Hindsight isn't 2020

The market started off red hot this year. Now let’s see what we can learn from 2020.

Last year had record Tech M&A deals

Peak pandemic we saw $600 billion dollars in Tech deals last year. There's never been a bigger disconnect in the market. But for what it's worth, technology saved us in 2020.

A dead market came back to life, fast

In the spring of 2020, the global economy froze. No one was going outside, sales went to zero, and companies were in desperate need for capital. But once this dark period was over, we saw six times as many deals in the third and fourth quarter. Tech M&A experienced a v-shaped recovery before everyone else.

Here are the three largest tech deals of 2020:

  1. IHS Markit by S&P Global for $44 billion [big data]
  2. Slack by Salesforce for $27.7 billion [software]
  3. Maxim Integrated by Analog Devices for $21 billion [semiconductors]

Succession but the 2020 version

It’s the end of the decade and of an era for many corporate giants. 2020 marked ten years since our last recession. In the corporate world this means succession planning. Many companies like IBM will be changing their corporate structure very soon.

But IBM is a Value Trap

Warren Buffett once made the mistake of buying IBM. Why? Because nobody ever got fired for buying IBM. Until he started losing money.

Big blue is still the big elephant in the room. Even with its poor operating performance in recent years, Ginni Rometty, the former CEO, kept the company above water. Last year she completed her transition and named Arvind Krishna the new CEO. So it is natural for Arvind to make some changes.

Begin the deal making

First, Arvind was the lead IBM’s acquisition of RedHat Linux. This was a notable $34 billion deal, changing the direction of IBM, shifting it to a hybrid cloud strategy. RedHat is an open source software product. My first computer in high school had Linux. I love the product.

And now RedHat is acquiring StackRox, a native security software for the cloud. This will be the first of many cybersecurity deals this year. But the new boss didn’t stop there.

Arvind will also spin-off IBM’s managed services provider business. This spinoff is a massive standalone business. Today it has $60 billion in backlog, more than twice the size of its nearest competitor. More than half of IBM’s revenues came from IT services. Now a majority of IBM’s revenues will come from cloud software and solutions, and more than 50 percent of IBM’s revenues will be recurring.

Splitting these assets will allow investors to value IBM and the NewCo separately, unlocking any trapped value. We’ll find out if Arvind made the right decision in the long run. Who knows, maybe Uncle Warren will come back for Big Blue.

Not all technologies are equal

Last month I tweeted about the disconnect in technology valuations. It's hard to imagine why investors value a money-losing business as much as a market leader.

https://twitter.com/VijarKohli/status/1343920708259258371

To Learn more about IBM, I recommend reading Who Says Elephants Can't Dance?: Inside IBM's Historic Turnaround by Lou Gerstner. In 1990, IBM had its most profitable year ever. By 1993, the computer industry had changed so rapidly the company was on its way to losing $16 billion and IBM was on a watch list for extinction.

This is a well-written book about the challenges Lou faced as CEO. I think every manager needs to hear his story.

More SPACs are available for retail investors

Last year there were 242 SPACs at an average size of $335 million. This was four times the amount raised from the prior year.

Now the SPAC king, Chamath Palihapitiya, has not one but two SPACs going public this week. First is Clover Health, an outcomes based Medicare provider. Clover was founded in New Jersey by a notable healthcare executive. Keep an eye out for this team. They have a successful track record in healthcare.

Second is SoFi, the fintech company focused on the student loan market. SoFi is competing with legacy technology in the lending industry. The student loan industry is ready for change and millennials have made their choice. The company has a variety of financial products ranging from student loan refinancing to automated investing. Read more about Chamath’s thesis here.

The world’s first trillionaire will be in energy

Tesla had a record year in 2020, selling almost 500,000 cars in a pandemic. Investors loved this and the stock followed suit, now making Elon the richest man in the world.

https://twitter.com/elonmusk/status/1347204459147902978

It’s hard to believe that Tesla almost went bankrupt twelve years ago. But with Elon’s commitment to solving Earth’s energy crisis, he preserved and kept the dream alive.

The world’s first trillionaire will come from climate change. Big problems will result in big payouts. Today, Elon has done more to solve the world’s energy crisis while making his employees and shareholders very wealthy. I can’t think of a single politician who has done anything comparable for climate change. Entrepreneurship is alive and well in America. Let’s keep investing in visionaries.

Oh, and he’s still working on getting us to Mars.

Read my 2021 outlook and surprises

Earlier this week I posted my thoughts on 2020 and 2021. I’ve also begun doing live videos to answer audience questions on YouTube, LinkedIn and Twitter. Near the end of the video I mention ten surprises we may expect in 2021. Please watch and let me know what you think!