Weekly News Wrap: We’re out of recession and into a trade war

Monday 7 December 2020

Our pick of the week’s biggest stories affecting markets

IN FOCUS: SALESFORCE BUYS SLACK

What’s going on? 

Salesforce – a company specialising in sales productivity tools with a current market value of $ US220 billion, is buying Slack – a workplace messenger platform currently valued at around $US17 billion. The acquisition would be Salesforce’s largest ever.

Salesforce is the world’s biggest seller of software that companies use to manage their customer relationships, so adding a collaboration tool to that software suite is a natural fit. 

Salesforce has a rich stock price trading at nearly 100 times its trailing-year profits. It means the company has currency to use for takeovers like this one. It’s using half its stock to buy Slack, while the rest is being covered with cash and credit (during a time with extraordinarily low interest rates.)

Salesforce hopes to take control of Slack (an acronym for “searchable log of all conversation and knowledge”) sometime from May to July next year.

What’s the backstory?

Slack is free for people who use the basic version, and was adopted in the tech industry early on because it’s easy to use and more informal than email. The company’s been going well this year; new installations of the application hit 1.8 million in March, a monthly record. This year they’re up 50 per cent compared to the same time last year. The company has over 12 million users. Despite this, Slack’s shares have risen only modestly during pandemic.

Slack went public only 18 months ago. Interestingly, Slack was one of the first high-profile companies to go public through a direct listing, which means the company floats its existing shares onto an exchange and lets the market determine the price without any input from investment banks.

Currently Slack is owned by a number of venture-capital firms who control a majority of the company’s voting stock. Japanese technology giant SoftBank Group Corp also controls 11 per cent of the votes.

Salesforce has been trying to grow in recent years. It’s bought the data-analytics platform Tableau Software last year for $15 billion-plus, this year they’ve bought cloud-software provider Vlocity Inc. At one point they even had ambitions to buy Twitter back in 2016, but the idea was dropped because shareholders didn’t like the sound of it.

What does it mean going forward?

Salesforce was the company that pioneered providing software via the cloud through a subscription. Now they help companies with everything from analysing their data using artificial-intelligence tools to managing staff. It means Salesforce is now finding itself in direct competition with Microsoft.

The two companies have a bit of history: Salesforce lost out to Microsoft in 2016, with Microsoft victorious in buying professional networking service LinkedIn. Microsoft has also been trying to get in on Salesforce’s product offering, by also producing a line-up of tools to help companies manage their customer relationships.

More recently Microsoft has been heavily pushing its Teams suite, which offers a very similar service to Slack. Slack itself has also had some dealings with Microsoft, in July the company filed a complaint in the European Union accusing Microsoft of illegally bundling Teams into Office 365 so that it couldn’t be deleted by customers who may prefer Slack.

The coronavirus pandemic has shown there is demand for the combined tools of Salesforce and Slack, if the merger is successful, analysts believe Salesforce will pose a much stronger threat to Microsoft, and could also prove a game changer in the enterprise software realm.


In Brief:

QANTAS LOOKS LIKE IT WILL BREAK EVEN IN 2021

Qantas shares up more than 30% in the past month thanks to expectations domestic capacity will be at 68% of pre-Covid levels in December and will rise to 80% in March. That’s a big change from just 20% during the worst days of this year. The promise of a vaccine on the horizon isn’t hurting either. 

Qantas is expected to post a big statutory loss for this financial year, but the good news is it expects to be close to break-even at the underlying EBITDA line for the six months to December 31. From January to July 2021 it’s expected to be net free cash flow positive.

Essentially the freight business and the loyalty business are going okay, and thanks to the domestic business recovering, those three parts of the business should be able to hold up the international arm until mid next year.


WE’RE OUT OF A RECESSION – TECHNICALLY

The September quarter’s shown a 3.3% surge in economic growth, and that’s put an end to our recession, which only lasted two successive quarters – just enough to fit the definition.

Some analysts say with unemployment at 7% (up from 5%) and expected to keep rising, the bad times aren’t over yet, but at the very least the easing of restrictions and massive government stimulus seems to be paying off.

The Black Friday sales broke all records here in Australia, and that’s a good sign that consumer spending is up and will hopefully stay up over Christmas and into the New Year.


PENFOLDS GETS CAUGHT IN CHINA TRADE TENSIONS

It’s not a great time for Treasury Wine Estates with China making up 30% of the company’s profits. Trade tensions have meant massive tariffs – 169% –  slapped on the luxury wines, so Treasury’s now looking for new markets to export to.

Chief Executive Tim Ford has indicated this week pivoting to a new market is easier said than done. Mr Ford believes it’ll take between two and three years before they will have established a good export relationships with countries that could pick up the slack. Their highest hopes are in the United States where Australian wines are already more well known, but other markets they’re looking at expanding into are those of South Korea, Japan and Taiwan.

It’s good for us if we like wine though; Treasury will be trying to sell more domestically, and has also indicated they’ll be using some of their high-end grape supply in other bransds like Wynns, Wolf Blass, Seppelt and Pepperjack. 

While the share price for Treasure has been bouncing around this year amid the trade issues, currently the company is trading about $10 less than this time last year ($19).


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