|The age-old credo of “cash is king” is repeated more often in times like these. Corporates are tightening their purse strings and startups measuring their cash runways. With little or no demand for most products and services, capital is the new “stock” in the corporate world. It’s also the original stock.|
|Stocks are the elements of the system that you can see, feel, count, or measure at any given time. A system stock is just what it sounds like: a store, a quantity, an accumulation of material or information that has built up over time. It may be the water in a bathtub, a population, the books in a bookstore, the wood in a tree, the money in a bank, your own self-confidence. A stock does not have to be physical. Your reserve of good will toward others or your supply of hope that the world can be better are both stocks. “Thinking in Systems: A Primer” by Donella H. Meadows|
|So what are companies doing with this stored up capital, or what Warren Buffett liked to call an elephant gun? Go hunting, of course. Especially now, when tumbling valuations have declared hunting season open.|
Bargain Hunters Like the cash rich Indian IT services providers Tata Consultancy Services, Infosys and Wipro. The trio, collectively, have a cash hoard of over $13 billion. Nice time to consider acquisitions to gain a strategic capability, or enter a new niche, or simply to boost growth. They have experience of times like these. Like TCS, which bought Citigroup’s captive business process centre in India for $505 million in 2008 and got a decade-long $2.5 billion contract.
|“Our largest M&A to date was actually executed at the peak of the global financial crisis,” TCS chief executive Rajesh Gopinathan said in a post-earnings analyst call. “We are not shy of M&A and we believe that the best time to execute it is when nobody else is buying.” |
“Our stance is that for the right asset at the right price, we are always game for it. And if this current market throws up those opportunities, we would definitely snap them up,” Gopinathan said. TCS, Infosys and Wipro first in line for spoils of a Covid wipeout, The Economic Times
|Buyers remorse This is the case of those who went bargain hunting a little early and are now looking to back out because, well, Covid-19. And it’s interesting to note that most examples are of firms in the US, which, most literature shows, was among the least prepared for the pandemic.|
Last month, US auto parts company BorgWarner threatened to walk away from a $951 million deal to buy Delphi Technologies for accessing a credit line without the acquirer’s approval. Earlier this month, WeWork sued its investor, SoftBank, for ditching a $3 billion tender offer.
The most high-profile example is PE firm Sycamore Partners reneging on its offer to take over Victoria’s Secret from struggling retailer L Brands. The $525 million-offer was made in late February. But last week, Sycamore said it wants out as a “material adverse effect has occurred” due to the pandemic. It also alleged contract violations as L Brands closed thousands of stores, furloughed staff, stopped paying store rent. L Brands’ fired back in a strongly worded court complaint.
|Sycamore ignores a fundamental problem with its apparent case of buyer’s remorse. |
In reality, Sycamore’s current position is pure gamesmanship. On April 13, 2020, roughly a week before it sent the purported termination notices, Sycamore sent L Brand a letter revealing its true motivations in all of this. In that letter, Sycamore said it still wanted to buy Victoria’s Secret, but it wanted to renegotiate the purchase price and other economic terms of the Transaction Agreement “ to take account of the COVID-19 situation.”
|How this plays out in the courts could set a precedent.|
Reluctant hunters Then there are those who are forced into the fray because a competitor made the first move. Like last week, when Facebook put $5.7 billion, its single largest investment, into Jio Platforms, the wholly owned unit of India’s Reliance Industries. We covered the ‘whys’ in our latest edition of The Nutgraf. The deal had a twofold effect, Dev Chatterjee wrote in the Business Standard.
