Daily Musings

Evening all

FTX has been sued. So has Binance. Compounding is magic. And in the name of said magic we have FTX now suing Binance. So as I stumble down the scam rabbit hole, I share today’s musings.

Cheers
Philip

Today’s Stories

Venture

• Neo Financial - the Canadian neobank - raised CAD 112m in equity (another CAD 250m in debt). Series D lead: An undisclosed Chinese investor. Existing investors include Valar (PThiel is getting busy - fastlane from Zero to One), Afore Capital, Thomvest, and notable Angels like the Slack CEO Stewart Butterfiled, Roblox CEO David Baszucki and Shopify CEO Tobi Lütke. Notably: The challenger bank was minted a unicorn in its Series C but now with total funding exceeding CAD 650m, the company is attaining a lower valuation.

• In 2020, median pre-money valuations for early-stage AI, SaaS, and fintech companies were USD 25m, USD 27m, and USD 28m, respectively. Fast forward to 2024: those figures have soared to USD 70m (+2.8x), USD 46m (+1.7x), and USD 50m (+1.8x). AI's rapid advancements are also accelerating the ability of SaaS and other sectors to scale to USD 1m ARR faster than ever. Sure, relative valuations might not have scaled in lockstep, but up they’ve gone.

Chart Art

M&A

• Elliott has amassed a USD 5bn stake in Honeywell. And Paul Singer goes for a fan favorite: The breakup. Proposed divisions: Aerospace and Automation. In my view: It’s overdue. I've delved into industrials’ streamlining efforts in previous newsletters and self-help stories focused on getting back to core business after years of low-interest-rate M&A benders. Anecdotal cases:
  

  • ABB offloaded Bearings division Turbo and Power Grids (all deals I had the pleasure losing sleep over. Special shoutout to time zones and selling Power Grids to Hitachi. For those interested to see just how much I enjoyed 5AM calls: have a glance at the ICE Robusta Coffee Futures Price

  • Siemens split off Siemens Energy in 2020, and the sale of its drives business to KPS is set to close in Q1 2025 for some EUR 3.5bn (countless PowerPoint decks and crashes, I’m just glad to see these deal is moving even if I am not there to celebrate the close)

  • UTC broke into Raytheon, Carrier, and Otis—a trifecta of post-split outperformance

  
  The case is simple: core focus gives business units clear guidance, strategy, and the right capital structure for growth. Sometimes, breakups unlock value—sum of the parts > company as a whole. Elliott’s letter to Honeywell’s board echoes this: They underscore the untapped value masked by Honeywell’s one-stop-shop for everything under the sun approach. HON’s performance relative to the S&P 500 backs the case. For more ideas that crossed my mind and desk during the industrial IBD days: IHI and 3M (which actually started transforming in 2023. The goal is to become "stronger, leaner, and more focused.”)

Macro

• Briefly mentioned yesterday: high yields have corporates hanging onto costly debt longer than they’d like. Lets as a level and have a look at the broader capital stack implications. My scribblings from first principles (admittedly simplified):
  

  • Equity risk premium is shrinking as yields surge

  • And this, mind you, as the S&P sits at historic highs, with investor capital flooding in (GS sentiment tracker shows momentum investor frenzy). You can practically see the Carhart Momentum Factor Investors lighting up. Factor returns attached YTD and 1D post election

  • Potential Trump-era tax cuts may further devalue the interest tax shield. Weakening case for debt

  
  Put simply: DCFs may start looking shaky if these assumptions come to bear. Moving away from the theory centric garbage in garbage out cash flow discounting: Where’s the cash coming from? Debt’s costly, tax shield is dwindling, and equity issuance? Tough sell. What investor is keen to take on issuances at implied earnings multiples that can’t compete with steady returns of govvy bonds. Not to mention the yields on IG paper.

  
  Companies may need to get creative.