target individuals and transfer money. It will also enable the government to track the money more efficiently and prevent illicit funding.

Fan Yifei, deputy governor of the PBOC, said last year that there is a “pressing need to digitalize cash and coin” as producing and storing these currently is expensive. In 2020, China did a test with people in some provinces and it seemed to work. For every digital Yuan made, physical ones are destroyed so as to avoid excess money in the system. They are planning to phase out physical currency eventually.

Closing Comments

Being the first to the game, China has a lead over all other economies at this point. Once this becomes the mainstream in China, they will push it out to its trade partners and their debtors. This will increase the Digital Yuan’s circulation and will eventually bring the global economy under its hands if others don’t follow suit.