Microsoft, Google and Amazon are considering tying up with Indian players to improve their own local market access Better prospects for Jio rival Vodafone Idea and Bharti Airtel in terms of valuation, raising fresh funds, and equity tie-ups
|“The Reliance-Facebook deal will encourage other telcos to seek similar tie-ups, given that the tide is turning for the sector,” said a Vodafone Idea executive.|
“With more and more people staying home on account of the virus outbreak, demand for seamless digital products will increase. Tech companies are bound to love this new paradigm shift and would like to tie up with local Indian companies — in telecom and retail,” said the executive cited above. Voda, Airtel may go the Jio way, scout for tech giants looking for tie-ups, Business Standard
|As Meadows wrote, “Stocks change over time through the actions of a flow. Flows are filling and draining, births and deaths, purchases and sales, growth and decay, deposits and withdrawals, successes and failures.”|
|“Build” and they shall invest Rohin|
Sequoia is raising a new $7 billion fund. Lightspeed raised $4 billion. General Catalyst raised $2.3 billion. Index Ventures raised $2 billion. Insight Partners raised $9.5 billion.
In the US alone, VCs raised $21 billion in the first quarter of 2020, even as country by country, economies were going into a tailspin.
But where is all this money going to go if startups are busy merely trying to survive by cutting costs, dialing down ambitions, and laying off employees?
Well, one answer comes from venture capitalist Marc Andreessen’s call to arms for western societies. It’s called, “It’s time to build.”
|The problem is desire. We need to *want* these things. The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don’t like it, even if only to force the incumbents to build these things. And the problem is will. We need to build these things.|
Every step of the way, to everyone around us, we should be asking the question, what are you building? What are you building directly, or helping other people to build, or teaching other people to build, or taking care of people who are building? If the work you’re doing isn’t either leading to something being built or taking care of people directly, we’ve failed you, and we need to get you into a position, an occupation, a career where you can contribute to building. There are always outstanding people in even the most broken systems — we need to get all the talent we can on the biggest problems we have, and on building the answers to those problems.
|It’s going to soon be a great time to start up. Talent will be cheap. As will real estate and office space. Opportunities will be abundant. Many incumbents will be too busy pivoting, cutting costs, and figuring out how to maintain past valuations and company cultures. |
And the VCs will be flush with cash.
|The remittance rabbit hole Arundhati|
The real world impact of oil prices crashing and the calls by the US anti-immigration lobby to suspend the US H1B visa program are going to be felt in immigration patterns and in industries like IT. But among the most significant second order effects is plummeting remittances.
Global remittances are projected to decline by about 20% in 2020 due to the economic crisis brought on by the COVID-19 pandemic and shutdown.
The effect of this is bound to end up at India’s doorstep.
India has the world’s largest diaspora—some 35 million people. To put that in perspective, Malaysia’s population is smaller. In 2018, the Indian diaspora sent $78.6 billion back to India, according to the World Bank. In 2016-17, about 26.9% of remittances to India came from the UAE, mostly from semi-skilled and unskilled workers. Another 22.9% came from the USA, according to RBI data.
|For some in southern states like Kerala and Tamil Nadu, these are the only paychecks they get. Kerala, receives about 19% of all India’s inward remittances. So, while the state has successfully flattened the Covid curve and seeks to emerge from Covid-19, a precipitous fall in remittances is going to push the state into a new series of problems. The state ranks right at the top when it comes to education and health indicators. But a fall in remittances could undo that progress.|
|An RBI study says 59.2% of the remittances received in India were used for family maintenance—for education, nutrition, upkeep of health. And another 20% went into savings.|
Now, one of the biggest thorns in remittances is the cost of sending money. The destination; transfer method; payments infrastructure; size of remittance; extent of market competition; and the prevailing regulations in both source and destination countries are all baked into the cost. To send $200 to India, you’d need to pay around 5.8% of that in charges in the first quarter of 2018. The World Bank’s goal is to bring this cost down to 3% by 2030.
With such unprecedented fall in remittance volumes, it’s the perfect opportunity for countries to bring down the cost, collectively. Right now, what makes it expensive is that a lot of remittance is still cash-based and the cost of compliance is enormous and there’s a lack of well-defined global standards.
If countries don’t rally together, the impact will be calamitous as remittances are as good as foreign aid.
|Shun cars to save cities Shreedhar|
One thing is certain. People are going to be wary of crowded places for a long time to come.
Lockdowns have changed the face of cities as we know them. Streets are barricaded. Public transport, restricted. But cities are, by design, crowded. Metropolises like New York City and Mumbai seem to be the worst hit. So are cities responsible for the spread of Covid-19?
The World Bank looked at Chinese cities and didn’t think so.
|The evidence we’ve found does not support the argument that density is a key determinant of coronavirus transmission risk… On the contrary, cities with the highest coronavirus infection rates were those with relatively low population densities, in the range between 5,000 to 10,000 people per square kilometer. Urban Density Is Not an Enemy in the Coronavirus Fight: Evidence from China, World Bank|
|Okay, so cities may not be the devil incarnate on their own. But what about the mechanisms within cities? Both NYC and Mumbai have crowded train systems. Perhaps there’s something there.|
Again, no. Not rail systems, but cars. A preliminary analysis of numbers from NYC’s boroughs shows a strong correlation between automobile commutes and Covid cases.
|There are multiple things happening here. Some of them a commentary on human behaviour, some a little more.|
|Since travel brings us in contact with others at our destinations (stores, jobs, restaurants), the excess drop in travel may have made subway people safer precisely because the subway seems so dangerous.|
Second, and less obviously, subway-dependent people likely have more geographically-determined circles of contact. Car owners can move freely well beyond their immediate neighborhood. Automobiles Seeded the Massive Coronavirus Epidemic in New York City, Market Urbanism
|There’s more. Car use also ends up increasing the density of people on the road.|
Think about it.
Cars take up the bulk of the space on a typical road, while pedestrians are huddled together on the edges. Remove the cars (parked ones too), and the pedestrians and cyclists suddenly have more space. And that’s exactly what many cities are doing worldwide—Milan, Paris, Berlin, London, Vancouver, Philadelphia and Bogota.
Bicycles are cheap, space efficient, and socially distant (unless you’re stuck in a bike traffic jam in the Netherlands). In Australia, they are already the next rare commodity after toilet paper.
|After the applause Nadine Governments are flailing in the face of the crisis. Who’s coming to the rescue? Private companies and wealthy individuals. Mike Bloomberg stepped up to finance New York’s mass testing and tracing plan. In India, startups are the ones with solutions for effectively controlling who passes checkpoints. In Indonesia, the government is using Gojek drivers to distribute food packages. In most cases, we cheer these efforts because public-private collaboration seems to yield the quickest results. What if the entanglement goes too far? Expect a backlash against the way some private companies have inserted themselves into coronavirus response measures where they are channeling public aid budgets.|
It’s already happening in Indonesia, with a wave of criticism washing over startups that have become (too) intertwined with government relief efforts. Most of the discontent targets a programme called the Pre-Employment Card, initially designed to offer subsidised training to improve young people’s employability. Physical distancing measures saw the whole programme shift to digital platforms—companies who already provide online learning courses. Critics argue that part of the government aid now goes towards the benefit of the platforms, not the people. How much should private companies and wealthy individuals be involved in running a country? That’s a question the coronavirus crisis is forcing all societies to confront. Last week’s Pivot podcast with Kara Swisher and Scott Galloway has a segment about Bloomberg and his plan to fund rapid testing and tracing. Galloway says:
|“For about a day or so, we should applaud those wealthy people, but then we need to think about [how] we get back to a state where our governments and our fire departments can put out fires, instead of asking the rich guy down the neighbourhood to […] bring that really nice hose over.”|
|Ball-tampering comes full circle Jaideep|
Covid-19 may force a major rule change in the world of cricket, with authorities discussing supervised ball-tampering. The fielding team is currently allowed to use saliva and sweat to shine the ball, which helps the bowler to make the ball move in the air, or swing. Saliva is obviously not the best of ideas in a post-Covid world.
The sports governing body is now considering allowing the use of artificial substances—like a leather moisturiser, wax, shoe polish—to shine the ball under the umpires’ supervision.
It’s amazing how things come full circle. Just two years ago, the Australian cricket board slapped long-term bans on three players for contriving to use an artificial substance—sandpaper—to tamper with the ball.
It’s not only cricket, the world of sports, as we know it, could change.